An insurer was not liable for a fire loss where the insured failed to maintain an automatic sprinkler system, and the insurer was entitled to reimbursement of an advance payment the insurer made during its investigation of the claim.. ( American Way Cellular, Inc. v. Travelers Property Casualty Company of America (2013) 216 Cal.App.4th 1040)
Facts
American Way Cellular, Inc. applied, through a broker, to Travelers Property Casualty Company of America for a property insurance policy. The broker indicated on the application that American Way’s premises were equipped with an automatic fire sprinkler system, even though the premises in fact had no such system.
The policy that Travelers issued included an endorsement that stated: “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 section provided as follows: “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.”
A fire damaged the premises at which American Way operated. Shortly after the fire, Travelers issued an advance payment of $250,000. However, after Travelers issued the advance, Travelers discovered that the premises had not been protected by a fire sprinkler system at any time, and issued a reservation of rights letter. Ultimately, Travelers denied coverage for the claim and announced its intention to seek recovery of the advance.
American Way filed suit against Travelers and the broker through whom American Way purchased the policy. Travelers, in turn, filed a cross-complaint against American Way for reimbursement of the $250,000 advance.
The trial court determined that Travelers had no obligation to pay benefits to American Way, because the policy required that the insured premises contain an automatic sprinkler system and because it was undisputed that the premises did not have such a system. The trial court thus found in favor of Travelers on its cross-complaint for declaratory relief and reimbursement of the $250,000 advance. American Way appealed.
Holding
On appeal, American Way argued that the policy did not require American way to “maintain” a sprinkler system that never existed. However, the Court of Appeal rejected this argument. Relying on various appellate holdings from other jurisdictions, the Court concluded that American Way was not entitled to coverage because American Way failed to maintain an automatic sprinkler system as required under the terms of the endorsement. The Court ruled that the sprinkler requirement was a “condition precedent” to coverage, and that this condition required American Way to have a “functioning, operational sprinkler system during the period of coverage.”
American Way also argued that Travelers had failed, before issuing the policy, to investigate whether the building had an automatic sprinkler system. The Court of Appeal rejected this argument, too, holding that Travelers was entitled to rely on the information on American Way’s application, and that Travelers had no duty to determine whether American Way’s premises had a sprinkler system before Travelers issued the policy.
Comment
The provision at issue in this case was neither an insuring agreement nor an exclusion. Instead, it was a “condition precedent.” A condition neither confers nor excludes coverage for a particular risk but, rather, imposes certain duties on the insured in order to obtain the coverage provided by the policy. A “condition precedent” refers to an act, condition or event that must occur beforethe insurance contract becomes effective or binding on the parties.