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Comment on alarm customer losing insurance coverage for no fire alarm
February 9, 2023
Comment on alarm customer losing insurance coverage for no fire alarm from article on January 30, 2023
          In reading part of this case, it appears the general manager of Mama K's, had procured the insurance policy using Buckman-Mitchell Insurance Inc. who purchased the policy from Topa Insurance Company. As part of the insurance policy application, Buckman-Mitchell submitted a form to Topa that erroneously stated Mama K's had a central station fire alarm. Topa issued Mama K's an insurance policy with a "Protective Safeguards" endorsement conditioning coverage for fire damage on Mama K's maintaining an automatic fire alarm to protect the "entire building."
          It looks like the error occurred with BMI insurance as they assumed Mama K's had this type of system. Isn't there anything that requires an insurance agent or company to verify the protective systems are in place?
          We get calls all the time from insurance agents asking for an alarm monitoring certificate to prove that there is a monitored alarm in residential accounts. It would only make sense that they would ask for the same on a commercial account.
          On another note, the FIRE button on the keypad is nothing more than a manual panic alarm that requires someone be there to properly activate it. There are many systems in daycare and other type of businesses that only have and require manual only fire alarms. Would this mean that a disclaimer form needs to be signed by the customer telling them that manual fire alarm systems do not provide automatic coverage?
          This is rather complex legal stuff.  We are dealing with insurance and we are dealing with the law of agency.  It’s important for you to understand all the issues here.
          Some basics first:  An insurance broker is usually an independent business; independent from the insurance companies it recommends it’s customer to and places the insurance, and independent from the customers it represents.  Absent the exception below, the broker is typically the insured’s agent.  That means the broker is representing the customer, not the insurance company.  The broker acts on behalf of the customer when dealing with the insurance company and placing the insurance. 
          When a broker is the authorized agent of the insurance company then the broker acts on behalf of the insurance company.
          An agent owes a duty of loyalty to the agent’s principal, in this case, the customer.  But when it deals with the insurance company it’s as if the customer was dealing with the insurance company.  The agent acts for the principal and must act within the scope of authority granted by the principal.  Third parties have a right to rely on the acts of the agent when the agent is acting within the scope of authority or when acting within the scope of apparently authority, even if exceeding the actual authority.  All this creates issues of fact that need to be unraveled if there is a dispute.
          So the customer engages its agent-broker to place insurance.  The broker places the insurance. Along with the insurance application there is a requirement for a Certificate of Insurance.  The Certificate of Insurance is issued by the alarm company confirming the alarm system and service.  K&K’s form has exculpatory provisions that reduce exposure and you should be using this form for your commercial and residential customers who request confirmation of alarm service so that they can obtain insurance or get discounts on the insurance.
          Who is responsible for submitting an erroneous statement of alarm coverage?  Ultimately the customer is responsible and that’s why the customer lost its insurance coverage.  For sure the insurance carrier was not responsible although had it conducted an inspection before issuing the insurance an argument could be made [that wasn’t reported in the case].  A broker might have some exposure if the broker failed to make clear the automatic fire alarm requirement.  Just about any customer involvement in the certification process would negate the broker’s responsibility since the broker would argue that the broker relied on the customer’s information.
          It’s not uncommon for a customer to request a Certificate of Insurance.  They aren’t all alike; get and use K&K Standard Alarm Forms for Certificate of Insurance.
          Regarding the fire button, an alarm company needs to be careful to make clear that some systems are not fire alarm systems.  Painting an orange red doesn’t make it an apple.  If the button is designed for manual fire alarm alert then you better make that clear in your contract.  Both the contract and the Disclaimer Notice needs to emphasize that the fire alarm button is and does exactly what it does, and it does not substitute for an automatic fire alarm.  If code requires something more in the way of a fire alarm then you better make sure the contract and Disclaimer Notice makes that clear. 
          I’ll let you in on a little secret that’s not a secret at all.  Judges and juries are giving out awards like they are giving away other people’s money, which they are.  Awards are at time ridiculously high, far exceeding both your insurance coverage and the equity in your alarm business.  Be careful with the:
  *  contracts you use
  *  how you execute those contracts
  *  what Certificate of Insurance you use
  *  how you do the installation
  *  how much insurance you carry

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301