On December 26, 2022, Nelson visited the property after noticing his security cameras had gone offline. He discovered a burst water pipe that caused extensive damage to the building and its contents. Nelson filed an insurance claim with his provider, Frankenmuth Mutual Insurance Company.

The Insurance Policy

Nelson had a commercial property insurance policy for Scott's Motorcycle Service with Frankenmuth Mutual Insurance Company. Frankenmuth investigated the claim, sending an adjuster, reviewing documents, and examining Nelson under oath.

Frankenmuth denied the claim in June 2023, citing the policy's Vacancy condition. The policy stated:

6. Vacancy

a. Description of Terms

(1) as used in this Vacancy Condition, the term building and the term vacant have the meanings set forth in (1)(a) and (1)(b) below:
. . .

(b) 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:
(i) Rented to a lessee or sublessee and used by the lessee or sublessee to conduct its customary operations; and/or
(ii) Used by the building owner to conduct customary operations.

b. Vacancy Provisions
If the building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs:
(1) We will not pay for any loss or damage caused by any of the following, even if they are Covered Causes of Loss:
. . .
(b) Sprinkler leakage, unless you have protected the system against freezing;
. . .
(d) water damage

Under the policy's terms, if a building is vacant for more than 60 consecutive days before a loss, the insurer will not cover damages caused by certain perils, including water damage from burst pipes. The policy defined a building as vacant unless at least 31% of its total square footage was being used to conduct customary operations.

US District Court

Nelson sued, claiming breach of contract and bad faith. He argued that the property was not vacant because his utilities were on, his inventory remained, he monitored the shop, and the closure was only temporary. Frankenmuth countered that because the repair business was no longer operating and generating income, customary operations, as stated in the policy, had ceased.

Frankenmuth argued that the vacancy condition of the policy applied in this case to deny coverage. Nelson argued that the property was not vacant because the business was only temporarily closed, the property still held a lot of inventory, all the utilities were still on and functional, and Nelson had visited the property within thirty days before the loss.

Nelson argued that "vacant" should be interpreted as it is understood by the general public, meaning "empty, without inanimate objects, containing nothing." Under this definition, the property was, of course, not vacant.

While courts will turn to an ordinary dictionary definition for undefined words, that was not necessary in this case since vacant was defined. The policy stated that a building is deemed vacant unless 31% of its total square footage is used by the building owner to conduct customary operations.

Customary Operations

Nelson then argued that he did continue to conduct customary operations, an undefined term in the policy. He argued that customary operations were being conducted because the utilities were maintained; the internet was maintained, which allowed him to monitor security cameras; the location was temporarily not permanently closed; he regularly visited; and he stored many items at the property.

In a similar case, Frankenmuth Mut. Ins. Co. v. Five Points W. Shopping City, LLC, another district court defined customary operations as:

"Customary" means "commonly practiced, used, or observed." Customary, Merriam-Webster.com Dictionary. And an "operation" is the "performance of a practical work." Operation, Merriam-Webster.com Dictionary. Putting these definitions together, the question is whether Winn-Dixie was "performing its commonly practiced work" at any point after June 10, 2018 at 5 Points' building.

The court found that the customary operation of Nelson's business was operating as a motorcycle repair shop. The business was not open to the public or did not generate income between June 2021 and December 2022, and there was no other business operating out of the property. Nelson's occasional visits were to tinker with personal vehicles, not to repair motorcycles for pay.

The court ruled that the building was unambiguously not being used to conduct the customary operations of the business in the 60 days prior to the loss, and therefore, the vacancy condition applied.

Editor's Note

This case highlights the importance of adhering to a policy's conditions, or coverage may be denied. Even though the insured took action that he believed was enough to maintain the property and avoid the vacancy clause, it was not what was strictly required by the policy.

While courts will give the ordinary definition to undefined terms in policies, in this case, "vacant" was defined in the policy, so that definition was used by the court. According to the policy's definition, the motorcycle repair shop was "vacant", so the vacancy condition served to deny coverage.

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