Parsing “vacancy” in water damage claim
Kut Suen Lui and May Far Lui owned a building that contained tenant space. The building’s last tenant, the Agape Foundation, Inc., left the building in the first week of December 2010 after being evicted by the Luis for failure to pay rent. The building was not subsequently rented.
On or about January 1, 2011, less than 60 days after the Agape Foundation moved out of the building, a frozen sprinkler pipe broke and caused substantial water damage to the building. Upon discovering the damage, the Luis notified their insurance provider, Essex Insurance Company, and filed a claim. Essex began investigating the Luis’ claim and paid them a total of $293,598.05 for property damage.
After paying this sum, Essex discovered that the property was vacant at the time of the water damage. Essex then denied the Luis’ claim and refused to pay any more money. In denying the Luis’ claim, Essex sent their attorney a letter explaining that a “change of conditions” endorsement in their policy excluded coverage for the water damage because it occurred while the building was vacant. The endorsement stated:
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.
“In this situation,” the letter said, “the subject building was vacant and unoccupied at the time of the loss. The insurance company was never notified of the vacancy until after the loss, and hence never approved coverage beyond the named perils listed in the Endorsement. The cause of the January 1, 2011 loss was not one of the perils named in the Change of Conditions Endorsement. Therefore, the insurance company cannot provide coverage for the claimed loss.” In addition, the letter stated that Essex would refrain from seeking reimbursement for the money it had already paid to the Luis on condition that the Luis would not pursue their claim any further.
The Luis sued Essex, claiming total damages in the amount of $758,863.31. The Luis and Essex filed cross motions for summary judgment. Essex argued that the unambiguous language of the endorsement in the Luis’ policy immediately suspended coverage at the inception of any vacancy for all but specifically named causes of loss.
The Luis argued that coverage restrictions in their policy’s “Vacancy Provisions” became effective if the property was vacant for a period of 60 consecutive days. Further, the Luis sought summary judgment on the grounds that (1) Essex was estopped from denying coverage, (2) Essex waived its right to deny coverage, and (3) Essex denied the coverage in bad faith.
The court denied Essex’s motion for summary judgment and 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. The court acknowledged that it was ruling only on the “narrow issue” that there was “a conflict in the language” of the endorsement. Thus the court declined to grant summary judgment on the Luis’ waiver, estoppel, and bad faith claims, stating that there were questions of material fact that governed those issues. Essex appealed, and the appellate court reversed the trial court’s order granting summary judgment in favor of the Luis. The Luis appealed this ruling.
On appeal, the state supreme court held that the language of the endorsement plainly provided only limited coverage for a vacant building and that coverage was suspended after 60 days of vacancy unless the insured paid an additional premium and Essex agreed to the vacancy.
The Luis asserted that the endorsement could reasonably be read to mean that there were no coverage consequences at all until after 60 days of vacancy. The court held that this interpretation was unreasonable because it caused much of the endorsement’s language to become superfluous. The court also rejected the Luis’ other arguments about the ambiguity of the policy and endorsement language.
The court affirmed the appellate court’s reversal of the trial court’s ruling construing the endorsement in favor of the Luis.
Kut Suen Lui and May Far Lui vs. Essex Insurance Company-Supreme Court of Washington-No. 91777–9-June 9, 2016.