Protective Safeguards Endorsement: How to Avoid Having Your Business Property Damage Claim Denied

Whether you own and insure your office or other business property, or insure the office or building you rent, you will obviously want to make sure that you have an automatic sprinkler system or some other fire detection or suppression system in place in case of fire.

You’ll also want to make sure that your fire alarms are working and that you have service contracts for periodic inspections of your facilities to identify fire and other risks. But what happens if there’s a fire in your building and your sprinkler system fails? Well, when you make your insurance claim you could be in for a nasty surprise if your policy has a “protective safeguards endorsement.”

This endorsement would deny coverage if you had failed to maintain and ensure that your system is in proper working order.If your policy contains a protective safeguards endorsement, and you fail to adequately maintain any of the protective safeguards at your commercial building or manufacturing facilities and you suffer a loss caused by fire, coverage for the fire loss can be denied by your insurance company.

Also, if you knowingly turn off or suspend any of the safeguards, even if it is for routine maintenance, and fail to notify the insurance company of the suspension, and a loss occurs during the suspension, coverage can be denied.

Because of the potential coverage gaps that can be created by this endorsement, it’s very important for you to know whether it’s attached to your policy – and if it can be removed. If it can’t be removed, you need to understand your responsibilities in order to avoid having your claim rejected.

These are types of protective safeguards that could be in the endorsement:

  • Automatic sprinkler system
  • Automatic fire alarm
  • Security service
  • Service contract
  • Automatic commercial cooking exhaust and extinguishing system
  • Any other protective system described in the endorsement schedule

Protective Safeguard Horror Stories*

Burmac Metal Finishing Co. – An Illinois appellate court ruled that an insurer was justified in denying coverage for a fire and explosion because Burmac had capped between three and 19 automatic sprinkler systems out of 600 at its industrial building without notifying the insurer. The court ruled that this action constituted failure to maintain the system, justifying denial of coverage.

 Y2K Textile, Inc. – A California appeals court ruled that an insurer had properly denied coverage for fire loss when the protective safeguards endorsement required the insured to maintain a contract with a duct-cleaning service and the insured never obtained a copy of such a contract.

* Source: Faegre Baker Daniels blog

Insurers will often offer a premium discount or a credit, or an otherwise uninsurable property may qualify for coverage, if the property policy includes a protective safeguards endorsement. Typically, a policy will identify the protective safeguards the endorsement covers and then it will have the following key clause:

As a condition of this insurance, you [the insured] are required to maintain the protective devices or services listed in [this endorsement].”

The endorsement will spell out that the insurer will not pay for the loss or damage that is caused by or resulting from a fire if, prior to the fire, the policyholder:

  • Was aware that any of the protective safeguards had been suspended or were impaired prior to the fire, and that the policyholder had failed to inform the insurer.
  • Failed to maintain the protective safeguards in complete working order.

That means that you have two duties under such an endorsement:

  • The duty to notify the insurer of any suspensions or impairments of any safeguards.
  • The duty to maintain the safeguards.

Policies will also include instructions for when you must inform your insurer of a suspension of a safeguard. Most endorsements will include the following safe harbor provision:

If part of an Automatic Sprinkler System is shut off due to breakage, leakage, freezing conditions or opening of sprinkler heads, notification to us will not be necessary if you can restore full protection within 48 hours.”

What you should do

If you have an insurance policy for your property, and you are unsure whether it includes a protective safeguards endorsement, you can call us. If your policy does include it, we can also work with you and the insurer to see if can be removed, if you’re so inclined.