Kut Suen Lui And May Far Lui v. Essex Insurance Company ( 2015 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON C,
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KUT SUEN LUI and MAY FAR LUI, ) NO. 72835-1-I ~
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Respondents, )
) DIVISION ONE ‘~
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ESSEX INSURANCE COMPANY, ) UNPUBLISHED OPINION
Appellant. ) FILED: April 6, 2015
__________________________________________________________________________________)
LAu, J. —After a vacant building owned by Kut Suen and May Far Lui was
damaged by a frozen water pipe, Essex Insurance Co. denied coverage for the property
loss because the Luis’ insurance policy excluded losses due to water damage when the
building is vacant. On the parties’ cross motions for summary judgment, the trial court
granted the Luis’ motion and denied Essex’s motion.1 It concluded that the policy’s
vacancy provisions are ambiguous and construed the policy in favor of the Luis. But
because the plain language of the policy unambiguously denies coverage for water
1 Essex does not appeal the trial court’s denial of its motion for summary
judgment.
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damage at the inception of any vacancy, we reverse and remand for further
proceedings.
FACTS
The main facts are undisputed. Kut Suen and May Far Lui owned a three-story
building containing tenant space. On or about January 1, 2011, a water pipe froze and
burst, causing substantial damage to the building. No tenant occupied the building at
the time. The previous tenant, The Agape Foundation Inc., was evicted around
December 7, 2010, for failure to pay rent. Upon discovering the damage, the Luis
notified Essex Insurance Co., their insurance provider. Essex investigated the Luis’
insurance claim and ultimately paid the Luis $293,578.05 for property damage. When
Essex learned that the building was vacant during the time of the loss, it denied
coverage of their insurance claim. In a letter to the Luis’ attorney, Essex explained that
the vacancy endorsement in the Luis’ insurance policy prevented coverage for water
damage occurring when the building is vacant. Essex stated that although it would
refrain from seeking reimbursement for the almost $300,000 already paid, it would no
longer provide any coverage for the loss:
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, the Endorsement states:
Effective at the inception of any vacancy or unoccupancy, the Causes of
Loss provided by this policy are limited to Fire, Lightening, Explosion,
Windstorm or Hail, Smoke, Aircraft or Vehicles, Riot or Civil Commotion,
unless prior approval has been obtained from the Company.
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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.
The Luis sued Essex2 for the remainder of the total claimed amount.3 Both the
Luis and Essex filed cross motions for summary judgment. The Luis argued that the
policy’s vacancy provisions did not restrict insurance coverage until after 60 consecutive
days of vacancy occurred. The Luis also claimed that (1) Essex waived its right to deny
coverage, (2) Essex was estopped from claiming the vacancy provision in the policy
restricted coverage, and (3) Essex denied coverage in bad faith. Essex argued in its
motion for summary judgment that the policy’s vacancy provisions trigger at the
inception of any vacancy and, therefore, unambiguously deny coverage for the Luis’
claim.
The trial court denied Essex’s motion for summary judgment and granted partial
summary judgment in favor of the Luis, concluding that the vacancy endorsement is
ambiguous and construing the endorsement in favor of the Luis. The trial court declined
to grant summary judgment on the Luis’ remaining claims of waiver, estoppel, and bad
faith due to genuine issues of material fact: “I’m not making a determination on
estoppel or waiver, and I’m not granting the plaintiff’s motion for bad faith. I believe
there are issues of fact that govern all those latter issues.” Report of Proceedings
The Luis initially included Avila & Sorenson Inc., as a defendant but later
2
dismissed it from the case. Avila is not part of this appeal.
~ The Luis’ insurance claim totaled $758,863.31—$465,285.26 more than what
Essex had already paid at the time the Luis filed the lawsuit.
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(Aug. 30, 2015) at 25. The trial court’s ruling addressed the sole issue of whether the
vacancy endorsement denied the Luis’ insurance coverage.
Essex moved for reconsideration. Alternatively, Essex requested that the trial
court certify its ruling for interlocutory appeal under RAP 2.3(b)(4). The trial court
denied Essex’s reconsideration motion but granted the motion to certify. Under RAP
2.3(b)(4), the trial court certified its prior ruling that the vacancy provision did not
suspend coverage of the Luis’ insurance claim. Therefore, the sole issue in this
interlocutory appeal is the interpretation of the vacancy provision:
The Court finds that its legal interpretation of the insurance policy language is a
novel controlling question of law about which there are grounds for
disagreement. There are no material issues of fact on which the Court’s
interpretation depends. . [A]ppellate review will determine whether Plaintiff’s
.
remaining claims should proceed to trial.
