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Risk Management
The lure of wiring, pipes & coils
Vacant buildings attract destructive scavengers in search of copper
By Donald S. Malecki, CPCU
Insurers are not particularly keen on issuing commercial property policies on vacant buildings or structures—or to cover these types of properties on existing policies. Being largely unattended, these properties are particularly vulnerable to physical loss or damage from various causes of loss. This is the reason some of these policies commonly exclude losses resulting commonly from vandalism, theft and water.
With the price of copper currently worth its weight in gold, vacant properties are easy targets, since these types of properties are not always protected against loss or damage to the extent they otherwise would be when they are occupied.
Not all such losses, of course, can be prevented and when they do occur, these losses can be substantial because of the damages that usually accompany the removal of copper from buildings or structures. When copper electric wiring, pipes and/or air-conditioning coils are extracted from a building or structure, extensive damage to the electric, water and/or HVAC systems usually results.
When these losses occur, the response from the insurer will be to deny coverage, particularly when damages are excessive. On the other hand, the usual response of the property owner or sole tenant (named insured), is to become “creative” in order to get the losses covered in whole or in part.
Copper thieves
One such case where copper was the target of thieves resulting in no coverage to the owners was Certain Underwriters At Lloyds London v. Wan E Law; Sie L Tsu, No. 08-20159 (U.S. Dist. Ct. App. 5thCir. 2009). The copper that was taken came out of 17 free-standing commercial air-conditioning units installed on the roof of a vacant office building.
To get to their target, the thieves had to scale the building’s roof, tear off portions of the formed housings of each air-conditioning unit and then break into the units to extract the copper condenser coils. While the salvage value of the copper was only $2,000, the total damage caused by the thieves was closer to $200,000.
The particular property policy issued by the Underwriters provided coverage for loss caused by vandalism but excluded coverage for loss by theft, other than for any damage resulting from burglars breaking into or exiting from the insured building. The Underwriters, in this case, denied coverage based on the policy’s theft exclusion.
The district court ruled in favor of the insureds and awarded them $177,150, which represented the gross cost of repair minus the salvage value of the stolen copper, plus attorneys’ fees. The Underwriters appealed this decision claiming that the district court (1) misinterpreted the insurance policy and (2) miscalculated the damages.
The key question on appeal was whether or not the damage to the air conditioners was considered to be (1) vandalism [vandalism coverage], (2) caused by or resulting from theft [theft exclusion], or (3) building damage caused by the breaking in or exiting of burglars [the ingress/egress exception].
The Underwriters asserted that the damage done to the roof-mounted air conditioners resulted from theft and was therefore excluded from coverage by the theft exclusion. Insofar as the Underwriters were concerned, the district court’s decision that coverage applied in light of the ingress/egress exception to the theft exclusion was in error. The insureds, on the other hand, maintained that coverage applied because the loss was caused by vandalism along with the ingress/egress exception.
Vandalism issue
From the court of appeals’ perspective, had vandalism not been defined in the policy as narrowly as it was, the damage might have been considered to have encompassed all willful damage, including damage caused in the course of a burglary. The reason this was not the case, however, was that the policy definition of vandalism was defined to mean “willful and malicious damage to, or destruction of, the described property.”
The insured contended that the purpose for which damage was done was irrelevant to determining if the cause of the damage was vandalism. The problem with that argument, from the court of appeals’ standpoint, was that it ignored the distinction that the policy made and would have rendered the theft exclusion meaningless.
Cogently, the court of appeals stated that the policy provisions at issue; that is, vandalism coverage, the theft exclusion, and the ingress/egress exception to the theft exclusion, indisputably turned on the purpose for which the damage at issue was done.
Damage done for no purpose other than to destroy property for destruction’s sake is vandalism, explained the court. Incidental damage done in furtherance of thievery, the court continued, fell within the narrower category of damage resulting from theft. Damage to the insured building, the court concluded, done by burglars entering or leaving the building that they attempted to burglarize fell into the even narrower ingress/egress exception.
