In Lui v. Essex Ins. Co., the insured owned a building containing tenant space. The insured’s last tenant was evicted from the building in December of 2010. In January 2011, less than 60 days after the eviction, a frozen sprinkler pipe broke and caused substantial water damage. At the time of the pipe bursting, no tenants occupied the building. The insured tendered a claim to its insurer. The insurer provided almost $300,000 in payments to the insured before discovering that no tenants occupied the building at the time of the property damage.

When the insurer discovered the insured property was vacant, the insurer denied coverage under the following endorsement:

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.

The insured argued that this endorsement was ambiguous and had no force until 60 days after the vacancy. In other words, since the water damage took place within 60 days of the last tenant leaving, the endorsement was inapplicable.

In analyzing the language of the endorsement, the court noted that the policy defined vacant as when 31% or less of the building is in use. Based on the plain language of the policy, the court held that “the average insured would understand that the first paragraph of the endorsement ends all insurance coverage if less than 31 percent of the building has been rented or used for its customary operations for more than 60 consecutive days.” Additionally, the court held that an average person would recognize that the second paragraph of the endorsement provided limited coverage. Specifically, the endorsement did not enumerate water damage as covered under the policy language.

Ruling in favor of the insurer, the court read the endorsement’s two paragraphs together and found “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.” Under the facts of this case, the court concluded that there was no coverage for the water damage to the insured’s building.

Aside from analyzing the construction of the policy language, this opinion highlights how occupants at the insured property can limit the risk of damage to the property. The court noted that the reason vacancy provisions exist in policies is because damaging conditions are less likely to be discovered in vacant buildings. The longer damage goes undiscovered, the more likely it is that there will be more exposure to both the insured and the insurer. Therefore, the court held that the “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.” In reaching this conclusion, the court speculated that the damage in this case may have been mitigated had the property not been vacant.