Accordingly, the Luis’ remaining claims of waiver, estoppel, and bad faith are not
properly before us.
ANALYSIS
Standard of Review
This court reviews an order granting summary judgment de novo, performing the
same inquiry as the trial court. Sheikh v. Choe, 156 Wash. 2d 441, 447, 128 P.3d 574
(2006). Granting summary judgment is proper when there is no genuine issue as to any
material fact and the moving party is entitled to judgment as a matter of law. CR 56(c);
see Ranger Ins. Co. v. Pierce County, 164 Wash. 2d 545, 552, 192 P.3d 886 (2008).
Interpretation of an insurance contract is a question of law reviewed de novo. Woo v.
Fireman’s Fund Ins. Co., 161 Wash. 2d 43, 52, 164 P.3d 454 (2007).
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The Vacancy Endorsement
The parties dispute whether the vacancy endorsement in the insurance contract
requires an insured building to be vacant for 60 days4 before coverage is limited. The
vacancy endorsement provides:
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.
(Boldface omitted.) The policy provides a specific definition for “vacancy” in the building
and personal property coverage form:
6. Vacancy
a. Description of Terms
(1) As used in this Vacancy Condition, the term building and the
term vacant have the meanings set forth in 1(a) and 1(b)
below.
(b) When this policy is issued to the owner or general lessee
of a building, building means the entire building. Such
building is vacant unless at least 31% of its total square
footage is:
(i) Rented to a lessee or sub-lessee and used by the
lessee or sub-lessee to conduct its customary
operations; and/or
(ii) Used by the building owner to conduct customary
operations.
(2) Buildings under construction or renovation are not
considered vacant.
~ The parties agree that the damage occurred before the building had been
vacant for 60 days.
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b. Vacancy Provisions
If the building where loss or damage occurs has been vacant for
more than 60 consecutive days before that loss or damage occurs:
(1) We will not pay for any loss or damage caused by any of the
following even if they are Covered Causes of Loss:
(a) Vandalism;
(b) Sprinkler leakage, unless you have protected the system
against freezing;
(c) Building glass breakage;
(d) Water damage;
(e) Theft; or
(f) Attempted theft.
(2) With respect to Covered Causes of Loss other than those
listed in b.(1)(a) through b.(1)(f) above, we will reduce the
amount we would otherwise pay for the loss or damage by
15%.
(Boldface omitted.) Essex argues these provisions are unambiguous. It contends the
vacancy provisions mean that, absent written permission and additional premium, the
instant a building becomes “vacant” (i.e., “at the inception of any vacancy. . . .“), it is
covered only for the limited causes of loss listed in the second paragraph of the vacancy
endorsement (fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles,
riot or civil commotion). After 60 days of vacancy, coverage is suspended altogether.
The Luis respond that the policy is ambiguous and could reasonably be read to mean
that “the ‘vacancy’ condition does not occur until the building has been vacant or
unoccupied for sixty days; upon inception of this vacancy condition, i.e., the post-sixty
day period, and with payment of an additional premium, Essex provides coverage but
the coverage is limited to certain enumerated Causes of Loss.” Br. of Resp’t at 12.
Because the vacancy endorsement’s plain language unambiguously restricts coverage
at the beginning of any vacancy, we reverse the trial court’s grant of summary judgment
in the Luis’ favor.
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The Vacancy Endorsement is Unambiguous
Insurance policies are construed as contracts. Findlay v. United Pac. Ins. Co.,
129 Wash. 2d 368, 378, 917 P.2d 116 (1996). Washington courts follow the objective
manifestation theory of contracts, looking for the parties’ intent as objectively manifested
rather than their unexpressed subjective intent. Hearst Commc’ns, Inc. v. Seattle Times
Co., 154 Wash. 2d 493, 503, 115 P.3d 262 (2005). Therefore, courts consider only what
the parties wrote, giving words their ordinary, usual, and popular meaning unless the
agreement as a whole clearly demonstrates contrary intent. Hearst, 154 Wash. 2d at 504.
