Protective Safeguard Endorsements – Watch out and Beware!

Protective Safeguard Endorsements are increasingly common in commercial property insurance policies. They are being used as a basis to deny otherwise valid claims. Our office recently resolved a federal court case in Connecticut which underscores the importance of why policyholders must fully understand these endorsements, act quickly after a loss, and retain independent cause and origin investigators when dealing with an unknown cause of loss. Recently, my partner, Brianna Robert and I successfully resolved another complex property insurance dispute in Connecticut federal court.

The Loss and Denial of the Claim

On September 20, 2023, at approximately 2:00 a.m., a fire of unknown origin began in the basement of our client’s commercial building. The extensive fire damage rendered the property uninhabitable. The tenant, a restaurant that occupied the space for over 20 years, was insured for its own betterments and improvements, as well as for its inventory, and carried liability insurance. Our client insured the building under a commercial property insurance policy. After the devastating loss, investigators for the local authorities, the tenant’s insurer, and our client’s insurer all investigated the property and agreed on one thing: the fire originated in the basement. Despite multiple investigations, no one at the time could determine precisely how the fire started.

Despite the uncertainty, our client’s insurance company denied coverage. The basis for the denial was a Protective Safeguards Endorsement. According to her insurer, our client had not been in compliance with the endorsement’s requirements, thereby voiding all coverage. A Protective Safeguards Endorsement may read as follows:

Understanding Protective Safeguard Endorsements

Policyholders often learn too late that insurance companies typically require the insured to maintain these protective devices, such as smoke detectors, fire extinguishers, or sprinkler systems, in good working order or if the insured is aware of a problem with them.

The language of a protective safeguard endorsement states that if an insured is aware of a problem with a protective safeguard or is in control of the premises where it is located, the insurance company expects the insured to maintain it in good working order. This exclusionary language is often strictly construed by insurers and, in many jurisdictions, by courts as well. Insurers routinely argue that coverage is barred entirely if the safeguard is not functioning at the time of the loss. However, many endorsements, including the one at issue here, contain both conditions and exclusions, which often do not neatly align, leading to confusion, misinterpretation and potential ambiguities.

Competing Policy Provisions

In our case, it was undisputed that our client had no knowledge of any problems with smoke detectors on the premises. In fact, evidence suggested that there were no traditional smoke detectors in the restaurant at all. Other than an Ansul fire suppression system above the stove and grill, which serves as a detection system during cooking, there was no smoke detection system in place.

Equally as important, our client had no control over the premises. The property was subject to a long-term lease with a tenant for over 20 years. Our client had no keys, no access, and had not been inside the restaurant for many years. In its denial letter and subsequent litigation posture, unsurprisingly, her insurance company argued that none of this mattered. It argued that the “condition” portion of the endorsement imposed an absolute condition that an insured must maintain protective safeguards, regardless of whether they know of a problem or have control over the premises. Our client’s insurer’s position was that, since smoke detectors did not exist and were not maintained, coverage was denied in its entirety.

This interpretation creates a fundamental conflict within the endorsement itself. The exclusionary language requires knowledge or control of the protective safeguard, whereas, according to the insurer, the condition imposed strict liability to maintain it regardless of knowledge or control.

Policyholder Arguments and Their Limits

As a policyholder attorney, many questions arise, and to best assist our clients, we explore several different arguments in these types of cases.

First, it can be argued that the presence of a safeguard would not have changed the devastating outcome. Here, the fire occurred at approximately 2:00 a.m. when no one was present on the premises. Whether smoke detectors existed or not, they would not have prevented or mitigated the loss. Other cases have presented a similar issue, for example, one involving a fire extinguisher. If no one had been present to use the extinguisher, it would not have changed the outcome. While intuitively appealing, courts routinely reject this argument, holding that compliance with the protective safeguard endorsement, not causation, is what matters.

