The Case: French King Realty v. Interstate Fire and Casualty Company, 79 Mass. App. Ct. 653 (2011)
Why we featured this case:
This case presents three important decisions of first impression in Massachusetts. First and foremost, this is the first Massachusetts case to decide that the word “maintain” as used in the endorsements for sprinkler protected buildings is ambiguous. Second, this case is also the first Massachusetts case to hold that an insured’s failure to notify the insurance company that a sprinkler is not functioning can result in a denial of a fire loss; and, third, this is one of the few cases in the country that has held that the insurance company can recover its advance payments from the insured after a subsequent denial of coverage.
What You Should Know About This Case:
French King Realty Inc. runs a restaurant and motel in Erving. It is located on the Mohawk Trail Route 2 near the French King Bridge (Awarded the most beautiful steel bridge of in 1932) and French King Rock (so named by the French officer of an Indian scouting party during the French and Indian Wars). Not surprisingly the restaurant is called the “French King Restaurant” (French King).
The ISO Protective Safeguards Endorsement used on Commercial Property Coverage
French King’s Commercial Property Coverage with Interstate Fire and Casualty Company (Interstate) had the ISO “Protective Safeguards” endorsement which required the following:
As a condition of this insurance, you are required to maintain the protective devices or services listed in the Schedule above.
The schedule section of the endorsement listed the required protective device as an “Ansul System or Equivalent”.
French King’s policy was non-renewed by an admitted carrier. As normally would follow, French King’s agent placed the risk in the excess and surplus market with Interstate. On its application, French King answered that its policy had not been renewed because the prior carrier’s “”[u]nderwriting guideline required a `wet’ Ansul system.” French King had a “dry” system. The system was considered beyond obsolete as the manufacturer had phased it out of its inventory in 2002. As a result, there was no one who could inspect, service, recharge, or repair the French King system. In 2004, Massachusetts adopted standards for fire suppression systems to comply with the National Fire Protection Association rules that specified that dry fire suppression systems should be upgraded to the UL300 standard (wet systems).
After the policy was issued, French King’s contractor inspected the system and sent a warning that the fire suppression system at the restaurant was not in accordance with the NFPA requirements as well as with the manufacturer’s UL listing on the system. French King got two estimates for a new system that would have cost about $3500 but, did not contract for the upgrade.
Finally, in June, 2005, while the policy was in force, the building inspector arrived. He advised French King that as the system had been “red tagged as of June 10, 2004, he could not issue a certificate of inspection until French King had the system fixed. Since French King’s existing certificate of inspection did not expire until January 2006, it appears that French King’s management thought that it could take their time in implementing the upgrade. Unfortunately, however, time ran out sooner than later.
Protective Safeguard endorsements are for insureds’ knowledge of any problem and failure to notify the insurance company
On October 12, 2005, French King had a kitchen fire. The fire suppression system failed to operate and the restaurant suffered $291,000 in property damage.
Interstate advanced $15,000 to French King two days after the loss. After further investigation, however, it then denied the claim. Interstate’s denial was based upon the conditions of insurance stating that French King was required to “maintain the protective devices or services listed in the Protective Safeguards endorsement and on the additional provisions that excludes losses or damage caused by, or resulting from fire, if, prior to the fire, the insured”:
(1) knew of any suspension or impairment in any protective safeguard listed in the Schedule …. and failed to notify the insurer of that fact; or
(2) Failed to maintain any protective safeguard …. over which [the insured] had control, in complete working order.
French King’s defense was that the authorized suppression system maintenance company it hired continued to service the dry system and to certify it as operational. As a result, there was no knowing violation of the exclusions. In fact, French King’s manager claimed that he was never informed by the service company, orally or in writing, that his system was not operational and that they had not explained the meaning of the term “noncompliance” to him. The Superior Court awarded summary judgment to Interstate finding that French King had failed to “maintain” the fire suppression system as required by the endorsement.
What the Appeals Court said:
On appeal, French King’s argument was that the word “maintain” as used in the endorsement was ambiguous and that, if that was the case, then a a genuine issue of material fact existed that required a jury trial as to whether French King knew that the fire suppression system was suspended or impaired.
The term “maintain” as used in the Protective Safeguard Endorsement is ambiguous.
The word “maintain” is not defined in the Protective Safeguard Endorsement. The Appeals Court found that the word “maintain”, as used in the endorsement, is ambiguous because it is employed with two different meanings within the endorsement.
