Protective Safeguards Endorsements Need a Warning Label

The Endorsement Requirements

The requirements of these endorsements are strict. Take, for example, the Insurance Services Office, Inc. (ISO), form Protective Safeguards (CP 04 11 09 17). The endorsement describes a variety of protective safeguards that may be required, and ones that are warranted for a particular building are listed in the Schedule. The endorsement describes each of the following safeguards.

• P-1 Automatic Sprinkler System
• P-2 Automatic Fire Alarm
• P-3 Security Service
• P-4 Service Contract
• P-5 Automatic Commercial Cooking Exhaust and Extinguishing System
• P-9 Another described protective system

Certain conditions are outlined, and if the insured does not comply with all of these, there is no coverage for loss or damage caused by or resulting from fire. The conditions are as follows.

As a condition of this insurance, you are required to:

• 1. Maintain the protective safeguards listed in the Schedule, and over which you have control, in complete working order;
• 2. Actively engage and maintain in the "on" position at all times any automatic fire alarm or other automatic system listed in the Schedule; and
• 3. Notify us if you know of any suspension of or impairment in any protective safeguard listed in the Schedule.

Source: Insurance Services Office, Inc., Protective Safeguards (CP 04 11 09 17), © 2016.

An exception to the notification provision is made in one situation only.

However, if part of an Automatic Sprinkler System or Automatic Commercial Cooking Exhaust And Extinguishing System is shut off due to breakage, leakage, freezing conditions or opening of sprinkler heads, notification to us will not be necessary if you can restore full protection within 48 hours.

Source: Insurance Services Office, Inc., Protective Safeguards (CP 04 11 09 17), © 2016.

ISO rules, as outlined in the Commercial Lines Manual, state that "the clause or warranty specified by the rate publication must be added to the policy if protective devices or services are required." As an example, if the building is rated as having an automatic sprinkler system, that protective safeguard should be included in the endorsement.

ISO Burglary and Robbery Protective Safeguards (CP 12 11 09 17) is an endorsement that works in a similar manner but removes coverage for theft losses if the conditions of the endorsement are not met.

Insurer proprietary endorsements may be worded differently and often remove coverage for perils other than fire and theft.

What the insured's obligations are and the impact of the failure to meet those obligations have on coverage seem obvious, and there are several questions that have been litigated. Some of these are discussed below.

What Does It Mean To Maintain a Protective Safeguard?

The ISO endorsements require the insured to "maintain the protective safeguards listed in the Schedule, and over which you have control, in complete working order." What does it mean, though, to maintain a protective safeguard? The endorsements do not define this term.

This question was raised in a case decided in 2011 under Pennsylvania law in Five Star Hotels LLC v. Insurance Co. of Greater NY, 09 Civ. 8717 (PGG) (S.D.N.Y. Mar. 25, 2011). Five Star Hotels LLC installed an upgraded automatic sprinkler system in a Holiday Inn hotel in Pittsburgh. The property policy issued to Five Star by Insurance Company of Greater New York (ICGNY) included a protective safeguards endorsement requiring Five Star to maintain an automatic sprinkler system. In December 2008, two couplings in the sprinkler system on the tenth and eleventh floors of the hotel burst, causing extensive water damage to the lower floors.

It was determined that the loss was caused by the freezing and expansion of water inside the sprinkler system. ICGNY denied coverage, in part, because it claimed that Five Star's failure to prevent freezing was a breach of the requirement that it maintain the automatic sprinkler system. Five Star argued that keeping the system in place without removing or disabling it satisfied the requirement to maintain the system.

The court ruled that the meaning of "maintain" was ambiguous, so ICGNY could not deny coverage due to a breach of the protective safeguards endorsement.

What Is Meant by "Complete Working Order"?

Not only must the protective safeguard be maintained, but it must be maintained in complete working order.

This idea was the subject of an Illinois case decided in 2005, Burmac Metal v. West Bend Mut. Ins. Co., 356 Ill. App. 3d 471, 825 N.E.2d 1246 (2005). Burmac Metal Finishing Company owned a building insured by West Bend Mutual Insurance Company. In 1997, the building was damaged by a natural gas explosion and the ensuing fire that started near an oven in the building. The property policy's protective safeguards endorsement warranted an automatic sprinkler system.

Burmac did have an automatic sprinkler system in the building with over 600 sprinklers. Prior to the loss, Burmac removed and capped between 3 and 19 of the sprinklers over an area containing the oven. This was done to prevent the automatic sprinkler system from activating because of the high heat generated by the oven. The sprinkler heads in that area had discharged water in the past, and Burmac was unable to correct the problem with new sprinkler heads. Burmac did not notify West Bend of the capped sprinklers.

West Bend denied Burmac's claim, saying that it had not satisfied the condition of the protective safeguards endorsement.

