Protective Safeguard Endorsements — A Warning Every Policyholder Should Receive About Protective Safeguards

Protective Safeguard Endorsements in property insurance policies are specific provisions that require the policyholder to maintain certain safety measures as a condition for insurance coverage. These endorsements are designed to reduce the risk of damage to the insured property. By ensuring that protective measures are in place and functional, the likelihood of severe losses from events like fires or burglaries is minimized. Maintaining these safeguards can often lead to lower insurance premiums, as they reduce the risk the insurer has to bear. This was discussed in yesterday’s post, “What Are Protective Safeguard Endorsements? What Happens If the Schedule Is Blank?”

The warning every policyholder should receive is that these clauses often raise insurance coverage issues where a loss is denied. These maddening clauses sometimes lead to absurd claims denials, as noted in a comment by insurance educator Bill Wilson to What Are Protective Safeguard Endorsements What Happens If the Schedule Is Blank:

I was involved in a claim with a burglar alarm protective safeguards endorsement. The building was protected by a burglar alarm that was inoperable. However, the thieves never entered the building…they stole property in a fenced in yard. The insurer denied the claim, citing the inoperable burglar alarm system. But, even if the system was operable, it would not have prevented the theft.

In another claim, a wood chipper was insured on an inland marine form with a protective safeguards provision that required a fire extinguisher on the apparatus at all times. The extinguisher had been removed to recharge it when vandals accessed the yard where it was stored and set the equipment on fire. The insurer denied the claim due to the absence of the extinguisher. Think about it…even if the extinguisher was there, the vandals are not going to set a fire then put it out with the extinguisher.

Unfortunately, these safeguard provisions are written as warranties, not representations.

An article, Protective Safeguards Endorsements to Property Insurance Policies May Pose Unanticipated Risks for Landlords, Tenants and Others, provided a detailed warning that should be adopted by insurance agents when selling Protective Safeguard Endorsements to policyholders:

Be prepared to give required notices promptly. Insureds under property insurance policies with protective safeguards endorsements should review the notice provisions of their policies to determine how and to what address notices are to be given. Insureds should make sure this information is communicated to those with operational responsibility for each insured property so notice can be given, when appropriate, without delay.

Be clear about notification and maintenance responsibility. Landlords should be sure their leases—and property management agreements—are clear as to which party is responsible for the notification and maintenance duties described above. In some instances, especially in single-tenant buildings, the landlord may reasonably insist that the tenant take responsibility for maintaining systems, devices and contracts. The landlord may not want the tenant to give unapproved notices to the insurer, given the impact any notice may have on property insurance premiums.

Keep detailed maintenance records. Anyone with contractual or practical responsibility for maintaining systems, devices and contracts should keep detailed records of the nature, timing and results of maintenance activities. As noted earlier, it is not clear that maintenance efforts will be sufficient to satisfy requirements of a protective safeguards endorsement if a maintenance failure on a single, critical occasion leads to a failure of a system or device, but an insured is clearly on stronger ground if it can show a consistent pattern of maintenance.

Consider how listed systems might become impaired. Recalling that ‘impairment’ as well as ‘suspension’ of a device or service may require notice to the insurer, any party with an interest in the availability of fire insurance coverage should consider how, as a practical matter, each listed system, device or service might be impaired, and how non-impairment may be demonstrated. These practical considerations may require consultation with system vendors, independent engineers or contractors or other third parties.

Review criteria for permitting alterations. Landlords should think carefully about their criteria and procedures for granting consent to proposed tenant alterations. They should also consider whether it is appropriate for leases to permit any tenant to make alterations that are merely characterized as ‘nonstructural’ or in some other nonspecific manner. Even where the tenant is given broad discretion to make alterations, it may be appropriate for the landlord to require some kind of expert certification that the alterations will not “impair” any facilities listed in a protective safeguards endorsement.

Avoid indemnification risks. Tenants should also consider how they would be able to demonstrate that a seemingly permitted alteration did not impair such facilities, because most leases—even those that grant the tenant broad freedom to make alterations—prohibit the tenant from doing anything that would affect, or increase the cost of, property insurance coverage. An alteration that impaired the functioning of a listed system or device might therefore be a breach of the lease and expose the tenant to serious liability under a typical indemnification clause.

Watch for analogous requirements. This article has focused on protective safeguards endorsements as they affect fire insurance coverage. Protective safeguards endorsements are sometimes issued with respect to risks other than fire, including burglary, theft and damage to construction work in progress. Those endorsements contain similar language and may present similar risks to insureds. They deserve similar thoughtful attention.

The concept behind Protective Safeguards is commendable and serves a vital role. These measures are instrumental in mitigating and averting losses, thereby enhancing the insurability of properties. Additionally, they play a significant part in lowering insurance premiums. However, it’s crucial to acknowledge that these safeguards often lead to a substantial number of claim denials and ensuing litigation. It is in your best interest to heed this caution seriously. By doing so, you can proactively take steps to avert potential claim denials, safeguarding your interests before any issues arise.

Thought For The Day

It is much more beneficial to try to implement preventive measures rather than just wait for disaster and then try to recover from it.

—Dalai Lama