No Sprinklers No Coverage

Negligent Broker Saved by Exclusion

Boulevard RE Holdings, LLC, (Boulevard) sued Mixon Insurance Agency, Inc., (Mixon), alleging breach of contract and negligent procurement of insurance only to find that if the policy had been issued protecting Boulevard there would be no coverage because of a clear and unambiguous exclusion requiring operative fire sprinkler systems.

In Boulevard RE Holdings, LLC v. Mixon Insurance Agency, Inc., No. 22-1895, United States Court of Appeals, Eighth Circuit (July 20, 2023) the Eighth Circuit applied Missouri law to resolve the dispute.

FACTUAL HISTORY

Boulevard owned commercial property in which BMG Service Group, LLC, (BMG) operated a bar (Property). Boulevard entered into a contract for deed with BMG for the sale of the Property for $1,275,000. Under the contract, Boulevard retained the Property's legal title until BMG paid the purchase price in full. The contract also obligated BMG to obtain, at its own expense, fire insurance in the amount of the purchase price. The insurance was to be issued in Boulevard's name.

BMG asked its broker, Mixon, to have Boulevard listed as a "named insured, loss payee, additional insured, and mortgagee" on the insurance policy. Mixon procured the policy from Berkley Assurance Co. The policy was issued and contained an endorsement called the Fire Protective Safeguard Endorsement (Endorsement). The Endorsement required the insured to maintain a working automatic sprinkler system on the Property. The Endorsement also excluded all coverage for loss or damage by fire if the sprinkler system was inoperative.

The policy, as issued, did not list Boulevard as a "named insured, loss payee, additional insured, and mortgagee."

Approximately one year later, the Property was destroyed by fire. At the time of the fire, the sprinkler system was inoperative.

Boulevard submitted a proof of loss to Berkley Assurance, claiming to have an interest in the property as a "lender." The district court held that Boulevard was not entitled to recover as a mortgagee because sellers in a contract for deed are not mortgagees under Missouri law. The district court also concluded that even if Boulevard was an insured or a mortgagee, noncompliance with the Endorsement barred recovery.

BOULEVARD'S COMPLAINT AGAINST MIXON

The operative complaint raises two causes of action against Mixon: negligent failure to procure insurance and breach of contract. Under Missouri law, both causes of action require showing that the defendant caused the plaintiff to suffer damages.

The Eighth Circuit noted that on the record facts, even if Boulevard had been named as a mortgagee, coverage would still be barred because of the Endorsement.

The Endorsement required the Property to have a working sprinkler system. The Property was destroyed by a fire that occurred while the Property lacked a working sprinkler system. Indeed, had Mixon procured the Policy in precisely the manner requested by BMG, and had the Policy issued with Boulevard listed as a mortgagee or other additional insured, Boulevard would nonetheless be in the same position in which it found itself.

If the policy had issued listing Boulevard as requested, the Endorsement would still have barred coverage.

ZALMA OPINION

It is usual for insurers of restaurant and bar risks to require the presence of fire sprinkler systems. The bar that burned had no operative fire sprinkler systems and, as a result, had no available coverage for damage by fire. Boulevard, who sold the property under contract tried to avoid the condition precedent and its own negligence by failing to review the policy or insist on the fire sprinklers, by suing the broker for not naming it as an insured. The Eighth Circuit found the arguments sufficient to consider and then avoided all the arguments by concluding that if the broker did everything requested there would still be no coverage. In essence it concluded as did the great basketball announcer Chick Hearn: "No harm, no foul."

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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