The United States Court of Appeals for the Second Circuit asked the highest court in New York two questions relating to a property insurance policy covering acts of “vandalism.”
(1) For purposes of construing a property insurance policy covering acts of vandalism, may malicious damage be found to result from an act not directed specifically at the covered property?”
(2) If so, what state of mind is required?
New York’s Court of Appeals, in Georgitsi Realty, LLC v. Penn-Star Ins. Co., 2013-06731 (N.Y. 10/17/2013) [enhanced version available to lexis.com subscribers], answered the questions.
Plaintiff is the owner of a four-story apartment building in Park Slope, Brooklyn. It obtained from defendant a “named perils” policy of property insurance, covering “direct physical loss or damage… caused by or resulting from” any of 14 kinds of events. The peril involved is described in the policy as: “Vandalism, meaning willful and malicious damage to, or destruction of, the described property.”
Armory Plaza, Inc., the owner of the lot next to plaintiff’s building, decided to build a new building that would include an underground parking garage. It hired contractors to do the excavation. According to plaintiff, the excavation caused cracks in the walls and foundations of plaintiff’s building; the cracks became more pronounced, the building began to settle, and plaintiff feared the building would collapse. Plaintiff complained to the New York City Department of Buildings, which issued a series of violations and “stop work” orders. Plaintiff alleges that the violations resulted in guilty pleas or defaults and fines totaling more than $36,000, but that the stop work orders were ignored and the contractors kept working.
Plaintiff obtained a temporary restraining order from the trial court directing Armory and its contractors “to cease all construction and/or excavation work.” This order too, plaintiff says, was ignored.
Plaintiff made a claim under its policy which Penn-Star Insurance Company (Penn-Star) rejected, and plaintiff brought suit in trial court. The case was removed to the United States District Court for the Eastern District of New York, which granted summary judgment for defendant, holding that the alleged conduct of Armory and its contractors was not “vandalism” within the meaning of the policy (Georgitsi Realty, LLC v Penn-Star Ins. Co., 2011 WL 4804873 [ED NY Aug. 30, 2011] [Report and Recommendation of Magistrate Judge] [enhanced version available to lexis.com subscribers]; Georgitsi Realty, LLC v Penn-Star Ins. Co., 2011 WL 4889251 [ED NY Sept. 30, 2011] [adopting Report and Recommendation]) [enhanced version available to lexis.com subscribers]. Plaintiff appealed to the Second Circuit Court of Appeals (Georgitsi Realty, LLC v Penn-Star Ins Co, 702 F.3d 152, 159 [2d Cir 2012]) [enhanced version available to lexis.com subscribers].
On the question of whether an act may be called “vandalism” when it was not directed specifically at the damaged property, the authorities, though sparse, support an affirmative answer. New York, until now, has never addressed the meaning of “vandalism” in an insurance policy. The most relevant New York case is an Appellate Division decision, Cresthill Indus. v Providence Washington Ins. Co. (53 A.D.2d 488 [2d Dept 1976]) [enhanced version available to lexis.com subscribers]. The plaintiff in that case had leased part of the ground floor of a warehouse and stored its property there. “[P]ersons described… as ‘perpetrators’ apparently broke into the unoccupied third floor of the warehouse, uncoupled the pipes carrying water to the bathroom fixture, carried away the fixtures and left the water running from the severed connections”. The water flowed down to the first floor and damaged plaintiff’s property. The damage was held to be covered by an insurance policy applicable to “[v]andalism and malicious mischief, meaning only willful and malicious damage to or destruction of the property covered hereunder”, even though the “perpetrators” did not direct their acts at the plaintiff’s property, and presumably never knew that plaintiff or its property existed.
A case closer to this one on its facts is the decision of the United States Court of Appeals for the Sixth Circuit in Louisville & Jefferson Co. Metropolitan Sewer Dist. v Travelers Ins. Co. (753 F.2d 533 [6th Cir 1985]) [enhanced version available to lexis.com subscribers],. There, the alleged vandal was a person named Distler, the owner of a recycling firm that had a contract to store toxic waste. Distler decided to save money by “storing” the waste in a public sewer. The sewer itself was not property covered under the plaintiff’s insurance policy, but the waste flowed to a sewage treatment plant that was covered. The plaintiff was allowed to recover the damage to the plant under a policy insuring against vandalism. Distler obviously was not directing his activities at the sewage treatment plant. The mere fact of dumping away from the treatment plant did not prevent recovery because Distler’s actions were clearly malicious.
The Court of Appeal, therefore, concluded it saw no reason why the term “vandalism” should be limited to acts directed specifically at the covered property. Vandalism, as the term is ordinarily understood, need not imply a specific intent to accomplish any particular result; vandals may act simply out of a love of excitement, or an unfocused desire to do harm, or out of a desire to enrich oneself without caring about the consequences to others. It is, therefore, not relevant that the alleged act of vandalism did not bring the alleged vandals in direct contact with the covered property. Where damage naturally and foreseeably results from an act of vandalism, a vandalism clause in an insurance policy should cover it.
It is true that, in some cases of alleged vandalism not directed at particular property, the term does not fit. The word vandalism, which derives from the sack of Rome by the original Vandals in 455 AD more readily brings to mind people who smash and loot than business owners who seek their own profit in disregard of the injury they do to the property of others. However, there is no principled distinction between the two. An excavator who is paid to dig a hole, and does so in conscious disregard of likely damage to the building next door, is, for these purposes, not essentially different from an irresponsible youth who might dig a hole on the same property, with the same effect, whether in search of buried treasure or just for fun.
In common speech, and by the express terms of the policy in suit, vandalism is “malicious” damage to property. The Second Circuit’s second question asks, in essence, what state of mind amounts to “malice” for these purposes. As a court must, before assessing punitive damages, it must conclude that the conduct posited as vandalism is “malicious” when it reflects such a conscious and deliberate disregard of the interests of others that it may be called willful or wanton. This test will serve to distinguish between acts that may fairly be called vandalism and ordinary tortious conduct.
However, insurance against vandalism should not be converted into something approaching general coverage for property damage. Insureds who want broader coverage should obtain it and pay an appropriate premium.
The Court of Appeals answered the first question “yes.” It answered the second by saying that the state of mind is the same that would be required to award punitive damages against the alleged vandal. That is, a conscious and deliberate disregard of the interests of others that the conduct in question may be called willful or wanton.
The Second Circuit and the New York Court of Appeal was faced with a clear and unambiguous statement of a peril, that if it occurred, the insurer agreed to pay indemnity. That definition, “vandalism, meaning willful and malicious damage to, or destruction of, the described property.” Although the actions of Armory Plaza, Inc. was not directed to the property of the plaintiff its conduct caused damage to plaintiffs property. Since they had notice and even ignored a court order, the conduct deliberately disregarded the interests of the plaintiff and was willful or wanton.
By Barry Zalma, Attorney and Consultant
Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma or email@example.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.
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