National Fire & Marine Insurance Company v. 3327 West 47th Place, LLC

Filing 49

MEMORANDUM Opinion and Order Signed by the Honorable Amy J. St. Eve on 11/16/2017:Mailed notice(kef, )

IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
NATIONAL FIRE & MARINE
INSURANCE COMPANY,

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Plaintiff,
v.
3327 WEST 47TH PLACE, LLC,
Defendant.

No. 16-cv-11590
Judge Amy J. St. Eve

MEMORANDUM OPINION AND ORDER
Plaintiff 3327 National Fire & Marine Insurance Company has moved for a judgment in
its favor on the pleadings with respect to Count II of Plaintiff National Fire & Marine Insurance
Company’s Complaint pursuant to Federal Rule of Civil Procedure 12(c) [24]. The Court grants
Plaintiff’s motion in part and denies it in part.
BACKGROUND
I.

Plaintiff’s Complaint
On January 4, 2017, Plaintiff filed its First Amended Complaint seeking a declaration

that the insurance policy (the “Policy”) it issued to Defendant does not provide coverage for the
fire loss that occurred on April 30, 2016 to a brick warehouse (the “Building”) that Defendant
owns. (First. Am. Compl. ¶¶ 1-2.) In deciding whether to issue an insurance policy to
Defendant, Plaintiff hired an inspector, David Moller, to examine the property and interview one
of the building’s owners. (Id. ¶ 18.) The resulting inspection report, which depended in part on
representations the building’s owner made, indicated that the building had security cameras, an
ADT security system, and motion and door alarms. (Id. ¶¶ 19-20.)

The Policy included a Protective Safeguards Endorsement (“PSE”), which stated that, “as
a condition of this insurance,” Defendant was required to “maintain [certain] protective devices,”
including an “Automatic Burglary Alarm, protecting the entire building that sends signals to an
outside central station or a police station.” (Id. ¶ 27.) Pursuant to the Endorsement, Plaintiff was
not required to pay for “loss or damage caused by or resulting from fire” if prior to the loss
Defendant “failed to maintain any protective safeguard listed.” (Id.) The Policy also provided
that any coverage required under the policy was void in any case of Defendant’s fraud. (Id. ¶ 28.)
Finally, the Policy contained an exclusion that stated that Plaintiff would not provide coverage
for any act Defendant committed or conspired to commit with the intent to cause a loss. (Id. ¶
29.)
On April 30, 2016, the Building sustained significant damage due to a fire that started at
7:32 PM on the first floor of the building. (Id. ¶ 30.) A security guard discovered the fire and
called 911. (Id. ¶ 32.) The Chicago Fire Department concluded that fire originated as “the result
of a mattress being ignited by an open flame ignition source.” (Id. ¶¶ 34-35.) In Count II,
Plaintiff seeks a declaration of no coverage because, under the PSE in the Policy, Defendant was
required to maintain an Automatic Burglary Alarm protecting the whole building, and Defendant
failed to do so. (Id. ¶¶ 50-60.)
II.

Defendant’s Affirmative Defenses
In response to Plaintiff’s Complaint, Defendant submitted Affirmative Defenses. (R. 31

Def.’s Am. Affirmative Defenses.) In those Affirmative Defenses, Defendant alleges that
Gateway Underwriters Agency, Inc. (“Gateway”) is an agent of Plaintiff, having entered into a
Producing Agency Agreement with Plaintiff in 2011. (Id. ¶ 4.) As Plaintiff’s agent, Gateway is

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authorized to process applications for property insurance and to hire third-party vendors to
perform loss control underwriting inspections on Plaintiff’s behalf. (Id. ¶¶ 5-6.) Overland
Solutions, Inc. (“Overland”) performs loss control underwriting inspections of commercial
buildings for insurance companies, and Gateway entered into a letter of understanding with
Overland to perform loss control underwriting surveys. (Id. ¶¶ 7-8.) Defendant alleges that the
letter provided that Overland would perform inspections pursuant to its written Standard
Operating Procedures (“SOPs”), which were designed in accordance with industry standards for
loss control underwriting inspections. (Id. ¶ 9.) The SOPs require that Overland’s field
representatives prepare a written report within 72 hours of an inspection and that the report
accurately reflect the building’s hazards and controls (e.g. fire and burglar alarm systems) and
make appropriate recommendations for uncontrolled hazards. (Id. ¶¶ 10-11.) The SOPs also
emphasize the importance of photographs in completing a satisfactory inspection. (Id. ¶ 12.)
Defendant alleges that it purchased the Building in May 2013, and in October 2013,
Sentinel Alarm Co., Inc. (“Sentinel”) installed and connected a burglar alarm system and video
security camera system for Z-Mattress, a tenant occupying first floor space in the Building. (Id.
¶¶ 13-14.) The purpose of the burglar system, which consisted of motion detectors and door
sensors, was to detect any unauthorized entry into the Z-Mattress store. (Id. ¶¶ 14-15.) The
video security system included 13 cameras inside the store and 3 cameras outside the store. (Id.
¶ 17.) Sentinel also installed 2 additional door sensors in the first floor space and additional
motion detectors in the basement and in the second floor of the building—spaces Z-Mattress also
leased. (Id. ¶ 18.) Nationwide Digital Monitoring Company monitored the burglar alarm system
in the leased spaces. (Id. ¶ 19.)

