Insured Not Entitled to Coverage When it Fails to Set Fire Alarm as Required by Policy

On January 21, 2015, the Second Department issued a decision in Triple Diamond Café, Inc. v. Those Certain Underwriters at Lloyd's London, 2015 NY Slip Op. 00527, affirming summary judgment in favor of an insurer because of the insured's failure to observe a policy warranty.

In Triple Diamond Café, the trial court granted the defendant insurer summary judgment on the plaintiff bar and lounge's claim that the insurer improperly "denied coverage on the basis that the plaintiff failed to comply with a" policy provision providing "Warranted Automatic extinguishing system and hood and duct cleaning, central station fire and burglar alarms will be fully operational throughout the period of the policy," because the alarm had not been set. The Second Department affirmed, explaining:

Insurance Law § 3106(a) provides: "In this section warranty means any provision of an insurance contract which has the effect of requiring, as a condition precedent of the taking effect of such contract or as a condition precedent of the insurer's liability thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of the occurrence of any loss, damage, or injury within the coverage of the contract". As a general matter, warranties represent a promise by the insured to do or not to do some thing that the insurer considers significant to its risk of liability under an insurance contract. Here, the provision in the special conditions section of the declaration page which states "warranted burglar alarm will be fully operational throughout the period of the policy" meets the definition of a warranty pursuant to the Insurance Law, since requiring the plaintiff to have a fully operational burglar alarm would be significant to the defendant's risk of liability under the insurance policy. Contrary to the plaintiff's contention, there is no requirement that the warranty be set forth in any particular manner, as long as its effect is to create a condition precedent to the insurer's liability. Indeed, the use of the term "warranted" at the beginning of the subject provision establishes that the provision was a warranty as defined by the Insurance Law. Accordingly, the Supreme Court correctly concluded that the provision contained on the declaration page constituted a warranty as a matter of law.

. . .

In the context of an insurance policy, the statement that an insured have a fully operational security system logically requires that the system be actually utilized by the insured to prevent or mitigate the risk the insurer takes by writing the policy. Interpreting the term as the plaintiff suggests would reduce the provision to a nullity, giving it no comprehensible meaning. Hence, in context, the only reasonable meaning to be assigned to the term "fully operational" requires that the alarm system be activated and in use. Accordingly, the Supreme Court properly concluded that the plaintiff breached the warranty by failing to set the alarm on the date of the loss, and, thus, properly granted the defendant's motion for summary judgment dismissing the complaint.

(Internal quotations and citations omitted). New York courts can be tough on insurers. Still, they will not read policy terms such as the warranty above out of a policy (particularly a commercial one) to save the insured.