Fire Sprinkler’s Absence Precluded Coverage

American Way Cellular, Inc. v. Travelers Property Casualty Company of America
(Cal. Ct. of App., 2d Dist.), filed May 30, 2013

KEY FACTS

Ali Sheibani owned American Way Cellular. Sheibani went to A & J Financial Insurance Services, a licensed insurance broker, for property insurance. A & J submitted the insurance application to USASIA Insurance Services, Inc., which was a Travelers agent.

The application had a box headed “FIRE PROTECTION (Sprinklers, Standpipes, CQ/Halon Systems).” The application indicated that American Way had “SMOKE DETECTORS/FIRE EXTING/SPRINKLERS.”

The policy Travelers issued had a “protective safeguards” endorsement: “As a condition of this insurance, you are required to maintain the protective devices or services listed…” The protective devices were listed as “Automatic Sprinkler System, including related supervisory services.” An exclusion said:

“We will not pay for loss or damage caused by or resulting from fire if, prior to the fire, you: a. Knew of any suspension or impairment in any protective safeguard listed in the Schedule above and failed to notify us of that fact; or b. Failed to maintain any protective safeguard listed in the Schedule above, and over which you had control, in complete working order. If part of an Automatic Sprinkler 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.”

American Way suffered a fire loss. Travelers advanced $250,000 and investigated the fire’s cause. During its investigation, Travelers learned that American Way did not have a fire sprinkler system. Based on this discovery and the “protective safeguards” endorsement, Travelers denied American Way’s claim and demanded reimbursement of the $250,000 advance.

The trial court ultimately granted summary judgment in Travelers’ favor.

HOLDING & REASONING

The Court of Appeal affirmed.

The court held that the “protective safeguards” endorsement barred coverage. It rejected American Way’s argument that Travelers had a duty to inspect its premises to see if there were sprinklers and that by failing to do so, it could not rely on the endorsement.

The court held that Travelers had made a prima facia showing that A & J was not its agent and that American Way failed to raise a triable issue as to A & J’s status. The application’s incorrect reference to American Way’s sprinklers was not attributable to Travelers’ fault.

ANALYSIS

This case reiterates the potential importance of insurance applications. They are often carefully assessed after a claim. It would have been interesting to see how a reformation claim might have worked. If the insured had not made a “mistake” on the sprinklers, would the policy have been issued without the sprinkler exclusion, but with a higher premium?