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Travelers Property Casualty Company of America et al v. Superior Court of the State of California

April 17, 2013


ORIGINAL PROCEEDINGS in mandate. John L. Segal, Judge. (Los Angeles County Super. Ct. No. BC453024)

The opinion of the court was delivered by: Croskey, J.


(Los Angeles County Super. Ct. No. BC453024)


A developer obtained a construction loan from a bank, and began construction on a multi-unit condominium complex. The bank required the developer to maintain builder's risk insurance (i.e., a construction policy) on the property and to identify the bank, and its successors and assigns, as loss payee. The developer, apparently, did so. Eventually, when the condominium complex was near completion, the developer fell behind in its payments on the loan. After the developer's default, the bank sold the loan to an investor, who would ultimately foreclose on the property. After the assignment to the investor, but before the foreclosure sale, the developer's construction insurance policy lapsed and the developer sought a new policy. At this point, the developer represented to its insurance broker that a homeowner's association had been created, and that most of the condominium units had been sold. Given those facts, the broker discussed the possibility of replacing the builder's risk policy with a condominium policy issued to the homeowners association. The developer agreed and obtained a condominium policy for the homeowners association, from an insurer for which the broker was an authorized agent. However, it would subsequently be revealed that no certificate of occupancy was ever issued and no units were ever occupied; any sales which may have been pending failed to close.

Shortly after the new policy issued, the property was allegedly damaged by theft and vandalism. The developer filed for bankruptcy and the investor obtained the property through foreclosure. Subsequently, the investor filed a claim against the insurer for the losses from the theft and vandalism. The insurer denied the claim, on the basis that the condominium policy excluded coverage for such losses if incurred when the property was vacant. The investor brought the instant action against the insurer for breach of contract, and against the broker (and the insurer, as the broker's principal) for professional negligence.

The insurer and broker both moved for summary judgment, and their motions were denied. The insurer and broker filed petitions for writ of mandate, challenging the trial court's rulings. We conclude that the trial court should have granted both motions for summary judgment. We will therefore issue the requested writ. As to the investor's cause of action for breach of contract against the insurer, the vacancy exclusion is applicable to the claim and plainly bars coverage. As to the investor's cause of action for professional negligence, we hold that the broker owed no duty to the investor to provide any particular type of coverage to the developer and the homeowners association, its clients. If the developer breached its contract with the bank (and its assignee) by failing to maintain builder's risk insurance, the remedy of the investor, if any, is against the developer.


1. The Initial Loan

On September 21, 2005, Joy Investment Group (Joy) obtained a $4.5 million construction loan from East West Bank (EWB), in order to construct a 13-unit condominium project at 332 South Virgil Avenue, in Los Angeles (the property). Under the construction loan agreement, Joy covenanted to maintain "fire and other risk insurance . . . as Lender[*fn1 ] may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender." The insurance clause further provided, "In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender's loss payable or other endorsements as Lender may require." In addition, Joy executed a separate agreement to provide insurance in connection with the loan. The agreement to provide insurance set forth several different types of insurance which Joy was required to provide. Specifically with the respect to the property, Joy agreed to provide (1) fire and extended coverage; (2) builder's all risk coverage; and (3) general liability insurance.

Construction began, and, although the record is silent on the matter, it is assumed that Joy obtained the necessary coverages. In any event, it appears that, from at least some point in 2008, Joy obtained its insurance from Koram Insurance Center, Inc. (Koram), which placed its 2008 policies with Underwriters at Lloyd's of London. Koram issued certificates of insurance indicating that EWB, its successors and/or assigns, was "named as a mortgagee" and, in some cases, as an "additional insured." The last of the Lloyd's policies was effective from October 1, 2008 through January 1, 2009.

