SEPTEMBER 2013 BAD FAITH CASES: INSURER PROPERLY DENIES COVERAGE WHERE INSURED DID NOT HAVE A WORKING SPRINKLER SYSTEM AS ASSERTED IN THE INSURANCE APPLICATION AND REQUIRED BY THE POLICY (Philadelphia Commerce Court)

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The court granted the insurer’s Motion for Summary Judgment. Plaintiff brought suit alleging the insurer improperly denied coverage after an apartment building owned by plaintiff was destroyed by a fire and plaintiff provided proper and timely notice of the claim. The insurer denied coverage based on the insurance application, which stated the property was equipped with an automatic sprinkler system, when in reality, no such system existed.

Plaintiff alleged this denial was improper because the final Commercial Insurance Application was prepared and submitted without being reviewed by plaintiff’s president, and that the Protective Safeguards Endorsement (PSE) contained in the policy, requiring plaintiff to “maintain” an automatic sprinkler system, was ambiguous because no such system existed.

Plaintiff obtained its insurance policy through Cohen-Seltzer, a professional insurance agency, with effective dates of August 8, 2008 to August 8, 2009. The policy was then renewed for 2009-2010. The insurance application was completed by plaintiff’s employee and submitted to Cohen-Seltzer. Plaintiff’s employee was authorized to sign documents such as a commercial insurance application form, and was aware that she had the authority to do so.

In the 2009-2010 application, the employee stated the property was “100% sprinklered.” The 2008-2009 insurance application also indicated the property was 100% sprinklered. Cohen-Seltzer used these documents to create and submit a Commercial Insurance Application to the insurer to obtain the requested policy.

The insurer issued the policy based on the fact the property was 100% sprinklered, and also reduced the policy premium by approximately 40% because of this representation. During its investigation of the fire, the insurer learned the building did not have a sprinkler system, and denied coverage based on the plain words of the PSE.

Because the PSE “clearly and unambiguously” made “maintenance” of an automatic sprinkler system a condition of the insurance, the condition was breached by the absence of a sprinkler system.

Furthermore, any damage caused by the fire was not covered due to an exclusion of any loss or damage caused by a fire if the insured failed to maintain the sprinkler system in operative condition. Because the absence of a sprinkler system was a clear violation of the policy, the court found in favor of the insurer, finding no genuine issues of material fact remained.

Finally, because the insurer properly denied coverage, the bad faith claim was dismissed as well.

Date of Decision:  June 17, 2013

Yera, Inc. v. Travelers Cas. Ins. Co. of Am., Sept. Term 2011, No. 2141, 2013 Phila. Ct. Cm. Pl. LEXIS 191 (C.C.P. Phila. June 17, 2013) (Snite, J.)

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