Disputes involving “vacancy” exclusions typically involve the appropriate definition of that word. We have previously written about such cases here and here. The recently-decided case of Lui v. Essex Ins. Co., 2016 Wash. LEXIS 692 (Wash. June 9, 2016) presents a somewhat different issue, namely, how soon after a vacancy occurs are a policy’s coverages restricted.
In Lui, the insureds owned and rented out a three-story building with a tenant space. On or about January 1, 2011, the building suffered substantial water damage, totaling over $750,000, when a sprinkler pipe froze and broke. There were no tenants in the building at the time of the loss – the previous tenant had been evicted some four weeks prior for failing to pay rent.
When, during the investigation of the loss, the insurer learned that the property had been vacant when the pipe froze, it denied the claim, relying on the policy’s “Vacancy or Unoccupancy” endorsement, which limited the available policy coverages in the event the insured property had no tenant(s) or occupant(s). Specifically, the applicable endorsement provided that:
Coverage under this policy is suspended while a described building…is vacant or unoccupied beyond a period of sixty consecutive days…
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…
The insureds brought suit, claiming that the terms of the endorsement were ambiguous and irreconcilable, and, therefore, that all policy coverages remained in effect until the property was vacant or unoccupied for more than sixty days. In other words, the insureds argued that there were no “coverage consequences” relating to a building vacancy until the 61st day of that vacancy. On cross-motions for summary judgment, the trial court agreed that there was a “conflict in the language” of the endorsement and entered judgment for the insureds. The appellate court disagreed, reversed, and certified the case to the Washington Supreme Court.
The Washington Supreme Court interpreted the policy using a “a fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance.” Applying this standard, the Court concluded:
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.
Given that interpretation, the fact that the insured property was vacant at the time of the loss, and the fact that the limited, enumerated, perils that remain covered for a period of time post-vacancy did not include water damage, the Court determined that the policy did not provide coverage for the claimed loss.
In so-holding, the Court also explained the justification for the gradual, two-step, post-vacancy, reduction of coverage provided in the endorsement. The Court noted that:
Potentially damaging conditions in a vacant building are more likely to go undiscovered…The longer a building is vacant, the greater the risk and the greater the damage if there is a condition causing damage. Therefore, it makes sense that a vacancy endorsement would limit coverage for the first 60 days of a vacancy and then exclude all coverage if the building remains vacant after 60 days. Indeed, the facts of this case highlight the risks to a vacant building and why an insurance company would include such a vacancy endorsement.
The Court’s decision provides a useful explanation of both the interpretation and application of a two-step vacancy endorsement, as well as the practical risk-control reasons that an insurer may require a gradual reduction in coverages over a period of time following a vacancy.