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September 2013

No Summary Judgment in Suit Alleging Insurer Should Pay Lost Rents for Vandalized Vacant Building

The California Court of Appeal, Second Appellate District, recently reversed a trial court order granting summary judgment to a commercial property insurer.  The trial court held the insurer properly denied its insured’s lost rents claim in connection with vandalism damage where there was not an existing tenant when the damage took place.  The Court of Appeal disagreed, holding the policy did not clearly require the insured to have a tenant in place as a condition of coverage for lost rents.  Whether the insured would have been able to rent the property, but for the vandalism, raised triable issues of fact.  Therefore, the court concluded summary judgment in favor of the insurer was improper.

Folksamerica Reinsurance Co. issued a commercial building owner’s policy to Ventura Kester, LLC as owner of a property in Sherman Oaks.  The policy, in effect from September 2006 to September 2007, covered the structure and promised to pay the insured’s “net loss of rental income” due to damage to covered property.  A tenant was in place when the policy was issued, but it subsequently vacated the premises.  Ventura began discussions with potential tenants, including entering into a letter of intent with OfficeMax.

The property was vandalized in May 2007.  Thieves broke in and stole copper wire and pipes, causing extensive damage, which Ventura reported to Folksamerica.  OfficeMax declined to lease the property shortly after the break-in.  Building repairs were estimated to take a year, and Ventura was unable to reach an agreement with other potential tenants.  Ventura’s property damage claim was resolved in 2009.  Folksamerica denied Ventura’s lost rents claim in 2010 because no lease of the premises was in effect at the time of the loss. 

Ventura sued Folksamerica in 2010 alleging breach of contract and breach of the covenant of good faith and fair dealing.  Ventura alleged wrongful denial of its claim for lost rents, which allegedly totaled $3.8 million accruing between 2007 and 2010. 

Ventura moved for summary adjudication regarding the policy’s lost rents provision.  Ventura argued the policy did not require a signed lease as a condition of coverage.  Folksamerica filed a competing motion for summary judgment asserting Ventura could not demonstrate any lost rents were due to the vandalism damage.  A letter of intent is preliminary, and no binding rental agreement was in place.  The court agreed and entered judgment for Folksamerica. Ventura appealed.  

On Sept. 11, the Court of Appeal reversed.  It concluded the policy’s lost rents provision is ambiguous, and Ventura had a reasonable expectation of coverage for rents actually lost as a result of the vandalism damage. 

The court stated the policy covers the insured’s net loss of rental income due to damage to a covered structure.  Folksamerica suggested the language refers to loss of rent from an existing tenant, which is uncollectible because of property damage, but the court concluded the policy’s plain language does not limit recovery or calculate lost rents this way.  The policy covered damage to the building, regardless of whether it was vacant.  If Folksamerica had intended to require an existing tenant at the time of damage for coverage of lost rents to apply, the court concluded Folksamerica could have included a clear limitation to this effect in the policy.

The court also rejected Folksamerica’s argument that Ventura could not establish any actual loss of rents as a result of the vandalism damage.  There was evidence OfficeMax declined to lease the building because of a change in its business plan.  But there also was evidence lease negotiations fell through due to delays in resolving the insurance claim.  The court concluded summary judgment was improper because triable issues of fact existed – namely, whether Ventura would have leased the property if the vandalism damage had not occurred, the fair market rental value of the property, and whether Ventura acted reasonably in mitigating its damages. 

Click here for the opinion.

This opinion in Ventura Kester, LLC v. Folksamerica Reinsurance Co., (Sept. 11, 2013) __ Cal.App.4th __ ; 13 C.D.O.S. 10148, is not final.  The Court of Appeal may modify it on rehearing or the California Supreme Court may order it depublished or grant review.  The latter two events would render the opinion unavailable as legal authority in California courts.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.

Insurance

Arthur Schwartz



Insurance