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An appellate court in California has ruled that the owner of an apartment building sued by tenants for missing or inoperable smoke detectors was not entitled to a defense of the lawsuit from its insurer because the owner breached the insurance policy by failing to provide working smoke detectors.

The Case

Tenants at a Los Angeles apartment building owned, maintained, and leased from July 1, 2012 to December 26, 2013 by New Hampshire Apartment, Inc., sued the owner for multiple habitability violations. They alleged, among other things, that the property was infested by vermin and cockroaches, lacked security, had broken windows and doors that were off their hinges, and lacked adequate water supply, heat, and proper sewage disposal.

The tenants also asserted that smoke detectors either were missing or inoperable.

New Hampshire was insured by American Safety Indemnity Co. (“ASIC”), which refused to defend New Hampshire.

The tenants and New Hampshire reached a settlement that, among other things, provided for the assignment of New Hampshire’s claims against ASIC to the tenants.

The tenants sued ASIC, alleging breach of contract and breach of the implied covenant of good faith and fair dealing.

The trial court ruled in favor of ASIC, and the tenants appealed.

The ASIC Policy

The ASIC policy provided that:

In consideration of the premium charged, it is understood and agreed by the insured that it is a condition precedent to the acceptance of this insurance and payment of any claim under the policy that the insured warrants that at all times during the currency of the policy . . . the insured shall maintain in complete working order . . . Smoke Detectors in all units/living spaces. BREACH OF ANY WARRANTY(S) SHALL RENDER COVERAGE PROVIDED BY THIS POLICY NULL AND VOID.

The Appellate Court’s Decision

The Second District Court of Appeal affirmed.

In its decision, the appellate court found that New Hampshire failed to satisfy the insurance policy’s smoke detector condition because the property had nonfunctional or missing smoke detectors. As a result, the appellate court ruled, ASIC’s obligation to provide coverage under the policy never accrued.

The appellate court rejected the tenants’ contention that the smoke detector warranty did not preclude coverage because any noncompliance with the warranty lacked a nexus with the condition insured against. The appellate court explained that, generally, an insured must be in strict compliance with a condition precedent to the right of recovery under an insurance policy. It then ruled that lack of a “nexus” to the loss did not vitiate a warranty as a precondition to coverage.

The appellate court concluded that California courts have held the breach of even an “immaterial warranty” would void an insurance policy “where the policy expressly declares that it shall avoid it.”

The case is Gray v. American Safety Indemnity Co., No. B289323 (Cal. Ct.App. Dec. 3, 2018). Attorneys involved include: Kabateck Brown Kellner, Richard L. Kellner and Brian S. Kabateck for Plaintiffs and Appellants. Chamberlin & Keaster, Robert W. Keaster and David M. Berke for Defendant and Respondent.

Steven A. Meyerowitz, Esq., is the Director of FC&S Legal, the Editor-in-Chief of the ‘Insurance Coverage Law Report,’ and the Founder and President of Meyerowitz Communications Inc. As FC&S Legal Director, Mr. Meyerowitz, a member of the team that conceptualized FC&S Legal, provides daily analysis and commentary on the most significant insurance coverage law decisions from courts across the country and news regarding legislative and regulatory developments. A graduate of Harvard Law School, Mr. Meyerowitz was an attorney at a prominent Wall Street law firm before founding Meyerowitz Communications Inc., a law firm marketing communications consulting company.