Catch 22 or Paradox? Stay Tuned!
By Michael C. Perlmuter, JD
President and General Counsel of the Alex N. Sill Company, LLC
We received such positive feedback from readers of our first “war story” described in the August 2, 2018 BLOG (Good Guys Win the Battle: A Recent Property Insurance Settlement War Story), we decided to follow that one with another report from the trenches on a timely topic. However, as the issue we are about to describe is a current matter, we are characterizing it conceptually as a paradoxical insurance coverage issue rather than an existing claim.
This BLOG is about the successful positioning of a business claim — specifically distinguishing the underlying event as vandalism versus theft. This has less to do with semantics and more to do with both understanding the policy language as well as the how different courts will react.
Standard commercial property insurance policies often leave insureds scratching their heads when asserting a claim for damage caused to their property by thieves attempting to steal or successfully stealing property. The issues, you see, revolve around:
- Are the perpetrators vandals or thieves or could the perps be both vandal and thief?
- Does it make any sense to have coverage if the criminals are unsuccessful thieves and no coverage if they are successful thieves?
Here is why it matters:
Many commercial property insurance policies often include coverage for vandalism, but not for theft, i.e., “Covered Causes of Loss” includes “Vandalism and malicious mischief, meaning the willful and malicious damage to or destruction of the property covered.” The same policies however, exclude “loss or damage caused by or resulting from theft, except for building damage caused by the breaking in or exiting of burglars.”
So, if a criminal breaks down a building door and hacks into the walls of the building in order to find and steal copper wiring — and does steal the wiring — for example, what is covered under the policy? That is, what is vandalism and what is theft? These questions (and claims like these) have been the subject of frequent litigation as insurance carriers often maintain that the only damages recoverable in such a circumstance are the damages caused by breaking down the door, and not any of the damages caused by the criminals hacking into the walls because the damage was done in the commission of a theft.
Despite no unanimity of judicial authority in respect to coverage in these circumstances, the opinion of the majority of courts and jurisdictions as well as in our opinion, the most logical and persuasive argument seems to be that in such an instance, an insured would be entitled to recover:
- The damage done to the door, etc., in gaining entrance to the building, and
- The damage done to the walls in hacking, but
- Not the value of the wires that were stolen.
Let’s examine rulings of the Sixth Circuit of the federal court system where we have had considerable interaction and experience. We look to the courts of that jurisdiction for authority.
In Detroit City Dairy, Inc. v. United National Ins. Co., 2007 WL 3333020 (E.D. Mich. Nov. 8, 2007), the action arose when criminals broke into a warehouse, ripping apart the roof, ceiling, walls and refrigeration units in order to take copper wiring, flashing and tubing, causing over $1 million in damage to the building. Reading the vandalism/theft provisions most strictly, the insurer offered only $6,348, simply covering the damage done in entering and exiting the building. The insurer stated that the rest of the damage was due to theft of the copper materials-not vandalism-and therefore was excluded.
The court disagreed, however, reasoning the policy covered the full amount of the building damage, based upon:
- The insurance clause covering vandalism, but not theft, was ambiguous where the losses where arguably caused by vandalism and theft; and
- The policy contained no definition of theft.
Therefore, the theft exclusion was itself ambiguous on its face. Construing the ambiguities against the party drafting the policy (which is commonly referred to as a contract of adhesion), and in favor of finding coverage when there are ambiguities, the court found the theft exclusion did not defeat the million-dollar vandalism damage to the building during the commission of a theft.
Some courts adjudicating vandalism/theft cases have focused on what is meant by “willful and malicious” in the vandalism coverage provision.
In Louisville & Jefferson County Metro SewerDistrict v. Travelers Ins. Co., 753 F.2d 533 (6th Cir. 1985), the Sixth Circuit stated the majority of courts supported the broad interpretation of the malice requirement-meaning “no animosity need be shown, and malice may be inferred from the unlawful act itself” finding coverage for the damage due to vandalism.
Further, Black’s Law Dictionary supports this interpretation defining “malicious” as “substantially certain to cause injury…without just cause or excuse.” Thus, despite the arguments made by some carriers, the criminal who causes “incidental” damage to a building with the primary intention to steal does not preclude coverage under the vandalism provisions of a policy.
This position is supported by courts in Alabama and Florida. In Aetna Cas. & Sur. Co. v. Arizona, 481 So.2d 380 (1985), the court stated that “[The insurance contract provision before us for interpretation provides coverage for acts of vandalism or damage done to the building in connection with a burglary or theft…[w]e find that some of the items related to the subject warehouse were stolen, and that the insurance company should not be liable for the replacement cost of those items. On the other hand, it is equally clear that some of the damage of which the Plaintiffs complain was the direct result of vandalism; thus, the insurance company will be liable for the total cost, both materials and labor, for the repair of that damage.”
In Allstate Ins. Co. v. Coin-O-Mat, Inc., 202 So.2d 598 (Fla. Dist. Ct. App. 1967), the Florida District Court of Appeals held the policy covered damage to the property that occurred during the theft: “[T]he plaintiff suffered a direct loss to its insured property through vandalism or malicious mischief, which loss is not excluded from coverage even though it may have occurred in the course of an actual or attempted theft or burglary.” [Emphasis added.]
Summarizing, an insured should expect that its carrier will take the position that damage done to its building in the commission of a theft is not covered under its policy due to the theft exclusion. And, despite there being confusing and conflicting judicial decisions in this area, the better and more reasoned argument is that:
- The theft exclusion is a narrow exception to vandalism coverage; and
- It does not exclude vandalism caused prior to or concurrently with a theft for, among others, the simple reason that if interpreted any other way, an insured would not be able to recover for the damages caused by a criminal who vandalizes a building while in the process of successfully stealing copper wiring, while the same insured would be able to recover for the damages caused to his building if the same criminal was unsuccessful because he did not find copper wiring in the building. The difference in finding coverage vs. not finding coverage cannot and should not revolve around the success of the thief!
Stay tuned for the carrier’s position in our current matter!