Property Insurance Policy’s Endorsement Requiring Sprinkler Maintenance Created Condition Precedent To Coverage, And Fire Loss Was Not Covered

Property Insurance Policy’s Endorsement Requiring Sprinkler Maintenance Created Condition Precedent To Coverage, And Fire Loss Was Not Covered

07.18.2013

In American Way Cellular, Inc. v. Travelers Property Cas. Co. of America, 216 Cal.App.4th 1040 (5/30/2013), the California Court of Appeal ruled, as a matter of first impression, that a property insurance policy requiring the insured to “maintain” a sprinkler system was a condition precedent to coverage, where the insured’s insurance application had falsely represented that the covered building had a sprinkler system. Because no sprinkler system existed, the insured was not entitled to coverage for damage caused by an otherwise covered fire loss. The Court held that the insurance broker’s alleged negligence in preparing the insurance application could not be imputed to the insurer because the broker was not the insurer’s actual or ostensible agent.

The insurance broker prepared an insurance application, which represented that the insured’s building was equipped with a sprinkler system when it was not. The broker testified it was not Traveler’s agent, but rather, acted as broker for the insured. The insured’s principal testified that the insurer never contacted him during the application process. 

Based on the application, Travelers issued a property policy containing a “Protective Safeguards Endorsement for Sprinklered Locations and Restaurants,” which stated: “As a condition of this insurance, you are required to maintain the protective devices or services listed. . . . Automatic Sprinkler System, including related supervisory services.” The endorsement excluded coverage for loss or damage caused by a fire if, prior to the fire, the insured knew of a suspension or impairment of the sprinkler system or failed to maintain the sprinkler system in complete working order.

A fire occurred at the covered premises. In its investigation, Travelers learned there was no sprinkler system at the premises. In the ensuing lawsuit, the trial court granted summary judgment in favor of Travelers.
 
On appeal, the Court affirmed, holding that a sprinkler system was a condition precedent to coverage under the policy and that the insured’s failure to maintain a sprinkler system barred coverage. The Court further held that Travelers could not be liable for failing to verify whether the building had a sprinkler system because “an insurer does not have the duty to investigate the insured’s statements made in an insurance application and to verify the accuracy of the representations.  [Citation].  Rather, it is the insured’s duty to divulge fully all he or she knows.”  Furthermore, the Court determined that Travelers could not be liable for the broker’s alleged negligent preparation of the insurance application because the broker was not Travelers’ agent, and Travelers had never represented otherwise to the insured.