The court ruled that the existence of three or more capped sprinkler heads at the time of the loss constituted a failure to substantially perform the condition of insurance that required Burmac to maintain its automatic sprinkler system.

What Can the Insured Control?

Protective safeguards endorsements typically require the insured to maintain protective safeguards over which it has control. Where that line is drawn is sometimes in question as is illustrated in this case from Mississippi, Charles Stores, Inc. v. Aetna Ins. Co., 490 F.2d 64 (5th Cir. 1974).

The Charles Stores, Inc., insured its building with Aetna Insurance Company and Hartford Fire Insurance Company ("the insurers"). The property policies included a protective safeguards endorsement that required the insured to "maintain so far as is within his control such protective safeguards as were stipulated in the application for this insurance for which credit in rate has been granted." The protective safeguards to which the endorsement applied were an automatic sprinkler system and fire alarm.

A fire started at the insured property, and firefighters discovered that the water valve to the sprinkler system had been turned off and a screw connection in the alarm system unfastened. The fire was intentionally set by someone outside the insured's organization, and the arsonist disengaged the protective safeguard devices before starting the fire.

The insurers denied coverage, claiming that the fact the sprinklers and fire alarm were off when the fire was started was a breach of warranty that terminated the coverage.

The court ruled in Charles Stores' favor, stating:

Neither the language of the policy nor the cases cited support an interpretation of the policy so sweeping as that urged by [the insurers]—that the insured is a guarantor of the continuing effectiveness of safeguard devices so long as it is in control of the premises and that such guarantee is breached and coverage suspended if the cause for the inoperative condition of safeguards is the act of persons other than the insured done concurrently with the fire itself. An insured's overall control of the premises does not give it control in the sense that it can prevent the act of an arsonist who cuts off the sprinkler system while setting a fire.

The Significance of Turning on the System

The second condition in the ISO endorsement is that the insured "actively engage and maintain in the 'on' position at all times any automatic fire alarm or other automatic system listed in the Schedule." This language was not added until the endorsement was updated in 2017. According to ISO's Circular LI-CF-2016-100:

This explicit requirement is in reaction to claims scenarios in which automatic alarm systems were not activated, and creative arguments were advanced by policyholders asserting that inactivation does not equate to suspension or impairment of a protective safeguard. Clearly, a protective safeguard that is not activated does not provide protection and as such does not fulfill the expectation that is integral to the insurer's acceptance of the risk.

An example of such an argument, albeit one involving an automatic sprinkler system as opposed to an automatic alarm system, was made in a case involving a warehouse building in Virginia, Breton, LLC v. Graphic Arts Mut. Ins. Co., No. 1:09cv60 (AJT/TRJ), 2009 U.S. Dist. LEXIS 104846 (E.D. Va. Nov. 10, 2009). Breton insured its building with Graphic Arts Mutual Insurance. The property policy included a protective safeguards endorsement that required Breton to maintain any protective safeguard listed over which it had control. The endorsement listed an automatic sprinkler system, including related supervisory services. Breton leased the building to a tenant who was responsible for the repair and maintenance of the property. Breton did not have access to the building and did not have a key to the sprinkler room.

Fire destroyed the building in December 2007. The fire department found that the supply valve in the sprinkler room was in the closed position so that water could not flow to the sprinkler heads. Graphic Arts denied the claim, stating that Breton had violated the terms and conditions of the protective safeguards endorsement.

Breton contended that it maintained the system because it was installed and not removed during the policy term. Graphic Arts contended that maintaining the system also involved periodically inspecting it and keeping it in good operating order and that Breton "failed to maintain their sprinkler system because the main control valve was closed and no water entered the system at the time of the fire."

The court ruled that the undefined term "maintain" was ambiguous and ruled in favor of Breton on this point.

The previously mentioned question of control over the protective safeguard was also addressed by this court. Because the court ruled that the system had been maintained, coverage applied. This part of the case was not necessary to resolve the coverage issue, but it is interesting to note the court's opinion.

Breton claimed it did not have control over the sprinkler system since it didn't have keys to the warehouse or the sprinkler room. Graphic Arts contended Breton "must be deemed to have had control since it owned the property but chose to divest itself of actual control … and that it should therefore not benefit from that 'control' qualification in the loss exclusion." Here again, the court found the policy language ambiguous, ruling that Breton did not have control over the sprinkler system at the time of the fire because it did not have "physical dominion over it or unfettered access to it."

Interestingly, the subject of turning on the automatic sprinkler system resulted in a different outcome in a case involving a vacant warehouse in Philadelphia, Berenato v. Seneca Specialty Ins. Co., 240 F. Supp. 3d 351 (E.D. Pa. 2017). In that case, Paul Berenato owned a vacant building that he insured through Seneca Specialty Insurance. The policy included a protective safeguards endorsement requiring that Berenato maintain in complete working order an automatic sprinkler system. In early 2015, the sprinkler system leaked at least three times. Berenato turned it off after the third leak, believing the leaks were caused by the cold weather. However, Seneca was not notified of this. On March 28, 2015, while the system was still turned off, a fire damaged the building.

