§16.1 - Determining Insurance Coverage: What Do You Need and What Should You Get?

• Jurisdiction: Washington

§16.1 DETERMINING INSURANCE COVERAGE: WHAT DO YOU NEED AND WHAT SHOULD YOU GET?

Insurance shifts some of the risk of owning certain interests in property from the insured to the insurer. "An insurable interest in property generally arises when someone would profit or enjoy some advantage from the property, or would suffer a loss from the destruction of the property." CLS Mortgage, Inc. v. Bruno, 86 Wn.App. 390, 394, 937 P.2d 1106 (1997). RCW 48.18.040(2) defines "insurable interest" as " any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage."

When choosing insurance for property and determining the scope of coverage, the following analysis should be used:

What is insured?

What is excluded/excepted from coverage?

What is put back in by operation of law, if anything?

(1) Anatomy of an insurance policy

Most insurance policies covering interests in real property have six parts: (1) declarations, (2) the insuring agreement(s), (3) exclusions, (4) definitions, (5) conditions, and (6) endorsements. Each section is addressed in general below.

(a) Declarations

The declarations page is a cover sheet that summarizes the basic information of the policy such as the identity of the insured(s), the limit(s) of coverage, the policy period, the type of coverage provided, the property insured, and the standard policy forms that make up the policy. The declarations page is not insurance but only a summary of the policy.

(b) Insuring agreement

The insuring agreement is the grant of coverage to the insured. The agreement usually contains the threshold requirements that an insured must meet to recover on a claim, as well as the scope of the insurer's obligation once those requirements have been met. The term "coverage" is narrowly construed, Farmers Ins. Co. of Wash. v. Frederickson, 81 Wn.App. 319, 322, 914 P.2d 138 (1996), is a question of law, and has a narrow and precise meaning: "the assumption of risk of occurrence of the event insured against before its occurrence." Ryan v. Cuna Mut. Ins. Soc'y, 84 Wn.2d 612, 615, 529 P.2d 7 (1974); Freimuth v. Glens Falls Ins. Co., 50 Wn.2d 621, 314 P.2d 468 (1957). "The determination of whether coverage exists is a two-step process: first, the insured must show the policy covers his loss; second, to avoid coverage, the insurer must show specific policy language excludes the insured's loss." Wright v. Safeco Ins. Co. of Am., 124 Wn.App. 263, 271, 109 P.3d 1 (2004).

(c) Exclusions

Exclusions negate coverage for specific types of damages or causes of loss, are usually set apart from the coverage grant, and are strictly construed against the insurer. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Zuver, 110 Wn.2d 207, 210, 750 P.2d 1247 (1988).

(d) Definitions

Policies frequently define key terms, which are either set apart in boldface or are highlighted. If a policy leaves a term undefined, the term is given its plain, ordinary, and popular meaning. A standard English dictionary definition may be used as an aid. State Farm Fire & Cas. Co. v. Ham & Rye, L.L.C., 142 Wn.App. 6, 174 P.3d 1175 (2007).

(e) Conditions

Conditions identify the various prerequisites to coverage, including the insured's contractual obligations to give notice, assistance, and cooperation.

(f) Endorsements

Endorsements are written amendments that modify the terms of the policy, usually by increasing the coverage given by the standard policy. Generally, endorsements are read together with the policy to give meaning to all provisions. However, if there is a conflict between the policy and an endorsement (or a rider, as it is sometimes called), then the endorsement controls. Primerica Life Ins. Co. v. Madison, 114 Wn.App. 364, 367, 57 P.3d 1174 (2002).