“Every insurance contract shall be construed according to the entirety of its terms and
conditions as set forth in the policy, and as amplified, extended, or modified by any
rider, endorsement, or application attached to and made a part of the policy.” RCW
48.18.520. An insurance policy is construed as a whole, with the policy being given a
“‘fair, reasonable, and sensible construction as would be given to the contract by the
average person purchasing insurance.” Key Tronic Corp. v. Aetna (CIGNA) Fire
Underwriters Ins. Co., 124 Wash. 2d 618, 627, 881 P.2d 201 (1994) (quoting Queen City
Farms, Inc. v. Cent. Nat’I Ins. Co., 126 Wash. 2d 50, 65, 882 P.2d 703, 891 P.2d 718
(1994)). Courts harmonize clauses that seem to conflict in order to give effect to all the
contract’s provisions. Nishikawa v. U.S. Eagle High, LLC, 138 Wash. App. 841, 849, 158
P.3d 1265 (2007). Insurance limitations must be clear and unequivocal. Bordeaux, Inc.
v. Am. Safety Ins. Co., 145 Wash. App. 687, 694, 186 P.3d 1188 (2008).
We will find a clause ambiguous only “when, on its face, it is fairly susceptible to
two different interpretations, both of which are reasonable.” Am. Nat’l Fire Ins. Co. v.
B&L Trucking & Constr. Co., 134 Wash. 2d 413, 428, 951 P.2d 250 (1998). We construe
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ambiguity in favor of coverage. Key Tronic, 124 Wash. 2d at 630. But we cannot “create
ambiguity where none exists.” Quadrant Corp. v. Am. States Ins. Co., 154 Wash. 2d 165,
171, 110 P.3d 733 (2005). We will not find a contract provision ambiguous simply
because it is complex or confusing. McDonald v. State Farm Fire & Cas. Co., 119
Wash. 2d 724, 734, 837 P.2d 1000 (1992). Therefore, our task is to determine whether
each party’s proposed interpretation is reasonable. If both are reasonable, then we
must construe the policy in favor of the Luis.
Essex proposes the only reasonable interpretation of the policy. Under Essex’s
interpretation, the policy alters coverage in two ways, absent written permission to the
contrary. First, it restricts coverage to specified causes of loss whenever usage of the
insured building drops below 31 percent, i.e., when it becomes “vacant.”5 Second, after
60 consecutive days of vacancy, coverage is suspended altogether.
The plain language of the policy supports this interpretation. The vacancy
section of the building and personal property coverage form states that the insured
building “is vacant unless 31% of its total square footage is: (i) Rented to a lessee or
sub-lessee and used by the lessee or sub-lessee to conduct its customary operations;
and/or (ii) Used by the building owner to conduct customary operations.” Therefore,
when less than 31 percent of the building is in use, it is “vacant.” According to the
~ In its reply brief, Essex argues that “vacancy” and “unoccupancy” have different
meanings. Resp’t’s Reply Br. at 6. Some persuasive authority supports this argument.
See, ~ Roias v. Scottsdale Ins. Co., 678 N.W.2d 527, 532 (Neb. 2004) (“The terms
‘vacant’ and ‘unoccupied’ . . are not synonymous.”). However, the difference between
these terms, if any, is irrelevant. The parties here do not dispute whether the building
was either vacant or unoccupied or not, they dispute whether the building needed to be
vacant or unoccupied for 60 days before the policy restricted coverage.
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second paragraph of the vacancy endorsement, “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.” Finally, under the first
paragraph of the vacancy endorsement, the policy provides no coverage after 60 days
of vacancy, absent written permission: “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.
Insurers use vacancy provisions like this one to reflect the increased risk posed
by vacant buildings. See, ~ Heartland Capital lnvs., Inc. v. Grange Mut. Cas. Co.,
2010 WL 432333 (C.D. III. 2010). Vacant buildings are more susceptible to insurance
risks such as fire, trespass, leaks, and other defects that often cause greater damage
because they go unnoticed. Roias v. Scottsdale Ins. Co., 678 N.W.2d 527, 533 (Neb.
2004). Washington courts have recognized that vacancy provisions are reasonable and
should be enforced as any other contract provision. Brehm Lumber Co. v. Svea Ins.
Co~ 36 Wash. 520, 524, 79 P. 34 (1905).
Nevertheless, the Luis argue that the vacancy endorsement is ambiguous. The
Luis contend that the vacancy condition in the endorsement is not triggered until the
building has been vacant for 60 days. At the inception of this condition, absent written
permission to the contrary, coverage is suspended. But with written permission and an
6 The record shows the Luis were aware of Essex’s interpretation of the policy in
2004, well before the incident at issue here. Essex partially suspended coverage in
2004 upon discovering the building was vacant. An insurance agent then explained to
the Luis that coverage was restricted as soon as the building became vacant. Essex
reinstated full coverage when a tenant moved into the property.