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Plaintiff insured the Building for the policy period between December 2014 and
December 2015 (the “original policy”). (Id. ¶ 20.) The premium for the initial policy was
$18,469. (Id. ¶ 21.) Defendant alleges that Plaintiff’s underwriting requirements included an
underwriting inspection and that Gateway hired Overland to perform the inspection of the
Building. (Id. ¶¶ 22-23.) Defendant claims that this inspection was necessary in part to verify
the accuracy of the information in Defendant’s insurance application, which Globe Insurance
Agency (“Globe) prepared and submitted to Plaintiff for a quote for property insurance coverage.
(Id. ¶ 24.) Defendant alleges that it never saw the application before Globe submitted it. (Id. ¶
25.) The insurance application indicated that ADT installed and serviced the Building’s burglar
alarm system. (Id. ¶ 26.)
Defendant asserts that the inspection was also necessary to allow Plaintiff to cancel the
policy if the inspection revealed a material misrepresentation or Defendant’s violation of any
terms of the policy. (Id. ¶ 27.) Defendant’s managing member signed the policy, but he only
reviewed the first page of the policy before signing it and did not have any information regarding
the burglar alarm system in the Building. (Id. ¶ 28.) He never told any Globe representative that
an ADT alarm system serviced the Building. (Id. ¶ 29.)
In January 2015, Overland assigned the underwriting inspection to David Moller, a loss
control field representative since July 2013, who had previously worked for Allstate Insurance
Company from 1990 to 2009 and had performed over 1,000 inspections in his career. (Id. ¶¶ 3031, 33.) Overland received $91 for the inspection. (Id. ¶ 31.) Defendant claims that, based on
his experience, Moller knew that underwriters had the responsibility to evaluate commercial
property risks to determine if it is profitable for the company to insure the risk and to determine
the appropriate premium. (Id. 34.) Defendant also alleges that, given Moller’s experience, he

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knew that as a third-party underwriter, he was the insurance company’s “eyes and ears” for
purposes of inspecting the property. (Id. ¶¶ 35-36.)
Moller performed an inspection of the Building on February 3, 2015 and it lasted no more
than one hour. (Id. ¶ 39.) Moller prepared a Value Survey Report (the “Report”) following his
inspection. (Id. ¶ 41.) Moller had unlimited access to the Building during his inspection and no
one from Defendant’s company accompanied him. (Id. ¶ 42-43.) Moller took 6 exterior
photographs and 15 photographs of the interior of the Building. (Id. ¶ 44.) One of the interior
photographs, which was the only photograph Moller took of the burglar system or video security
system, showed two keypads, one motion detector, and one door sensor. (Id. ¶ 45.) Defendant
alleges that Moller assumed that ADT monitored the alarm system in the Building because one
of the keypads had the ADT insignia. (Id. ¶ 46.) Neither of the pictured keypads serviced the
alarm system in Z-Mattress’s spaces and Moller did not test the keypads. (Id. ¶¶ 47-48.)
Moller’s Report states that the Building had an ADT burglar alarm system with motion detectors,
door contacts, and security cameras. (Id. ¶ 49.) Defendant’s managing member never told
Moller that the Building had an ADT system or that it had security cameras. (Id. ¶ 50.)
Defendant alleges that notwithstanding his inspection, Moller (1) did not know the location of
any of the detectors or cameras in the Building; (2) failed to disclose the existence of a control
panel or keypad in the Z-Mattress’s space; and (3) failed to disclose that there was no motion
detector on the third or fourth floor. (Id. ¶¶ 51-54.) Moller did not verify that each floor was
equipped with a burglar alarm system nor did he make any recommendations or identify
corrective actions for the Building. (Id. ¶¶ 55-56.)
Defendant alleges that Plaintiff received Moller’s Report on February 9, 2015, more than
60 days after the original policy had been in effect. (Id. ¶ 57.) Plaintiff renewed the insurance

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coverage for the Building effective December 1, 2015 through December 1, 2016 (the “renewal
policy”). (Id. ¶ 58.) Plaintiff issued the renewal with a $19,400 premium without an application
or underwriting inspection. (Id. ¶¶ 59-60.)
On April 30, 2016, a fire in the Building originated in the first floor space Z-Mattress
leased that had a security system. (Id. ¶¶ 61-62.) The Chicago Fire Department made forcible
entry into the Building and the Department classified it was “incendiary,” which means a human,
either purposefully or accidentally, started the fire. (Id. ¶¶ 63-64.) Defendant alleges that a ZMattress employee was in the Building until the afternoon of the fire, and the Z-Mattress burglar
system was armed, in service, and operable at the time. (Id. ¶¶ 65-66.) Z-Mattress’s burglar
system was never activated or triggered. (Id. ¶ 67.) Plaintiff cancelled the renewal policy
effective June 29, 2016, but it did not return the entire premium to Defendant. (Id. ¶ 68.)
On the basis of these allegations, Defendant asserts the following affirmative defenses to
Count II: (1) Defendant substantially complied with the PSE; (2) the PSE was ambiguous; (3)
Plaintiff waived the right to assert a breach of the PSE because it had constructive knowledge
that the entire Building was not secured by a burglar alarm system and because it failed to return
the entire premium to Defendant; (4) Plaintiff is estopped from invoking the PSE as a basis for
no coverage because Defendant paid an inspection fee and thus had a reasonable expectation that
Plaintiff would notify it of any issues with the Building, which it did not; (5) even if there had
been a burglar alarm system covering the entire Building, it would have detected only entry or
movement in the building and not the fire, and thus Defendant’s purported breach of the PSE is
not material to the fire loss. (Id. ¶¶ 69-94.)

