From the Desk of Kyle D. Riley: When an insurance company denies coverage, often the resolution of the case will turn on the plain language of the policy and any applicable endorsements. In the following case, an insurer’s unambiguously drafted policy and endorsements carried the day, thus avoiding an expensive payout that was excluded by the terms of the endorsement.
Claims Pointer: In this case arising out of a coverage dispute over water damage to a vacant building, the Washington Supreme Court reversed a trial court’s granting of summary judgment to the insureds because the plain language of the insurance policy, as modified by the endorsement, unambiguously excluded water damage if the insured building was vacant. An unambiguous exclusion will be enforced.
Lui v. Essex Insurance Co., No. 91777-9, Washington Supreme Court (June 9, 2016).
Kut Suen Lui and May Far Lui (the Luis) owned a building containing tenant space. The building’s last tenant, the Agape Foundation, Inc., (Agape) left the first week of December 2010 after the Luis evicted it for failure to pay rent. Around January 1, 2011, less than 60 days after Agape moved out of the building, a frozen pipe burst, causing substantial water damage. The Luis, upon discovering the damage, filed a claim with their insurance company, Essex Insurance Co. (Essex). Essex began investigating the claim and paid nearly $300,000 for property damage during the course of its investigation.
After payment was tendered, Essex discovered the property was vacant at the time of the water damage. Essex denied the Luis’ claim and refused to pay any more money. Essex sent a letter to the Luis’ attorney explaining that the endorsement in the policy excluded coverage of the water damage because it occurred while the building was vacant. The letter also stated that Essex would refrain from seeking reimbursement for money already paid to the Luis on the condition that the Luis not pursue their claim any further.
The Luis sued, claiming total damages of $758,863.31. Both parties moved for summary judgment. Essex argued that the unambiguous language of the “Change in Condition Endorsement” (the endorsement) in the policy immediately suspended coverage at the “inception” of any vacancy for all but specifically named causes of loss. Because the building was vacant and water damage was not one of the named causes of loss, Essex argued that the court should rule the Luis were not entitled to coverage as a matter of law. The Luis argued that coverage restrictions from the policy’s “Vacancy Provisions” became effective only if the property was vacant for a period of 60 consecutive days. The trial court denied Essex’s motion but granted partial summary judgment in favor of the Luis solely on its conclusion that the endorsement was internally ambiguous and therefore had to be construed as providing coverage for the water damage. According to the trial court, the word “inception” from the endorsement did not suspend coverage automatically. Essex appealed, and the Court of Appeals reversed the trial court, ruling that the plain language of the endorsement unambiguously limited coverage to only the enumerated causes of loss at the moment the building became vacant, not after 60 days as the Luis argued. The Luis then appealed the matter to the Supreme Court.
The Supreme Court reviewed the specific language of the endorsement, which provided that “[c]overage under this policy is suspended while a described building…is vacant or unoccupied beyond a period of sixty consecutive days,” and also that “[e]ffective at the inception of any vacancy or unoccupancy, the Causes of Loss provided by the policy are limited to Fire, Lightning, Explosion, Windstorm or Hail, Smoke, Aircraft or Vehicles, Riot, or Civil Commotion, unless prior approval has been obtained from the Company.” The Court explained that the endorsement superseded the original terms of the underlying contract and changed the terms of the underlying policy. In fact, in italicized letters, the endorsement asked the insured to “Please read carefully as this changes coverage under your policy.” Because the endorsement changed the terms of the underlying policy, the terms of the endorsement controlled.
The Court then interpreted the terms of the endorsement, ultimately determining that the average insured would understand by the policy’s plain language that the endorsement terms superseded the terms of the underlying policy, the endorsement’s first provision excluded all coverage after 60 days of vacancy, and the endorsement’s second provision provided only limited coverage from when the building first became vacant up until 60 days of vacancy. Because the language of the policy was plain, the Court enforced that language.
The Court also articulated the policy reasoning for vacancy provisions, which it noted supported the plain language reading. According to the Court, potentially damaging conditions in a vacant building are more likely to go undiscovered, and the longer a building remains vacant, the greater the risk and the greater the damage if there is a condition causing damage. It therefore makes sense to limit coverage for the first 60 days of a vacancy and exclude all coverage if the building remains vacant beyond 60 days. The Court further explained that the facts of this case illustrate the risks to a vacant building and why an insurance company would include such a vacancy endorsement. Because the Luis’ building was vacant, the water leak went unnoticed until someone called the fire department to report “water coming from a building.” Had the Luis or a tenant occupied the building, the response time and resulting damage may have been reduced.
In light of the compelling policy reasons behind the vacancy endorsement, and given the unambiguous plain language of the endorsement, the Supreme Court held that the trial court erred in granting summary judgment to the Luis.
Case updates are intended to inform our clients and others about legal matters of current interest. They are not intended as legal advice. Readers should not act upon the information contained in this article without seeking professional counsel.