For the first time, the Court of Appeals in Georgitsi Realty, LLC v. Penn-Star Insurance Company weighed in how broadly the term “vandalism” should be interpreted when used in a property insurance policy. It appears that the Court’s broad interpretation of “vandalism” may expose property insurers to claims for damages allegedly caused by construction on neighboring properties.
The insured in Georgitsi owned a four-story brownstone in Park Slope, Brooklyn. The insured procured a “named perils” property insurance policy from Penn-Star covering “direct physical loss or damage . . . caused by or resulting from” numerous perils, including “vandalism.” The policy defines vandalism as “meaning willful and malicious damage to, or destruction of, the described property.”
The insured’s neighbor, Armory Plaza, Inc., began construction of an underground parking garage that began causing substantial damage to the foundation of the insured’s building. The New York City Department of Buildings issued violations and “stop work” orders against Armory, and the insured obtained a temporary restraining order from the Supreme Court “to cease all construction and/or excavation work.” Armory ignored all of them.
Penn-Star rejected the insured’s claim so it sued its insurer, and the district court found in favor of Penn-Star, holding that Armory’s alleged conduct did not constitute “vandalism” under the policy. The insured appealed to the Second Circuit, which certified the following two questions to the Court of Appeals:
- 1) “For purposes of construing a property insurance policy covering acts of vandalism, may malicious damage be found to result from an act not directed specifically at the covered property?”
- 2) “If so, what state of mind is required?”
In answering the first question in the affirmative, the Court held that there is no reason to limit the scope of the term vandalism to acts directed specifically at covered property. The Court compared Armory’s “conscious disregard of likely damage to the building next door” to that of an “irresponsible youth who might dig a hole on the same property… whether in search of buried treasure or just for fun.”
Nevertheless, the Court ruled that a “malicious” state of mind in this context requires the same showing as that for punitive damages; the actor must demonstrate “such a conscious and deliberate disregard of the interests of others that [it] may be called willful or wanton” (citations omitted). The Court reasoned that the term “malicious” distinguishes vandalism from ordinary tortious conduct, and thus prevents the insured from gaining more than he bargained for in the insurance contract.