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LEGAL STANDARD
Under Federal Rule of Civil Procedure 12(c), a party may move for judgment on the
pleadings after the pleadings are closed but early enough not to delay trial. See Fed. R. Civ. P.
12(c). “When a Rule 12(c) motion is used in an attempt to dispose of the case on the merits, the
Court applies the summary judgment standard, except that the Court may consider only the
contents of the pleadings.” VFC Partners 39 LLC v. Huntley Bldg. Dev. Corp., No. 15-CV9646, 2017 WL 2345543, at *2 (N.D. Ill. May 30, 2017) (citing Alexander v. City of Chicago,
994 F.2d 333, 336 (7th Cir. 1993)). The Court thus takes the well-pleaded allegations in the
nonmoving party’s pleadings as true and draws all reasonable inferences in favor of the
nonmoving party—in this case, Defendants. Id. Where the plaintiff moves for judgment on the
pleadings, “the motion should not be granted unless it appears beyond doubt that the non-moving
party cannot prove facts sufficient to support his position.” Hous. Auth. Risk Retention Grp., Inc.
v. Chi. Hous. Auth., 378 F.3d 596, 600 (7th Cir. 2004). Put differently, judgment on the
pleadings is appropriate if there are no genuine issues of material fact and the moving party is
entitled to judgment as a matter of law. VFC Partners, 2017 WL 2345543, at *2. The pleadings
the Court may consider “include the complaint, the answer, and any written instruments attached
as exhibits.” N. Indiana Gun & Outdoor Shows, Inc. v. City of S. Bend, 163 F.3d 449, 452 (7th
Cir. 1998). Additionally, the Court “may take judicial notice of documents that are part of the
public record, including pleadings, orders, and transcripts from prior proceedings in the
case.” Scherr v. Marriott Int’l, Inc., 703 F.3d 1069, 1073 (7th Cir. 2013).1

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Because Plaintiff has attached Defendant’s application for insurance, the underwriter’s Value Survey
Report, Defendant’s insurance policy, an engineering report, the Chicago Fire Department’s report on the
incident, and the deposition transcript of Mohammad Abdeljaber, Defendant’s executive, to its Amended
Complaint and these documents are central to its claim, the Court may consider these attachments in
ruling on the present motion.

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ANALYSIS
Plaintiff argues that it is entitled to judgment on the pleadings because Plaintiff failed to
comply with the PSE, which it claims was a condition precedent to coverage for a fire loss. The
Seventh Circuit has held, in analyzing insurance coverage, that a clear endorsement requiring a
protective device or system is a condition precedent to coverage for certain losses and that if the
insured fails to comply with the endorsement’s requirements, there is no coverage under the
insurance policy. See, e.g., Goldstein v. Fid. & Guar. Ins. Underwriters, Inc., 86 F.3d 749, 754
(7th Cir. 1996) (finding no coverage where policy and endorsement stated “that the property will
not be covered if the sprinkler system is not in working order” and it was not disputed that the
sprinkler system was not in working order at the time of the [loss]”); Indian Harbor Ins. Co. v.
Randolph Partners, LLC -740 Series, No. 08 C 629, 2010 WL 3155974, at *5 (N.D. Ill. Aug. 10,
2010) (finding no coverage where endorsement clearly required insured to “maintain a central
station burglar and fire alarm as a condition of coverage” and insured failed to do so); Burmac
Metal Finishing Co. v. W. Bend Mut. Ins. Co., 825 N.E.2d 1246, 1253-55 (Ill. App. 2d Dist.
2005) (upholding jury decision to exclude coverage due to insured’s failure to maintain
protective safeguard).
Here, it is undisputed that Defendant’s insurance policy with Plaintiff included a PSE,
which stated that, “as a condition of this insurance,” Defendant was required to “maintain
[certain] protective devices,” including an “Automatic Burglary Alarm, protecting the entire
building that sends signals to an outside central station or a police station.” (Am. Compl. ¶ 27;
R. 8, Def.’s Ans. ¶¶ 27, 51-53.) It is also undisputed that Defendant did not have an Automatic
Burglary Alarm protecting the entire Building. (Def.’s Ans. ¶ 54; Ex. J, Dep. of Mohammed
Abdeljaber 162-63.) Despite these undisputed facts, Defendant asserts several affirmative

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defenses that it argues create a genuine issue of material fact as to whether Plaintiff must cover
Defendant’s loss. The Court addresses each affirmative defense in turn.
I.

Substantial Compliance
Defendant first argues that it substantially complied with the PSE because Sentinel

installed a burglar alarm system and video security camera system for Z-Mattress, Defendant’s
first-floor tenant, consisting of 8 motion detectors, 9 door sensors, and 16 cameras and those
systems were active and connected at the time of the fire. Defendant relies largely on Burmac,
825 N.E.2d at 1251, in which the insurance policy at issue contained a PSE that required that the
insured maintain an automatic sprinkler system as a condition to coverage. The insurer denied
coverage arguing that the insured had failed to comply with the PSE because it had removed or
capped between 3 and 13 of the 600 sprinklers in the insured’s system. Id. After the trial court
initially granted summary judgment, the court in Burmac held, under the specific facts at issue,
that the question of whether the insured had substantially complied with the PSE was an issue of
fact that barred a finding of summary judgment. Id. On remand, the jury found that the insured
had failed to substantially comply with the PSE, and the appellate court upheld that verdict. Id.
at 1253, 1255.
Defendant’s reliance on Burmac is unavailing due to the factual differences present in
this case. First, in Burmac, the insured party maintained the required sprinkler system itself, as
the PSE in its policy required. Here, the PSE’s plain language also required that Defendant itself
maintain a burglary alarm system. (Am. Compl. ¶ 27; R. 8, Def.’s Ans. ¶¶ 27, 51-53.)
Specifically, the policy provides that “As a condition of this insurance, you are required to
maintain the protective devices,” which included the burglar alarm system. (Am. Compl., Ex. D,
Policy National 69-70.) The policy also clearly states that “the words ‘you’ and ‘your’ refer to

