Protective Safeguard Endorsement is a Condition Precedent for There to be Coverage
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In Mama K’s Diner, LLC v. AMCO Insurance Company, F082800, California Court of Appeals, Fifth District (January 17, 2023) the trial court granted summary judgment to AMCO Insurance because the insured did not maintain a promised automatic fire alarm system. Mama K’s appealed.
Mama K’s Diner, LLC (Mama K’s) appealed from a grant of summary judgment for defendant AMCO Insurance Company (AMCO). The case involved a dispute over insurance coverage for Mama K’s restaurant, which was damaged by a fire.
Mama K’s sued AMCO for breach of contract and breach of the implied covenant of good faith and fair dealing, contending the damage is covered under the insurance policy it bought from AMCO. AMCO denies there is coverage because Mama K’s did not have an automatic fire alarm as required by the policy. The trial court granted summary judgment for AMCO, concluding the damage was not covered because undisputed evidence showed that Mama K’s failed to maintain an automatic fire alarm as was required for fire coverage.
Mama K’s operated a restaurant called Mama K’s Diner out of a building on Main Street in Visalia, California from April 2016 to December 26, 2018 (the day of the fire). As part of the insurance policy application, the broker submitted a form that erroneously stated Mama K’s had a central station fire alarm. AMCO issued Mama K’s an insurance policy with a “Protective Safeguards” endorsement conditioning coverage for fire damage on Mama K’s maintaining an automatic fire alarm protecting the entire building. The Policy insured Mama K’s business personal property. The Policy included a “Protective Safeguards” endorsement stating:
FIRE PROTECTIVE SAFEGUARDS
We will not pay for loss or damages caused by or resulting from fire if, prior to the fire you:
Failed to maintain any protective safeguard as designated at each premises by symbol in the Declarations and over which you have control, in complete working order.
The ‘Protective Safeguards’ endorsement also included the following “NOTICE” in bold capitalized font:
‘YOU RISK THE LOSS OF CERTAIN INSURANCE COVERAGE AT PREMISES DESIGNATED IN THE DECLARATIONS IF YOU FAIL TO MAINTAIN ANY OF THE APPLICABLE PROTECTIVE SAFEGUARDS, LISTED BY SYMBOL IN THE DECLARATIONS FOR EACH PREMISES.’
On December 26, 2018, a fire caused substantial damage to the restaurant. Mama K’s submitted a claim to AMCO. The owner, Huff, spoke with an AMCO adjuster and told him the restaurant did not have an automatic fire alarm. In fact, the restaurant never had an automatic fire alarm. Instead, the restaurant only had an automatic burglar alarm system monitored by a security company. The burglar alarm system keypad had a button marked “fire,” but that button had to be pressed by someone to trigger an alarm. The fire happened at 1:00 a.m. when no one was inside the restaurant to press the “fire” button on the keypad.
The Breach Of Contract Cause Of Action
The Court of Appeal concluded the grant of summary judgment on the first cause of action was proper based on the theory of breach alleged in the complaint. In the insurance context a condition precedent refers to an act, condition or event that must occur before the insurance contract becomes effective or binding on the parties.
The undisputed evidence in the record showed that the Policy contained a protective safeguards endorsement requiring that Mama K’s must maintain an automatic fire alarm to be covered for fire damage, and that Mama K’s failed to maintain an automatic fire alarm. AMCO, therefore, was not obligated under the Policy to pay any benefits on Mama K’s claim. The maintenance of the automatic fire alarm was a condition precedent for fire coverage which Mama K’s failed to satisfy, and therefore Mama K’s cannot maintain its suit against AMCO for breach of contract.
The most important fact remained that the breach of contract cause of action clearly states that Mama’s K’s theory of breach is that the Policy’s express terms provide coverage and refused to accept the protective safeguards endorsement’s requirements.
The Bad Faith Cause of Action
The law implies in every contract, including insurance policies, a covenant of good faith and fair dealing. A breach of the implied covenant of good faith and fair dealing involves something more than a breach of the contract or mistaken judgment.
To establish a bad faith claim, the insured must show that (1) benefits due under the policy were withheld and (2) the reason for withholding the benefits was unreasonable or without proper cause. Since summary judgment was proper on all causes of action against AMCO, there was no basis for an award of indemnity nor punitive damages against it.
The judgment was affirmed.
Conditions precedent are important promises made by an insured. In this case Mama K’s promised to maintain an automatic fire alarm system as a condition of coverage for fire. Mama K’s failed to do so, it only had an automatic burglar alarm, and failed to keep its promise. People insured, just like insurers, must keep the promises they make. Mama K’s found out what happens when they failed to keep the promises made when it acquired the policy.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
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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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and email@example.com
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