...held that while the insurer was responsible for paying for a fire loss during a period when the safeguards endorsement had been waived because of an error by the insurer’s agent, the insurer was justified in denying coverage for subsequent loss due to the owner’s failure to restore a nonfunctioning sprinkler system, as required by the endorsement. 1
The case of QB Investments, LLC v. Certain Underwriters at Lloyd’s, London, No. 01-10-00718 (Tex. App. Houston, August 4, 2011) involved a property insurance dispute resulting from a denial of coverage for a warehouse fire. The issues were two-fold; one being what effect a binder has on coverage, and the other dealing with a protective safeguards endorsement. Lloyd’s denied QB Investment’s claim for the fire damage because it was undisputed that the fire alarm was not installed at the time of the fire. The trial court ruled in favor of Lloyd’s, and QB Investments appealed.
On appeal, the Court of Appeals ruled in favor of Lloyd’s, noting that it is undisputed that the policy contains a safeguards endorsement, and that while the safeguards endorsement is not specifically mentioned in the binder, the binder stated that other endorsements may apply. The endorsement was part of the policy when it was issued and when the fire occurred.
Although the above cited cases ruled for the insurer when it was undisputed that a protective safeguards endorsement applied, and that the device or service was inoperable at the time of loss, there are exceptions. One case, where the court did not hold in favor of the insurer despite the existence of a protective safeguards endorsement, is Brookwood, LLC v. Scottsdale Insurance Co., No. 08-4793 (U.S. Dist. Ct. E. Dist LA. 2009) 2 . The case involved an unoccupied retail store located in a shopping center. The retail store had an inoperable burglar alarm system. Burglars broke through a locked door to the store and stole copper wire and other electrical equipment. The insurer denied the claim because the insured (the shopping center owner) failed to maintain a centrally monitored burglar alarm system after indicating to the insurer that the shopping center was protected by such a system. The insurer claimed that this constituted a material misrepresentation by the insured who had indicated on the insurance application that a centrally monitored burglar alarm system was operable.
The insured countered that the protective safeguards endorsement was ambiguous and that the insurer had waived its right to enforcement of its endorsement by continuing to accept premiums after being put on notice that there was no functioning alarm system in the retail unit. To fortify its position, the insured pointed to a report prepared for the insurer after the property was inspected — just after the policy’s inception — that noted there was either no burglar alarm system or only a local one, i.e., not a centrally monitored system. Thus, the insured contended that the insurer had been notified that a centrally monitored alarm system was not operable and had waived its right to enforcement.
The applicable protective safeguards endorsement indicated that the insurer would not pay for loss caused by or resulting from theft if, prior to the theft: (1) the insured knew of any suspension or impairment of any safeguard identified in the...