Vacancy/Occupancy Clauses in Property Insurance

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Even when an insured has the option of rejecting the endorsement, which may be more the exception rather than the rule, insureds should not feel that they are immune to problems in the event of a loss where a safeguard device is inoperable. Keep in mind that not all insurance policies are based on standard AAIS or ISO forms. There are many nonstandard forms out there that could exclude coverage for reasons other than those specifically involving a protective safeguards endorsement. One example is a policy containing an increase in hazard provision.

Veteran insurance people will remember the Standard Fire Policy (SFP) (aka the 165 lines policy) that was replaced by the simplified, more readable language forms in the mid 1980s. The SFP policy stated that the company will not be liable for loss occurring while the hazard is increased by any means within the control or knowledge of the insured, a clause that is no longer found in most current property policies. The SFP is not entirely dead, however, as it appears in many state FAIR plan policies, and the increase in hazard provision is also found in the mortgage clause of many property policies, although not with exactly the same wording.

Although the SFP was long ago withdrawn as far as it relates to standard property policies, it or a similar increase in hazard provision may be included with some nonstandard property forms. The point is that if an increase in hazard provision were to be part of a property policy without a protective safeguards endorsement, and a loss were to involve an inoperable or defective device or service, the insured could still be denied coverage based on the increased hazard resulting from the inoperable safeguard device.

Agents and brokers can provide an important service to insureds when applications for insurance include questions about sprinkler systems, fire and burglar alarms, or other devices, by explaining the potential consequences of not maintaining these devices or services. By providing such service and periodically inquiring with insureds about the maintenance of safeguard devices, they may not only avoid coverage problems, but could also contribute to the prevention of losses and minimize the risk that they might be sued for not sufficiently advising an insured of the potential repercussions for failing to maintain such devices.

The Courts and the Protective Safeguards Endorsement

Generally, the language of these endorsements is considered clear and unambiguous. Insurers are usually successful in denying coverage when protective devices are required, but not installed or maintained, or the insured has indicated that a device exists when, in fact, it does not.

In the case of Burmac Metal Finishing Co. v. West Bend Mutual, 2005, the insurance company denied coverage for damage caused by a natural gas explosion since the insured failed to properly maintain its automatic sprinkler system as required by the protective safeguards endorsement. The Illinois Appellate Court ruled in favor of West Bend Mutual that no coverage applied under these circumstances because the insured failed to comply with the endorsement.

In Goldstein v. Fidelity & Guaranty Insurance Underwriters, 1996, a U.S. Circuit Court of Appeals...


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