• Vacancy and Occupancy in Property Insurance Policies: Economic Hardships, Policy Ambiguities and Their Impact upon Claims Decisions
  • March 13, 2012 | Author: Eric W. Moch
  • Law Firm: Johnson & Bell, Ltd. - Chicago Office
  • Background

    The terrible economic climate has wreaked havoc on millions of Americans over the last several years. Millions have lost their jobs and personal savings, and their property values have plummeted. Foreclosures and bankruptcies have spiked. Millions of homes sit empty today, their previous owners having abandoned them voluntarily because they are unable to sell or rent them, or lost them to foreclosure.

    The economic crisis has not spared the insurance industry. Property loss claims are up. A significant percentage of those claims arise from arson (sometimes, regrettably, by desperate policy holders in search of financial gain), vandalism in abandoned structures and damages arising from inattention, such as frozen and burst water pipes or water damage from deteriorating roofs.

    Investigating and resolving such claims is challenging enough in the best of times, but the economic downturn has forced property loss adjusters to grapple with an issue that tends not to exist when policy holders are on firm financial footing. Does coverage exist under a homeowners’ policy if an insured dwelling no longer served as the policy holder’s residence at the time of loss? Was the dwelling vacant or unoccupied on the date of loss, and if so, is the loss covered? The vacancy and occupancy status of insured property increasingly has become a predominate consideration.

    Illinois law on this issue has not changed much in recent years, but that doesn’t mean the law is well known. This article provides a summary of the current state of Illinois law on vacancy and occupancy clauses in property insurance policies. The following is an overview of how Illinois courts treat these issues. 

    I. Vacancy and Occupancy

    Common sense would seem to dictate that if a policy holder secures insurance for a dwelling on the promise that it is his residence, but then he ceases to reside there, there should be no coverage for a loss to that dwelling. That seems intuitive. After all, if the insurer bound the policy upon the explicit promise that the policy holder would live there full time and thus safeguard the risk, the insurer should be able to walk away from the agreement if the policy holder broke that explicit promise. Alas, not so fast. Illinois courts have not made a habit of resolving these disputes in the insurer’s favor. And when courts do side with policy holders in such circumstances, they prefer to use the policy’s express language against the insurer. 

    First, some key definitions. Courts have defined vacancy as “generally empty or deprived of contents.” See, Thompson v. Green Garden Mutual Insurance Co., 261 Ill.App.3d 286, 291 (1994). Unoccupied means “that no one was living in the dwelling or had actual use or possession of the dwelling at the time of the loss.” Id. A house is unoccupied when “it has ceased to be a customary place of habitation or abode, and no one is living or residing in it.” 44 Am.Jur.2d Insurance § 1220 (1982). The interpretation of the words vacant and unoccupied as used in an insurance policy is a question of law, but whether the subject dwelling was vacant or unoccupied at the time of the loss is a question of fact.

    A. Vacancy

    As a general matter, it is far easier to demonstrate that a dwelling was unoccupied versus vacant. The presence of just an appliance or two or personal possessions inside a dwelling at the time of loss may well be enough to defeat an argument that it was vacant as a matter of law. If a policy excludes coverage only to vacant dwellings, but not unoccupied ones (some policies are indeed this narrow), then a denial based upon a  vacancy exclusion can be difficult to sustain.

    The intent of the property owner is another key consideration in a vacancy analysis. If the owner claims that he still valued the apparently vacant property and considered it a dwelling even though it contained very few contents at the time of loss, that fact may in and of itself prevent an insurer from prevailing at the summary judgment stage in litigation. It would not be unusual for a court to rule that the believability of the insured’s assertion presented a question of fact prohibiting summary judgment and warranting submitting the case to a jury.

    B. Occupancy

    Many policies seek to exclude coverage for both vacant and unoccupied dwellings. The key inquiry in any claim arising from a loss to property that was either vacant or unoccupied is whether the express policy language excludes coverage because of an absence of occupants, irrespective of contents. Consider a few pretty standard homeowners’ policy provisions that purport to govern occupancy:

    DEFINITIONS

    4.“Insured location” means:

    a. The residence premises

    1. “Residence Premises” means:

    1. The one family dwelling, or other structures, and grounds; or
    2. That part of any other building;

    Where you reside and which is shown as the residence premises in the Declarations

    SECTION I - PROPERTY COVERAGES
          COVERAGE A - DWELLING
                     We cover:

    1. The dwelling on the “residence premises” shown in the Declarations, including structures attached to the dwelling;

    A quick glance at these provisions may convince you that a denial based upon a lack of residency in the covered property at the time of loss would be sound. But don’t be so sure. These provisions may not be explicit enough in one certain respect: time; duration of residency. This language does not quantify how often or for how long a policy holder must live there in order for it to qualify as his residence. Because the law recognizes an individual’s right to reside in more than one place at one time, this deficiency could undermine a claim denial, or worse, prohibit it altogether.

    Illinois courts have reasoned that if insurers want to quantify the length of time and frequency with which an insured must reside in a dwelling for it to qualify as a residence premises, they are free to do so. When insurers do not, however, and that absence of clarification gives rise to reasonable, differing interpretations of the term, an ambiguity exists in the policy and an insurer may not deny coverage on that basis. See, e.g., FBS Mortgage Corp v. State Farm Fire & Casualty Corp., 833 F.Supp 688 (1993) (federal district court interpreting Illinois law), Lundquist v. Allstate Insurance Co., 314 Ill.App.3d 240 (2000). Under Illinois law, ambiguities in policy language must be construed in favor of coverage and against the insurer. See, Employers Insurance v. Ehlco Liquidated Trust, 186 Ill. 2d 127, 141, (1999). This means that an insurer might be prohibited, as a matter of law, from relying upon an open-ended and ambiguous occupancy provision in denial of a claim.

    It is imperative that claims representatives understand how their policies address the vacancy/occupancy issue. Prevailing on a vacancy or occupancy exclusion will always be dependent upon the policy language as well as a thorough and well-documented investigation into the circumstances surrounding what and who occupied a loss address and for what length of time.  However, it seems clear that in Illinois even the most meticulous claims investigation into the occupancy status of a dwelling cannot sustain a denial upon “occupancy” language if there are ambiguities in the pertinent policy provisions.

    Consequently, insurers must be prepared to cite all applicable policy provisions in support of denials, which traditionally would be based only upon an Occupancy provision. For instance, many policies condition ongoing coverage upon the insured notifying the insurer of any material changes in the hazard. Any reasonable insurer would consider an insured’s decision to vacate the subject property to be a material change in the hazard. Many policies also enable insurers to deny coverage to property that an insured has abandoned.

    While a denial based upon either of these provisions would most likely give rise to questions of fact necessitating a trial, they may play a vital role in enabling insurers to vindicate themselves in the face of challenges to policy provisions that they only thought protected them. Insurers also should review their standard policy language, and especially occupancy clauses, to ensure they are specific enough to protect them from having to pay property claims that common sense would dictate they don’t owe. Sadly, even a cursory review of a Lexis case law database reveals that common sense and the rule of law sometimes take divergent paths.