Edward Eshoo | Property Insurance Coverage Law Blog | August 29, 2016
Homeowner and commercial property insurance policies typically exclude loss or damage caused by or resulting from neglect.1 Under the ISO Homeowners 3-Special Form,2 neglect means “neglect of an ‘insured’ to use all reasonable means to save and preserve property at and after the time of a loss.” Under the ISO Commercial Property Causes of Loss-Special Form,3 neglect means “neglect of an insured to use all reasonable means to save and preserve property from further damage at and after the time of loss.” As both forms clearly and unambiguously state, the exclusion does not apply to pre-loss neglect. Rather, it applies only to neglect of an insured at and after the time of loss.4
But, what if the purported neglect occurred after an incident which also resulted in a loss? That was the issue raised in Chicago Import, Inc. v. American States Insurance Company. There, a sprinkler at the insured’s warehouse sprayed water, damaging inventory. The Chicago Fire Department was called, who turned off the water supply and replaced the sprinkler. After the sprinkler was replaced, the Chicago Fire Department employees told a Chicago Import employee that “everything was okay” with the sprinkler system. Chicago Import submitted an insurance claim, which American States paid.
Three weeks later, a fire broke out in the warehouse. But, the sprinkler system was off at the time of the fire. American States denied coverage for the fire, asserting that the “neglect” exclusion barred coverage because the damage was caused by Chicago Import’s failure to turn the sprinkler system on after the repairs. Chicago Import denied that it knew the system was off, stating it left such matters to the Chicago Fire Department.5
Both parties moved for summary judgment on applying the neglect exclusion. American States relied on Bass v. Illinois Fair Plan Ass’n,6 in which coverage was not afforded for a third fire because the insured failed to adequately protect the building after two prior fires by not boarding it up. The federal district court in Chicago Import distinguished Bass, stating that the losses there resulted from the same harm (fire), while the losses before it resulted from entirely different harms (water and fire). The district court reasoned that “[i]f a wayward sprinkler head requires an insured to take all reasonable measures to protect against a later fire, the distinction between pre and post-loss neglect is meaningless – once an insured makes a single claim the distinction is forever lost, regardless of the timing of, or dissimilarity between, the losses.”7 Because American State’s complaints were about pre-loss neglect, the district court found that the neglect exclusion did not bar coverage, and granted summary judgment for Chicago Import.
Even if the exclusion applied, the district court in Chicago Import noted that it would have denied both parties’ motions because there were genuine issues of material fact as to (1) whether any employee knew or reasonably should have known that the sprinkler system was off and (2) whether the extent of damage would have been less had the system been on, given the “save and preserve property from further damage” language in the exclusion. On the issue of knowledge, the district court appears to have followed the Tuchman court’s interpretation that “the insured must have knowledge of a readily identifiable, imminent, and real peril, endangering the property.”8
1 The neglect exclusion appears in the 165-line, 1943 New York Standard Fire Policy adopted by many jurisdictions, including Illinois, at lines 21-24: “neglect of the insured to use all reasonable means to save and preserve the property at and after a loss, or when the property is endangered by fire in neighboring premises.”
2 HO 00 03 05 01.
3 CP 10 30 04 02.
4 See Tuchman v. Aetna Cas. & Sur. Co., 55 Cal.App.4th 1607, 52 Cal.Rptr.2d 274 (1996). See also 5 John Alan Appleman & Jean Appleman, Insurance Law and Practice § 3115.
5 The neglect exclusion in the American States policy was worded the same as the ISO Causes of Loss-Special Form’s neglect exclusion.
6 98 Ill.App.3d 549, 424 N.E.2d 908 (1981).
7 Chicago Import, Inc. v. Am. States Ins. Co., 2015 WL 2193138, at *2 (N.D.Ill. Aug. 16, 2016).
8 Tuchman, 55 Cal.App.4th at 1616, 52 Cal.Rptr.2d at 279.