Court Ruling Emphasizes Common Sense Reading of Insurance Policy in Win for Policyholder

The Washington Court of Appeals recently decided Poole v. State Farm Fire and Casualty Company, a case about fine print in a homeowner’s policy.  After the Pooles’ home burned down, State Farm denied coverage under a technical reading of the words “similar construction.”  Washington’s Court of Appeals disagreed with State Farm and emphasized the traditional principal that insurance policies are interpreted based on their ordinary and common meaning as a reasonable policyholder would understand them.

The Pooles had a State Farm homeowner’s policy covering their home.  Their home also contained a shop the Pooles used as a business.  The shop was in the same building as the home. After the structure containing the home and shop burned down, the Pooles made a claim under their State Farm policy.  State Farm agreed the policy covered the loss and agreed to pay to rebuild the structure.

The dispute arose when the Pooles decided to rebuild the shop as a separate building from the home, rather than rebuilding both in the same building as they had been originally.  State Farm refused to pay to rebuild the shop in a separate building, claiming the policy only provided coverage if the Pooles rebuilt the shop in the same building as the home.

State Farm relied on language limiting coverage to the Pooles’ “dwelling” and allowing reconstruction only for “similar construction.”  Since the shop was only covered as an attachment to the Pooles’ home, State Farm argued rebuilding the shop in a detached structure wasn’t “similar construction.”

The court disagreed, applying the ordinary and common meaning of the term “similar construction.”  The court noted that the limitation on coverage to the Pooles’ “dwelling” limited only coverage, and did not limit the Pooles’ reconstruction options.  Regarding whether the detached shop was “similar construction,” the court found reasonable the Pooles’ argument that the detached shop featured the same style, quality and building materials, and was used for the same purpose, as the original shop.  The court also noted State Farm’s representative admitted “reasonable people could disagree” about whether the policy covered reconstruction of the shop in a detached structure.

Because the Pooles’ interpretation was reasonable, the court applied the traditional insurance law principle that policy language capable of more than one meaning must be given the meaning that favors the insured.  Accordingly, the court found in favor of the Pooles.

The Poole case is an important reminder that technical terms in insurance policies matter, and that insureds are entitled to have ambiguous insurance policy language interpreted in favor of coverage.

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