2. The Loan is Assigned

By November 2008, however, Joy was in default on the construction loan. Indeed, Joy had by then been in default for at least six months. Michael M. Braum, Trustee of the Braum Lalehzarzadeh Living Trust (Braum) purchased the note from EWB.*fn2 Braum had inspected the property and thought it was "a winner." According to Braum, "[e]verything was finished," and the units were listed for sale. Indeed, Braum had been informed that four of the units were in escrow, although the property was vacant at the time. Braum purchased the note from EWB for $3.7 million, comprised of a $1.1 million downpayment, and an unsecured interim note to EWB. EWB assigned its deed of trust on the property to Braum. It is not clear at what point Braum commenced foreclosure.

3. Joy Obtains the Condominium Insurance Policy

In December 2008, as Joy's then-existing construction insurance policy*fn3 was about to expire, Joy spoke with Koram regarding new insurance. It is undisputed that Jay No, a member of Joy, "informed Koram that several of the units at the [p]roperty had buyers and were in escrow and that Joy had recently created a homeowners[] association for the condominium complex [(HOA)]." It is further undisputed that No and Koram "then discussed obtaining an insurance policy for the HOA instead of the type of [v]acant building[] policy previously issued by [Lloyd's] with Joy . . . as the named insured." Finally, it is undisputed that "[a] written proposal was prepared by Koram concerning a Travelers[*fn4 ] 'HOA' policy, conditioned upon 80% of the condominium units being sold. Mr. No signed the proposal on behalf of Joy . . . /. . . HOA." Indeed, the written proposal, signed by No, is part of the record, and it not only indicates, under "Coverage," "Subject to . . . 80% sold," but, under "Conditions" states, "Subject to . . . 80% occupancy."*fn5 (Capitalization and underlining omitted, both italics added).

Braum would ultimately rely heavily on the fact that Travelers initially declined to issue the policy, due to "inadequate occupancy," but, upon resubmission, agreed to issue the policy once Koram confirmed to Travelers that 10 of the 13 units had been sold.*fn6 However, Braum does not argue, and there is no evidence to suggest, that Koram had not been informed by Joy that 10 of the units had, in fact, been sold.

When Koram received the policy, it sent it to No. Koram never received any objections, questions, concerns or complaints about the policy from anyone at Joy.

4. Relevant Policy Terms

Travelers issued the policy on January 15, 2009, although the policy period commenced on January 1, 2009. The policy was set to run through January 1, 2010. The policy was entitled "Condominium PAC Plus"; the named insured was the HOA. The policy included a businessowners coverage part, with amendatory provisions regarding condominium association coverage, and a general liability part.

The vacancy exclusion at issue in this case is part of the businessowners coverage. The policy identifies the Covered Causes of Loss as "RISKS OF DIRECT PHYSICAL LOSS unless the loss is: [¶] a. Limited in Paragraph A.5., Limitations; or [¶] b. Excluded in Paragraph B., Exclusions." The Limitations paragraph, A.5, follows immediately. The vacancy clause is the fourth limitation therein. It states, "We will not pay for any loss or damage caused by any of the following, even if they are Covered Causes of Loss, if the building where loss or damage occurs has been 'vacant' for more than 60 consecutive days before that loss or damage occurs: [¶] (1) Vandalism; [¶] . . . [¶] (5) 'Theft'; or [¶] (6) Attempted 'theft'." "Vacant" is defined, in the "Property Definitions" section of the policy, as follows: "(1) When this policy is issued to a tenant, and with respect to that tenant's interest in Covered Property, building means the unit or suite rented or leased to the tenant. Such building is vacant when it does not contain enough business personal property to conduct customary operations. [¶] (2) When this policy is issued to the owner or general lessee of a building, building means the entire building. Such building is vacant unless at least 31% of its total square footage is: [¶] (a) Rented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations; or [¶] (b) Used by the building owner to conduct customary operations."

5. The Certificate of Insurance

EWB used a company called Van Wagenen to monitor compliance with insurance requirements in its contracts. On January 14, 2009, Van Wagenen faxed a request for updated insurance information to Joy, on behalf of EWB.*fn7 The one-page request referenced the Lloyd's policy and stated, "A review of our records indicates that the above referenced policy specified a coverage period ending 01/01/09. If the policy has been renewed or a new policy issued, confirm the policy meets the required coverages listed below: [¶] · Fire and Extended Coverages [¶] ...

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