Vacancy Exclusion Applies to Vandalism But Not Arson Loss

A federal court in Ohio, faced with the question of whether a vacancy exclusion applied in the case of arson, a matter of first impression in that state, attempted without success to get the answer from the Supreme Court of Ohio, and then answered the question itself based on guidance from contract interpretation principles of Ohio and other states. The decision, filed November 21, 2017, is entitled Wells Fargo Bank, N.A. v. Allstate Ins. Co., and is reported at 2017 U. S. Dist. LEXIS 192610.

Ripening the case for cross-motions for summary judgment, the parties stipulated to the facts of the case, which involved a fire set by an unknown arsonist on February 6, 2014, damaging a dwelling located in Poland, Ohio when it was vacant by the end of 2013, its owner having defaulted on his mortgage payments that year. Wells Fargo Bank was the insured mortgagee under a policy of homeowners’ insurance covering the residence, which policy was in force at the time of the fire.

The policy afforded coverage for three types of property damage. Coverage A provided insurance for damage to the dwelling; Coverage B for other structures’ protection, and Coverage C provided insurance for damage to personal property. Wells Fargo made its insurance claim for arson fire damage under Coverage A. Allstate denied the bank’s claim based upon the Coverage A policy exclusion stating, “we do not cover vandalism or malicious mischief if your dwelling has been vacant or unoccupied for more than 30 consecutive days immediately prior to the vandalism or malicious mischief.” The issue separating the parties, therefore, was whether the exclusion, which defeated coverage for “vandalism or malicious mischief,” did so for damage caused by an arson fire.

The court observed that jurisdictions other than Ohio have decided this issue in conflict with one another. Several courts have held that an exclusion for vandalism and/or malicious mischief does not encompass arson, where the policy language distinguishes between arson, on one hand, and vandalism and/or malicious mischief, on the other. Some courts have ruled that arson is a species of vandalism or malicious mischief and therefore fire damage due to arson is excluded from coverage if the dwelling is vacant at the time of the fire.

Wells Fargo contended that general rules of contract interpretation afforded the court the principles with which it could decide the issue. Those principles, many of which depend upon the structure of the insurance policy and hold, for example, that insurance policy terms must be given the same meaning throughout the entire policy, pose the question of whether, when viewing the policy as a whole it appears that arson is or is not a form of vandalism or malicious mischief.

Even though Wells Fargo made its claim under Coverage A, which insured against all risks of direct physical loss (except as excluded by the policy), it pointed to the fact that, under the personal property insurance provided by Coverage C of the policy, which provided named peril insurance, “fire” and “vandalism” are treated as separate and different perils. Thus, the policy section describing “Losses We Cover Under Coverage C,” reads:

“We will cover sudden and accidental direct physical loss to the property described in Coverage C – Personal Property, except as limited or excluded in this policy, caused by:

“1. Fire or Lightning
…

“8. Vandalism and Malicious Mischief.

“We do not cover vandalism or malicious mischief if your dwelling has been vacant or unoccupied for more than 30 consecutive days immediately prior to the vandalism or malicious mischief.…”

Under the personal property provision of Coverage C, therefore, “fire” and “vandalism” were treated by the policy as separate and distinct perils, said the court, summarizing Wells Fargo’s argument. Accordingly, Wells Fargo argued, arson is not a form of “vandalism,” but a form of “fire.”

Also on the side of finding coverage for the arson loss despite vacancy was an arson reward provision found in the policy, reading:

“We will pay up to $5,000 for information leading to an arson conviction in connection with a fire loss to property covered under Section I of this policy. The $5,000 limit applies regardless of the number of persons providing information.”

Wells Fargo pointed to this arson reward provision because it described arson as a “fire loss,” not as a “vandalism or malicious mischief” loss. Alternatively, Wells Fargo argued that the term “arson” is at least ambiguous as to whether it is a “fire” or “vandalism” loss, and any ambiguity must be interpreted against the drafter, here Allstate.

Allstate argued that the vacancy exclusion was not ambiguous and that based on the plain meaning of the terms “arson,” “vandalism,” and “malicious mischief,” arson is a form of vandalism or malicious mischief. Allstate also contended that the distinction between fire and vandalism, found in Coverage C did not apply to Coverage A, which, after all, was the coverage under which Wells Fargo made its insurance claim. The insurer argued that these two portions the policy should be read differently because under the “all risk” portion of the policy, every risk is covered unless it is explicitly excluded, whereas under the named peril spark portion of the policy only those causes of loss enumerated are covered. In rejecting this contention, the court stated that such an exercise would contravene basic principles of contract interpretation in Ohio. Insurance policies must be examined in their entirety, the court said, and a proper reading of the policy generally cannot be accomplished by relying on one provision to the exclusion of others.

Finally, the court pointed out that, “When a term exists in multiple places in the contract, the term should be given the same meaning throughout the contract, unless another interpretation is clear from the language of the contract.” Because the vacancy exclusion provision is worded using the same language in two parts of the policy, the court said, the provision should be read to exclude the same perils from coverage. Therefore, the court held, the vacancy exclusion provision could not be read to exclude fire loss coverage under Coverage A, but allow fire loss coverage under Coverage C.

The court accordingly granted Wells Fargo’s motion for summary judgment and denied that made by Allstate.