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the Named Insured shown in the Declarations,” and the Named Insured shown in the
Declarations is Defendant. (Id. at National 21, 31.) Despite the explicit language in the policy,
here, in contrast to Burmac, it is undisputed that although Z-Mattress installed an alarm system
in parts of the Building, Defendant itself did not maintain any burglary alarm system, and
accordingly, Defendant failed to substantially comply with the PSE. (Def.’s Ans. ¶ 54; Ex. J,
Dep. of Mohammed Abdeljaber 162-63.)
Second, in Burmac, the record indicated that the insured had removed or capped between
3 and 13 of the 600 total sprinklers in its system, meaning that at least 587 or 98% of the
sprinklers were operational. 825 N.E.2d at 1251. In contrast, here, the Building had four floors
with a total square footage of 217,000 feet. (Ex. J, Dep. of Mohammed Abdeljaber 146, 166-67.)
Z-Mattress leased only 95,000 square feet and Z-Mattress only placed alarm sensors in its first
floor space and in portions of its second floor and basement spaces. Thus, even drawing all
reasonable inferences in Defendant’s favor, Z-Mattress’s system covered at best less than 50% of
the total square footage of the Building and failed entirely to cover two floors of the Building,
which falls well short of substantially complying with the PSE’s requirement that Defendant’s
maintain a system that protected the entire Building. Indian Harbor, WL 3155974, at *5
(rejecting insured’s substantial compliance argument where tenant had an alarm on the first floor
but entire building was not secured by the alarm); United Capitol Ins. Co. v. Kapiloff, 155 F.3d
488, 495–96 (4th Cir. 1998) (finding no coverage where insured had some protective safeguards
but failed to install protective safeguards on its entire property as required).
Accordingly, even drawing all reasonable inferences in Defendant’s favor, Defendant did
not substantially comply with the PSE’s requirement that it maintain an automatic burglary alarm
system.

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II.

Materiality
Defendant next argues that an issue of fact exists as to whether Defendant’s failure to

comply with the PSE was material to the fire loss at issue. Specifically, Defendant argues that its
breach of the PSE was not material because even if there had been a burglar alarm system
covering the entire Building, it would have detected only entry or movement in the building and
not the fire, and thus it would not have prevented the fire loss.
Defendant’s materiality argument fails as a matter of law. Under Illinois law, an insurer
does not need to show a causal connection between the breach of a condition precedent and the
subsequent loss. Wabash Properties, Inc. v. Transp. Indem. Co., No. 84 C 7641, 1985 WL 2452,
at *3–4 (N.D. Ill. Aug. 21, 1985). In Wabash, for example, the insured argued that the insurer
could not avoid coverage unless it proved that the failure of the insured’s sprinkler system, which
the insured was required to maintain as a condition of the insurance policy, caused the
destruction of the building. Id. at *3. The court explained that an insurer “need not show a
causal connection between the breach of the condition and the loss.” Id. (citing Mack v.
Liverpool and London and Globe Insurance Co., 329 Ill. 158 (1928)). Put differently, “[i]f an
insured breaches a condition of the policy, ‘it is immaterial that the breach was in no manner
whatsoever connected with, or that it did not at all occasion, the loss, for the warranty is a
condition on which the validity of the contract rests, which failing, the contract fails.’” Id. at *4.
(citation omitted). Accordingly, the court found that since the insured had breached the sprinkler
requirement in its policy, “coverage under the policy was suspended during the breach whether
or not the failure of the sprinkler caused the loss.” Id.; see also Chi. Title & Trust Co. v. Ill. Fair
Plan Ass’n, 414 N.E. 2d 205 (1980) (holding insurer did not have to prove building’s vacancy

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caused fire damage to enforce provision voiding coverage during periods when building was
vacant).
Defendant relies on Landmark Am. Ins. Co. v. Green Lantern Roadhouse LLC, No. 07CV-0535-MJR, 2009 WL 413086, at *5 (S.D. Ill. Feb. 18, 2009), for the proposition that under
the Illinois Insurance Code a breach of an insurance policy must materially affect the loss or
hazard insured. In Landmark, the insured certified in its insurance application that it had
installed burglar and fire alarm systems despite the fact that the insured property never contained
such alarms. Id. at *7. The insurer refused coverage and sought to have the policy declared void
and rescinded due to the insured’s misrepresentations. Id. at *1. The court referred to § 154 of
the Illinois Insurance Code, which provides in part that “[n]o misrepresentation or false warranty
made by the insured or in his behalf in the negotiation for a policy of insurance . . . shall defeat
or avoid the policy unless it shall have been made with actual intent to deceive or materially
affects either the acceptance of the risk or the hazard assumed by the [insurer].” Id. at *3.
Relying on that statute, the court found that the insured’s misrepresentation did not void the
insurance policy from the outset. Id. at *4. Instead, the court found that the parties’ policy itself
provided a remedy for the insured’s breach of the alarm requirement, regardless of § 154, and
explained that the policy dictated that because the insured did not have a burglar alarm system it
was automatically not liable for claims resulting from theft but did not impact damages due to
fire. Id.
Defendant’s reliance on Landmark is futile for several reasons. First, Landmark is not
binding on this Court, no other court has cited Landmark approvingly, and importantly, as one
other court has noted, the Illinois Supreme Court’s decision to deny coverage due to an exclusion
that had no material connection to the at-issue loss in Mack is still good law and is applicable

