In September 2000, Norman and Glenna Schuchman purchased homeowner’s insurance from State Auto Property and Casualty Insurance Company (“State Auto”) to insure a residence in Junction City, Illinois. Almost ten years later, a fire severely damaged the insured house and the Schuchmans asserted a claim against the homeowner’s policy State Auto had issued. After a lengthy investigation, however, State Auto denied the Schuchmans’ claim on the basis that the Schuchmans were not residing on the “residence premises, ” as that term is defined by the policy, and because the Schuchmans were maintaining a residence other than at the “residence premises,” in violation of the policy’s Special Provisions. In Schuchman v. State Auto Property and Casualty Ins. Co., 12-2751 (7th Cir. 10/23/2013) [enhanced version available to lexis.com subscribers], the Seventh Circuit resolved the issue.
On November 10, 1980, Glenna (née Reed) Schuchman purchased a parcel of land in Junction City, Illinois. The parcel was, and is, a contiguous tract of land consisting of eight lots, Numbers 9 through 16, of Block 45 of Junction City. The parcel is situated at the corner of West 14th Street and Madison Avenue.
When Ms. Schuchman purchased the parcel, a single house was situated on the southern end of the property facing West 14th Street and the parcel’s southern boundary. Ms. Schuchman moved into this house after purchasing the property. In 1983, she married Norman Schuchman, who subsequently moved into the house with her. At this time, the house had the mailing address, “Rural Route #1.”
In the late 1980s and early 1990s, Ms. Schuchman moved two mobile homes onto the property—one for her mother and the other for her stepfather. These mobile homes were together assigned a single mailing address, “Rural Route #2.” Sometime before 1993, however, the house and mobile homes were each assigned new mailing, or street, addresses. The house was assigned the address, “109 West 14th Street.” One mobile home was assigned “1406 Madison Avenue, ” and the other “1408 Madison Avenue.” So far as the record reflects, the Schuchmans had nothing to do with the assignment of these addresses.
The Schuchmans pay property tax based on the parcel as a whole. Separate title searches for 1408 Madison Avenue and 109 West 14th Street both return the same tract of eight contiguous lots owned by the Schuchmans. On September 8, 2000, the Schuchmans submitted an application for homeowner’s insurance to State Auto through an insurance broker, Michael Wethington. The application listed 1408 Madison Avenue as the Schuchmans’ mailing address and 109 West 14th Street as the location of the property to be insured.
Sometime before 2004, the Schuchmans moved two additional mobile homes onto the property near the mobile home bearing the 1408 Madison Avenue address; these new trailers shared the 1408 Madison address. The Schuchmans then moved from the house at 109 West 14th Street into these new mobile homes. At this time, Mr. Wethington informed Ms. Schuchman that the mobile homes would not be covered by the State Auto policy because State Auto did not insure mobile homes. Mr. Wethington also informed Ms. Schuchman that, so long as the Schuchmans continued to reside on the property, the house at 109 West 14th Street would continue to be covered by the State Auto policy.
In the early hours of May 23, 2010, a fire broke out at the 109 West 14th Street house, severely damaging the building and its contents. The Schuchmans filed a claim with State Auto under their homeowner’s insurance policy to cover the damage to the house. After a lengthy investigation, State Auto agreed to provide coverage for the contents of the house, as the policy covered personal property “anywhere in the world.” However, State Auto denied coverage for damage to the house itself on the basis that “the home at 109 W. 14th Street was not being used as [the Schuchmans'] ‘residence premises, ‘ as that term is defined in the insurance policy.” State Auto also denied coverage for the building on the basis that the Schuchmans had violated the Special Provisions of the policy which required that the “residence premises” be the only premises where the Schuchmans maintained a residence.
THE STATE AUTO HOMEOWNER’S POLICY
“1. We [(State Auto)] cover: a. The dwelling on the ‘residence premises’ shown in the Declarations, including structures attached to the dwelling.”