The Court noted that the Protective Safeguard Endorsement states: “[Y]ou are required to maintain the protective devices or services listed in the Schedule above” (emphasis supplied). Then, in the exclusions, the same endorsement states, “We will not pay for loss or damage caused by or resulting from fire if, prior to the fire, you: . . . Failed to maintain any protective safeguard listed in the Schedule above, and over which you had control, in complete working order” (emphasis supplied).
The Court went on to say that if found that the two uses of maintain susceptible to a range of meanings— from one by which the obligation is simply to have a fire suppression system in place, to the further obligation to keep the system operational. The Court refused to accept Interstate’s view of that the word “maintain” was capable of only one meaning in the context of the endorsement.
Since the word “maintain” was determined to be ambiguous, the Court refused to accept the Superior Court’s reasoning. This did not, however, signal the end of French King’s troubles.
The knowledge of the insured that its fire suppression system was impaired and its failure to notify the insurer barred coverage in the Appeals Court’s view
After winning on the ambiguity of the term “maintain,” French King’s luck ran out. It had argued that since there was a genuine issue of fact that, in and of itself, barred summary judgment over the question of whether it knew that the fire suppression system was suspended or impaired. The Appeals Court disagreed with French King’s argument and found that the record showed clearly and conclusively that French King’s fire suppression system was impaired, that French King knew it was impaired, and that it failed to inform its insurer.
A major point against French King, in this finding, was that whatever French King’s corporate knowledge was prior to the building inspector’s ultimatum in June, 2005, by that date, French King had to have understood that the system needed to be “fixed”, that its service company had “red tagged” it and that it had “flunked the system.” Based upon the building inspector’s statements, French King was plainly aware of the deficiency of the restaurant’s fire suppression system and the ramifications of the deficiency as it related to the restaurant’s continuation in business. Moreover, that fact that French King had twice gotten estimates for a system upgrade and on neither occasion did an upgrade occur weighed heavily against their favor.
As a result, the Court ruled that even though French King had until January of 2006 to upgrade the system for certificate of inspection purposes, pursuant to the terms of the exclusion, French King had had a duty to notify Interstate that the system was impaired and did not do so before the loss occurred.
The term “in complete working order” is not ambiguous as used in the Protective Safeguard Endorsement.
The Appeals Court also found that there was no issue as to whether French King had control over the fire suppression system and had failed to maintain the system “in complete working order” as required by the Protective Safeguard Endorsement. The Court rejected French King’s specific contention that the term “in complete working order” was ambiguous.
As such, the Court determined that the terms of exclusion in the Protective Safeguard Endorsement required French King to “maintain” a fire suppression system “in complete working order” for coverage to attach. This meant that French King was required to take steps to bring its fire suppression system into compliance. Since there was no dispute that French King had completed this necessary step, the Court found that this exclusion in the Protective Safeguard Endorsement applied and there was no coverage for the loss.
Court orders insured to return advance payments made by insurance company before denial.
In one of the most unusual aspects of this case, in affirming the Superior Court order, the Appeals Court ordered French King to reimburse Interstate for the $15,000 it had initially advanced for cleanup costs. This turn of events marked another first in Massachusetts for such an order. The court justified this decision stating “[a]lthough no Massachusetts courts have directly addressed this issue, other jurisdictions have persuasively reasoned that an insurer is entitled to reimbursement for an erroneous payment when coverage does not exist under the policy and the insured was unjustly enriched and did not change position to its detriment in reliance on the payment.”
To add insult to injury, the Superior Court judgment added interest to the order reimbursing Interstate at the rate of 12%. This left French King with an additional $6,000 interest owed in addition to the original $15,000 advance.
Agent Takeaways:
- The condition of the Protective Safeguard Endorsement that there is no coverage if the “insured knew of a suspension or impairment … and failed to notify us of that fact” could be problematic as to the question of notice. The endorsement does not distinguish the type of notice required, oral or written, or to whom the notice is given to. An agency may wish to be careful that it does not become involved in a lawsuit where the insured’s claim is “I told my agent the system was down.”
- The Protective Safeguard Endorsement does not require notice if the repair can be completed in 48 hours. But an agency or an insured would be wise not to rely on that exception as delayed repairs out of the insured’s control could have disastrous consequences if a loss occurred beyond this 48 hour grace period.
- The notification and “working order” provisions of the Protective Safeguard Endorsement are not a prominent part of the policies where this endorsement is attached. For their own E&O risk management, an agency might wish to make sure that insureds who are required to keep such a system in working order are aware of what the endorsement requires.
By Owen Gallagher