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additional premium, Essex provides coverage for the enumerated causes of loss in the
second paragraph of the endorsement.
The Luis’ interpretation is unreasonable because it contravenes the plain
language in the vacancy endorsement. Specifically, it overlooks the plain meaning of
the phrase “inception at any vacancy.” “Inception” means ‘“an act, process, or instance
of beginning.” Panorama Vill. Condo. Owners Ass’n Bd. of Dirs. v. Allstate Ins. Co.,
144 Wash. 2d 130, 139,26 P.3d 910 (2001) (quoting WEBSTER’STHIRD NEW INT’L
DICTIONARY 1141(1981)). And if the policy defines “vacancy” as whenever the
building’s usage drops below 31 percent of its total square footage,7 the “inception” or
beginning of vacancy would be the instant that condition occurs. Indeed, as Essex
notes, this definition of “vacant” is common in insurance policies. Accordingly, many
courts have found that an insured building becomes “vacant” when its usage dropped
below 31 percent of the total square feet. See, ~ Heartland, 2010 WL 432333.
The Luis claim “inception” refers to the 60-day requirement in the first paragraph
of the endorsement—i.e., vacancy coverage restrictions “incept” on day 61. But this
~ The Luis argue that this definition of vacancy applies only at the moment the
policy is issued. They cite section E.6.a.(b), which provides: “When this policy is issued
to the owner or general lessee of a building [s]uch building is vacant unless at least
. . .
31% of its total square footage is: (i) Rented or (ii) Used by the building owner.
. . . .
The Luis argue that for a building to be “vacant,” less than 31 percent of the building
must be in use “when the policy is issued . . But placing this temporal requirement
. .“
on the vacancy provision nearly eliminates the various coverage provisions related to
vacancy in both the policy and the endorsement. The “when” phrase can be more
reasonably read to distinguish between when the policy is issued to an owner and when
the policy is issued to a tenant. Indeed, the policy provides a separate definition for
vacancy “when [it] is issued to a tenant,” rather than an owner. Otherwise, as long as a
building was not “vacant” at the moment the policy was issued, it would never be vacant
regardless of its usage.
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ignores the plain language of the second paragraph, which unambiguously states that
coverage is limited “at the inception of ~j~y vacancy. . . .“ (Emphasis added.) The
second paragraph places no limit on the vacancy condition restricting coverage—”any”
vacancy limits the available causes of loss. Therefore, as explained above, when the
insured building satisfies the policy’s definition for vacancy, that qualifies as “any
vacancy” under the terms of the endorsement, and the inception of that vacancy limits
the available causes of loss. Ultimately, the Luis’ proposed interpretation improperly
integrates the two paragraphs in the endorsement. They apply the 60-day requirement
in the first paragraph to the second paragraph despite the fact that the plain language of
the endorsement indicates there are separate consequences for (1) the beginning of a
vacancy and (2) a vacancy lasting longer than 60 days.
Further, the Luis’ interpretation of the endorsement arguably renders the second
paragraph superfluous. The first paragraph completely suspends coverage after 60
days of vacancy, while the second paragraph limits the available causes of loss. The
second paragraph serves no purpose if it applies only after 60 days of vacancy. No
reason exists to limit the available causes of loss after 60 days if, under the first
paragraph, no coverage is available at all. “An interpretation of a contract that gives
effect to all provisions is favored over an interpretation that renders a provision
ineffective, and a court should not disregard language that the parties have used.”
Snohomish County Pub. Transp. Benefit Area Corp. v. FirstGroup Am., Inc., 173 Wash. 2d
829, 840, 271 P.3d 850 (2012).
The Luis contend that Essex’s interpretation of the vacancy endorsement
conflicts with other provisions in the policy. Specifically, the Luis point to the vacancy
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provisions in section E.6.(b) of the building and personal property coverage form. They
claim their interpretation harmonizes the endorsement’s provisions with section E.6.(b).
But regardless of any conflict between these two sections, the endorsement controls
over other policy provisions. Transcon. Ins. Co. v. Wash. Pub. Utils. Dist. Util. Sys., 111
Wash. 2d 452, 462, 760 P.2d 337 (1988). The Washington Supreme Court has held that
an endorsement controls when it expressly states that it changes the policy:
An endorsement attached to a policy, which expressly provides that it is
subject to the terms, limitations and conditions of the policy, must be read with
the policy and will not abrogate or nullify any provision of the policy unless it is so
stated in the endorsement. However, if there is ambiguity arising because of the
difference of language used in the endorsement and the body of the policy, or
between endorsements, the language of the contract is construed most strongly
against the insurer.
