'Customary Operations' or a Vacant Building?

Many times, courts are faced with the question of whether a loss location is “vacant” under a commercial property policy when trying to determine if the building owner or lessee is conducting customary operations. This article explores various decisions across the United States as to what is considered “customary operations,” thereby rendering the property “vacant.”

The Policy Provision

Most standard commercial property insurance policies provide coverage for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from a Covered Cause of Loss. While those policies typically cover losses resulting from theft and/or vandalism, coverage is usually precluded by the vacancy provision. A typical vacancy provision is:

d. We will not pay for any loss or damage caused by any of the following, even if they are Covered Causes of Loss, if the building where loss or damage occurs has been “vacant” for more than 60 consecutive days before that loss or damage occurs:

(1) Vandalism;

* * * *

(5) “Theft”; or

(6) Attempted “theft.”

* * * *

“Vacant” is often defined to mean:

(2) When this policy is issued to the owner or general lessee of a building, building means the entire building. Such building is vacant unless at least 31% of its total square footage is:

(a) Rented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations; or

(b) Used by the building owner to conduct customary operations.

Under the plain terms of these policies, there is no coverage for damage or loss resulting from theft or vandalism if the Property has been vacant for 60 days prior to the theft and/or vandalism. As such, the question plaguing most insurers, insureds and courts across the United States is whether the Property has been used by the insured or lessee to conduct customary operations within 60 days of the alleged theft and/or vandalism.

Case Law

In Saiz et al. v. Charter Oak Fire Ins. Co., 2007 WL 2701398 (D. Colo. Sept. 12, 2007), Saiz learned that a sprinkler activation at the insured premises had triggered an alarm and the restaurant building had sustained damage. The business was identified as a “family style restaurant” in the policy. At the time of the loss, Saiz was insured by Charter Oak under a business owners' policy that imposed certain limitations on coverage, including a limitation not to “pay for any loss or damage” caused by vandalism or water damage “if the building where the loss or damage occurs had been 'vacant' for more than [sixty] consecutive days before the loss or damage occurs.” Under the policy, a property was deemed “vacant” unless 31% of total square footage of the entire building is either “[r]ented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations” or “[u]sed by the building owner to conduct customary operations.” After concluding its investigation, Charter Oak denied the claim determining there was no coverage because the building was vacant and the sprinkler head had been vandalized, thereby causing the water damage.

In the suit that followed, Charter Oak filed a motion for summary judgment, arguing that there was no coverage because the building was vacant as that term was defined under the policy. In response, Saiz argued the premises were neither vacant nor used for any purpose other than operating a restaurant. Although Saiz ceased operations and closed the actual restaurant five months before the date of loss, he testified that he used the office in the building to work on selling the building and on other restaurant projects located outside of Colorado ' just not preparing and selling food or running a “family style restaurant.”

Guided by its plain and ordinary meaning, the court interpreted the phrase “customary business operations” to unambiguously refer to “the business of operating a restaurant.” The court reasoned that merely using the basement office of the restaurant after the restaurant's permanent closure did not fall within the rubric of the customary operations of a restaurant, even though restaurants often have offices.

Further, in Karen Habinyon Hachudosh D'Rabeinu Yoel of Satmar BP v. Philadelphia Indem. Ins. Co., 2011 WL891347 (E.D.N.Y. Mar. 11, 2011), one of the insured properties, 25 West, was initially acquired and used as a school for 7th- and 8th-grade boys. After concerns were voiced by parents regarding the location of the property, the insured ceased daily use of the building as a school in February, 2006. Following its closure, 25 West was predominately used for storage of school supplies, furniture and computers. There had been no electricity or gas in the building since 2006; only water. The building custodian was present at the building two or three times a week for the purpose of loading and unloading storage. “Infrequent” staff meetings and teacher training sessions were held at the property. Students were present during one of the meetings and were served lunch that day. There were also plans to use the building in the future for older children.

Once the loss was discovered on Oct. 7, 2007, a claim was submitted to Philadelphia Indemnity. The latter denied the claim based upon its determination that the building was vacant as defined by the policy. Suit was brought, and Philadelphia Indemnity ultimately moved for summary judgment on the vacancy issue.

