AVERN COHN, UNITED STATES DISTRICT JUDGE.
This is a property loss insurance case. Plaintiff K.V.G. Properties, Inc. (KVG) is suing defendant Westfield Insurance Company (Westfield) claiming breach of contract and seeking a declaration of coverage. As will be explained, KVG seeks coverage for losses to commercial property caused by tenants growing marijuana, an activity not authorized by KVG.
Before the Court is Westfield's motion for summary judgment. Westfield says that summary judgment is appropriate because (1) KVG has no proof that the damage occurred during the policy period, (2) coverage was properly denied based on exclusions relating to (a) illegal/dishonest acts, (b) unauthorized construction or remodeling and (c) the presence of moisture
The relevant facts not in dispute follow:
KVG, a Michigan corporation with its principal place of business in Wixom, Michigan owns three commercial properties located at 42910, 42916 and 42920 Ten Mile Road, Novi, Michigan. The properties can be used for general office or light industrial businesses. Each building is divided into units which KVG generally rents under lease agreements.
Westfield issued a commercial insurance policy to KVG, Policy No. CWP 3449419, effective January 30, 2015 — January 30, 2016 covering the units at the three properties against direct physical loss or damage. During the policy period, KVG had the following lease agreements:
Address: Tenant: 42916 Ten Mile Road John Abdaal 7-1-2015 to 6-30-2015 Units 7 and 8 42916 Ten Mile Road Renee Shammas 7-1-2015 to 6-30-2015 Units 9 and 10 42916 Ten Mile Road Nahed Hamma 7-1-2015 to 6-30-2015 Units 11 and 12 42920 Ten Mile Road Brian Yono 10-1-2012 to 3-31-2014 Units 15, 16 Addendum, 8-1-2-15 to 7-31-2018 42920 Ten Mile Road FHM Enterprises 12-1-2011 to 11-30-2014 Units 17, 18 Addendum 12-1-2014 to 11-30-2019 Lease Term:
On or about November 2, 2015, KVG informed Westfield that its tenants in units 7, 8, 9, 10, 11, and 12 located at 42916 Ten Mile Road and its tenants in units 13, 14, 15, and 16 located at 42920 Ten Mile Road had damaged the property by using them for to grow marijuana. KVG apparently became aware of this when DEA agents executed a search warrant on the units on October 29, 2015.
Following the raid, KVG, through its shareholder, property manager and representative, Kyriakos "Chuck" Damavoletes, filed eviction actions against the tenants in the affected units because of the damage to the units caused by the marijuana growing operations. KVG eventually obtained judgments for possession and eviction orders for all of the affected units.
KVG says that the tenants caused significant damage to the units by removing walls, cutting holes in the roof, adding HVAC ductwork, and adding gas lines, which requires service/replacement of the heaters and air conditioning units in each unit. KVG estimates the damage as follows; $18,182.98 for repairing the electrical systems, $74,550.00 for repairing the
Westfield denied KVG's claim following an investigation. A letter dated January 8, 2016 sets for the reasons for the denial and states in pertinent part:
The letter also cited several policy exclusions which will be discussed below.
"The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A moving party may meet that burden "by `showing'-that is, pointing out to the district court-that there is an absence of evidence to support the nonmoving party's case."
Fed. R. Civ. P. 56(c)(1).
The Court must decide "whether the evidence presents a sufficient disagreement to require submission to a [trier of fact] or whether it is so one-sided that one party must prevail as a matter of law."
In Michigan, "in reviewing an insurance policy dispute [courts] must look to the language of the insurance policy and interpret the terms therein in accordance with Michigan's well-established principles of contract construction," the predominant rule being that "an insurance contract must be enforced in accordance with its terms."
Westfield first says that summary judgment is appropriate because KVG has not shown that the damage occurred during the policy period. The policy period is from January 30, 2015 to January 30, 2016. Here, Damavoletes testified at deposition that units 7-12 at 42916 Ten Mile Road had been occupied by a former tenant, Luxury Sheets, since about 2012. Tenants Abdaal, Shammas and Hamma took possession of Luxury Sheets' space in 2015. There are no records of the units' condition when Luxury Sheets took possession or when Abdaal, Shammas and Hamma took possession in 2015. Similarly, the tenants in units 15-18 at 42920 Ten Mile Road, Yono and FHM Enterprises, took possession in 2011 and 2012, several years before the policy period began. There are no records of the condition of the units either before or during these tenancies. Apparently, KVG never entered the units between 2011 and 2015.
