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National Fire & Marine Insurance Co. v. 3327 West 47TH Place, LLC

United States District Court, N.D. Illinois, Eastern Division

November 16, 2017

NATIONAL FIRE & MARINE INSURANCE COMPANY, Plaintiff,
v.
3327 WEST 47TH PLACE, LLC, Defendant.

          MEMORANDUM OPINION AND ORDER

          Amy J. St. Eve, Judge

         Plaintiff 3327 National Fire & Marine Insurance Company has moved for a judgment in its favor on the pleadings with respect to Count II of Plaintiff National Fire & Marine Insurance Company's Complaint pursuant to Federal Rule of Civil Procedure 12(c) [24]. The Court grants Plaintiffs motion in part and denies it in part.

         BACKGROUND

         I. Plaintiffs Complaint

         On January 4, 2017, Plaintiff filed its First Amended Complaint seeking a declaration that the insurance policy (the “Policy”) it issued to Defendant does not provide coverage for the fire loss that occurred on April 30, 2016 to a brick warehouse (the “Building”) that Defendant owns. (First. Am. Compl. ¶¶ 1-2.) In deciding whether to issue an insurance policy to Defendant, Plaintiff hired an inspector, David Moller, to examine the property and interview one of the building's owners. (Id. ¶ 18.) The resulting inspection report, which depended in part on representations the building's owner made, indicated that the building had security cameras, an ADT security system, and motion and door alarms. (Id. ¶¶ 19-20.)

         The Policy included a Protective Safeguards Endorsement (“PSE”), which stated that, “as a condition of this insurance, ” Defendant was required to “maintain [certain] protective devices, ” including an “Automatic Burglary Alarm, protecting the entire building that sends signals to an outside central station or a police station.” (Id. ¶ 27.) Pursuant to the Endorsement, Plaintiff was not required to pay for “loss or damage caused by or resulting from fire” if prior to the loss Defendant “failed to maintain any protective safeguard listed.” (Id.) The Policy also provided that any coverage required under the policy was void in any case of Defendant's fraud. (Id. ¶ 28.) Finally, the Policy contained an exclusion that stated that Plaintiff would not provide coverage for any act Defendant committed or conspired to commit with the intent to cause a loss. (Id. ¶ 29.)

         On April 30, 2016, the Building sustained significant damage due to a fire that started at 7:32 PM on the first floor of the building. (Id. ¶ 30.) A security guard discovered the fire and called 911. (Id. ¶ 32.) The Chicago Fire Department concluded that fire originated as “the result of a mattress being ignited by an open flame ignition source.” (Id. ¶¶ 34-35.) In Count II, Plaintiff seeks a declaration of no coverage because, under the PSE in the Policy, Defendant was required to maintain an Automatic Burglary Alarm protecting the whole building, and Defendant failed to do so. (Id. ¶¶ 50-60.)

