The Washington Supreme Court, often described as pro-policyholder, issued a unanimous decision in favor of an insurance company on June 9, 2016: Lui v. Essex Insurance Company, No. 91777-9 (Wash., Jun. 9, 2016). Addressing a first-party property claim, the court rejected the policyholder’s arguments that certain provisions in a “Vacancy or Unoccupancy” endorsement were ambiguous and must be construed in favor of coverage.

Essex Insurance Company issued a property insurance policy to Kat Suen and May Far Lui (the Luis) that included certain coverages for property damage to their building. The Luis evicted their tenant, but did not notify Essex that the building was unoccupied. Then a sprinkler pipe froze, burst and caused water damage to the building.

The Luis reported the claim to Essex and received payments totaling $293,598.05. Thereafter, Essex discovered that the building had been unoccupied for almost 60 days at the time the pipe broke. Essex sent a letter to the Luis, stating that coverage could not be provided for the claimed loss based upon the following endorsement:

CHANGE IN CONDITIONS ENDORSEMENT
Please read carefully as this changes coverage under your policy.

VACANCY OR UNOCCUPANCY

Coverage under this policy is suspended while a described building, whether intended for occupancy by owner or tenant, is vacant or unoccupied beyond a period of sixty consecutive days, unless permission for such vacancy or unoccupancy is granted hereon in writing and an additional premium is paid for such vacancy or unoccupancy.

Effective at the inception of any vacancy or unoccupancy, the Causes of Loss provided by this 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.

Essex also advised the Luis that it would not seek reimbursement of the $293,598.05 paid if the Luis did not pursue additional payment for the balance of their claim, which they maintained totaled $758,863.31.

In response, the Luis sued Essex to recover the full claimed amount plus additional sums that included damages for alleged bad faith. Their primary theory was that the coverage restrictions for vacant properties did not apply because they did not become effective until after the property was vacant for 60 consecutive days.

In its unanimous opinion addressing only the coverage issues, the Washington Supreme Court focused on the “Vacancy or Unoccupancy” endorsement’s plain and unambiguous language. The Supreme Court noted that the “average insured” would understand that the first paragraph ends all insurance coverage if the building is vacant for more than 60 days. Addressing the second paragraph, the Supreme Court reiterated that the endorsement provides only limited coverage starting at the moment the building becomes vacant. As it was undisputed that the building was not vacant for more than 60 days at the time the pipe burst, the first paragraph did not control. Although there was limited coverage for the building starting the day it became vacant until the 60th day, such coverage was limited to the perils listed. As exposure for water damage caused by broken pipes does not fall within any of these perils, the court concluded that there was no coverage for the water damage to the Luis’ vacant building.

The Supreme Court rejected as unreasonable the Luis’ argument that the “after 60 days of vacancy” concept in first paragraph controls the reading of both paragraphs, which would render the limited coverages described in the second paragraph likewise not effective until after 60 days of vacancy. In doing so, the court explained that the Luis’ proposed interpretation (1) ignores the plain language, (2) causes much of the endorsement’s language to become superfluous and (3) creates an unresolvable contradiction between the two paragraphs.

It is notable that the Supreme Court included in its opinion a paragraph explaining the supporting public policy. According to the Supreme Court, “it makes sense” for an insurance company to restrict coverage for vacant buildings, considering that the response time and resulting damage could have been reduced had the building been occupied. Although the context of the claim is typically not the stated reason for a favorable or unfavorable coverage result, insurers are well-advised to proceed mindful of the entire picture and, if possible, narrow the scope of issues to be decided.