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56 the risk underwritten by the standard line car- rier changes considerably. Most standard-line policies contain language limiting the types of losses covered after a prop- erty has been vacant for a stated period of time. Why? Quite simply, a vacant property has an increased risk of damage. Many policies set that period of vacancy at 30 days, although some will extend the vacancy clause to 60 or 90 days. After the property remains vacant for said period of time, certain perils will no longer be covered. e most common exclusion is vandalism. Vandalism is a broad term, and in the con- text of an insurance contract, is rarely defined. is lack of definition can lead to confusion as to what occurrences may be covered as "vandal- ism" and what occurrences may be excluded. ere is a split in legal precedent as to whether the definition of vandalism is ambiguous, what actions actually constitute "vandalism or mali- cious mischief," and whether those actions also include "arson." In reviewing the conflicting decisions, a servicer or investor can assess risk exposure and the important steps to take in order to limit that risk. LEGAL PRECEDENT Generally, the interpretation of an insur- ance policy, like other contracts, is a question of law. Ambiguous terms in an insurance policy are commonly given their plain and ordinary meaning unless the parties have expressed a contrary intent. In most states, any ambiguity is construed against the insurer as the drafter of the policy and in favor of the insured. When addressing a vacant, vandalized property with damage from an occurrence of arson, the coverage afforded the mortgagee rests on the interpretation of the term "vandalism." Please note, insurance policies differ in contract language and definition, so application of legal precedent is contingent on the similarities and/ or the differences in the language of the policy governing the loss. In Estes v. St. Paul Fire and Marine Insurance Company, a Kansas federal court held that in an insurance policy that excluded vandalism from coverage, if the home was vacant for 30 days or more, "vandalism" included arson. e court pointed out in the decision that vandalism is commonly defined as "the willful or malicious destruction or defacement of things of beauty or of public or private property", citing Webster's ird New International Dictionary. e court also noted that arson is defined as "the willful malicious burning of or attempt to burn any building, structure, or property of another with criminal or fraudulent intent." e court reasoned that arson of a private dwelling was clearly within the plain and ordinary meaning of vandalism. In Battishill v. Farmers Alliance Insurance Company, a claimant in New Mexico suffered a fire loss, which was determined to be inten- tional, to a rental home that had been vacant for more than 30 days. e insured filed a claim for loss, only to have the insurer deny, ar- guing the loss was excluded under the vacancy clause. e insurer maintained the fire was an act of vandalism and malicious mischief. e subject insurance policy did not define the term vandalism or malicious mischief, nor did it mention specifically the term "arson." e New Mexico Supreme Court reasoned the common and ordinary meaning of an undefined term should be based upon contem- porary usage, where possible, because the issue is how a reasonable insured would understand the term at the time of purchase. e court noted that "the ancient connotations of 'van- dalism' have given way, in modern usage of the term, to a very broad meaning of the word that includes the destruction of property gener- ally." e court then concluded that "it can be inferred that fire, vandalism, and malicious mischief are covered, unless they fit within an explicit exception. erefore, even though arson is a form of fire, to which no exception applies, it is encompassed within the defini- tions of vandalism and malicious mischief, to which an exception does apply." In contrast, other courts have held that the term "vandalism" is ambiguous, and when left undefined in the insurance policy, should be construed in a light most favorable to the claimant. In American States Insurance Com- pany v. Rancho San Marcos Properties, LLC, the Washington Court of Appeals held that arson was not "vandalism" under the vandalism exclusion in a property insurance policy. e court held that, "is policy does not exclude arson. Not all arson is an act of vandalism. So when the vandalism exclusion is read strictly (as we must), arson is covered. Moreover, coverage here should not turn on esoteric, semantic, or nice distinctions. Vandalism de- scribes the motive for an event, not the event." In its summation, the court stated succinctly, "Ultimately, the question (at least in Washing- ton) is whether the average person purchasing insurance would believe that he or she assumed Legal precedent differs in the interpretation of the terms "vandalism" and "arson" as they are applied under the vacancy exclusion. A servicer or investor should be aware of the limitations in coverage under a borrower's insurance policy for vacant properties that suffer losses from arson."

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