Having explained the foregoing, the court of appeals was quick to add that it should not be misunderstood as saying that vandalism can never occur during a theft or vice versa. What this court also wanted to make clear was that damage done in the furtherance of a theft or attempted theft was damage that fell within the theft exclusion of the policy.
In deciding against the insureds, the court of appeals stated that the damage occurred solely in the furtherance of stealing the copper. Just enough of the air-conditioning units’ exterior metal paneling was torn away to allow access to the machinery inside. In other words, the court explained, what damage had occurred was for the sole purpose of gaining access to the copper.
The court of appeals also stated that there was no evidence of malicious damage. Even though the damage might have exceeded the minimum required to gain access to the copper tubing, the court said it was done entirely to gain such access.
The ingress/egress exception
On the issue of the ingress/egress exception to the theft exclusion, the insured maintained that coverage applied. Their rationale was based on the district (lower) court’s decision that the air conditioners were part of the building because they were fixtures and the policy defined “building” to include fixtures. Thus, according to the insureds, the thieves’ entry into the rooftop fixtures was the equivalent to “breaking in or exiting” the building.
The court of appeals did not dispute the fact that the large air-conditioner units could be considered fixtures and that the insured building includes fixtures. From its perspective, however, the exception to the theft exclusion meant only that the insurer would pay collateral damage caused by the burglars’ attempt to gain access to the interior of the building. In so stating, this court also said that this was not the only time this meaning was affixed to this coverage exception.
The court of appeals’ analysis concluded that coverage did not apply because the loss was caused by theft, which was specifically excluded. This decision, however, was not unanimous. The dissenting justice was of the opinion that the air-conditioning units were destroyed when thieves broke into the units to steal the copper coils. With these units being part of the building, it was the dissenting justice’s opinion that the building exception to the theft exclusion (ingress/egress) should have applied.
One of the cases referred to by the court of appeals was Gen. Star Indemnity Co. v. Zelonker, 769 So.2d 1093 (Fl. Ct. App. 2000). This case arose following a coverage dispute when unknown individuals came to the insured’s warehouse and made holes in the meter box and electrical conduit in order to pull copper wiring out. In doing so, they also damaged the air conditioner.
The court held that coverage did not apply for damage to the meter boxes because the damage was the result of theft and did not constitute a building entry. The court, however, did affirm an award for damage to the air conditioner based on the jury’s finding that damage was vandalism and not theft.
Conclusion
While there may be a tendency to conclude that theft of copper wiring, piping, air-conditioning coils and other valuable property from a vacant building will likely fall within the theft exclusion and not be considered vandalism, each case should be weighed on its own merits.
Policy language differs. While standard policy forms are available from the American Association of Insurance Services, and Insurance Services Office, many independently filed forms are available as well. The policy of Certain Underwriters At Lloyds London involved in the first case discussed in this article offered broader coverage, for example, compared to what ISO offers in conjunction with its Building and Personal Property Coverage Form CP 00 10 and Causes of Loss Form CP 10 03.
Under the building and personal property form of ISO, for example, even vandalism is not covered when a building has been vacant for more than 60 days. With both theft and attempted theft also excluded, there is little room for argument.
Even if the coverage form is broader in scope than what ISO offers, for example, there still has to be some realization by insureds that vacant buildings and structures are open invitations to physical loss or damage, requiring some kind of implementation of loss control.
The fact that insureds are fortunate enough to obtain coverage also does not mean that an insurer will necessarily be willing to continue coverage once a covered loss occurs. That may be wishful thinking because insurers do not like to write insurance on vacant premises regardless of coverage limitations.
It may be necessary, at times, for insureds to seek out coverage in the excess and surplus lines markets. Producers interested in markets should refer to The Insurance Marketplace publication of The Rough Notes Company. Insureds may likely have to pay more for the coverage, but they will have coverage where the underwriter is cognizant of the situation, which is not always the case in the standard insurance market.
The author
Donald S. Malecki, CPCU, has spent 49 years in the insurance and risk management consulting business. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C.
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