Under New York’s Insurance Law, certain conditions placed on an insured are considered “warranties” that must be met in order for the insurer to be obligated to provide coverage for a loss. Specifically, a warranty is defined as any provision which has the effect of requiring, as a condition precedent of the taking effect of the policy or as a condition precedent of the insurer’s liability thereunder, the existence of a fact which tends to diminish, or the nonexistence of a fact which tends to increase, the risk of the occurrence of any loss, damage, or injury within the coverage of the contract.

In the case of Triple Diamond Café, Inc.  v Those Certain Underwriters at Lloyd’s London, the Appellate Division, Second Department, was tasked with determining whether the insured’s failure to set the alarm at the premises constituted a breach of a policy warranty thereby relieving the insurer from providing coverage

Plaintiff insured, a bar and lounge, was broken into and burned down in a fire. The defendant insurer denied coverage for the loss on the basis that the plaintiff failed to comply with a policy condition, constituting a material breach of the policy, and barring coverage for the loss. Specifically, the policy declaration page contained the provision “Warranted Automatic extinguishing system and hood and duct cleaning, central station fire and burglar alarms will be [f]ully operational throughout the period of the policy.” The insurer’s investigation confirmed that the alarm system was not activated at the time of the loss.

The Supreme Court awarded summary judgment to the insurer, concluding that the alarm provision constituted a warranty as defined by Insurance Law § 3106, that the term “fully operational” was not ambiguous and, in the context of the policy, required the plaintiff to actually set the alarm in order to be in compliance with the warranty. Because the insured breached the warranty by failing to set the alarm, materially increasing the risk of loss, the insured was not entitled to coverage under the policy as a matter of law.

The Appellate Division, Second Department, held that the provision at issue met the definition of a warranty, since requiring a fully operational burglar alarm would be significant to the insurer’s risk of liability under the insurance policy. The Court denied the insured’s contention that the warranty was required to be set forth in any particular manner, as long as its effect is to create a condition precedent to the insurer’s liability. The Court also noted that the use of the term “warranted” at the beginning of the subject provision establishes that the provision was a warranty as defined by the Insurance Law. The Second Department also rejected the insured’s argument that the term “fully operational” did not require the burglar alarm to be actually set or was ambiguous. Since the insured failed to set the alarm, the court determined, the warranty was breached and the insurer had no obligation to provide coverage.  As such, the decision was affirmed in favor of the insurer.

Thanks to Jorgelina Foglietta for her contribution to this post.  Please write to Mike Bono for more information.