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Caselaw Update – Interpreting Endorsements to Insurance Policies

Posted Wednesday, July 13, 2016 by Christopher L. Thayer

What many people do not realize, sometimes until after it is too late, is that insurance policies are just contracts, and what is covered, what is not covered, and what benefits you may be entitled to are limited to the express language of your policy. Most of us do not sit down and read through our insurance policies, and if we did, most people would not understand all the jargon unfortunately. In a recent case before the Washington Supreme Court, Lui v. Essex Insurance Company, the Court had the chance to revisit issues relating to the interpretation of language in an insurance policy, and specifically how to interpret subsequent endorsements to a policy that changes coverage terms in the underlying policy.

The Luis owned a commercial building that sustained water damage after a pipe burst while the building was vacant. The Luis' insurance policy for the building limited coverage for water damage in two ways based on vacancy: (1) coverage was suspended if the building remained vacant for 60 consecutive days and (2) effective at the beginning of any vacancy, there was no coverage for certain specified losses, including water damage. At the time of the water leak, the property had not been vacant for 60 consecutive days.

The Luis submitted a claim to its insurer, Essex. Essex initially paid out almost $300,000, but after learning the property was vacant at the time of the loss, refused to pay out any more funds (though it did not seek reimbursement of amounts previously paid). Essex relied on a provision in a policy endorsement which limited the coverage provided when the property was vacant, and did not include coverage for water damage. The Luis submitted claims for an additional $760,000 in damages, but Essex declined any further payments. The Luis argued that the vacancy provisions in the underlying policy did not become effective until the property had been vacant for 60 consecutive days. The Supreme Court analyzed the claims as follows:

Insurance policies are construed as contracts. Weyerhaeuser Co. v. Commercial Union Ins. Co., 142 Wn.2d 654, 665, 15 P.3d 115 (2000). When we interpret an insurance policy, we consider the insurance policy as a whole, giving the policy '"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 Wn.2d 618, 627, 881 P.2d 201 (1994). Where possible, we harmonize clauses that seem to conflict in order to give effect to all of the contract's provisions. Realm, Inc. v. City of Olympia, 168 Wn. App. 1, 5, 277 P.3d 679 (2012).

The Supreme Court ruled that the endorsement superseded the original terms of the underlying insurance policy. Insurance policies may be "amplified, extended, or modified by any...endorsement... attached to and made a part of the policy." RCW 48.18.520. "An endorsement becomes a part of the insurance contract even if the result is a new and different contract. As endorsements are later in time, they generally control over inconstant terms or conditions in a policy." Transcon. Ins. Co. v. Wash. Pub. Util. Dists.' Util. Sys., 111 Wn.2d 452, 462, 760 P.2d 337 (1988). By its plain language, the endorsement changed the terms of the underlying policy. In italicized letters, the endorsement to the Luis’ Essex policy asked the insured to "[p]lease read carefully as this changes coverage under your policy." Because the endorsement changed the terms of the underlying insurance policy, the terms of the endorsement control.

The Luis case demonstrates the importance of reading your own insurance policies, and paying attention to the periodic endorsements that you may receive in the mail. The language used by insurance companies is there for a reason, and it is incumbent on the insured to read and understand their own insurance policies.

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