American Home Assurance Company v. Harvey's Wagon Wheel, Inc.

398 F.Supp. 379 (1975)

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Nature of the Case

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Facts

Ps issued policies of fire insurance in which they insured D against interruption of business. Both policies contained automatic sprinkler warranties which provided: 'THIS POLICY BEING WRITTEN AT A REDUCED RATE BASED ON THE PROTECTION OF THE PREMISES BY AN AUTOMATIC SPRINKLER SYSTEM, IT IS A CONDITION OF THIS POLICY THAT SO FAR AS THE SPRINKLER SYSTEM AND THE WATER SUPPLY THEREFOR ARE UNDER THE CONTROL OF THE INSURED, DUE DILIGENCE SHALL BE USED BY THE INSURED TO MAINTAIN THEM IN COMPLETE WORKING ORDER, AND THAT NO CHANGE SHALL BE MADE IN SAID SYSTEM OR IN THE WATER SUPPLY THEREFOR WITHOUT THE CONSENT IN WRITING OF THIS COMPANY.' At the time the policies were issued, the restaurant and casino areas of D were equipped with operative automatic sprinkler systems. Prior to the issuance of the policies, D had begun to reconstruct the casino and restaurant areas. Two employees of the insurance broker had knowledge before the policies were issued that D had undertaken the construction project. Those employees did not relate that knowledge to Ps. The insured building was damaged by fire and D's business was interrupted for more than sixty days. At the time of the fire, the sprinkler system in the casino was inoperative. The sprinkler system in the restaurant area was operative. The casino was damaged by fire; the restaurant was not. Ps filed this action to determine if they were obligated to pay D under the policy. D argues that the automatic sprinkler provisions are not warranties and therefore are not determinative of underlying coverage but rather are conditions concerned only with a reduced premium rate allowable for sprinklered building risks. D contends that a breach of the automatic sprinkler warranty should not affect coverage but should result only in an increase in the premium rate. D argues that the phrases 'written at a reduced rate based on the existence * * * of an automatic sprinkler system' and 'due diligence shall be used by the insured to maintain them in complete working order' imply that the parties intended that there would always be coverage.