Is Your Fire Insurance Full of Hot Air?

It was one of the worst fires in Catskills history: The 396-unit Grandview Palace Condominiums, formerly the fabled Brown's Hotel in the Borscht Belt, erupted in flames on April 14, 2012. Seven of its nine buildings were destroyed, though none of the residents died or were seriously injured.

But the primary fire-insurance company declined to pay out, saying the Grandview hadn't lived up to the terms of the contract. It was a reminder of a timeless truism: the time to inspect your fire insurance is before the fire starts. And so the condo board took the insurer to court, invoking an obscure state provision that's colloquially called the "Standard Policy."

The Grandview's story begins a month before the fire. Officials from the local town had threatened to condemn the place unless the board agreed to fix building-code violations, including non-working sprinklers and alarms, and have security guards serve as a fire watch.

The insurance company told the court that when it issued its 2011-2012 policy, "Grandview Palace was not covered by operable sprinklers and had a host of fire-safety code violations." What’s more, the insurer claimed, "representations by Grandview as to the existence and extent of protective safeguards were materially false."

The Grandview shot back that even if its sprinklers were not in working order, "the insurers accepted premiums with knowledge that there were code violations and non-compliance." But mostly the board pointed out that a contract provision called a Protective Safeguards Endorsement (PSE) in the insurance contract – which required the Grandview to have sprinklers, fire alarms, a central monitoring station, and fire- and building-code compliance – wasn't enforceable. Why? Because, the board contended, the Standard Policy overrode the Protective Safeguards Endorsement.

The Standard Policy says that all fire-insurance policies issued in the state must, with a few exceptions, meet a certain minimum level of coverage. For example, a policy requiring that a lawsuit be brought within one year wouldn't pass muster, since the Standard Policy says you have two years to do so.

On Dec. 9, the state Supreme Court confirmed that several of the Grandview’s buildings had no sprinklers, and that a number of sprinklers in other buildings were "blocked by drop-ceilings, painted over, taped over or corroded." The court also ruled that the Standard Policy is just a minimum set of standards. An insurance company can always require higher standards – such as functional sprinklers – in order for the insured to get a payout.

It was a setback for the condo board, but all is not lost for the Grandview. There are enough unresolved issues – including uncertainty over whether the insurer knew about the defective sprinklers, or should have inspected the property before offering coverage – that the case appears headed for trial. But for now, co-op and condo boards might want to get their insurance professionals to double-check how their fire-insurance policy compares to the Standard Policy.

While they’re at it, boards should also make sure their building’s sprinklers actually work.