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here. Clarendon Am. Ins. Co. v. Miami River Club, Inc., 417 F. Supp. 2d 1309, 1322 (S.D. Fla.
2006) (applying Illinois law to insurance coverage dispute and finding no coverage because “the
Illinois Supreme Court in Mack . . . enforced an exclusion which had no relation to the at-issue
loss, and that decision has not been overturned.”) (citing Mack, 160 N.E. at 225); see also
Warczak v. Attorneys’ Title Guar. Fund, Inc., 2015 IL App (2d) 140677-U, ¶ 36, appeal
denied, 42 N.E.3d 376 (Ill. 2015) (citing Mack with approval). Second, here, like in Landmark,
the policy itself provides for a remedy if Defendant failed to maintain a burglar alarm system,
but unlike in Landmark, the policy’s bar on coverage was not limited to claims for theft loss.
Here, the parties’ policy provides that Plaintiff “will not pay for loss or damage caused by or
resulting from fire, water, or theft if, prior to the loss, [Defendant] failed to maintain any
protective safeguard listed in the Schedule.” (Am. Compl., Ex. D, Policy National 70.) As
discussed above, an automatic burglary alarm system protecting the entire building was one of
the protective safeguards listed. (Id. at 69.) Thus, here, unlike in Landmark, the parties’ policy
explicitly provided for no coverage for fire loss if Defendant failed to maintain a burglary alarm
system, which Defendant admits it failed to do.
Accordingly, given the clear language in the parties’ policy and the Illinois precedent, the
Court finds the exclusion in the PSE applies to the fire damage here regardless of whether
Defendant’s breach of the PSE was material to that damage. Wabash, WL 2452, at *4
(“coverage under the policy was suspended during the breach whether or not the failure of the
[protective safeguard] caused the loss.”).
III.

Waiver
Defendant next argues that Plaintiff waived its right to assert a breach of the PSE as a

basis for not offering Defendant coverage. Under Illinois law, “[w]aiver arises from an

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affirmative act, is consensual, and consists of an intentional relinquishment of a known
right.” Home Ins. Co. v. Cincinnati Ins. Co., 821 N.E.2d 269, 282 (Ill. 2004) (citations omitted);
see also PPM Finance, Inc. v. Norandal USA, Inc., 392 F.3d 889, 895 (7th Cir. 2004). “A
waiver may be either expressed or implied, arising from acts, words, conduct, or knowledge of
the insurer.” Home Ins., 821 N.E.2d 269, 282 (citations omitted). “Implied waiver of a legal
right must be proved by a clear, unequivocal, and decisive act of the party who is alleged to have
committed waiver.” Ryder v. Bank of Hickory Hills, 585 N.E.2d 46, 49 (1991). Put differently,
a party relying on implied waiver must point to an “act [that is] clear, unequivocal and decisive.”
Delta Consulting Grp., Inc. v. R. Randle Const., Inc., 554 F.3d 1133, 1140 (7th Cir. 2009).
However, “[a]n implied waiver arises when conduct of the person against whom waiver is
asserted is inconsistent with any intention other than to waive it.” Home Insurance, 821 N.E.2d
269, 282 (citation omitted); see also PPM Finance, 392 F.3d at 895. “Where there is no dispute
as to the material facts and only one reasonable inference can be drawn therefrom, it is a question
of law whether the facts proved constitute waiver. Delta Consulting, 554 F.3d at 1140 (citation
omitted). If the facts necessary to constitute waiver are in dispute or if reasonable minds might
differ as to the inferences to be drawn from the undisputed evidence, however, then the issue
becomes a question of fact. Id. The burden of proof to show waiver is on the party asserting it
as a defense. Sphere Drake Ins. Ltd. v. All Am. Life Ins. Co., 300 F. Supp. 2d 606, 628 (N.D. Ill.
2003), aff’d sub nom., 376 F.3d 664 (7th Cir. 2004).
Here, Defendant argues that Plaintiff waived its right to assert a breach of the PSE as a
basis for no coverage because (1) it had constructive knowledge that the entire Building was not
secured by a burglar alarm system yet took no action to cancel the policy or correct this

