Minnesota Court Rules That Vandalism Is An Act Of The Insured So Prior Owner’s Actions In Failing To Secure The Property Did Not Negate The Mortgagee’s Claim For Coverage Under A Standard Mortgage Clause

In Commerce Bank v. West Bend Mut. Ins. Co., A14-0247 (Minn. Ct. App. Sept. 22, 2014) the mortgagee brought suit under a general liability insurance policy for damages from vandalism. The policy provided that if the insurer denied the insured’s claim due to its misfeasance or failure to comply with the policy, the mortgagee still had a right to payment of its claim. The policy also limited coverage in cases of vacancy, except no coverage exists if the building has been vacant for more than 60 consecutive days before the loss or damage occurs. In September 2011 the property was vandalized and incurred significant damage, resulting in the loss. After the loan went into default and the mortgagee took title to the property in January 2012, it submitted a claim for the September 2011 loss. The insurer denied the claim saying the loss was excluded from coverage because the building had been vacant for more than 60 days prior to the loss. The mortgagee brought suit for coverage and lost. The appellate court reversed observing that in connection with policies containing a standard insurer clause such as this, it is axiomatic that coverage will not be invalidated by the mortgagor’s acts or neglect. The term any acts used in a standard mortgage clause do not refer merely to acts prohibited by the contract or to failure to comply with the terms thereof, but literally embrace any act of the mortgagor. The insurer responded, and the district court agreed, that the vacancy hazards excluded under the policy, such as vandalism, water damage, and theft, are not policy provisions to be obeyed, but risks that were never assumed citing _Waterstone Bank, SSB v. Am. Family Mut. Ins. Co_., 348 Wis.2d 213, 832 N.W.2d 152, 156 (Wis.App.2013). _Waterstone_ held that such a loss was not covered in the first place, because the vacancy clause [was] not a term or condition, the violation of which by the property owner’s acts would forfeit or void the policy, therefore the mortgage holder clause [did] not create coverage for a risk that was never assumed. Id. at 156-57. The Minnesota reviewing court rejected _Waterstone_ finding that it directly contravenes Minnesota law. The supreme court of Minnesota in _American Nat’l Bank and Trust Co., v. Young_, 329 N.W.2d 805 (Minn. 1983) unequivocally established that, under a standard mortgage clause, ‘the insurance with respect to the mortgagee shall not be invalidated by the mortgagor’s acts or neglect.’ This principle applies not only when the mortgager’s ‘acts [are] prohibited by the contract or [because of the mortgagor’s] failure to comply with the terms thereof, but literally embrace[s] any act of the mortgagor.’ The court was unpersuaded by the insurer’s argument that allowing coverage would render the vacancy provision meaningless. The reason given by the insurer was that ‘[t]he non-coverage exists by the terms of the vacancy provision and not by any breach or violation by the property owner.’ But it was the owner’s failure to occupy the property that comprised the acts or negligence causing the property to remain vacant for more than 60 days. The mortgagee did not breach the policy so the vacancy provision does not apply.

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