In Old Second Nat’l Bank v. Indiana Ins Co., 2015 IL App (1st) 140265 (Ill. App. Ct. 1st Dist. 2015), the Illinois Appellate Court for the First District upheld summary judgment in favor of a mortgage holder, finding a standard mortgage clause trumps a vacancy condition even though the insured property was vacant for more than four years prior to the loss.
The owner of an abandoned slaughterhouse, Brothers Future Holdings, LLC (Brothers), applied for property insurance through its insurance broker, Assurance Agency, Ltd. (Assurance). Assurance had a relationship with Peerless Indemnity Insurance Co. (Peerless) in which Assurance could solicit and process applications for coverage and bind Peerless to certain policies. The application submitted by Assurance on behalf of Brothers contained several erroneous statements regarding the building. The application incorrectly described the abandoned building as 100% owner occupied. Peerless subsequently issued a policy based on this application. The policy was renewed a year later.
During the renewal policy period, vandals broke into the building and severely damaged the structure and stole copper pipes, wiring, fixtures and other equipment. The loss totaled approximately $2.3 million. Brothers and the property’s mortgage holder, Old Second National Bank (the Bank), timely submitted a claim to Peerless. Coverage was denied to both Brothers and the Bank based on the Vacancy Condition in the Peerless policy.
The Bank filed suit against Peerless, claiming breach of contract and estoppel. The circuit court granted summary judgment in favor of the Bank, finding the standard mortgage clause required Peerless to indemnify the Bank notwithstanding Peerless’ denial of coverage to Brothers pursuant to the vacancy clause.
The appellate court agreed, explaining that a standard mortgage clause acts as a separate contract between the insurer and the mortgage holder. Peerless’ mortgage clause provided that, “if we deny your claim because of your acts or because you failed to comply with the terms of this policy, the mortgage holder will still have the rights to receive loss payment.” The appellate court reasoned it was the act of Brothers in failing to occupy the building for the 60-day period prior to the loss that triggered the policy’s vacancy provision. Accordingly, the mortgage holder was still entitled to recover under the Peerless Policy.
The Illinois Appellate Court’s decision appears to discount an insurer’s right to exclude coverage for vacant property. Due to the risks of vandalism and theft, an insurer may choose not to insure vacant properties. Nevertheless, the Illinois Appellate Court found the mortgagee must not be refused coverage as long as the loss did not result from the mortgagee’s breach of the policy. Different language in the mortgage clause would likely lead to a different, and better, result for the insurer.
Of note, in a related proceeding, the Illinois Appellate Court for the First District affirmed a jury verdict in favor of Brothers in the amount of $2.3 million and against Assurance for negligently causing Brothers to be denied coverage for vandalism and theft under the Peerless policy. See Bros. Future Holdings, LLC v. Ind. Ins. Co., 2015 IL App (1st) 141581.