The New York court found that the policy exclusion was unambiguous and clearly intended to apply to the customary operations of a school. While the policy did not define “customary operations,” the parties did not dispute that 25 West was initially insured as a “High School,” and at no point, until after the loss, did the insured inform Philadelphia Indemnity otherwise. Given the context of the provision, and the reasonable expectations of the parties, customary operations could not be interpreted as anything other than the customary operations of a school. Based upon the affidavit of the insured, the court held that the building was not being operated as a school, as 25 West had no permanent student body or faculty, and no electricity or gas. The activities identified by the Plaintiff, including one visit by teachers and students, could not reasonably be expected to constitute customary operations of a school where the building was not being operated as a school, but utilized for storage.

A similar result was reached in Sorema North American Reinsurance Co. v. Johnson, 258 Ga.App. 304, 306, 574 S.E.2d 377 (2002), where the court found “nothing ambiguous” about a vacancy exclusion provision that used the term “customary operations.” The policy issued by Fulcrum Insurance Company covered a building that Emergent Financial Corporation acquired through foreclosure from Frost Foods, Inc., a meat-packing business. Frost Foods ceased operating sometime before the foreclosure, but left inventory and equipment in the building. Upon acquiring the property, Emergent began selling the inventory and marketing the building for sale. Some of Emergent's liquidating and marketing activities initially took place in the building; however, it was undisputed that no Emergent employee or agent worked inside or visited the building after August 1998. In September 1998, Johnson contracted to buy the building “as is” from Emergent. The sale closed on Nov. 12, 1998.

The day after the sale to Johnson, it was discovered that the building had been vandalized. A claim was reported to Fulcrum, which denied the claim because the building had been vacant for more than 60 days prior to the claim. On cross-summary judgment motions, the court found no evidence in the record suggesting that Emergent had been physically using any portion of the building for any purpose related to its customary operations with the 60-day period prior to the date of loss. This was because it had not conducted any of its lending, asset management, marketing or liquidation operations from that location after August 1998, even though Johnson argued that the building was used as an asset in Emergent's customary asset management operation.

Similar to the argument made by Johnson related to the customary operations of asset management, in Hollis v. Travelers Ind. Co. of Connecticut, 2010 WL 1050991 (W.D. Tenn 2010), Hollis argued that ILS, a wholesale distributor of fasteners and specialty hardware, was also an “acquirer of competitors,” and thus was conducting customary operations by attempting to dispose of its leasehold when it started moving its operations from the loss location to another location before the loss occurred in August 2006.

ILS acquired PPG, which had its corporate headquarters at 2700 Summer Avenue, in October, 2005. As a result, ILS took over PPG's lease at the loss location. ILS was tasked with moving ILS/PPG's operations from the Summer Avenue building to a location on South Ridge. In doing so, ILS set up cubicles at the South Ridge location and moved PPG personnel there sometime in March or April of 2006.

ILS, however, continued to pay Hollis rent after moving to the South Ridge location. Additionally, ILS left valueless material and equipment at the Summer Avenue location. ILS admitted that it never intended to use the property to conduct its ongoing fastener operations, however, it asserted that simply by taking over PPG's lease and subleasing space to Summerfield, ILS was conducting its customary operations. It was suggested that ILS was in the business of “acquiring and consolidating ' competitors and, as an incident thereto, the disposing of excess supply capacity.” As such, it contended that ILS was conducting its customary operations by consolidating PPG's South Ridge and Summer Avenue locations. While the court found the argument persuasive, it ultimately determined that ILS was a wholesale distributor of fasteners and specialty hardware, therefore, ILS's customary operations must relate to that task and any acquisition of competitors or disposition of property ILS conducts was incidental to that goal and did not amount to customary operations.

Finally, in Bedford Internet Office Space, LLC v. Travelers Cas. Ins. Co., 41 F.Supp.3d 535 (N.D. Tex. 2014), two office buildings were vandalized over multiple months, resulting in multiple claims. Bedford leased both buildings to Bill Fletcher for use by his not-for-profit charitable ministry, Goodness Outreach Depot, on June 1, 2011. As part of the lease, Bedford was required to purchase insurance on the two buildings.

Travelers issued a “Technology Office PAC” policy as Bedford stated it was a data and security business. The policy did not define “customary operations,” but did define “operations” as “your business activities occurring at the described premises '” Bedford and Fletcher agreed that over the first 90 to 120 days of the lease, Bedford would move out of the property and Fletcher would be “ramping up” his business operations. Although Fletcher and his volunteers were in the buildings on numerous occasions in June and July of 2011, the transition ceased until September 5, 2011. Shortly thereafter, Bedford and Fletcher discovered there had been a break-in and theft at the buildings.

