A Protective Safeguards Endorsement Establishes a Condition Precedent to Coverage
Plaintiffs sued their insurance company to enforce their contractual rights. After Plaintiffs’ liquor store burned down, Defendant, the insurance company AmGuard, refused to pay the claim. In New Hamilton Liquor Store, Inc., et al. v. Amguard Insurance Company, Case No. 17-13077, United States District Court Eastern District Of Michigan Southern Division (July 23, 2020) the insurer reasoned that the coverage was excluded by Plaintiffs’ failure to maintain an automatic fire alarm.
Talib Hermiz bought New Hamilton Liquor Store, Inc., along with the company Mr. K & Hamilton, LLC—which owned the building 12150 Hamilton Ave in Highland Park—on March 17, 2009. Hermiz consulted with an insurance agent Rod Kathawa regarding this business. Kathawa asked Hermiz if he had an alarm. Hermiz said that he did, and Kathawa asked no further questions of alarms. Hermiz signed the contract, which was thereafter mailed to him. The contract contained a Protective Safeguard Endorsement (“PSE”). Hermiz acknowledged that he read the PSE, but he stated that he “did not understand.”
The PSE was headlined, in all caps, and warned that: “THIS ENDORSEMENT CHANGES THE POLICY, PLEASE READ IT CAREFULLY.” The PSE provided as follows: “We will not pay for loss or damages caused by or resulting from fire, if prior to the fire, you: 1. Knew of any suspension or impairment in any protective safeguard listed in the schedule above, and over which you had control, in complete working order. 2. Failed to maintain any protective safeguard listed in the Schedule above, and over which you had control, in complete working order.”
Mr. Hermiz had only three motion-detecting alarms in his store. Each alarm was located near a door. There was no fire alarm.
On Sunday, August 28, 2016, at 3:51:10, 3:51:11, and 3:51:13, all the alarms went off, alerting to motion within the store. The alarm center then placed two calls to the store to ascertain if anyone was there, and a third call to the local police department. The Police Department dispatched an officer to the scene, and, either by the officer’s call, or by some third party’s actions, the Highland Park Fire Department was notified at 3:54. Firefighters arrived at 3:58. Subsequent investigation established that the fire was an arson. Someone placed a ladder next to the store, climbed to the roof, cut a hole through the roof with a power saw, and then poured gasoline into the hole.
Amguard denied Hermiz’s claim. They based their denial on the fact that he had failed to install an automatic fire alarm as required by the contract.
At issue is whether or not Plaintiffs’ motion sensor alarm system qualified as an “automatic fire alarm” under the Protective Safeguard Endorsement of the insurance contract. The Michigan Supreme Court held in 2003 that “one’s alleged ‘reasonable expectations’ cannot supersede the clear language of the contract.” Wilkie v. Auto-Owners, Ins. Co., 469 Mich. 41, 60 (2003).
Whether or not Hermiz reasonably believed that he was in compliance with his insurance company is not relevant. An insured is obligated to read his or her insurance policy and to raise questions concerning coverage within a reasonable time after the policy is issued.
The PSE is a condition-precedent of the contract, and a Plaintiff’s failure to abide by its terms will preclude coverage.
The Court’s first task was to determine whether or not the contract was ambiguous. If the Court finds no reasonable person could dispute the meaning of ordinary and plain contract language, the Court must accept and enforce the language as written. The meaning of such clear and unambiguous contract language is a matter of law.
The term “automatic fire alarm” in the PSE included no definition for fire alarm. Both Plaintiff and Defendant argue that the PSE is unambiguous and should be read in their favor. Plaintiff argues that a “fire alarm” is any alarm that can detect a fire, as the motion sensors in the shop did. Defendant argues that a “fire alarm” clearly refers to an alarm designed to detect fires.
“Fire alarm” is not an ambiguous term. After checking various dictionary definitions the court found that the term “fire alarm” unambiguously refers to a device meant to alert people of the presence of a fire. Plaintiffs’ alarm system does not fit this definition. The Alarm was not even a fire alarm, for the alarm wouldn’t warn any people in the building of a fire. The alarm was not activated until people in the building left, because the alarm would alert to any human presence, and therefore was only used after the building was closed. It was an alarm designed to prevent intrusions, not to protect against fires, which can also start while businesses are open.
There is no circumventing the simple fact that Plaintiffs’ alarm was an automatic burglary alarm, not an automatic fire alarm. This is why the alarms were clustered around the entrance to the building. It is also why National Alarm received, on August 28, 2017 at 3:51:09 an alert that was described on the log as INTERIOR BURG ‘ZN5 BACKROOM MOTION. It is also why the police, not the fire department, were initially dispatched to the scene.
Given the context of the PSE, therefore, Plaintiffs’ argument—that they were not on notice that the PSE required an automatic fire alarm—is unreasonable. Given the unambiguous every-day usage of the term “fire alarm,” there is also no reasonable way to understand the term to encompass the alarms present in Plaintiffs’ store.
The recognized that the PSE is clear that failure to maintain an automatic fire alarm, or knowledge of its suspension or impairment, is grounds for excluding coverage in the event of a fire. Its plain language does not contemplate that the efficacy of any device in alerting to the fire at issue is at all relevant to whether that condition for exclusion is triggered. Because they were not in compliance with the PSE, Plaintiffs cannot recover on their breach of contract claim.
Talib Hermiz may have felt he had adequately protected his assets by paying both an automated alarm system and purchasing an insurance plan. There is no indication, however, that he complied with the conditions of the insurance contract.
He signed an endorsement stating that he had a fire-alarm, and that if that alarm system was not maintained, coverage for fire damage would be excluded. The insurer’s motion for summary judgment was granted.
PSE’s are issued by insurers to make sure representations made by applicants for insurance are truthful and give the insurer a means to protect itself from false statements made in an application for insurance promising protections for the property. The PSE eliminates the need to rescind a policy for a misrepresentation of a material fact and establishes a condition precedent to coverage. The breach of the condition eliminated the right to recover the benefits promised by the policy. Testifying that he read the PSE and did not understand it was not sufficient since he could have easily asked his insurance broker what it meant. Since a PSE often results in a premium discount the misrepresentation saved Hermiz a few dollars in premium and cost him the ability to rebuild and restock his liquor store.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
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