Use of ‘Maintain’ in Insurance Policy Gives Rise to Factual Dispute

By Don R. Sampen, published, Chicago Daily Law Bulletin, March 23, 2021

The U.S. District Court for the Northern District of Illinois recently denied summary judgment to a property insurer because of a difference over the meaning of “maintain” in two provisions of the policy, and a resulting factual dispute regarding why a fire alarm system failed to notify city authorities of a fire.

The case is Berkshire Hathaway Homestate Insurance Co. v. Chicago Metropolitan Hospital, LLC, 2021 U.S. Dist. Lexis 16800 (Jan. 29). The insurer, Berkshire, was represented by Cozen O’Connor of Chicago. McKnight & Kitzinger LLC of Chicago represented the insured, Chicago Metropolitan Hospital, and its lenders, Robert and Kathleen Dieleman, who participated in the litigation as loss payees.

In 2013, the hospital purchased a vacant building to be used as a freestanding emergency center. The building was equipped with a fire alarm system and a city tie box that reported any alarm to Chicago authorities.

Chicago Metropolitan owned the alarm system, and the City of Chicago’s Office of Emergency Management and Communications owned the tie box. When a fire occurred in 2017 causing more than $1 million in damages, an alarm signal was never transmitted to OEMC.

The fire insurance policy issued by Berkshire to Chicago Metropolitan contained a protective-safeguards endorsement with two relevant provisions. One was a condition to coverage requiring Chicago Metropolitan “to maintain the protective devices or services” listed in a schedule. The schedule referenced an automatic fire alarm system connected or reporting to a central station or alarm station.

The second was an exclusion barring coverage if Chicago Metropolitan failed to “maintain any protective safeguard listed in the schedule, and over which it had control, in complete working order.”
Following the fire, Berkshire conducted an investigation and denied coverage, among other reasons, because Chicago Metropolitan violated the protective-safeguards endorsement. It then filed this declaratory action seeking a determination of the parties’ rights and obligations. Chicago Metropolitan counterclaimed, seeking both coverage and sanctions for bad faith claims handling. The parties ultimately filed cross-motions for summary judgment.

Analysis

In an opinion by Judge Joan H. Lefkow, the court found in favor of Berkshire on the bad faith claim but otherwise denied the motions. The coverage dispute largely centered on the meaning of the word “maintain” in the condition and exclusion.

Initially, Lefkow surveyed the evidence concerning maintenance of both the alarm system and the city tie box, and noted conflicting evidence over whether the alarm system, the tie box, or both were in complete working order at the time of the fire.

Notwithstanding that evidence, Berkshire took the position that the term “maintain” as used in the endorsement required Chicago Metropolitan to ensure the functionality of the overall reporting system, and because the system did not work, coverage should be denied.

Lefkow disagreed, observing that the term “maintain” could not have such a broad meaning because, as used in the exclusion, the term was limited in application to the portion of the system over which Chicago Metropolitan actually had control.

For its part Chicago Metropolitan contended that “maintain” meant only that it “continue in possession” of the alarm system on the property, apparently without regard to whether the system worked. Lefkow rejected that interpretation as well, observing that “maintain” had to be read in light of the purpose of the fire alarm system, not just being on the premises, but being capable of decreasing the risk of fire damage.

Thus, Lefkow said, the meaning of “maintain,” at least for purposes of the condition precedent, fell somewhere in between “possess” and “ensure functionality,” and Illinois law required that the term be construed in favor of the insured. Under these circumstances, Chicago Metropolitan arguably maintained the alarm system sufficiently well to comply with the policy’s condition.

The exclusion, however, expressly barred coverage if a portion of the fire alarm under Chicago Metropolitan’s control failed to function as intended. Chicago Metropolitan urged that the exclusion was not enforceable because it conflicted with the Illinois Standard Fire Policy promulgated by the Director of Insurance. According to Lefkow, Chicago Metropolitan failed adequately to develop that argument and, in addition, waited until its reply brief to make it. So the argument was forfeited.

Nonetheless, because of factual disputes over whether the building alarm system or the city tie box failed, and because a jury could find in either party’s favor, Lefkow ruled that neither party would be entitled to summary judgment concerning coverage.

She did, though, grant Berkshire summary judgment on Chicago Metropolitan’s claim of bad faith, due to the bona fide nature of the dispute over coverage. She also denied Berkshire summary judgment on a separate claim of bad faith by the lenders, the Dielemans, for delay of payment.

Key point

A policy evidencing different meanings given to the same word will be construed in favor of the insured.