Bedford reported the theft to the police and reported that the loss or damage occurred sometime between June 22, 2011 and Sept. 7, 2011. Subsequent break-ins occurred at the buildings through January, 2012. During the investigation of the claims, Bedford stated there had been no electricity or water service to the buildings since 2008. Based upon the condition of the properties and statements of Bedford, Fletcher and various police officers, Travelers determined the buildings were vacant for more than 60 consecutive days before the loss or damage occurred, and denied the claim.

Bedford brought suit against Travelers, alleging breach of contract, breach of the duty of good faith and fair dealing, and various violations of the Texas Insurance Code. Because both Bedford and Fletcher were in the transition process of moving in and out of the buildings, the court was given the task of determine the customary operations for both the owner and the lessee. Given the policy's definition of “operations,” and the court's use of Webster's definition of “customary,” the court defined “customary operations” as the commonly practiced business activities of either a data and security business or a nonprofit ministry. Based upon the evidence submitted, the court found that neither Bedford nor Fletcher were conducting customary operations of either's business at the property within 60 days of the loss or damage.

Rather, Bedford was transitioning its business out of the property and had a presence there to the extent that the property was used for storage, picking up and delivery of mail, and visiting the property twice a week. Fletcher, who was also in the process of “ramping up” his non-profit ministry by moving equipment to the property for use by his business, had only mere access to or incidental use, which did not constitute “customary operations.” Further, the court determined that the lack of water and electricity would make it seemingly impossible to conduct business activities at the property, thereby finding the policy unambiguous and that neither Bedford nor Fletcher were using the insured property to conduct customary operations within 60 days preceding the date of loss.

Conclusion

The purpose of a vacancy provision is to limit the risk of theft and vandalism, which would presumably be deterred by regular activity when a business is being operated at the premises. It is intended to protect the insurer from the higher risk of loss associated with property that is not attended. While courts face multiple facts that come into existence during a lawsuit, they appear to be in consensus that substantive operations of a business must be ongoing, not to some varying degree. They are applying canons of construction in contract interpretation that words be given their ordinary and plain meaning and reining in the creative arguments of policyholders and leaseholds alike.

Rebecca A. Moore and Seth A. Schmeeckle are both shareholders with Lugenbuhl, Wheaton, Peck, Rankin & Hubbard. The views presented in this article are not necessarily the views of the firm or any of its clients.

Many times, courts are faced with the question of whether a loss location is “vacant” under a commercial property policy when trying to determine if the building owner or lessee is conducting customary operations. This article explores various decisions across the United States as to what is considered “customary operations,” thereby rendering the property “vacant.”

The Policy Provision

Most standard commercial property insurance policies provide coverage for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from a Covered Cause of Loss. While those policies typically cover losses resulting from theft and/or vandalism, coverage is usually precluded by the vacancy provision. A typical vacancy provision is:

d. We will not pay for any loss or damage caused by any of the following, even if they are Covered Causes of Loss, if the building where loss or damage occurs has been “vacant” for more than 60 consecutive days before that loss or damage occurs:

(1) Vandalism;

* * * *

(5) “Theft”; or

(6) Attempted “theft.”

* * * *

“Vacant” is often defined to mean:

(2) When this policy is issued to the owner or general lessee of a building, building means the entire building. Such building is vacant unless at least 31% of its total square footage is:

(a) Rented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations; or

(b) Used by the building owner to conduct customary operations.

Under the plain terms of these policies, there is no coverage for damage or loss resulting from theft or vandalism if the Property has been vacant for 60 days prior to the theft and/or vandalism. As such, the question plaguing most insurers, insureds and courts across the United States is whether the Property has been used by the insured or lessee to conduct customary operations within 60 days of the alleged theft and/or vandalism.

Case Law

In Saiz et al. v. Charter Oak Fire Ins. Co., 2007 WL 2701398 (D. Colo. Sept. 12, 2007), Saiz learned that a sprinkler activation at the insured premises had triggered an alarm and the restaurant building had sustained damage. The business was identified as a “family style restaurant” in the policy. At the time of the loss, Saiz was insured by Charter Oak under a business owners' policy that imposed certain limitations on coverage, including a limitation not to “pay for any loss or damage” caused by vandalism or water damage “if the building where the loss or damage occurs had been 'vacant' for more than [sixty] consecutive days before the loss or damage occurs.” Under the policy, a property was deemed “vacant” unless 31% of total square footage of the entire building is either “[r]ented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations” or “[u]sed by the building owner to conduct customary operations.” After concluding its investigation, Charter Oak denied the claim determining there was no coverage because the building was vacant and the sprinkler head had been vandalized, thereby causing the water damage.

