Two days ago, Minnesota’s highest court unanimously held that a mortgagee’s recovery for vandalism damage to a vacant building is only barred by the vacancy clause if the insured’s actscaused the vacancy.  The decision is  Commerce Bank v. West Bend Mut. Ins. Co., 2015 WL 6498468, 2015 Minn. App. LEXIS 85 (Minn., Oct. 28, 2015)   If breached, the vacancy clause still automatically operates to void coverage for the insured, but it does not necessarily do the same for the mortgagee, and the determination entails addressing a question of fact.

The policyholder had a building in Burnsville that had been vacant for four months when the mortgagee/bank was added to the contract of insurance.  Seven months later, while still vacant, the structure was vandalized.  The bank submitted an insurance claim, but this was denied because the policy recited that loss by vandalism was excluded “[i]f the building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs.”

The bank brought suit.  The policy contained a so-called “standard” or “union” mortgage clause that provided that if the insurer denies a claim because of the insured’s acts or because the insured has failed to comply with the terms of the policy, “the mortgageholder will still have the right to receive loss payment” if it pays any premium due upon request and submits a sworn statement in proof of loss.  The trial court granted the bank’s motion for summary judgment, holding that it was entitled to recover despite the vacancy, but the court of appeals reversed and found in favor of the carrier.

On October 28th, the Minnesota Supreme Court reversed and remanded in an opinion written by Justice David Lillehaug.  The court first set the stage by explaining that under an “open” mortgage clause, the mortgagee simply stands in the shoes of the insured/mortgagor.  Under the “standard” or “union” version, however, it has a separate and independent contract with the insurer.  That contract is nonetheless subject to all of the terms and conditions of the policy, including the vacancy clause.  The issue was, therefore, “whether the two clauses are susceptible to a reasonable interpretation that avoids a conflict.”

The bank argued that the mortgage clause meant that the insurance coverage afforded to the mortgagee could never be invalidated by a 60-day vacancy because that was necessarily an act or omission by the policyholder.  The high court rejected that position because

it would effectively read the vacancy clause out of the mortgagee’s policy.  . . . Under [the] Bank’s interpretation, a vacancy is always caused by the owner’s failure to ensure that the property is not vacant, so a vacancy would never exclude a claim for coverage.

The justices held that there were a number of scenarios under which a vacancy could come about “despite the owner’s best efforts” to avoid it, such as “a severe economic downturn.”

The court also rejected the insurer’s position, however, because it held that that also failed to harmonize the two clauses.  The carrier argued that if there was a 60-day vacancy at the time of loss, there was no coverage for anyone regardless of the vacancy’s cause.  It contended a vacancy was effectively a risk that it never contracted to assume any circumstances whatsoever.

The justices then held that a mortgagee’s recovery in Minnesota was only defeated by a vacancy clause if the vacancy was caused by the policyholder.  In the words of the opinion:

Reading the standard mortgage clause and the vacancy clause together, . . . the mortgagee has coverage is there is a vacancy because of the acts of the owner.  However, if the vacancy is not due to the acts of the owner, the mortgagee does not have coverage.

The court then remanded, directing the trial court to “determine whether the owner’s acts caused the vacancy.”  Ominously for the bank – which was aware of the vacancy prior to the loss – it also cited a 1926 Minnesota Supreme Court opinion for the proposition that the mortgagee’s interest is “unaffected by any act or neglect of the mortgagor, of which the mortgagee is ignorant.”  The emphasis was from Wednesday’s decision, indicating that a mortgagee clearly ignores a known vacancy at its peril.