While the record contains scant evidence as to precisely when the damage occurred, given that Westfield has consistently relied on policy exclusions to deny coverage, the Court will assume, without deciding, that the damage to the units commenced during the policy period.
KVG contends that the damage to the units was vandalism for which coverage is provided. In other words, KVG says that the exclusions in the policy Westfield now relies on — dishonest/illegal acts, unauthorized construction or remodeling, and the presence of moisture — do not apply. At oral argument, counsel for KVG conceded that if the Court were to conclude that the damage was not vandalism, then it would likely not prevail. As such, the Court addresses KVG's argument first.
Michigan appellate courts have defined "vandalism" as "deliberate destruction or damage to private or public property,"
KVG relies on
Westfield says that coverage is excluded under the illegal/dishonest acts provision which denies coverage for:
In
Putting aside whether the tenants' marijuana operations were legal under Michigan law (of which there is no evidence), it is clear that the operations violated federal law. See 21 U.S.C. § 812 (classifying marijuana as illegal substance); 21 U.S.C. § 841(a)(1) (imposing penalties for manufacture and distribution). See also 21 U.S.C. § 856 (penalizing leasing property for purpose of manufacturing, storing, distributing, or using a controlled substance). Beyond criminal activity, the exclusion also applies to dishonest conduct. KVG says the tenants were supposed to be conducting general office and/or light industrial businesses and KVG did not give the tenants permission to grow marijuana on the property. Moreover, KVG acknowledges that all the alterations to the units to facilitate the marijuana growing operations were done surreptitiously. This suggests that the loss falls under the dishonest/illegal acts exclusion.
Case law from other jurisdictions supports this conclusion. Notably, in
Courts have also found the exclusion applicable in the context of other drug operations. In
Here, the leases gave the tenants exclusive possession and control over the units. Damavoletes also confirmed that KVG trusted the tenants to conduct the businesses they represented they were conducting and to comply with their contractually agreed-upon remodeling, and
Westfield also says that the damage to the units is excluded because it was the result of unauthorized construction or remodeling. The Court agrees. The policy excludes damage caused by or resulting from:
There is no dispute that the units were damaged. Included in the record are the reports of two contractors who inspected the units after the pot-growing operations were discovered — Price Heating & Cooling (Price) and Mathews Electric (Mathews). Price reported that some unknown person removed the filters from the units' heaters which allowed the coils to become plugged. This, in turn, required replacement of the coils, exchangers and condensers because new coils use a different type of coolant. Price also observed that the hot water tanks in units 8, 9, and 11 had corroded and rotted out. Mathews observed that as to the interiors of the units, alterations included the removal of interior walls and firewalls, boarding up of windows, installation of additional insulation, wiring, outlets and lighting and HVAC fixtures, and rerouting of HVAC ductwork.
Courts have held the unauthorized construction or remodeling exclusion precludes recovery in similar circumstances. In
Here, the leases provide that the tenants are responsible for HVAC maintenance, repair as well as any unauthorized alterations.
Westfield's additional argument that coverage was properly denied because damage to the units was caused by or resulted from the continuous or repeated presence of moisture, condensation or humidity also has merit.
This exclusion provides:
Here, when an engineer inspected the units shortly after the loss, he found standing water, moisture stains on interior surfaces and bio-growth on surfaces. He determined these conditions were caused by "moisture exposure from elevated moisture... for an extended period of time of one year or more." This opinion is uncontradicted. Westfield is entitled to summary judgment based on this exclusion.
For all the reasons stated above, Westfield properly denied coverage for the loss to the units based on policy exclusions. There is no genuine issue of material fact which challenges the Court's conclusion. As such, Westfield's motion for summary judgment is GRANTED. This case is DISMISSED.
SO ORDERED.