By Roy C. McCormick

H9F00179 Science and technology haven't yet been able to prevent or soften the deadly impact of tornadoes and hurricanes, but they have given us the means to minimize the consequences of fire. Sprinkler systems are readily available. Unfortunately, they haven't been utilized voluntarily on a broad scale.

Fire codes pertinent to the construction of high rise commercial and residential buildings in various major cities and other areas mandate the installation of sprinkler systems. By and large, there is not a widespread requirement for their use in newly constructed smaller buildings, with the exception of specialized occupancies such as nursing homes. Insurance agents and brokers can play an important part in influencing commercial insurance clients and others to incorporate sprinkler systems in, particularly, multiple occupancy store, office and warehouse buildings.

The installation of a sprinkler system in the initial stages of construction is less costly than when a building project is nearly finished or completely finished. An insurance adviser can perform a valuable money-saving service by encouraging the checking of architects' drawings or blueprints to determine the cost of a sprinkler system, and how its inclusion would affect insurance rates and acceptability.

"Collateral damage" (a term increasingly heard in various contexts) from sprinkler system water damage during a fire should not be a deterrent to taking such vital protection measures. Fire insurance applies to damage from sprinkler systems in the same manner as it does to the consequences of water and other extinguishing substances by fire departments in fighting fire. The client will be reassured to know that applicable property insurance covers damage done to building or contents by sprinkler leakage.

We reviewed commercial property coverage parts and forms used by a cross section of major insurers and found substantial concurrence on the scope of coverage for the leakage or discharge of any substance from an automatic sprinkler system, including collapse of a tank that is part of the system. ISO's Causes of Loss Basic Form CP 1010 is used herein for reference purposes with respect to coverage for sprinkler leakage. Broader ISO causes of loss forms, its businessowners policies, and AAIS forms and policies of a similar nature, including its businessowners and commercial output policies, provide comparable coverage.

A sprinkler system is defined as "any automatic fire protective or extinguishing system, including any connected sprinklers and discharge nozzles, ducts, pipes, valves and fittings, tanks, their component parts and supports ... and private fire protection mains." It is made clear that nonautomatic fire protective systems and hydrants, standpipes and outlets are included in the definition of "sprinkler system," for sprinkler leakage coverage purposes if supplied from the automatic fire protection system.

When a covered building or other structure contains an automatic sprinkler system, the sprinkler leakage cause of loss includes, in addition to damage from leakage or discharge, the cost to repair or replace damaged partsif such damage results from leakage or is a direct result of freezing. (Fire, windstorm, etc., damage to the components of the system would, of course, be covered under pertinent perils covered by the policy.) Also covered is the cost to tear out any part of the building, necessary to repair or replace a part of a sprinkler system that is causing sprinkler leakage.

The insured has an obligation to properly maintain a described automatic sprinkler system or, for that matter, an automatic fire alarm, security service, or service contract with a fire department. Maintenance of the sprinkler system or other protective system becomes a condition precedent to recovery or warranty by attachment of a protective safeguards endorsement. The endorsement procedure, widely used by insurers, has the effect of highlighting a duty of the insured that must be understood and carried out.

Protective safeguard endorsements, in pertinent part, provide that insurance will be automatically suspended at the location involved if the insured fails to give immediate notice to the insurer when it knows of any suspension or impairment in described protective safeguards or does not maintain such safeguards in working order over which it has control. A sprinkler system, described in a protective safeguards endorsement, must be properly maintained as a condition of the insurance. Without the system, the insurance might not have been written, the scope of coverage might be less, or the cost of insurance would be much higher.

In one North Carolina case when fire destroyed a manufacturer's building and its contents, the insurer denied coverage because its insured failed to maintain the sprinkler system in good condition. It was stipulated in a protective safeguards provision of the applicable policy that the sprinkler system "shall be maintained in good order (during the policy period) and shall be in use at all times out of business hours or when the insured's premises are left unattended ..." A fire marshal found that there was no water in the system's holding tank. Leaks had been reported by an employee, but they never had been fixed.

The North Carolina Court of Appeals found, at the conclusion of litigation, that the evidence was clear that the system had not been maintained in good order, as required by the insurance contract, and affirmed a trial court judgment that the insurer was not liable for the loss.

Agents can provide a valuable service by encouraging the installation of sprinkler systems in the many situations where the need is evident and, where a system is in use, by periodically discussing its value with the insured and making sure that it is fully operational. *

©COPYRIGHT: The Rough Notes Magazine, 1999