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deficiency, and (2) it failed to return the entire premium to Defendant despite the alleged lack of
coverage. The Court addresses each waiver argument in turn.
A. Constructive Knowledge Waiver
As noted above, Defendant first argues that Plaintiff waived its right to assert a breach of
the PSE as a basis for no coverage because David Moller, as an underwriter and agent of
Plaintiff, was responsible for inspecting the building and through Moller, Plaintiff had
constructive knowledge that the entirety of the Building was not secured by a burglar alarm
system yet Plaintiff did not cancel the policy despite this knowledge. Plaintiff argues that it did
not waive the exclusion because it did not have actual knowledge that the Building did not have
a burglar alarm system covering the entire premises since Defendant’s application and Plaintiff’s
inspector’s report both indicated that there was an ADT system covering the Building.
Despite Plaintiff’s arguments, in Illinois, “[a]n insurer may waive a policy defense by
continuing under a policy when it knows, or in the exercise of ordinary diligence, could have
known the facts in question giving rise to the defense.” Lumbermen’s Mut. Cas. Co. v. Sykes,
890 N.E.2d 1086, 1100 (2008) (citing Am. States Ins. Co. v. Nat’l Cycle, Inc., 631 N.E.2d 1292,
1298 (1994) (quoting Kenilworth Ins. Co. v. McDougal, 313 N.E.2d 673, 677 (1974))). If the
insured could have known the facts giving rise to the defense, “it can be said that the insurer has
constructive knowledge of the relevant facts, and that constructive knowledge may be sufficient
to form the basis of waiver even if actual knowledge is absent.” Lumbermen’s, 890 N.E.2d at
1100. Thus, under Illinois law, the correct inquiry is whether, at the time that Plaintiff executed
the insurance policy, “it could have known the facts later leading it to conclude that the [the fire
loss] was not covered, if it had been exercising ordinary diligence.” Id. (citations and quotations
omitted).

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Here, viewing the facts in the light most favorable to Defendant, Defendant has
sufficiently raised an issue of material fact as to whether Plaintiff had constructive knowledge
that the entire Building did not have a central burglar alarm system covering it. In Illinois, as a
matter of agency law, the knowledge of an agent is imputed to the agent’s principal.” Fifth Third
Mortg. Co. v. Kaufman, No. 12 C 4693, 2016 WL 2851554, at *6 (N.D. Ill. May 14, 2016)
(citing McRaith v. BDO Seidman, LLP, 909 N.E.2d 310, 331 (2009)). It is undisputed that David
Moller, the inspector, was an agent of Plaintiff. Plaintiff entered into an agreement with
Gateway, which retained Moller’s company, Overland, to perform loss control underwriting
inspections of properties Plaintiff was considering insuring. (R. 31, Def.’s Am. Affirmative
Defenses ¶¶ 4-8.) During his inspection, Moller had unlimited access to the Building, yet he did
not report that the alarm system in the Building only served the Z-Mattress space and he did not
report that there was no alarm system on the third or fourth floor of the Building. (Id. ¶ 42-43,
53-54.) The parties dispute whether Defendant’s executive provided any information to Moller
about the burglar alarm system in the Building. (Id. ¶ 50; Am. Compl. ¶18-19.) Under these
facts, taking the allegations in Defendant’s pleadings as true and drawing all reasonable
inferences in its favor, there is a genuine dispute of material fact as to whether Moller and
Plaintiff “could have known the facts later leading it to conclude that the [the fire loss] was not
covered, if it had been exercising ordinary diligence.” Lumbermen’s, 890 N.E.2d at 1100.
In addition to its arguments about lacking actual knowledge, Plaintiff also argues that
when it renewed Defendant’s policy, it sent Defendant notices and disclosures that put Defendant
on notice that it had to maintain the required protective safeguards. (R. 37, Pl.’s Reply 8-10.)
Plaintiff has attached the referenced documents to its Reply brief. (Id. Ex. 1-2.) As an initial
matter, Defendant has moved to exclude these arguments because the referenced documents

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were not attached to the pleadings. (R. 38, Def.’s Mot. to Exclude.) As Defendant notes, the
Court may only consider the pleadings, documents attached to the pleadings, and facts of which
it can take judicial notice. N. Ind. Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d
449 (7th Cir. 1998). Plaintiff contends that the Court should consider these arguments and
documents because Plaintiff provided the documents to Defendant in connection with the
insurance policy at issue and thus, the documents are essentially part of the policy, which
Plaintiff did attach to its pleadings.
Despite this argument, the Court grants Defendant’s motion and will not consider the
documents or Plaintiff’s arguments based on these documents because (1) as noted above,
Plaintiff failed to attach the documents to its Amended Complaint despite the fact that
Defendant’s failure to maintain protective safeguards was Plaintiff’s express basis for denying
coverage, and (2) Plaintiff also failed raise the notices and disclosures or any arguments related
to them in its motion for judgment on the pleadings, despite Defendant having already raised its
waiver and estoppel affirmative defenses at that time.2 See Arethas v. S/TEC Grp., Inc., No. 04
C 6743, 2005 WL 991782, at *6 (N.D. Ill. Apr. 14, 2005) (refusing to consider attachments that
were not included in the pleadings in analysis of motion for judgment on pleadings); Luellen v.
City of E. Chicago, 350 F. 3d 604, 612 n. 4 (7th Cir. 2003) (failure to raise argument in opening
brief waives argument).
Additionally, even if the Court admitted the notices and disclosures Plaintiff attached in
considering Plaintiff’s argument that Defendant’s waiver defense fails because Defendant was on
notice of the protective safeguard requirement at the time of the policy renewal, that argument

2
Although the Court allowed Defendant to amend its affirmative defenses after the Plaintiff filed its
motion for judgment on the pleadings, as the Court noted in that Order, “Plaintiff was already on notice of
the primary bases for Defendant’s amended affirmative defense—waiver and estoppel—because these
arguments were included in Defendant’s initial affirmative defense.” (R. 30, July 26, 2017 Order 4.)