In the suit that followed, Charter Oak filed a motion for summary judgment, arguing that there was no coverage because the building was vacant as that term was defined under the policy. In response, Saiz argued the premises were neither vacant nor used for any purpose other than operating a restaurant. Although Saiz ceased operations and closed the actual restaurant five months before the date of loss, he testified that he used the office in the building to work on selling the building and on other restaurant projects located outside of Colorado ' just not preparing and selling food or running a “family style restaurant.”

Guided by its plain and ordinary meaning, the court interpreted the phrase “customary business operations” to unambiguously refer to “the business of operating a restaurant.” The court reasoned that merely using the basement office of the restaurant after the restaurant's permanent closure did not fall within the rubric of the customary operations of a restaurant, even though restaurants often have offices.

Further, in Karen Habinyon Hachudosh D'Rabeinu Yoel of Satmar BP v. Philadelphia Indem. Ins. Co., 2011 WL891347 (E.D.N.Y. Mar. 11, 2011), one of the insured properties, 25 West, was initially acquired and used as a school for 7th- and 8th-grade boys. After concerns were voiced by parents regarding the location of the property, the insured ceased daily use of the building as a school in February, 2006. Following its closure, 25 West was predominately used for storage of school supplies, furniture and computers. There had been no electricity or gas in the building since 2006; only water. The building custodian was present at the building two or three times a week for the purpose of loading and unloading storage. “Infrequent” staff meetings and teacher training sessions were held at the property. Students were present during one of the meetings and were served lunch that day. There were also plans to use the building in the future for older children.

Once the loss was discovered on Oct. 7, 2007, a claim was submitted to Philadelphia Indemnity. The latter denied the claim based upon its determination that the building was vacant as defined by the policy. Suit was brought, and Philadelphia Indemnity ultimately moved for summary judgment on the vacancy issue.

The New York court found that the policy exclusion was unambiguous and clearly intended to apply to the customary operations of a school. While the policy did not define “customary operations,” the parties did not dispute that 25 West was initially insured as a “High School,” and at no point, until after the loss, did the insured inform Philadelphia Indemnity otherwise. Given the context of the provision, and the reasonable expectations of the parties, customary operations could not be interpreted as anything other than the customary operations of a school. Based upon the affidavit of the insured, the court held that the building was not being operated as a school, as 25 West had no permanent student body or faculty, and no electricity or gas. The activities identified by the Plaintiff, including one visit by teachers and students, could not reasonably be expected to constitute customary operations of a school where the building was not being operated as a school, but utilized for storage.

A similar result was reached in Sorema North American Reinsurance Co. v. Johnson , 258 Ga.App. 304, 306, 574 S.E.2d 377 (2002), where the court found “nothing ambiguous” about a vacancy exclusion provision that used the term “customary operations.” The policy issued by Fulcrum Insurance Company covered a building that Emergent Financial Corporation acquired through foreclosure from Frost Foods, Inc., a meat-packing business. Frost Foods ceased operating sometime before the foreclosure, but left inventory and equipment in the building. Upon acquiring the property, Emergent began selling the inventory and marketing the building for sale. Some of Emergent's liquidating and marketing activities initially took place in the building; however, it was undisputed that no Emergent employee or agent worked inside or visited the building after August 1998. In September 1998, Johnson contracted to buy the building “as is” from Emergent. The sale closed on Nov. 12, 1998.

The day after the sale to Johnson, it was discovered that the building had been vandalized. A claim was reported to Fulcrum, which denied the claim because the building had been vacant for more than 60 days prior to the claim. On cross-summary judgment motions, the court found no evidence in the record suggesting that Emergent had been physically using any portion of the building for any purpose related to its customary operations with the 60-day period prior to the date of loss. This was because it had not conducted any of its lending, asset management, marketing or liquidation operations from that location after August 1998, even though Johnson argued that the building was used as an asset in Emergent's customary asset management operation.

Similar to the argument made by Johnson related to the customary operations of asset management, in Hollis v. Travelers Ind. Co. of Connecticut, 2010 WL 1050991 (W.D. Tenn 2010), Hollis argued that ILS, a wholesale distributor of fasteners and specialty hardware, was also an “acquirer of competitors,” and thus was conducting customary operations by attempting to dispose of its leasehold when it started moving its operations from the loss location to another location before the loss occurred in August 2006.