         II. Defendant's Affirmative Defenses

         In response to Plaintiff s Complaint, Defendant submitted Affirmative Defenses. (R. 31 Def.'s Am. Affirmative Defenses.) In those Affirmative Defenses, Defendant alleges that Gateway Underwriters Agency, Inc. (“Gateway”) is an agent of Plaintiff, having entered into a Producing Agency Agreement with Plaintiff in 2011. (Id. ¶ 4.) As Plaintiffs agent, Gateway is authorized to process applications for property insurance and to hire third-party vendors to perform loss control underwriting inspections on Plaintiff's behalf. (Id. ¶¶ 5-6.) Overland Solutions, Inc. (“Overland”) performs loss control underwriting inspections of commercial buildings for insurance companies, and Gateway entered into a letter of understanding with Overland to perform loss control underwriting surveys. (Id. ¶¶ 7-8.) Defendant alleges that the letter provided that Overland would perform inspections pursuant to its written Standard Operating Procedures (“SOPs”), which were designed in accordance with industry standards for loss control underwriting inspections. (Id. ¶ 9.) The SOPs require that Overland's field representatives prepare a written report within 72 hours of an inspection and that the report accurately reflect the building's hazards and controls (e.g. fire and burglar alarm systems) and make appropriate recommendations for uncontrolled hazards. (Id. ¶¶ 10-11.) The SOPs also emphasize the importance of photographs in completing a satisfactory inspection. (Id. ¶ 12.) Defendant alleges that it purchased the Building in May 2013, and in October 2013, Sentinel Alarm Co., Inc. (“Sentinel”) installed and connected a burglar alarm system and video security camera system for Z-Mattress, a tenant occupying first floor space in the Building. (Id. ¶¶ 13-14.) The purpose of the burglar system, which consisted of motion detectors and door sensors, was to detect any unauthorized entry into the Z-Mattress store. (Id. ¶¶ 14-15.) The video security system included 13 cameras inside the store and 3 cameras outside the store. (Id. ¶ 17.) Sentinel also installed 2 additional door sensors in the first floor space and additional motion detectors in the basement and in the second floor of the building-spaces Z-Mattress also leased. (Id. ¶ 18.) Nationwide Digital Monitoring Company monitored the burglar alarm system in the leased spaces. (Id. ¶ 19.)

         Plaintiff insured the Building for the policy period between December 2014 and December 2015 (the “original policy”). (Id. ¶ 20.) The premium for the initial policy was $18, 469. (Id. ¶ 21.) Defendant alleges that Plaintiff's underwriting requirements included an underwriting inspection and that Gateway hired Overland to perform the inspection of the Building. (Id. ¶¶ 22-23.) Defendant claims that this inspection was necessary in part to verify the accuracy of the information in Defendant's insurance application, which Globe Insurance Agency (“Globe) prepared and submitted to Plaintiff for a quote for property insurance coverage. (Id. ¶ 24.) Defendant alleges that it never saw the application before Globe submitted it. (Id. ¶ 25.) The insurance application indicated that ADT installed and serviced the Building's burglar alarm system. (Id. ¶ 26.)

         Defendant asserts that the inspection was also necessary to allow Plaintiff to cancel the policy if the inspection revealed a material misrepresentation or Defendant's violation of any terms of the policy. (Id. ¶ 27.) Defendant's managing member signed the policy, but he only reviewed the first page of the policy before signing it and did not have any information regarding the burglar alarm system in the Building. (Id. ¶ 28.) He never told any Globe representative that an ADT alarm system serviced the Building. (Id. ¶ 29.)

         In January 2015, Overland assigned the underwriting inspection to David Moller, a loss control field representative since July 2013, who had previously worked for Allstate Insurance Company from 1990 to 2009 and had performed over 1, 000 inspections in his career. (Id. ¶¶ 30-31, 33.) Overland received $91 for the inspection. (Id. ¶ 31.) Defendant claims that, based on his experience, Moller knew that underwriters had the responsibility to evaluate commercial property risks to determine if it is profitable for the company to insure the risk and to determine the appropriate premium. (Id. 34.) Defendant also alleges that, given Moller's experience, he knew that as a third-party underwriter, he was the insurance company's “eyes and ears” for purposes of inspecting the property. (Id. ¶¶ 35-36.)

         Moller performed an inspection of the Building on February 3, 2015 and it lasted no more than one hour. (Id. ¶ 39.) Moller prepared a Value Survey Report (the “Report”) following his inspection. (Id. ¶ 41.) Moller had unlimited access to the Building during his inspection and no one from Defendant's company accompanied him. (Id. ¶ 42-43.) Moller took 6 exterior photographs and 15 photographs of the interior of the Building. (Id. ¶ 44.) One of the interior photographs, which was the only photograph Moller took of the burglar system or video security system, showed two keypads, one motion detector, and one door sensor. (Id. ¶ 45.) Defendant alleges that Moller assumed that ADT monitored the alarm system in the Building because one of the keypads had the ADT insignia. (Id. ¶ 46.) Neither of the pictured keypads serviced the alarm system in Z-Mattress's spaces and Moller did not test the keypads. (Id. ¶¶ 47-48.) Moller's Report states that the Building had an ADT burglar alarm system with motion detectors, door contacts, and security cameras. (Id. ¶ 49.) Defendant's managing member never told Moller that the Building had an ADT system or that it had security cameras. (Id. ¶ 50.) Defendant alleges that notwithstanding his inspection, Moller (1) did not know the location of any of the detectors or cameras in the Building; (2) failed to disclose the existence of a control panel or keypad in the Z-Mattress's space; and (3) failed to disclose that there was no motion detector on the third or fourth floor. (Id. ¶¶ 51-54.) Moller did not verify that each floor was equipped with a burglar alarm system nor did he make any recommendations or identify corrective actions for the Building. (Id. ¶¶ 55-56.)

