VACANCY CLAUSE BARS COVERAGE FOR FIRE EVEN IF INSURER NOT PREJUDICED

Greene v. Farmers Insurance Exchange
Texas Supreme Court, No. 12-0867 (August 29, 2014)
Justice Johnson (Opinion), Justice Boyd (Concurrence)
Many property insurance policies contain a “vacancy clause” that suspends or excludes coverage if the property is vacant for some specified period. Strictly construing such a vacancy clause in a homeowner’s policy, the Texas Supreme Court held that property damage to a vacant residence caused by a fire migrating from a neighbor’s property was not covered, even though the vacancy did not contribute to the loss and did not prejudice the insurer. Two concurring justices believed the result, while correct, cannot be reconciled with four previous decisions in which the Court applied a material-breach analysis to similar clauses that defined the scope of coverage.

LeWayne Greene moved to a retirement community, leaving her house vacant. A few months later, the vacant house was damaged by a fire that originated on neighboring property. Greene filed a claim under her homeowner’s policy, issued by Farmers on a standard form approved by the Texas Department of Insurance. Farmers denied the claim based on a policy provision suspending coverage sixty days after the house became vacant. Greene had not purchased an approved endorsement that would have provided coverage during an extended vacancy. Greene sued Farmers for breach of contract, and both parties filed motions for summary judgment. The district court granted Greene’s motion, but the court of appeals reversed, holding that the policy unambiguously barred coverage for damage occurring more than sixty days after the house became vacant.

The Texas Supreme Court affirmed the court of appeals’ reversal of the judgment, holding that the “anti-technicality” statute, Texas Insurance Code § 862.054, did not apply, and that the Court’s holdings in several previous cases requiring the insurer to show “prejudice” to justify denying coverage did not compel a similar showing in this case. Both rulings turned on the Court’s conclusion that the vacancy was simply an event triggering suspension of coverage, not a breach by the insured. The insurer therefore did not have to prove a “material” breach, that the vacancy contributed to the fire damage, or that it was “prejudiced” by the vacancy.

The Court distinguished four previous cases concerning notice and consent policy provisions—Hernandez, PAJ, Prodigy, and Lennar—in which it had required the insurer to show prejudice to justify denial of coverage. Each of those cases, the Court said, “involved an insured’s failing to do something it agreed to do or doing something it agreed not to do.” Because there was no breach, there was no need to decide whether it was “material.”

Justice Boyd, joined by Justice Willett, concurred in the judgment, but rejected the Court’s characterization of the four cases. The concurrence argued that each of those cases improperly applied the material-breach doctrine, and would have been decided differently under the “plain-meaning” analysis applied—correctly—by the Court in Greene. Rather than overrule the prior cases, the concurring Justices would strictly limit their scope to the specific provisions at issue in those cases, and acknowledge they are based on public policy, not on contract principles.

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