The Massachusetts Appeals Court recently concluded that an insured could not claim property insurance benefits following a fire at its restaurant, because the insured had actual knowledge that its fire-suppression system was no longer functional, and because the insured had exclusive control over the system’s maintenance.  French King Realty, Inc. v. Interstate Fire & Casualty Company, No. 10-P-1165 (Mass. App. Jun. 9, 2011).  A copy of the decision is available here by selecting “Appeals Court” and entering “06/09/2011” in the date field.

The insurer in this case had issued a commercial lines policy to a restaurant located in Erving, Massachusetts, for the period from April 3, 2005, through April 3, 2006.  The policy had protective safeguards exclusion (“PSE”), which generally provided that, as a condition of coverage, the insured would maintain the fire-suppression system disclosed in its application.  Coverage for loss would be excluded if, prior to any fire, the insured “knew of any suspension or impairment” in the fire-suppression system, or if the insured “failed to maintain any protective safeguard” over which it had control, “in complete working order.

”The restaurant had a dry-chemical fire-suppression system.  In February 2002, the system’s manufacturer issued a bulletin stating that it would no longer service or support the repair and maintenance of dry-chemical systems.  Instead, it recommended that its customers upgrade to a west-chemical system.  In August 2004, the Massachusetts Executive Office of Public Safety updated the state building code to require a wet-chemical system.  In June 2005, Erving’s building inspector informed the restaurant manager that his fire-suppression system was noncompliant, and that his restaurant’s liquor, food, and health licenses would not be renewed in 2006 unless the system were “fixed.”

The restaurant suffered a devastating fire on October 12, 2005, and the dry-chemical fire-suppression system failed to function.  The carrier immediately advanced the insured $15,000 to begin repairs.After an investigation, the carrier disclaimed coverage based on the PSE.  The Appeals Court upheld the disclaimer based on the exclusionary clauses and the uncontested facts in the record.  While it found that the term “maintain” in the PSE was ambiguous (thereby concluding that the insured had at least, at the pleading stage, demonstrated a colorable claim to coverage), the Appeals Court looked to the facts to conclude that (i) the fire-suppression system was impaired, (ii) the restaurant knew the system was impaired, and (iii) the restaurant had failed to disclose that fact to the carrier.  Noting further that the restaurant had control over the system, located entirely on property that the insured owned and operated, and that the restaurant had failed to keep the system in “complete working order,” the court stated that the carrier had an independent and legally sufficient alternative basis for disclaiming coverage.  The court also concluded that the carrier had not waived its coverage defenses, noting that the burden of pleading and proving a carrier’s waiver is solely on the insured.

The Appeals Court dealt a further blow to the insured, affirming a Superior Court’s order that it return the entire $15,000 advance.  The court reasoned that the carrier never had a coverage obligation, and that allowing the insured to keep a good-faith advance would constitute unjust enrichment.

The Appeals Court’s decision represents a significant victory for property carriers, both because it shows that courts remain willing to dispose of key questions on summary judgment and because of the fact that the decision creates new law with respect to an insured’s obligations regarding advances.