Promises Made Must be Kept for Coverage to Exist
Insurance contracts require, for validity, that the parties to the contract keep the promises made when the policy was acquired. When a plaintiff promises – in order to obtain coverage for theft – that it will install an operational central station reporting alarm system it must do so to obtain the coverage.
In Orchard Park Plaza, LLC v. Chubb Custom Insurance Company, No. 1-17-2526, 2018 IL App (1st) 172526, Appellate Court of Illinois First Judicial District Fourth Division (December 20, 2018) Orchard Park Plaza, LLC (Orchard) made such a promise and obtained insurance from Chubb Custom Insurance Company (Chubb). However, it failed to install a central station reporting alarm system and its claim to Chubb for theft was denied.
Orchard Park sued Chubb who had denied a property damage claim submitted by Orchard. The parties filed cross-motions for summary judgment, and the circuit court granted summary judgment in favor of Chubb on Orchard’s claims for reformation and declaratory judgment.
Orchard owns commercial property located on Orchard Drive in Park Forest, Illinois (property). When Orchard sought to obtain new insurance coverage for the property in March 2012, Orchard and Chubb negotiated through intermediaries. During the negotiations, the Matanky Realty Group was represented by Euclid Insurance Agency, a/k/a USI Company (Euclid), a retail insurance broker. Kevin Walker (Walker) from Euclid coordinated with Theodore Cornell (Cornell) at R-T Specialty of Illinois (RTS), a wholesale broker. Cornell contacted WKF&C Agency, Inc. (WKF&C), an underwriter for Chubb and other insurers.
The proposed policy excluded theft coverage. On March 20, 2012, Cornell responded, in part, “we need the following to bind: *** [c]onfirm theft will be included with a CS Alarm (they are putting one in).” A “CS Alarm” refers to a central station alarm. The broker responded that it can include theft once a central station alarm has been installed and confirmed active either with service contract or inspection.
The property was damaged and substantial amounts of copper cables and tubing were cut out of the walls during a break-in on October 15, 2012. Although Robert did not know the exact installation date, he testified during his deposition that an alarm system was operational at the property before September 27, 2012. According to Robert, the alarm system was set up with an automatic dialer. If the alarm was triggered, it would automatically dial the property manager, Gary Miller (Miller), as well as Matanky Realty Group and the Park Forest police department. Robert testified that the alarm was not functioning at the time of the burglary because the electric utility company had caused a power outage and the backup battery was drained.
After Orchard submitted a claim for the loss, Chubb requested information regarding which company monitored the alarm system at the property. In an email to Walker, Robert stated that the alarm was not monitored “since it was set up with a direct dialer to property management and the police.”
Chubb denied Orchard’s claim based on the theft exclusion in the policy. In the declaratory judgment count, Orchard sought an order declaring that the alarm system installed at the property is a central station alarm system or, alternatively, that the term central station alarm system is ambiguous and should be interpreted in favor of Orchard, as the insured.
The circuit court granted Chubb’s motion for summary judgment. The circuit court found that the policy could only be amended by endorsement and that there was no request to remove the theft exclusion by endorsement.
Orchard seeks reformation of its insurance contract with Chubb. A court may reform a contract when the written agreement does not reflect the intent of the parties. To state a claim for reformation, a plaintiff must allege:
- the existence and substance of an agreement between the parties and the identity of the parties to the agreement;
- that the parties agreed to reduce their agreement to writing;
- the substance of the written agreement;
- that a variance exists between the original agreement of the parties and the writing; and
- the basis for reformation.
Based on the communications between the parties, Orchard cannot prove an agreement by clear and convincing evidence and thus the elements of a reformation claim cannot be met. Even assuming that the parties’ intent was to remove the theft exclusion upon the fulfillment of certain conditions, Orchard nevertheless failed to satisfy what those conditions were and whether they were met.
The court observed that the alarm system installed at the property does not appear to have been a central station alarm because the hazard-detecting device installed at the property did not transmit a signal to a “central station.” Alarms can be
- a local alarm, in which an alarm bell on the premises signals an intrusion;
- a direct connect alarm, in which the alarm bell or signal device is located in a police or fire station; and
- a central station alarm, in which the signal device is located in a station and the station continually checks the signal system and either contacts the authorities or sends out its own armed guards when an emergency signal is received. (See Michael H. Boyer & Barry Zalma, Property Investigation Checklists: Uncovering Insurance Fraud, § 2:55 (May 2018 update).
The EVDFI proposal for the installation of a “wireless alarm system,” which was accepted by Robert on behalf of Orchard, made no reference to a central station alarm. Robert acknowledged that the alarm at the property was “not monitored since it was set up with a direct dialer to property management and police.”
Even assuming that the alarm system qualified as a central station alarm, the other requirements articulated in the Kipp email were not satisfied. Kipp wrote that theft coverage could be included “once a central station alarm has been installed and confirmed active either with service contract or inspection.”
The Chubb policy, as written, included a theft exclusion. In its breach of contract count, Orchard did not allege a breach of the written policy.
Chubb was not in the business of providing information, and the information it provided (through intermediaries) to Orchard was merely ancillary or incidental to the sale of insurance policies. Since there was no central station reporting alarm system active at the property there was no coverage for the theft.
Insurers are usually unwilling to insure against the peril of theft in a commercial property without assurance that the property is protected by a central station reporting alarm system. Chubb offered to insure theft if the insured installed an operational central station reporting alarm system. The insured installed an alarm that did not report to a central station. As a result it did not accept Chubb’s offer and the theft exclusion applied because the insured did not meet the condition required for theft coverage.
© 2018 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
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 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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