A second argument centers around the fact that the insurance company inspected the property before issuing the policy. There was evidence here that the insurance company conducted a pre-risk inspection of the property and, therefore, knew or should have known that there were no smoke detectors on the property. Policyholder attorneys often argue that this would be viewed as a waiver of the right to rely on a protective safeguard endorsement because the insurer itself had the opportunity to know whether such protective safeguards even existed on the premises. Again, while this is a sensible argument, insurance companies strongly dispute this position, and courts will frequently agree.

Our third argument was undoubtedly the strongest one. We argued that under well-settled rules of policy interpretation, where there is ambiguity, it should be construed in favor of the insured. See Mercedes Zee Corp., LLC v. Seneca Ins. Co., 151 F. Supp. 3d 255, 259 (D. Conn. 2015). Where the policy is susceptible to two interpretations, that which will “sustain the claim and cover the loss must, in preference, be adopted.” Liberty Mut. Ins. Co. v. Lone Star Indus., Inc., 290 Conn. 767, 796, 967 A.2d 1 (2009). Our primary argument centered around the fact that in order to defeat coverage under the exclusion in the protective safeguard endorsement, our client was required to either know that the protective safeguard was not working or that our client had control over the premises. In our case, neither of those conditions existed.

We argued that reading and interpreting the condition as imposing absolute liability would render the exclusion’s knowledge and control requirements meaningless. Under the insurer’s interpretations, the insured was effectively penalized twice, and critical policy language requiring control and knowledge became superfluous. Several courts addressing similar conflicts have held that, at a minimum, these competing provisions render the endorsement language ambiguous, therefore requiring the insurer to prove knowledge or control.

The Importance of a Cause and Origin Investigation

Just as critical to resolving this case was our decision to immediately retain an independent cause-and-origin expert. In any case involving a fire of unknown or undetermined origin, particularly where another party is in control of the premises and carries a liability policy, our firm always retains a cause-and-origin investigator.  This is an essential step. We retained an experienced Connecticut fire investigator. After a thorough examination of the debris, he concluded that the tenant had done electrical work in the basement over the years, had used appliances expressly prohibited from being plugged into extension cords, and had plugged them into an extension cord. Additionally, he determined that wiring running through the walls overheated ultimately igniting combustible materials, causing the fire.

This discovery opened the door to recovery under the tenant’s liability policy. Although the tenant and its insurer denied fault and claimed the cause of the fire could not be definitely proved, the presence of a well-supported expert’s opinion significantly improved our claim.

The Resolution and Key Takeaways for Policyholders

Ultimately, the combination of a compelling policy interpretation regarding the Protective Safeguard Endorsements and credible evidence pointing to tenant negligence led both defendants to conclude that resolving the claim to compensate our client for her loss and damages was in their best interests. Throughout this claim, interesting questions concerning our insurance company’s right to subrogate after it had denied the claim, as well as questions concerning wiring, permits, and causation, were posed. However, the insurance company’s insistence that the Protective Safeguards Endorsement language be strictly interpreted and strictly construed remained the most difficult and important point of discussion.

Protective Safeguard Endorsements are not going away. As experienced property insurance attorneys, our firm has seen an increase in these endorsements being used by insurance companies and referenced on declarations pages, while the detailed requirements and obligations of the insureds are buried elsewhere in the policy.

Under well-settled insurance rules, the insured is responsible for understanding the Protective Safeguard Endorsements and what their language means. If you, the policyholder, has a policy with a Protective Safeguard Endorsement, you need to be aware of and read all obligations. If your policy, like our client’s policy, obligates you to maintain smoke detectors, fire extinguishers, or other protective safeguards, keeping a detailed record of all maintenance work and inspections is extremely important. Ignoring these obligations can, and often will, result in denial when coverage is needed most.

If your claim has been denied based on a Protective Safeguard Endorsement, or if another party’s negligence may have caused your loss, early involvement of experienced coverage counsel and independent experts can make all the difference.