(g) Certificate of insurance

A certificate of insurance may accompany, but is not part of, the insurance policy. Unlike the policy, the certificate is merely evidence of the existence of the policy. Its use is limited to showing lenders and other interested parties that a particular property is insured and it may not be relied upon to establish rights or liabilities under a policy. U.S. Life Credit Life Ins. Co. v. Williams, 77 Wn.App. 861, 894 P.2d 566 (1995), aff'd, 129 Wn.2d 565 (1996). The Washington Supreme Court has recognized a significant exception to this rule. In Fittro v. Lincoln National Life Insurance Co., 111 Wn.2d 46, 757 P.2d 1374 (1988), the court held that when an insurance company is required by statute to issue certificates of coverage to holders of group insurance policies, the coverage provisions stated in the certificate of coverage furnished to the insured take precedence over conflicting terms in the master policy.

(2) Types of insurance coverage: property & liability

Generally, two basic types of coverage are available: property and liability.

(a) Property insurance

Property insurance provides coverage for direct and consequential damage to the insured's own property. It may include "named peril" ("occurrence" policies), "extended risk," and "all risk" ("open perils") coverages. In a named peril policy, the actual cause of loss must be listed in the policy for insurance to be triggered. Common causes of loss include fire, lightning, explosion, and theft. In an extended coverage policy, insurance is available to insure against an array of specified risks including, among others, windstorm, hail, aircraft, vehicles, explosion, riot, and smoke. "All risk" coverage insures against all risks not expressly excluded. Vision One, LLC v. Phila. Indem. Ins. Co., 174 Wn.2d 501, 513- 14, 276 P.3d 300 (2012). Common exclusions include environmental contamination, earth movement, flood, nuclear incidents, acts of terrorism, acts of God, and war.

Comment: The federal government offers an affordable alternative to private flood insurance. National Flood Insurance Act, 42 U.S.C. §§ 4001-4127. Lenders are required to advise borrowers purchasing property in known flood hazard areas to purchase adequate flood insurance. National Flood Insurance Reform Act of 1994, Pub. L. No. 103-325, 108 Stat. 2255-2287 (1994). The Biggert-Waters Flood Insurance Reform Act of 2012, Pub. L. No. 112-141, 126 Stat. 405, Div. F, Title II, §§100201-100253 (July 6, 2012), raised rates for some properties to reflect true flood risk and make the program more stable, and changed how Flood Insurance Rate Map updates impact policyholders. These changes have been delayed and modified by the Homeowner Flood Insurance Affordability Act of 2014, Pub. L. No. 113-89, 128 Stat. 1020 (Mar. 21, 2014).

An insured may bridge any gaps that exist between a "named peril" policy and an "all risk" policy by purchasing a Difference in Conditions (D.I.C.) policy. The D.I.C. policy, which is tailored to the insured's particular needs, specifically excludes risks covered by the insured's named peril and all risk policies while extending coverage to specific, otherwise noncovered risks (e.g., earthquakes).

Payment made under property insurance policies generally is either by actual cash value of the loss or replacement value. An actual cash value policy, also known as "market value," is equal to the replacement cost of the item minus any depreciation. Holden v. Farmers Ins. Co. of Wash., 142 Wn.App. 745, 752, 175 P.3d 601 (2008), citing 12 Lee R. Russ & Thomas F. Segalla, COUCH ON INSURANCE §175:5 (3d ed. 2005). [The Supreme Court reversed the Court of Appeals on other grounds in Holden v. Farmers Insurance Co. of Washington, 169 Wn.2d 750, 239 P.3d 344 (2010), in which the Washington Supreme Court held that an "actual cash value" (ACV) policy required inclusion of sales tax in calculation of replacement-cost-less-depreciation measure of fair market value, based on the ordinary understanding of the policy language by an average insurance consumer.] But see Nat'l Fire Ins. Co. v. Solomon, 96 Wn.2d 763, 638 P.2d 1259 (1982) ("actual cash value" within statutory language of fire policy is synonymous with "fair market value" and does not mean replacement cost less depreciation). Solomon was highly criticized in Hess v. North Pacific Insurance Co., 122 Wn.2d 180, 191, 859 P.2d 586 (1993) ("The facts in [Solomon ] mandate limiting whatever its holdings may be to those facts and the policy...