Is Unauthorized Construction/Demolition Performed by a Tenant Covered Damage Under a First-Party Property Policy?

If a homeowner agrees to sell a home, and as part of the sale agreement allows the prospective buyer to: (1) lease the property before escrow is closed, and (2) make certain improvements to the property with the owner’s permission, but then, after taking possession during the lease, the prospective buyer tears the property down but never rebuilds it or improves it, should the homeowner’s insurance claim for the damage be covered?

The Idaho Supreme Court recently addressed this very issue in Fisher v. Garrison Property and Casualty Insurance Company,¹ and ruled that the exclusions cited to and relied on by the insurer did not preclude coverage for the insured’s claim for destruction of her property by the renter/prospective buyer.

The case arose from a scenario in which the insured had entered into a “Real Estate Purchase and Sale Agreement” where the prospective buyer would purchase the property for $153,000; that the purchase was contingent upon him obtaining financing; that the buyer intended to occupy the property as his primary residence; that the prospective buyer would lease the property for fixed period; and that if the parties could not close escrow before March 31, 2013, the insured/homeowner would extend the lease on a month-to-month basis for a period up to September 1, 2013.

The purchase agreement also included a provision that stated:

Buyer intends to make certain improvements to the property upon possession, with the intent to sell the property for a profit which might be prior to the end of the lease period. The buyer is required to give a monthly update for plans/upgrades.

The insured and prospective buyer also executed a lease agreement. The rental agreement stated that the tenant needed to return the property to the owner in is as good condition as when it was received, except for ordinary wear and tear.

After the tenant took possession of the property, the insured learned that the tenant had torn the entire house down. Although the tenant initially agreed to rebuild a house on the foundation, after erecting rough framing of some interior and exterior walls, the tenant/prospective buyer ceased all work on the property and walked away from the lease and the purchase agreement.

The insured then filed a claim under her homeowner’s insurance policy issued by Garrison Property and Casualty Insurance Company. The insurer denied the claim, citing exclusions for faulty, inadequate, or defective work/construction. After the insured sued the insurer, the carrier moved for summary judgment.

The trial court granted summary judgment for the insurer, and the dispute made its way to the Iowa Supreme Court.

The insurance policy contained the following pertinent provisions:

[R]isk of direct loss to property described in Coverage[ ] A … if that loss is a physical loss to property.

2. We do not insure for loss to property described in Coverages A and B caused by any of the following. However, any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered….

c. Faulty, inadequate or defective:

(1) planning, zoning, development, surveying, siting;

(2) design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;

(3) materials used in repair, construction, renovation or remodeling; or

(4) maintenance;

of part or all of any property whether on or off the Described Location.

The Idaho Supreme Court vacated the trial court’s ruling. The court explained that, for the faulty workmanship exclusions to apply, the evidence must show that the direct physical loss was caused by faulty, inadequate, or defective design, specifications, workmanship, repair, construction, renovation, remodeling, grading, or compaction of part of any property on or off the described location.

The court however concluded that the cause of the loss was not the tenant/prospective buyer’s defective workmanship or his failure to complete the rebuilding of a house on the foundation that remained after he had torn the insured’s home down. Instead, the court concluded that the loss triggering event was the unauthorized demolition of the insured’s home.

In other words, the court determined that the destruction of the insured’s home was not caused by renovations agreed to by the insured. Instead, the damage consisted of unauthorized destruction. On this point, the court stated:

The Plaintiff had authorized Mr. Reynoso to perform some remodeling, such as installing new flooring, countertops, light fixtures, paint and other cosmetic improvements. There is no evidence in the record that he did any remodeling at all, much less that the direct cause of the loss of the Plaintiff’s house was caused by any remodeling that had been done.

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¹ Fisher v. Garrison Property and Cas. Ins. Co., No. 44117-2016 (Idaho May 26, 2017).