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Coverage Concerns Maintaining protective safeguards Lax loss prevention efforts may result in denial of coverage By Roy C. McCormick When commercial policies contain provisions requiring the maintenance of protective safeguards and measures, it is incumbent on insurance agents, brokers and customer service representatives to verify that such safeguards are being maintained. This loss prevention effort may avert coverage problems in the event of loss, including denial of coverage. The insurance and financial needs of large companies and organizations are generally handled and monitored by an in-house specialist who gives the safeguard requirements ongoing attention. Of special concern is the small company whose insurance is purchased by and becomes the responsibility of the owner or another individual who may be a jack-of-all-trades. Obviously, this is where the expertise and care of the insurance professional is especially needed. Policy provisions or protective safeguard endorsements in commercial property policies provide that insurance will be suspended at an insured’s location if the insured fails to give immediate notice to the insurer when it knows about any lapse or impairment in described protective safeguards, or does not maintain such safeguards in working order. An example of such an endorsement is ISO’s Protective Safeguards Endorsement TL 04 15. The protective safeguards to which the provisions apply may include—but are not limited to—an automatic sprinkler system, automatic fire alarm, security service, a service contract with a privately owned fire-fighting unit, or another described protective system. Protective safeguard provisions are interline. They may be made applicable to any of several coverage parts or major forms of insurance. Their importance is clear when related to a building and personal property coverage form written for a commercial building and the business personal property contained in it. Of course, coverage may be written for one or the other if there are separate interests. The specified protection measures must be maintained as a condition of the insurance. Without such requirements, insurance might not be written, the scope of coverage might be less, or the cost of insurance will be much higher. When fire destroyed a North Carolina manufacturer’s building and contents, the fire marshal discovered that there was no water in the sprinkler system’s holding tank. Leaks had been reported by an employee, but they had not been fixed. In litigation following denial of liability by the insurer, the North Carolina Court of Appeals found that maintenance required by the insurance contract was not observed, and that the insurer was not liable for the loss. In addition to the familiar protective safeguard systems, devices and systems cited above, others that are required to be maintained include: automatic burglar alarms, video/surveillance cameras, night watchperson schedules, valuable papers and records storage, and automatic dry chemical restaurant systems for kitchen exhaust equipment and fryers. The New York Supreme Court, Appellate Division, held that a business could not recover for water damage loss of valuable documents because of its failure to comply with a pertinent “express condition precedent” in its policy. At the end of the business day, the insured did not return the papers to receptacles described in its package policy’s valuable papers and records coverage part, a requirement that was clearly spelled out in the form. Fire loss of a log rolling and loading machine used in timber cutting underscored the importance of protective safeguard provisions. Conditions in inland marine insurance required that a special fire-extinguishing apparatus be on hand and that prescribed cleaning and inspection procedures be followed. A Louisiana court found that they were not and relieved the insurance company from liability. Occasionally the verdict goes the other way. An insurer had denied liability for a substantial burglary loss because a prescribed burglar alarm system was not operational at the time. A federal court found for the insured on evidence that the system was kept in good order and employees had been trained in its activation. A nightshift foreman had simply failed to activate the system. The insured did not fail in its duty to maintain required safeguards. Agents, brokers and customer service representatives can provide professional service to commercial insureds by checking on the maintenance of protective safeguards. Visiting an insured’s premises and making other contacts for this purpose not only may avert coverage problems, including denial of coverage, in the event of a loss, but they contribute to loss prevention. Even with insurance, losses such as fires can present substantial problems. * |
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