Under “DEFINITIONS, ” Section B.11 defines the term “residence premises” as:
“a. The one family dwelling where you reside; ¶ b. The two, three or four family dwelling where you reside in at least one of the family units; or ¶ c. That part of any other building where you reside; ¶ and which is shown as the ‘residence premises’ in the Declarations. ¶ ‘Residence premises’ also includes other structures and grounds at that location.”
The parties agree that the Schuchmans had to reside on the “residence premises” in order for coverage under the policy to be effective. They also agree that the Schuchmans were not residing at the 109 West 14th Street house at the time of the fire, but at the 1408 Madison Avenue mobile homes. The critical question, then, is whether “residence premises, ” as defined by the policy, encompasses those mobile homes. If “residence premises” includes the mobile homes, the Schuchmans were residing on the “residence premises” at the time of the fire, and the damage to the house is covered by the policy.
Turning to the Declarations page, we learn that the “premises” covered by the policy is located at “109 West 14th Street, Junction City, Illinois.” The Declarations page does not define the boundaries of that address. The subsequent description of the insured structure as a frame construction single-family residence confirms that the house associated with that mailing address is the covered dwelling. But because “residence premises” includes “other structures and grounds at that location,” it is clear that “residence premises” is not limited to that house. The “residence premises,” therefore, consists of the insured frame construction single-family house and any other structures and grounds located at 109 West 14th Street.
The implicit premise of the insurer’s argument is that the location—that is, the area of land—defined by one mailing address cannot include within it a structure that has another mailing address. The insurer has created a circular ambiguity by using a mailing address for a purpose it was never intended to serve—namely, for defining the metes and bounds of a piece of property.
The Seventh Circuit concluded that the meaning of “residence premises” is ambiguous as used in the policy. Resort to parol evidence concerning the parties’ intentions confirms, rather than resolves, the ambiguity in the meaning of “residence premises” under the policy. Further, when the Schuchmans moved out of the 109 West 14th Street house and into the 1408 Madison Avenue mobile homes, Mr. Wethington, their insurance broker, informed the Schuchmans that so long as they resided on the “property, ” the house at 109 West 14th Street would be covered under the State Auto policy. Wethington’s statements are not significant because they bind State Auto, but because they show that the Schuchmans understood the residence premises to include the entire contiguous parcel.
The Schuchmans continued to pay premiums on the policy for some six years after they moved out of the house and into the mobile homes parked nearby. To hear State Auto tell it, the Schuchmans were throwing their money down the drain by doing so. It is clear that State Auto never gave the Schuchmans any inkling that the existence of other mailing addresses on the property had any potential to compromise their coverage of the house under the policy. It is plain that the Schuchmans always viewed the property as a single unit.
The insurer has the capacity to draft intelligible contracts. With respect to the “residence premises,” State Auto failed to do so and none of the evidence they point to resolves the ambiguity inherent in using a mailing address to define the boundaries of a piece of property.
Further, because “residence premises” is susceptible to more than one reasonable interpretation, the Schuchmans cannot have violated the Special Provisions of the policy by residing in the 1408 Madison Avenue mobile homes. Therefore, because “residence premises” includes the 1408 Madison Avenue mobile homes, the Schuchmans were not maintaining a residence other than at the “residence premises” and were not violating the Special Provisions.
This is a case where what works perfectly in a big city where house addresses define the metes and bounds of a property it doesn’t work in a rural area where street addresses are uncommon. State Auto created an ambiguity because it did not recognize that the “residence premises” was eight contiguous lots all owned and occupied by the insureds. The Seventh Circuit applied the contra preferendum rule, found an ambiguity and applied it properly in favor of the insurer. To effect State Auto’s intent it would have been simple to describe residence premises as the single family, frame structure with a specific street address and no other structures. It did not and could not do so after the loss by claiming its undisclosed intent.
By Barry Zalma, Attorney and Consultant
Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma or firstname.lastname@example.org, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.
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