An interesting case arose in Illinois regarding an insurance policy issued by the plaintiff insurance company for a fire loss. The policy included a Protective Safeguards Endorsement (PSE) which stated that, as a condition of this insurance, the defendant was required to maintain certain protective devices, including an automatic burglary alarm protecting the entire building that sends signals to an outside central station or a police station. According to the endorsement, the plaintiff insurance company was not required to pay for loss or damage caused by or resulting from fire if the defendant failed to maintain any protective safeguard listed.

The building sustained significant damage due to a fire on the first floor of the building. A security guard discovered the fire and called 911.

The plaintiff sought a declaration that the insurance policy it issued to the defendant did not provide coverage for the fire loss that occurred. The plaintiff indicated that in deciding whether to issue an insurance policy to the defendant, the plaintiff hired an investigator to examine the property and interview one of the building’s owners. The resulting inspection report indicated that the building had security cameras, a security system and motion and door alarms.

The defendant alleged that the purpose of the burglar alarm system was to detect any unauthorized entry into its store; that the plaintiff’s underwriting requirements included an underwriting inspection and that its agent performed the inspection on the building to verify the accuracy of the information in the defendant’s insurance application; and that the agent assumed that the alarm company monitored the alarm system in the entire building because one of the keypads had the alarm company insignia. Neither of the keypads serviced the alarm system and the agent did not test the keypad.

The defendant indicated that it never advised the agent that the building had an alarm system or that it had security cameras. Based on those allegations, the defendant asserted that it substantially complied with the PSE and that plaintiff waived the right to assert a breach of the PSE because it had constructive knowledge that the entire building was not secured by a burglar alarm system.

The defendant further argued that an issue of fact exists as to whether its failure to comply with the PSE was material to the fire loss at issue — specifically that its breach of the PSE was not material because even if there had been a burglar alarm system covering the entire building, it would have detected only entry or movement in the building and not the fire, and thus it would not have prevented the fire loss.

The court pointed out that the defendant did not substantially comply with the PSE’s requirement that it maintain an automatic burglar alarm system. Under Illinois law, an insurer does not need to show a causal connection between the breach of a condition precedent and the subsequent loss.

Since the insured defendant had breached the policy and the Illinois precedent, the court found that the exclusion in the PSE applies to the fire damage here regardless of whether the breach of the PSE was material to that damage.

Notwithstanding the above, the court determined that the defendant did sufficiently raise an issue of material fact as to whether the plaintiff had constructive knowledge that the entire building did not have a central burglar alarm system covering it. Therefore, the court granted the plaintiff’s motion for judgment on the pleadings in part and denied it in part, finding that there was a genuine issue of material fact as to whether plaintiff had waived its right to exclude coverage based on defendant’s failure to maintain a central burglar alarm system covering the entire building.