IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

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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ESSEX INSURANCE COMPANY, ) UNPUBLISHED OPINION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

2 The Luis initially included Avila & Sorenson Inc., as a defendant but later

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 Wn.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 Wn.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 Wn.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 Wn.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 Wn.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 Wn.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 Wn.2d 618, 627, 881 P.2d 201 (1994) (quoting Queen City

Farms, Inc. v. Cent. Nat’I Ins. Co., 126 Wn.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 Wn. App. 841, 849, 158

P.3d 1265 (2007). Insurance limitations must be clear and unequivocal. Bordeaux, Inc.

v. Am. Safety Ins. Co., 145 Wn. 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 Wn.2d 413, 428, 951 P.2d 250 (1998). We construe

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ambiguity in favor of coverage. Key Tronic, 124 Wn.2d at 630. But we cannot “create

ambiguity where none exists.” Quadrant Corp. v. Am. States Ins. Co., 154 Wn.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

Wn.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 Wn.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 Wn.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

Wn.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 Wn.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 Wn.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 Wn. 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 Wn. 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 Wn.2d at 462.

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If the plain language of the endorsement is unambiguous, we adopt that meaning.

Quadrant, 154 Wn.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 Wn.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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