Difference in Conditions (“DIC”) coverage is a unique creature. DIC coverage is generally purchased to fill gaps in coverage that exist in typical property policies. As a prerequisite to DIC coverage, the insured is required to maintain underlying property insurance. The coverage is “all-risk” in a certain sense, but it bars coverage for any peril insured against by any other property policy, including the required underlying policy. A DIC policy does this via two types of exclusions. First, it bars coverage for the perils commonly referred to as the “specified causes of loss,” i.e., fire, lightning, explosion, etc., as these perils are typically insured against in a property policy. Second, a DIC policy contains a catch-all exclusion which broadly bars coverage for “other perils as defined and limited, under policies insuring against perils carried by the Insured under any other more specific insurance arranged for and in the name of the insured” (the “DIC exclusion”)
The Ninth Circuit recently affirmed Judge Zilly’s analysis of the catch-all exclusion in Siena del Lago Condo Ass’n v. Mt. Hawley Ins. Co., No. C12–251 TSZ, 2013 WL 2127137 (W.D. Wash. May 14, 2013), a case defended by Betts Patterson Mines. The insured claimed that damage to its building was caused by a combination of faulty workmanship (which was admittedly excluded in both the DIC and underlying policies) and wind-driven rain (which is not explicitly addressed in either). For purposes of summary judgment only, Mt. Hawley accepted this to be true but argued that both causes were excluded under the policy’s faulty workmanship and catch-all exclusions, respectively. This blog entry will only address the court’s analysis of the latter exclusion.
The catch-all DIC exclusion in Mt. Hawley’s policy barred coverage for “Other perils as defined and limited, under policies insuring against perils carried by the Insured.” Siena del Lago at *3. The parties generally agreed that this exclusion applied to perils “to the same extent that those perils are defined and limited in [Plaintiff’s] underlying all-risk policies.” The parties disagreed, however, as to the meaning of the phrase “as defined and limited” in the exclusion.
“As Defined”
The insured argued that “as defined” meant that the exclusion barred coverage for a peril only if the peril was specifically identified in the underlying policy. This would severely limit the scope of the exclusion because “all risk” policies by definition do not specifically identify the perils they insure against. Under this reasoning, because “wind-driven rain” was not specifically mentioned in the underlying policy, the catch-all exclusion would not apply.
Mt. Hawley responded that “as defined” applied to the general definition of “Covered Cause of Loss,” in the underlying policy, which is a typical “all risks” definition that is limited only by the perils excluded or not insured against.
Judge Zilly agreed with Mt. Hawley, ruling that because a DIC policy provides coverage for gaps in the underlying policies, it cannot be reasonably interpreted to provide coverage for the same perils covered by the underlying policies. Siena del Lago at *4. Because the peril of wind-driven rain was not excluded in the insured’s underlying policies, it was “insured against” as a Covered Cause of Loss and therefore the DIC policy’s catch-all exclusion barred coverage.
“As Limited”
Turning to the meaning of “as limited,” the insured focused on the general requirement in the underlying policy that the loss or damage “commence” during the policy period. According to the insured, this limitation was not present in the DIC policy, which meant that losses commencing prior to the underlying policy’s policy period would be covered by the DIC policy. Mt. Hawley argued that the phrase “as limited” referred solely to limitations on perils, not to other types of limitations on coverage. Again agreeing with Mt. Hawley’s interpretation, Judge Zilly noted that the phrase “as limited” in the catch-all exclusion modified the word “peril,” not “loss,” and there was a meaningful distinction between the two terms. The term peril “refers to fortuitous, active, physical forces such as lightning, wind, and explosion, which bring about the loss.” Siena del Lago at *4. And, the provisions limiting coverage to losses commencing during the policy period did not limit the perils that would be covered, but only the losses. Based on this distinction, Judge Zilly held that the underlying policies’ commencing condition, which did not limit a peril, did not interfere with the application of the DIC catch-all exclusion.
Based on the application of the faulty workmanship exclusion and DIC exclusion, Judge Zilly correctly held that there was no coverage under the DIC policies for the claimed damage caused allegedly by a combination of wind-driven rain and faulty workmanship. This decision was recently affirmed by the Ninth Circuit in Siena Del Lago Condominium Association v. American Fire and Casualty Co., 639 Fed. Appx. 436 (9th Cir. 2016).
