An arson fire engulfs a vacant house. Will the homeowners policycover the damage? The typical fire insurance policy excludescoverage for damage caused by vandalism or malicious mischief ifthe building was vacant for more than 30 days before the loss.Determining whether arson qualifies as vandalism or maliciousmischief can be a difficult task.

Last year, three appellate courts addressed that issue and cameto very different conclusions. A court in Florida found that thevacancy exclusion clearly excludes damage caused by arson; aCalifornia court said the vacancy exclusion might apply, dependingon the intent of the person who set the fire; and a court inTennessee found that the vacancy exclusion obviously does not applyto arson fires.

These courts used the same method to interpret similar vacancyexclusions. Because the policies did not define “fire,”“vandalism,” “malicious mischief” or “arson,” the courts looked atdictionaries to find the ordinary, everyday meaning of those words.They examined how terms like “vandalism” were used throughout thepolicy, not just in the exclusion.

These cases also deal with the same basic facts, because thehouses were vacant and the fires were intentionally set by someoneother than the insureds. Nevertheless, common rules of policyinterpretation, applied to the same situation and policy language,have yielded varying opinions on whether arson is excluded as aform of vandalism.

The Botee case (FL) — Arson is definitelyexcluded

The first case was decided in February 2015, in Florida.[Botee v. Southern Fidelity Ins. Co., 162 So.3d 183 (Fla.Ct. App. 2015).] An intentionally set fire damaged the insured'svacant house. The insurance company denied coverage on the groundsthat the fire was excluded as vandalism and malicious mischief.

The insured argued that the phrase “vandalism and maliciousmischief” did not include arson. She noted that the policy'spersonal property coverage listed “fire” and “vandalism andmalicious mischief” as separate covered perils, which suggests thatfire is not the same as vandalism or malicious mischief. Moreover,the vacancy exclusion listed “vandalism and malicious mischief” asexcluded causes of loss, but did not mention “fire.” Boteeasserted that this would lead an insured to believe that anintentionally set fire was not the same as “vandalism and maliciousmischief.” Therefore, even if someone could interpret arson as aform of vandalism, the exclusion was ambiguous. Thus, she arguedthat because an ambiguity in the policy must be resolved in favorof coverage, the arson damage had to be covered.

The Botee court disagreed. It analyzed the plain and ordinarymeaning of the words “vandalism,” “malicious mischief” and “arson.”“Vandalism” is defined in dictionaries as “willful or maliciousdestruction or defacement of…property.” “Malicious mischief” isdefined as “willful, wanton, or reckless damage to or destructionof another's property.” Arson is defined as “the willful ormalicious burning of property….” Because burning something is aform of damage, destruction or defacement, arson constituteswillful or malicious damage to or destruction or defacement ofproperty. Therefore, the court concluded, arson is a form ofvandalism and malicious mischief, and the vacancy exclusion appliedto the arson fire. Under Botee, arson is clearly excluded by thevacancy exclusion.

The Ong case (CA) — A deliberately set fire might beexcluded

Two months after Botee, a California court reached a decidedlydifferent position. [Ong v. Fire Ins. Exchange, 235Cal.App.4th 901 (Cal. Ct. App. 2015).] In this case, the evidenceshowed that although the fire was intentionally started, the intentwas not to damage the house. The court held that the vacancyexclusion excludes fire only if the fire was started with theintent to cause harm.

A transient started a fire on the kitchen floor of Mr. Ong'svacant house. A mattress lay next to the large hole the fire hadburned in the floor. There were smaller holes burned in the floornear the door, which could have been caused by someone trying tothrow burning wood outside.

Because the fire was intentionally set by a trespasser, theinsurance company denied coverage on the grounds that the fire wasan act of vandalism, and the vacancy exclusion therefore applied.The insured asserted that the transient started the fire in orderto keep warm, not to destroy property. Therefore, the insuredargued, this fire did not qualify as an act of vandalism.

The court determined that the ordinary meaning of “vandalism” isthe willful destruction of property or the destruction of propertywith a desire to cause harm. Absent evidence that someone startedthe fire with the intent to harm, the warming fire did not qualifyas vandalism. Therefore, the vacancy exclusion did not apply, andthe damage was covered.

Under Ong, a deliberately set fire is excluded underthe vacancy exclusion only if it was set in order to cause damage.It follows that the vacancy exclusion will not apply to a fireclaim unless the insurer can prove someone started the fire inorder to cause damage. Making that determination will require factsindicating the mental state and purpose of the person who startedthe fire.

The Phillips case (TN) — Arson is definitely notexcluded

Shortly after Botee and Ong, a Tennessee court concluded thatarson is not excluded by the vacancy exclusion. [Southern TrustInsurance Co. v. Phillips, 474 S.W.3d 660 (Tenn. Ct. App.2015).] When Mr. Phillips' vacant house was substantiallydamaged by an arson fire, the insurance company denied coveragebased on the vacancy exclusion.

The insured argued that the average person did not believe thatarson and vandalism were the same thing. The court agreed,observing that in everyday speech, vandalism and arson are seen asseparate and distinct activities. Likewise, in its list ofspecified perils, the policy listed “fire” as one peril, and“vandalism or malicious mischief” as another separate peril. Thecourt concluded the average insured reading that list would presumethat “arson” qualified as “fire,” and would expect that theexclusion of “vandalism and malicious mischief” did not apply to“arson.” Therefore, under Phillips, the vacancy exclusion does notexclude arson.

Three issues to consider

On a practical level, this review of recent cases highlightsthree principles that apply in any jurisdiction:

• Keep an open mind about how the policy applies to a loss;

• Use objective and neutral language to report facts; and

• Check legal developments before making a coveragedetermination.

1. Keep an open mind

Even though Botee, Ong and Phillips dealt with similarfacts, applied similar policies, and used the same method ofinterpretation, they came to divergent answers on the samequestion. So it is not surprising that an adjuster and an insuredmay have different opinions about how a policy applies to this typeof claim. Therefore, the first tip drawn from these cases is afundamental principle of claim investigation — keep an open mindabout how policy terms apply to the loss at hand.

2. Use objective and neutral language to reportfacts

In the Ong claim, the adjuster and the insurancecompany's fire investigator described the fire as a “warming fire,”and the court relied on that description when it analyzed coverage.Significantly, the court explained that previous cases did notapply to this claim because they did not involve a “warming fire.”This demonstrates that other people will presume that an adjuster'ssummary is accurate and objective. A neutral description of theloss scene or interview allows a coverage determination based onthe facts and not necessarily on the adjuster's initialinterpretation of them.

3. Check the law

Imagine an adjuster with three losses involving vacant housesdamaged by arson. The houses are in Florida, California, andTennessee. Whether the loss is covered or excluded depends on thejurisdiction. Due to widely differing views on the scope of thevacancy exclusion, adjusters should check the current law beforereaching a coverage decision on such claims.

Although the facts and the law change, the purpose of claimadjustment remains the same — to properly apply the policy to theloss. Following these three principles will help the adjusterarrive at the appropriate decision.

Brendan J. Fogarty ([email protected]) is a partner atLHB Pacific Law Partners, LLP. He represents insurers on claims andin litigation. Andrew P. Collier ([email protected]) is an associateat LHB Pacific Law Partners, LLP. Before becoming a lawyer, he wasan adjuster and a claims supervisor.