Frankenmuth Mut. Ins. Co. v. Fun F/X II, Inc.
2023 WL 2256750 (7th Cir. 2023)
The insured owned a costume and theatrical supply company, which stored its inventory in a warehouse. At the time of purchase, the warehouse had a functional sprinkler system with a working water supply. The insured hired an outside contractor to perform an annual sprinkler inspection, which revealed the system had no water pressure. The contractor notified the building owner, who called the city water company to inquire about the lack of water service. The city, however, could not explain why no water was flowing to the building.
Two months later, the insured spoke with the city’s fire inspector to try to solve the problem. The fire inspector could not explain what was needed to activate the water service. Eventually, the insured called a different representative from the city’s water company and requested that the water be restored to the building. The insured did not follow up or check whether the water pressure had been restored.
Approximately a year and a half later, a fire destroyed the warehouse and all its contents. The insured submitted a claim to its insurance company seeking coverage for the fire loss. It was later discovered that the city had mistakenly capped the pipe supplying water to the building when an adjacent building was demolished.
The insured’s policy contained an exclusion that barred coverage “for loss or damage caused by or resulting from fire, if prior to the fire, you: 1) knew of any suspension or impairment in any protective safeguard listed in the Schedule above and failed to notify us of the fact.” The automatic sprinkler system was identified on the Schedule as the protective safeguard to the building. Because the owner knew of the inactive sprinkler system and did not advise the insurer, the insurer denied coverage for the fire loss.
Eventually, a lawsuit was filed by the insurer seeking a declaratory judgment that it owed no coverage for the fire loss. The insured counterclaimed for breach of contract. The trial court granted summary judgment to the insurer, and an appeal ensued. On appeal, the Seventh Circuit Court of Appeals first observed that it was undisputed that the property owner knew of the lack of water pressure to the system. The insured, however, argued that the “impairment” in the sprinkler system occurred because of the city’s capping of the water service in an area that was not under the insured’s control. The Seventh Circuit rejected that argument and found that no reasonable policy holder would make a distinction to the definition of impairment when the insured admittedly knew the water service was not active.
Likewise, the court rejected the insured’s argument that the property owner did not know of the actual impairment of the capped line at the time of the fire. Because there was some domestic water service provided to the building, the insured claimed it did not know at the time of the fire that its sprinkler system was not operational. Once again, the Seventh Circuit rejected that argument because the policy language simply stated, if the insured was aware of the impairment “prior to the fire,” the insured had to notify the insurer. Because it was undisputed that the insured possessed actual knowledge of the lack of water pressure yet failed to advise the insurer, the policy exclusion applied.
This case is well reasoned under the facts and exemplifies the general rule that an unambiguous exclusion must be enforced as written.