Exclusion by Endorsement Controls Over Main Policy Wording

Part Time Residence Requires Protection from Water Leaks

Vasilli Katopothis and Francesca Dahlgren (the “Dahlgrens”) own a beach home that flooded in a plumbing accident while they were away. They sued their insurance company for breach of contract when it refused to cover the damage. The district court granted summary judgment in favor of the insurance company based on the plain language of the Dahlgrens’ insurance policy and transferred the claims against the cleaning-and-restoration company to the district court in Delaware for lack of personal jurisdiction.

In Vasilli Katopothis And Francesca Dahlgren v. Windsor-Mount Joy Mutual Insurance Co. And R.W. Home Services, Inc., Doing Business As Gale Force Cleaning And Restoration, No. 16-7132, United States Court of Appeals For The District Of Columbia Circuit (July 31, 2018) the D.C. Circuit Court of Appeal was asked to emasculate an endorsement defeating coverage for a water leak.

FACTS

In May 2000, the Dahlgrens, who reside in the District of Columbia, purchased a beach home in Rehoboth Beach, Delaware, where they spend most of their weekends. At all times relevant to this litigation, the house was a second residence and remained fully furnished with the accessories of daily life, such as furniture, clothes, food, toiletries, and medicine. When not at their beach home, the Dahlgrens routinely left the heat on to prevent the pipes from freezing and asked a friend to check on the house and retrieve the mail. They did not, however, shut off the water supply.

In February 2013, Ms. Dahlgren returned to the beach home to find two inches of standing water throughout the main level and additional water “gushing” from the ceiling overhead. The Dahlgrens had been away for ten days, and, in their absence, a pressurized hot water pipe in the upstairs bathroom had separated at the joint and flooded the house.

The Dahlgrens timely filed an insurance claim with Windsor-Mount to cover the damage from the accident. The insurance company denied the claim because, while they were away, the Dahlgrens had failed to shut off the water where it entered the house.

The Dahlgrens sued Windsor-Mount for breach of contract. The district court determined that the Dahlgrens could not recover under the clear terms of their insurance policy and granted summary judgment against them on that issue.

The Dahlgrens appeal, arguing the district court misconstrued their insurance policy under Delaware law and erroneously transferred the claims against Gale Force.

THE POLICY

The Dahlgrens’ homeowners insurance policy is a twenty-seven page standard contract produced by the American Association of Insurance Services. It provides coverage for damage to both real and personal property resulting from accidental discharge or leakage from the plumbing, subject to specific exclusions. The cover page of the policy also lists a number of endorsements included with the standard contract to amend the terms of coverage. ML-508D is one of those endorsements. ML-508D was approved by the Delaware Insurance Commissioner and printed on a blue sheet of paper to stand out from the rest of the policy.

It reads in full:

ADDITIONAL EXCLUSIONS FOR UNOCCUPIED

RESIDENCES

In addition to exclusions found elsewhere in your policy, if the insured residence is vacant, unoccupied (meaning an absence in excess of 72 hours), or under construction and unoccupied, the insured must:

Maintain heat in the residence and shut off the water supply where it enters the residence. If the residence is heated by a hot water system, the water supply to the heating system must be maintained and the water supply to the rest of the residence must be shut off.

OR

Shut off the water supply where it enters the residence and completely empty liquids from any plumbing, heating, air conditioning system, water heater, or domestic appliance.

If this is not done, we do not pay for loss caused by freezing of or discharge, leakage, or overflow from any plumbing, heating, or air conditioning system or any appliance or other equipment attached to it.

The endorsement required homeowner to either leave the heat on and shut off the water where it enters the house or shut off the water where it enters the house and drain any remaining liquid from the plumbing. Otherwise, ML-508D voids coverage for any damage caused by plumbing discharge, leakage, or overflow.

ANALYSIS

According to Delaware law, “[W]here the language in insurance contracts is unambiguous, the language is given its plain and ordinary meaning.” A contract is only ambiguous when the provisions in controversy are reasonably or fairly susceptible to different interpretations and not simply because the parties do not agree on the proper construction. Where the language of a policy is clear and unequivocal, the parties are to be bound by its plain meaning.

The Dahlgrens cannot recover under the clear and unambiguous terms of their insurance policy. If their house remained unoccupied “in excess of 72 hours,” the Dahlgrens were required to “[m]aintain heat in the residence and shut off the water supply where it enters the residence,” or else the plain language of ML-508D excludes coverage for “loss caused by . . . discharge, leakage, or overflow from any plumbing . . . system.” There is no dispute the Dahlgrens were away from their beach home for ten days and failed to shut off the water supply where it entered the house. There is no question that the damage for which they now seek coverage was caused by flooding from the plumbing.

By definition, endorsements amend the terms of an insurance policy. That’s their very purpose. A policy is not ambiguous or contradictory just because an endorsement amends its provisions.

It does not matter that other exclusions also apply to the Dahlgrens’ house because ML-508D operates in addition to whatever other exclusions exist. By its terms, ML-508D expressly forecloses recovery for all loss associated with plumbing accidents, including damage to real and personal property, unless certain requirements are met.

The D.C. Circuit could see nothing hidden or deceptive about ML-508D. It was written in plain language and listed on the cover page of the insurance policy as an applicable endorsement. And, to further draw attention to its terms, the endorsement was printed on blue paper to stand out from the rest of the policy. Windsor-Mount in no way disguised the endorsement or the conditions it imposed on coverage.

Any reading of the contract results in the conclusion that the purpose of the provision in question is to protect the insurance company from the increased risk that accompanies insuring a house that does not have an occupant. An unoccupied house presents a significant risk that leaking water will go unnoticed for some time, dramatically increasing the likelihood of extensive damage to property. What might be only a minor incident in an occupied house could escalate quickly into major damage if left unchecked, which is exactly what happened in this case.

The Dahlgrens essentially asked the DC Circuit to destroy or twist policy language under the guise of construing it. But creating an ambiguity where none exists could, in effect, create a new contract with rights, liabilities and duties to which the parties had not assented.

ZALMA OPINION

Insurance policies are contracts. When the conditions, limitations or conclusions are clear and unambiguous a court must enforce it since, to do otherwise, would be to rewrite the contract in violation of the U.S. Constitution’s contract provision. Had the Dahlgrens’ read the policy and the clear and unambiguous exclusion they would have turned off the water. Since they did not they appropriately lost their case.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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