Kevin Pollack | Property Insurance Coverage Law Blog | June 28, 2016
On June 9, 2016, The Washington Supreme Court held that an Essex Insurance Company property policy immediately cut off coverage for water damage after an insured property became vacant.1
In Lui, the policyholders owned a commercial building that sustained water damage after a pipe burst while the building was vacant. The policyholders’ insurance policy for the building purported to limit coverage for water damage in two ways based on vacancy found in a change of condition endorsement: (1) coverage was suspended if the building remained vacant for 60 consecutive days and, (2) at the inception of any vacancy, there would only be coverage for specified causes of losses (not including water damage).
The property became vacant in December 2010, after the policyholders’ tenants were evicted for failure to pay rent. The water loss occurred the following month after a frozen sprinkler pipe in the building broke, causing substantial water damage.
Although Essex had started adjusting the loss—and even began paying on the loss—once it learned that the property had been vacant at the time of the loss, Essex refused to pay anything further. In response, the policyholders sued Essex for the unpaid benefits believed to be owed under the insurance policy.
The policyholders argued that the Change of Condition Endorsement at issue was ambiguous, and therefore had to be construed in favor of coverage. The endorsement at issue read as follows:
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.
The policyholders’ argument was that the endorsement could be read to exclude coverage for water damage only after a continuous 60-day vacancy. Given the ambiguity, the policyholders argued that the court needed to construe the policy in favor of coverage for the loss that occurred less than a month after the property had become vacant. Although the trial court agreed with the policyholders, neither the Court of Appeal nor the Washington Supreme Court did.
The Washington Supreme Court found that:
Reading the endorsement’s two paragraphs together, the average insured would understand that the endorsement alters the underlying insurance policy to the extent that when a building becomes vacant, the policy provides limited coverage and, after a 60 consecutive day vacancy, the policy provides no coverage.
The Washington Supreme Court found that because the endorsement did not provide coverage for water damage once the property became vacant, there was no coverage for the loss.
Although most insurance policies contain endorsements or exclusions for properties that have been unoccupied or vacant for more than 30 or 60 days, the impact of this endorsement was to preclude many typical property loss claims the moment less than 31 percent of the building was being rented or used for its customary operations.
This case serves an important reminder that policyholders need to review their insurance policies if/when the properties being insured are or may become vacant. This is especially important for policyholders who lease their insured property for residential or commercial purposes.
Here, the endorsement specified there would only be coverage for the specified losses ”unless prior approval has been obtained from the Company.” A simple request to the insurer for water damage loss or other types of loss when the policy was purchased may have avoided the uncovered loss. While the premium may have gone up a little, for someone in the business of leasing out property, doing so could have avoided a six figure uncovered loss.
1 Lui v. Essex Ins. Co., No. 91777-9, 2016 WL 3320769 (Wash. June 9, 2016).