No coverage for water damage from frozen pipes as soon as tenants move out

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After making the payment, Essex discovered that the property was vacant when it was damaged by the water from the frozen pipes. Essex then denied the claim and refused to make any additional payments. In denying the Luis' claim, Essex sent their attorney a letter explaining that the "Change in Condition Endorsement" in the Luis' insurance policy excluded coverage for the water damage because it occurred while the building was vacant. The letter stated:

This letter explains the reasons why Essex must deny your clients' claim based on the investigation to date.

First, the policy contains a Change of Conditions Endorsement, which I copy here at Appendix A. This Endorsement was specifically endorsed to the policy over the past few years. As you will see, that Endorsement states:

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 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 that Essex had already paid to the Luis on condition that the Luis would not pursue their claim any further.

The Luis subsequently sued Essex, claiming total damages in the amount of $758,863.31.

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Trial court finds conflict in endorsement

Both the Luis and Essex filed cross motions for summary judgment.

Essex argued that the unambiguous language of the "Change in Condition Endorsement" in the Luis' insurance policy immediately suspended coverage at the beginning of any vacancy for all but specifically named causes of loss. Because the property was vacant and water damage was not one of the named causes of loss, Essex argued, the trial court should rule that the Luis were not entitled to coverage as a matter of law.

The Luis argued that coverage restrictions from their policy's "Vacancy Provisions" became effective if the property was vacant for a period of 60 consecutive days.

The trial court denied Essex's motion for summary judgment and granted partial summary judgment in favor of the Luis after concluding that the "Change in Condition Endorsement" was internally ambiguous and, therefore, had to be construed as providing coverage for the water damage. Specifically, the trial court found is a conflict in the two paragraphs of the change of conditions endorsement and resolved the conflict in favor of the Luis, holding that the word "inception" from the endorsement did "not suspend coverage automatically."

An appellate court reversed the trial court's order granting summary judgment to the Luis. It ruled 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 had argued.

The Luis then filed a petition for review with the Washington Supreme Court, which was granted.

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No coverage in vacant building

The court affirmed, finding that the Essex policy unambiguously excluded coverage for water damage immediately upon vacancy.

In its decision, the court reasoned that, after reading the "Change in Condition Endorsement," an average insured would understand that:

• The terms of the "Change in Condition Endorsement" superseded the terms of the underlying policy;
• The endorsement's first paragraph excluded all coverage after 60 days of vacancy; and
• The endorsement's second paragraph provided only limited coverage from when the building first became vacant up until 60 days of that vacancy.

In particular, the court determined that the endorsement provided that whenever an insured building became vacant — a term the court found to be "unambiguous" — insurance coverage was limited and that, after 60 days of vacancy, insurance coverage was suspended.

The court noted that, as a matter of policy, its reading of the endorsement was appropriate:

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.

The court concluded by stating, "The building was vacant. The Luis' policy endorsement did not cover water damage in a vacant building."

The case is Lui v. Essex Ins. Co., No. 91777-9 (Wash. June 9, 2016).