17

would still be unpersuasive. In Illinois, “a renewal of a policy is, in effect, a new contract of
assurance, and, unless otherwise expressed, on the same terms and conditions as were contained
in the original policy. Burmac, 825 N.E.2d 1246, 1255 (2005) (citing Dungey v. Haines &
Britton, Ltd., 614 N.E.2d 1205 (1993). “[I]t is the general rule that when a policy renewal is
made, the terms and conditions of the original policy become part of the renewal contract
of insurance. Id. (citation omitted). Here, the parties do not dispute that the terms and
conditions of the original and renewal policy, as well as the notices Plaintiff sent at the time of
renewal, were all the effectively same—they all required Defendant to maintain a central burglar
alarm system. As discussed above, however, under Illinois law, the question is not whether
Defendant was aware of the protective safeguard requirement, but whether Plaintiff “could have
known the facts later leading it to conclude that the [the fire loss] was not covered, if it had been
exercising ordinary diligence” at the time of the inspection. Lumbermen’s, 890 N.E.2d at 1100.
On that issue, as discussed above, there is a genuine dispute of material fact.  
Accordingly, the Court denies Plaintiff’s motion for judgment on the pleadings as to
Defendant’s waiver defense based on constructive knowledge.
B. Waiver Based on Plaintiff’s Failure to Return Premiums
Defendant also argues that Plaintiff waived its right to deny coverage based on the PSE
because it failed to return the entire premium to Defendant. Specifically, Defendant claims that
if, as Plaintiff argues, the policy was invalid due to the lack of a burglar alarm system, then
Defendant was entitled to a return of the entire premium. Defendant, however, misunderstands
Plaintiff’s argument. Plaintiff has not argued that Defendant’s failure to maintain a burglar
alarm system rendered the entire policy void and it has not attempted to rescind the contract.
(See R. 37, Pl.’s Repl. 11.) Instead, Plaintiff argues that Defendant’s failure to maintain a

18

burglar alarm system bars insurance coverage for several specific losses, including the fire loss at
issue here.3
Importantly, the Seventh Circuit has held, in an old but similar case, that an insurers’
retention of premiums even after the insured has violated a condition did not waive the insurer’s
right to deny the specific coverage to which the breached condition was related. Buehler Corp.
v. Home Ins. Co., 495 F.2d 1211 (7th Cir. 1974). In Buehler, the insurance policy at issue
required that the insured maintain a working sprinkler system, and after the insured failed to
maintain such a system, the insurer denied coverage for a fire loss. Id. at 1211-1212. The
insurer did not return to the insured any of the premium paid for the insurance, and the insured
thus claimed that the insurer had waived the right to avoid coverage. Id. at 1212. The district
court found that the insured was not entitled to coverage because it had violated the policy term
requiring it to maintain a working sprinkler system, and the Seventh Circuit affirmed. Id. The
court explained that if an insured violated a condition of a policy that the policy explicitly
provided would render the entire contract void, such as the premises becoming vacant, then the
insurer would have to rescind the contract promptly and return the premiums to void the
contract—failure to do so would waive the insurer’s right of rescission. Id. at 1214. Where,
however, the insurer, as in Buehler, did not rescind the policy or declare it void upon violation of
the condition, but merely exercised its right to deny coverage for a specific loss related to that
condition, the insurer did not waive the right to deny coverage by failing to return premiums. Id.
The Seventh Circuit has recently endorsed this position, and other courts have similarly
found no waiver where an insurer failed to return the premium after denying coverage for a

3
If Plaintiff, contrary to its statements in its Reply, has implicitly argued that Defendant’s failure to
maintain an alarm system covering the entire Building rendered the policy void and barred coverage for
any loss, the Court does not analyze that argument here. The Court only considers the argument that
Defendant’s failure to maintain an alarm system bars coverage for the fire loss claimed here.

19

specific loss. Estate of Luster v. Allstate Ins. Co., 598 F.3d 903, 912 (7th Cir. 2010) (explaining
that an exclusion from coverage did not require the return of premium, but voiding the policy
altogether would require insurer to return premiums). Stony Brook Marine Transp. Corp. v.
Wilton, No. 94-CV-5880 (JS), 1997 WL 538913, at *13 (E.D.N.Y. Apr. 21, 1997) (“Since
defendant is not seeking an equitable rescission . . . but rather is defending based upon plaintiff’s
failure to comply with the terms and provisions of the insurance contract, the return of the
premium prior to defendant making his summary judgment motion was not necessary.”); Great
Lakes Reinsurance (UK), PLC v. Durham Auctions, Inc., No. 1:07CV460HSO-JMR, 2008 WL
687023, at *3 (S.D. Miss. Mar. 10, 2008) (finding that plaintiff’s “failure to tender premiums . . .
has not amounted to a waiver of its right to pursue this declaratory action.”).
Here, the PSE explicitly provided that Plaintiff would not be liable for coverage in
relation to a fire loss if Defendant failed to maintain a burglar alarm system. Defendant failed to
maintain such a system, and now Plaintiff has denied coverage. As in Buehler and Stony Brook,
Plaintiff has not rescinded or voided its contract with Defendant, it has simply exercised its right
to deny coverage for fire loss based on Defendant’s failure to maintain a burglar alarm system.
As such, as in Buehler and Stoney Brook, Plaintiff has not waived its right to deny coverage by
failing to return the premium because it has not voided or rescinded the entire policy.
IV.

Estoppel
Defendant next argues that by paying the inspection fee,4 Defendant had a reasonable

expectation that Plaintiff would notify it of any issues with the Building, and by failing to notify
it of any issues, Defendant was estopped from invoking the PSE as a basis for no coverage.

4
Plaintiff denies that Defendant paid for Moller’s inspection, however, as discussed below, the Court
finds that Defendant is not estopped from denying coverage regardless of whether Defendant paid for the
inspection.