Transcon., 111 Wash. 2d at 462 (emphasis added). Indeed, it is a well-settled principle
that endorsements alter and modify the other provisions in an insurance policy. See,
~g., 3 NEwAPPLEMAN0N INSURANCE LAw LIBRARY EDmoN~ 21.01[1], 21.02[2][a]
(Jeffrey E. Thomas & Francis J. Mootz III eds. (2010) (“Endorsements are also often
issued to modify or remove the effect of existing terms or exclusions contained in the
policy form. In these instances, such an endorsement will supersede the term or
exclusion in question.”).
Here, the endorsement expressly states that it alters the policy. The
endorsement is entitled “CHANGE IN CONDITIONS ENDORSEMENT” and states
“Please read carefully as this changes coverage under your policy.” (Emphasis added.)
The end of the endorsement provides: “Nothing herein contained shall be held to vary,
alter, waive or extend any of the terms, conditions, provisions, agreements or limitations
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of the above mentioned Policy, other than as above stated.”8 (Emphasis added.)
Therefore, in accordance with the plain language of the endorsement, we read the
endorsement as superseding the policy, specifically section E.6.b. of the building and
personal property coverage form. See Transcon., 111 Wash. 2d at 462 (“As endorsements
are later in time, they generally control over inconsistent terms or conditions in a
policy.”). The Luis fail to cite any authority compelling us to harmonize the endorsement
with the policy’s other provisions under the circumstances here.
Finally, the Luis cite policy considerations to support their interpretation of the
insurance contract. For instance, they argue that Essex’s interpretation restricts
coverage the instant a building becomes “vacant” and is therefore contrary to the
“fundamental protective purpose of insurance.” State Farm Fire & Cas. Co. v. Ham &
Rye, LLC, 142 Wash. App. 6, 13, 174 P.3d 1175 (2007). Further, they argue that courts
view coverage exclusions with strict skepticism:
The courts liberally construe insurance policies to provide coverage
wherever possible. . Any remaining ambiguity must be given a meaning and
. .
construction most favorable to the insured. Coverage exclusions “are contrary to
the fundamental protective purpose of insurance and will not be extended
beyond their clear and unequivocal meaning. Exclusions should also be strictly
construed against the insurer.”
Bordeaux, 145 Wash. App. at 694 (footnotes omitted). But the Luis fail to explain why
these considerations should supersede the plain language of the vacancy endorsement.
8 At oral argument, the Luis argued that this provision indicates that the
endorsement is not intended to alter the rest of the policy. But that provision states only
that the endorsement does not change the policy other than as provided in the
endorsement. In other words, the endorsement cannot be read to alter any provisions
beyond its plain, unambiguous scope. When provisions in the policy conflict with the
plain language in the endorsement, however, we must read the endorsement as
controlling. Transcon., 111 Wash. 2d at 462.
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If the plain language of the endorsement is unambiguous, we adopt that meaning.
Quadrant, 154 Wash. 2d at 171 (“Most importantly, if the policy language is clear and
unambiguous, we must enforce it as written; we may not modify it or create ambiguity
where none exists.”).
Alternatively, the Luis argue that even if the vacancy endorsement excludes their
claimed loss, the endorsement does not apply because the building was being
renovated and therefore was not “vacant.” Under the policy’s vacancy definition,
“Buildings under construction or renovation are not considered vacant.” The Luis claim
that the building was under renovation because they were preparing for a new tenant.
The record shows that the Luis failed to raise this issue below, and we therefore decline
to address it on appeal. “As a general rule, appellate courts will not consider issues
raised for the first time on appeal.” State v. McFarland, 127 Wash. 2d 322, 332-33, 899
P.2d 1251 (1995); RAP 2.5(a).
We also decline to address the Luis’ remaining claims for bad faith, waiver, and
estoppel. As discussed above, these remaining issues are not properly before us. Both
parties agree that the trial court never ruled on these issues. Further, the trial court
explicitly stated it was not granting summary judgment on these issues because of
remaining issues of fact. The only issue properly before us in this appeal is the
coverage question.
CONCLUSION
Because the plain language of the vacancy endorsement unambiguously limits
coverage to only those enumerated causes of loss upon the inception of any vacancy,
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we reverse the trial court’s ruling construing the endorsement in favor of the Luis. We
reverse the trial court’s grant of partial summary judgment and remand for further
proceedings.
WE CONCUR:
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