Coverage Corner

BEWARE! PROTECTIVE SAFEGUARDS ENDORSEMENTS

By Cathy Trischan

It is common for an insurer to insist that certain protections be in place before offering property coverage to a business. If there are particular exposures in a frame building, for example, an automatic sprinkler system may be required. If there is high value inventory, a central station burglar alarm may be mandated. Sometimes, a protective safeguard is not required for a risk to be acceptable to an insurer, but having the safeguard in place can reduce the premium.

How, though, does an insurer make sure that the insured has the expected protections in place?

Protective safeguards endorsements are added to commercial property policies to ensure that any protective safeguards an insurer believes are in place exist and are maintained by the insured. These endorsements are warranties that the insured will do what it has promised to do to protect its property. Depending on the endorsement, the insured’s failure to comply with its terms can mean the loss of coverage for fire, theft, or other perils.

One commonly used endorsement is Protective Safeguards (CP 04 11 09 17) from Insurance Services Office, Inc. (ISO). The endorsement lists and describes the protective safeguards that apply in a particular building. The insured must maintain the safeguard in complete working order and notify the insurer of any known suspension of or impairment in the safeguard. The only exception to the notification requirement is if part of a sprinkler system or commercial cooking exhaust and extinguishing system is shut off due to breakage, leakage, freezing conditions, or opening of sprinkler heads. In that case, notification is not necessary if full protection can be restored within 48 hours. Further, any automatic system must be turned on. If the insured does not comply with the endorsement’s conditions, there is no coverage for loss caused by or resulting from fire.

These requirements are strict. In one Illinois case*, a building was damaged by a natural gas explosion and ensuing fire that started near an oven. The policy’s protective safeguards endorsement warranted an automatic sprinkler system. The building had over 600 sprinklers, but prior to the loss, the insured had removed and capped between 3 and 19 of the sprinklers in the part of the building containing the oven. This was done to prevent the sprinklers from activating because of the high heat generated by the oven. The court ruled that the existence of capped sprinkler heads at the time of the loss was a failure to maintain the required sprinkler system in complete working order. No coverage applied.

It is also not necessary that failure to maintain the required safeguard be material to the loss. In a NJ case**, the protective safeguards endorsement warranted that “all electric is on functioning and operational circuit breakers.” The main electrical panel that caught fire was a fuse panel box, but the cause of the fire was not the fuses. A fire started because of a wire in the ceiling leading to a ceiling fan. Even though having fuses instead of circuit breakers in part of the electrical system didn’t cause the fire, the court ruled that there was no coverage. The policy language, the court said, didn’t require the fire to be caused by failure to meet the conditions in the protective safeguards endorsement.

From an insured’s perspective, it is best if no protective safeguards endorsement is included on the policy, but this is not always possible. An insurer may require that the endorsement be included if the building is specifically rated as sprinklered or if the safeguard is an underwriting requirement. When the endorsement is added only because a rate credit is being given, it may make sense to forgo the credit. Often, the premium savings from a particular safeguard is small, and the savings should be weighed against the potential risks of including the endorsement.

If a protective safeguards endorsement must be included, make sure the insured has been notified of its conditions. To protect the agency in the event of an errors and omissions claim, the insured should confirm, in writing, that the required safeguards are in place and that they understand their responsibilities under the endorsement.

Protective safeguards apply in many property policies as discussed here. Similar endorsements may be found in Commercial General Liability, Cyber, and other policies as well. These endorsements should always be carefully reviewed and discussed with insureds.

Til next time!

Cathy Trischan, CPCU, CRM, CIC, ARM, AU, AAI, CRIS, MLIS, TRIP is IA&B’s commercial lines education consultant. She works with our CIC and CISR programs, as well as our live CE webinars. Catch her at one of our upcoming courses: IABforME.com/education

* Burmac Metal v. West Bend Mutual Ins. Co., 356 Ill. App. 3d 471, 825 N.E.2d 1246 (Ill. App. Ct. 2005)

** Vineland 820 N. Main Rd., LLC v. United States Liab. Inc. Co., No. 172986, 2018 WL 4693965 (D.N.J. Sept. 29, 2018)