         Defendant alleges that Plaintiff received Moller's Report on February 9, 2015, more than 60 days after the original policy had been in effect. (Id. ¶ 57.) Plaintiff renewed the insurance coverage for the Building effective December 1, 2015 through December 1, 2016 (the “renewal policy”). (Id. ¶ 58.) Plaintiff issued the renewal with a $19, 400 premium without an application or underwriting inspection. (Id. ¶¶ 59-60.)

         On April 30, 2016, a fire in the Building originated in the first floor space Z-Mattress leased that had a security system. (Id. ¶¶ 61-62.) The Chicago Fire Department made forcible entry into the Building and the Department classified it was “incendiary, ” which means a human, either purposefully or accidentally, started the fire. (Id. ¶¶ 63-64.) Defendant alleges that a Z-Mattress employee was in the Building until the afternoon of the fire, and the Z-Mattress burglar system was armed, in service, and operable at the time. (Id. ¶¶ 65-66.) Z-Mattress's burglar system was never activated or triggered. (Id. ¶ 67.) Plaintiff cancelled the renewal policy effective June 29, 2016, but it did not return the entire premium to Defendant. (Id. ¶ 68.)

         On the basis of these allegations, Defendant asserts the following affirmative defenses to Count II: (1) Defendant substantially complied with the PSE; (2) the PSE was ambiguous; (3) Plaintiff waived the right to assert a breach of the PSE because it had constructive knowledge that the entire Building was not secured by a burglar alarm system and because it failed to return the entire premium to Defendant; (4) Plaintiff is estopped from invoking the PSE as a basis for no coverage because Defendant paid an inspection fee and thus had a reasonable expectation that Plaintiff would notify it of any issues with the Building, which it did not; (5) even if there had been a burglar alarm system covering the entire Building, it would have detected only entry or movement in the building and not the fire, and thus Defendant's purported breach of the PSE is not material to the fire loss. (Id. ¶¶ 69-94.)

         LEGAL STANDARD

         Under Federal Rule of Civil Procedure 12(c), a party may move for judgment on the pleadings after the pleadings are closed but early enough not to delay trial. See Fed. R. Civ. P. 12(c). “When a Rule 12(c) motion is used in an attempt to dispose of the case on the merits, the Court applies the summary judgment standard, except that the Court may consider only the contents of the pleadings.” VFC Partners 39 LLC v. Huntley Bldg. Dev. Corp., No. 15-CV-9646, 2017 WL 2345543, at *2 (N.D. Ill. May 30, 2017) (citing Alexander v. City of Chicago, 994 F.2d 333, 336 (7th Cir. 1993)). The Court thus takes the well-pleaded allegations in the nonmoving party's pleadings as true and draws all reasonable inferences in favor of the nonmoving party-in this case, Defendants. Id. Where the plaintiff moves for judgment on the pleadings, “the motion should not be granted unless it appears beyond doubt that the non-moving party cannot prove facts sufficient to support his position.” Hous. Auth. Risk Retention Grp., Inc. v. Chi. Hous. Auth.,378 F.3d 596, 600 (7th Cir. 2004). Put differently, judgment on the pleadings is appropriate if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. VFC Partners, 2017 WL 2345543, at *2. The pleadings the Court may consider “include the complaint, the answer, and any written instruments attached as ...


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