ILS acquired PPG, which had its corporate headquarters at 2700 Summer Avenue, in October, 2005. As a result, ILS took over PPG's lease at the loss location. ILS was tasked with moving ILS/PPG's operations from the Summer Avenue building to a location on South Ridge. In doing so, ILS set up cubicles at the South Ridge location and moved PPG personnel there sometime in March or April of 2006.

ILS, however, continued to pay Hollis rent after moving to the South Ridge location. Additionally, ILS left valueless material and equipment at the Summer Avenue location. ILS admitted that it never intended to use the property to conduct its ongoing fastener operations, however, it asserted that simply by taking over PPG's lease and subleasing space to Summerfield, ILS was conducting its customary operations. It was suggested that ILS was in the business of “acquiring and consolidating ' competitors and, as an incident thereto, the disposing of excess supply capacity.” As such, it contended that ILS was conducting its customary operations by consolidating PPG's South Ridge and Summer Avenue locations. While the court found the argument persuasive, it ultimately determined that ILS was a wholesale distributor of fasteners and specialty hardware, therefore, ILS's customary operations must relate to that task and any acquisition of competitors or disposition of property ILS conducts was incidental to that goal and did not amount to customary operations.

Finally, in Bedford Internet Office Space, LLC v. Travelers Cas. Ins. Co. , 41 F.Supp.3d 535 (N.D. Tex. 2014), two office buildings were vandalized over multiple months, resulting in multiple claims. Bedford leased both buildings to Bill Fletcher for use by his not-for-profit charitable ministry, Goodness Outreach Depot, on June 1, 2011. As part of the lease, Bedford was required to purchase insurance on the two buildings.

Travelers issued a “Technology Office PAC” policy as Bedford stated it was a data and security business. The policy did not define “customary operations,” but did define “operations” as “your business activities occurring at the described premises '” Bedford and Fletcher agreed that over the first 90 to 120 days of the lease, Bedford would move out of the property and Fletcher would be “ramping up” his business operations. Although Fletcher and his volunteers were in the buildings on numerous occasions in June and July of 2011, the transition ceased until September 5, 2011. Shortly thereafter, Bedford and Fletcher discovered there had been a break-in and theft at the buildings.

Bedford reported the theft to the police and reported that the loss or damage occurred sometime between June 22, 2011 and Sept. 7, 2011. Subsequent break-ins occurred at the buildings through January, 2012. During the investigation of the claims, Bedford stated there had been no electricity or water service to the buildings since 2008. Based upon the condition of the properties and statements of Bedford, Fletcher and various police officers, Travelers determined the buildings were vacant for more than 60 consecutive days before the loss or damage occurred, and denied the claim.

Bedford brought suit against Travelers, alleging breach of contract, breach of the duty of good faith and fair dealing, and various violations of the Texas Insurance Code. Because both Bedford and Fletcher were in the transition process of moving in and out of the buildings, the court was given the task of determine the customary operations for both the owner and the lessee. Given the policy's definition of “operations,” and the court's use of Webster's definition of “customary,” the court defined “customary operations” as the commonly practiced business activities of either a data and security business or a nonprofit ministry. Based upon the evidence submitted, the court found that neither Bedford nor Fletcher were conducting customary operations of either's business at the property within 60 days of the loss or damage.

Rather, Bedford was transitioning its business out of the property and had a presence there to the extent that the property was used for storage, picking up and delivery of mail, and visiting the property twice a week. Fletcher, who was also in the process of “ramping up” his non-profit ministry by moving equipment to the property for use by his business, had only mere access to or incidental use, which did not constitute “customary operations.” Further, the court determined that the lack of water and electricity would make it seemingly impossible to conduct business activities at the property, thereby finding the policy unambiguous and that neither Bedford nor Fletcher were using the insured property to conduct customary operations within 60 days preceding the date of loss.

Conclusion

The purpose of a vacancy provision is to limit the risk of theft and vandalism, which would presumably be deterred by regular activity when a business is being operated at the premises. It is intended to protect the insurer from the higher risk of loss associated with property that is not attended. While courts face multiple facts that come into existence during a lawsuit, they appear to be in consensus that substantive operations of a business must be ongoing, not to some varying degree. They are applying canons of construction in contract interpretation that words be given their ordinary and plain meaning and reining in the creative arguments of policyholders and leaseholds alike.

Rebecca A. Moore and Seth A. Schmeeckle are both shareholders with Lugenbuhl, Wheaton, Peck, Rankin & Hubbard. The views presented in this article are not necessarily the views of the firm or any of its clients.