In American Way Cellular v. Travelers Property Casualty Co. (no. B234188, filed May 30, 2013), a California court of appeal confirmed that an insurer has no duty to investigate the veracity of representations in an application because the insured holds the duty to fully divulge information, and the insurer cannot be responsible for negligence by a broker who was not an agent.
The American Way insured sought coverage for a commercial warehouse in Los Angeles through a retail broker, A&J. The building had no sprinklers but the application submitted by A&J contained a box checked for “FIRE PROTECTION (Sprinklers, Standpipes, CQ/Halon Systems)” and had an entry stating “SMOKE DETECTORS/FIRE EXTING./SPRINKLERS.”
The resulting policy contained a “Protective Safeguards Endorsement For Sprinklered Locations and Restaurants,” which stated: “As a condition of this insurance, you are required to maintain the protective devices or services” listed as “Automatic Sprinkler System, including related supervisory services.” An exclusion stated that Travelers would not pay for loss or damage caused by fire if, prior to the fire, the insured knew of any impairment of the system or failed to maintain it in working order.
The broker had been authorized to submit applications to Travelers under contract with a Travelers agent, USASIA, that stated: “BROKER desires USASIA to place risks of BROKER’S clients (hereafter referred to as ‘INSURED’) with and for acceptance by admitted companies and or non-admitted companies…and USASIA agrees to allow BROKER commission on such business, if and when placed.”
After fire destroyed the warehouse, Travelers initially made an advance payment of $250,000, but subsequently denied the claim because there was no sprinkler system installed, and stated that it intended to seek reimbursement of the advance payment due to a lack of coverage.
In the ensuing lawsuit, the broker’s principals admitted that it was a brokerage and not a Travelers agent. One of the principals also made a declaration that the entries on the application were based on statements from the insured’s employees that the premises had sprinklers. In opposition to Travelers’ motion for summary judgment, the insureds denied having been the source of the information and stated that even a cursory inspection would have revealed the absence of sprinklers.
The appeals court affirmed summary judgment for Travelers, finding that the broker’s admission it was not a Travelers agent, coupled with the lack of an appointment filed with the Insurance Commissioner, established broker status and not agency. The court also cited the rule that ostensible agency cannot rest on representations by the broker alone, but must involve conduct of the insurer to mislead the applicant.
The court went on to reject a claim that the condition to “maintain” a sprinkler system created an ambiguity, because it would be impossible to maintain something that did not exist. The court distinguished Holz Rubber Co., Inc. v. American Star Ins. Co. (1975) 14 Cal.3d 45, which held that a sprinkler maintenance requirement would not apply where a building was still under construction. The American Way court pointed out that the insured never intended to install sprinklers, the application said the building had sprinklers, and a plain reading of the endorsement required a functioning, operational sprinkler system during the policy period.
The court entered summary judgment in favor of Travelers on its cross-complaint for declaratory relief and reimbursement of the $250,000 advance payment.
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