Seneca denied coverage, claiming that Berenato had violated the protective safeguards endorsement by disabling the sprinkler system. The court agreed that coverage did not apply, stating:

The Protective Safeguards Endorsement set an unambiguous baseline requirement that Plaintiff keep his sprinkler system on. To "maintain" a system in "complete working order" necessarily means that the system is operational, not merely that it exists."

Must Breach of the Condition Be Material to the Loss?

What if a failure to maintain the required protective safeguard has nothing to do with the loss? Can the insurer still deny coverage? In most cases, the answer has been "yes." Policy language does not require that failure to comply with the protective safeguards endorsement conditions must be a cause of the loss.

This question was addressed in a New Jersey case decided in 2018, Vineland 820 N. Main Rd. v. United States Liab. Ins. Co., No. 17-2986 (NLH/JS), 2018 U.S. Dist. LEXIS 168826 (D.N.J. Sep. 29, 2018). There, Vineland 820 N. Main Road, LLC, owned a building and insured it with United States Liability Insurance Company (USLI). The property policy included a protective safeguards endorsement requiring that "all electric is on functioning and operational circuit breakers."

In May 2015, a fire started in the wiring on the second floor of the building. The main electrical panel that caught fire was a fuse panel box with four fuses. The fire department's investigation revealed that the cause of the fire was not the fuses. It was determined that a wire in the ceiling leading to the ceiling fan was the likely cause of the fire, and this cause was not disputed by USLI.

Vineland 820 asserted that coverage should apply because the absence of circuit breakers did not cause the fire. The court ruled that this position was unsupported by policy language. In ruling in favor of USLI, the court stated:

No language requires that the fire be caused by or resulting from use of fuses or an inoperative circuit breaker … to hold otherwise would be to write into the contract a causation requirement where none exists. The Court may not write a better contract for [Vineland 820] than the one it bought merely to allow for coverage.

Conclusion

Ideally, from the perspective of the insured, no property policy will have a protective safeguards endorsement. However, the reality is that many do. In some cases, the endorsement will be more difficult to remove. If the building is specifically rated as a sprinklered building, for example, many insurers insist on the endorsement. If a particular safeguard is required for coverage to be written, many insurers insist on the endorsement. Where there may be some leeway, though, is when the endorsement is added only because a rate credit is being given for a protective safeguard. In those cases, consider how much is saved compared to the potential downside of having the endorsement. Often, the premium savings from a central station alarm, for example, may not justify the risk of a coverage problem due to the endorsement.

If a protective safeguards endorsement cannot be removed from a policy, and there is no better coverage option for the insured, there are a few steps that can be taken to help the insured be aware of and comply with its obligations under the endorsement. Agents should also be mindful that protective safeguards endorsements can be the subject of errors and omissions claims, so these steps can protect the agency as well as the insured. All steps should, of course, be thoroughly documented.

• Make sure the insured has been notified of the existence of the endorsement and has been provided with a copy.
• Have the insured confirm, in writing, that the required safeguards are in place and that they understand their duties under the endorsement.
• Emphasize to the insured the importance of immediately notifying the agent or insurer of any changes in the protective safeguards.
• Suggest that the insured make the appropriate personnel at each location aware of the protective safeguard endorsement requirements and set up a system so that any impairment of the safeguard is reported to a designated person within the insured's organization.
• If the building is tenant-occupied, particularly in the case of a single-tenant building, make sure the lease is clear as to which party is responsible for the maintenance of the protective safeguards. Make sure the lease does not permit the tenant to do anything that impairs the safeguards.
• Brainstorm with the insured about what could go wrong so they can develop procedures to avoid problems. The following are examples.
  • Have and follow a schedule to change batteries in any battery-operated devices.
  • Make sure maintenance contracts are in place for protective safeguards that require them, and make sure they are kept current.
  • Add signage to protective devices. A sign could be placed over the burglar alarm keypad reminding employees the system must be turned on. A notice could be put near a sprinkler valve warning that it should not be shut off unless a designated person in the insured's organization is notified.
• Suggest that the insured maintain records related to the existence, inspection, and maintenance of any of the safeguards.
• Make sure the insured has clear instructions on how and when to report any suspension or impairment in the safeguard to the agent or insurer.
• Repeat at each renewal.

Protective safeguards endorsements are endorsements that should not be overlooked or taken lightly. If they cannot be avoided, it is important that the insured is aware of the conditions and the effect that failing to comply with those conditions can have on coverage.