The U.S. Fifth Circuit Court of Appeals affirmed a grant of motion for summary judgment based on a Protective Safeguards Endorsement. Scottsdale Ins. Co. v. Logansport Gaming, L.L.C., 2014 WL 687963 (5th Cir. Feb. 24, 2014). 

The insured property included a restaurant. A fire began in the kitchen of the restaurant, and a fire extinguishing system did not activate. The insurer sought a judicial declaration of no coverage based on the insured’s failure to comply with the Protective Safeguards Endorsement, in which the policy required protective safeguards to be “maintained … in complete working order.” The insured counterclaimed seeking a declaration of coverage and statutory penalties for bad faith claims handling. The district court granted summary judgment declaring that the policy’s Protective Safeguard Endorsement precluded coverage for the fire damage. 

On appeal, the insured made three arguments: 

  1. the phrase “maintain … in complete working order”—as used in the Protective Safeguards Endorsement—is ambiguous; 
  2. an application of the district court’s interpretation of the Protective Safeguards Endorsement would lead to absurd results; and 
  3. “due diligence” is the proper standard for determining whether there was compliance with the policy wording. 

The Fifth Circuit found that the insured had failed to raise the ambiguity and absurdity arguments at the district court level and, therefore, waived those arguments on appeal. Thus, the sole issue considered on appeal was whether “due diligence” is the proper standard for determining compliance with the Protective Safeguards Endorsement. The Fifth Circuit answered this question in the negative. The Fifth Circuit found that the phrase “in complete working order” is crucial because it modifies the word “maintain,” thereby eliminating any arguable lower standard of “due diligence” for the policyholder to merely maintain a protective safeguard, e.g., by maintaining a service contract. The Fifth Circuit found that, under this policy wording, the protective safeguard must be maintained such that it works at the time of loss, and affirmed the summary judgment.