A Protective Safeguards Endorsement (“PSE”), as defined by my friends at IRMI, is “[a] property insurance endorsement that makes it a condition of coverage that the protective safeguards cited in the endorsement (such as an automatic sprinkler system or night watch guard) be in operation at all times except when the insurer has been notified of the impairment in protection. Failure to maintain the protective safeguards in good working order or failure to notify the insurer of even a temporary impairment in protection suspends coverage until the protection is restored.”  Essentially, as defined, it is a condition of coverage that if not met results in a loss of coverage.

In a recent case, a New York appellate court, had occasion to address the PSE after a fire in a multi-building condominium complex.

In Illinois Union Ins. Co. v. Grandview Palace Condominiums Ass’n, No. 155113/12 (N.Y. App. Div. 1st Dep’t Nov. 14, 2017), a fire took place at the insured’s multi-building condominium complex causing extensive damage to the property.  The insured sought coverage from its primary and excess carriers.  After an investigation, it was determined that some of the buildings did not have sprinkler systems and others had only limited sprinkler systems with some not working properly.  The primary policy had a PSE that, according to the court, unambiguously required as a condition of coverage that the insured maintain automatic sprinkler systems in complete working order in all of its buildings.  The carriers denied coverage and commenced an action to declare that they were not obligated to provide coverage.

The motion court denied the carriers’ motion for summary judgment and the insured’s cross-motion for summary judgment.  The appellate division modified the order and granted the insurers’ motion for summary judgment declaring that they were not obligated to cover the insured’s loss.  The court found that the PSE was not ambiguous and rejected the insured’s attempts to create an ambiguity where none existed.  The insured argued that the multiple buildings were actually multiple coverage locations so that the absence of sprinklers in one building did not mean that coverage was excluded from all buildings with sprinklers. The court rejected this argument as well as other waiver and estoppel arguments.

The insured also claimed that the excess carrier should be precluded from enforcing the PSE because adding the PSE to the excess policy changed the policy without consideration.  The court also rejected that argument because both the current and an earlier primary policy required fully functional sprinkler systems and that the excess carrier provided sufficient consideration to the insured by not cancelling its excess policy when the original primary insurer did.

The bottom line of this case is that a condition to coverage has to be met and will not easily be tossed aside by the courts. The PSE is a critical condition to property insurance coverage. The failure to maintain a working sprinkler system when having that system is a condition of coverage, which is also an essential element used to underwrite and price the insurance coverage, will not be easily disregarded.