20

In Illinois, the party asserting an estoppel defense has the burden of proving the elements
of estoppel. Sphere Drake, 300 F. Supp. 2d at 628 (citation omitted). “Under Illinois law,
estoppel is based upon an insurer’s conduct that misleads the insured to his detriment.” Great
Lakes Reinsurance (UK) v. 1600 W. Venture, LLC, No. 16 C 2145, 2017 WL 2559061, at *3
(N.D. Ill. June 13, 2017) (citing Burress–Taylor v. Am. Sec. Ins. Co., 980 N.E.2d 679, 686 (1st
Dist. 2012). “Cases in which an insurer’s conduct is found to amount to estoppel typically
involve a concession of liability by the insurer, advance payments by the insurer to the plaintiff
in contemplation of eventual settlement, and statements by the insurer which encourage the
plaintiff to delay filing his action.” Foamcraft, Inc. v. First State Ins. Co., 606 N.E.2d 537 (1st
Dist. 1992). Put differently, “[a]n insurer will be estopped from raising a limitations defense
where its actions during negotiations are such as to lull the insured into a false sense of security,
thereby causing him to delay the assertion of his rights.” Mitchell v. State Farm Fire & Cas. Co.,
796 N.E.2d 617 (4th Dist. 2003) (citation omitted). In order to succeed on its estoppel defense,
one element that Defendant must show is detrimental reliance. See In re Krueger, 192 F.3d 733,
741 (7th Cir. 1999); Moriarty v. Hills Funeral Home, Ltd., 221 F.Supp.2d 887, 895 (N.D. Ill.
2002).
Courts often reject estoppel defenses where the policy clearly stated that coverage was
excluded if the insured did not maintain protective safeguards and where the insured provided
false information about its protective safeguards to obtain the insurance policy. In Yera, Inc. v.
Travelers Cas. Ins. Co. of Am., No. 1398 EDA 2013, 2014 WL 10936714, at *4 (Pa. Super. Ct.
Apr. 22, 2014), for example, the insurance policy at issue explicitly required that the insured
maintain a sprinkler system covering the entire insured building. In applying for the insurance,
the insured affirmatively stated the building was 100% covered by sprinklers, and the insurer

21

issued a policy based on that information. Id. Given the clear language in the policy and the
lack of any statements by the insurer indicating that a sprinkler system was not required, the
court found that the insurer was not estopped from denying coverage based on the lack of a fully
operative sprinkler system. Id. Similarly, in Goldstein, 86 F.3d at 753–54, the policy excluded
coverage if the sprinkler system was not in working order, and although it was undisputed that
the system was not in working order, the insured claimed that the insurer was estopped from
denying coverage because it charged him a lower rate for his insurance, which he claimed
indicated he did not have to comply with the policy. The court rejected the insured’s argument
finding that he had not shown that he relied on a misrepresentation to his detriment because the
policy expressly stated that “the property would not be covered if it did not comply with
the protective safeguards clause in his insurance contract.” Id. at 754.
Additionally, courts have also found that an insured may not invoke an insurer’s
inspection as an estoppel defense because the inspection is conducted for the benefit of the
insurer not the insured. In Si Meat Vill., Inc. v. Amguard Ins. Co., 208 F. Supp. 3d 490, 494
(E.D.N.Y. 2016), appeal dismissed (May 2, 2017), for example, the insured claimed that the
insurer was estopped from denying coverage because the insurer’s agent inspected the property
and did not verify that there was a fire alarm covering the building as the policy required. The
court explained that the insured “could rely on the inspections to absolve it of its own
responsibility to comply with the protective safeguards endorsement only if the inspections had
been conducted for the benefit of [insured].” Id. The court found, however, that the insurer, as
is generally the case, conducted the inspections for its own benefit and not the insured’s, and
accordingly rejected the insured’s estoppel defense. Id. See also Berenato v. Seneca Speciality
Ins. Co., 240 F. Supp. 3d 351, 360 (E.D. Pa. 2017) (rejecting argument that insurer was estopped

22

from denying coverage due to inspector failing to notify insured of sprinkler requirement
because plain language of policy required sprinkler system).
Here, as in Yera, Goldstein, and Si Meat, Defendant’s estoppel defense fails. Defendant’s
insurance policy explicitly provided that Defendant was required to maintain a burglar alarm
system to receive coverage for a fire loss. Further, it is undisputed that in its application for
insurance, before Moller conducted his inspection, Defendant, through its agent, affirmatively
indicated that ADT installed and serviced a burglar alarm system covering the Building. (Am.
Compl. ¶¶ 16-17, 44.) Regardless of whether Defendant or its agent prepared the application,
Defendant is responsible for the content of the application and the policy expressly stated that
“the property would not be covered if it did not comply with the protective safeguards clause in
his insurance contract.” Goldstein, 86 F.3d at 754. Put simply, given Defendant’s affirmative
statements in its application prior to the inspection that it had an alarm system covering the
Building, Defendant cannot now assert that it relied on Plaintiff’s inspection to its detriment or
that Plaintiff’s inspection was the basis for its belief that there was a burglar alarm system
covering the Building. Additionally, as the court explained in Si Meat, Plaintiff’s agent
conducted the inspection of the Building for its own benefit not for Defendant’s benefit. Based
on the plain language in the policy, Defendant knew it was required to maintain a burglar alarm
system, and Plaintiff’s inspection, conducted for its own benefit, did not alter Defendant’s
understanding of this obligation.
In sum, this is not a case where Plaintiff conceded liability, advanced payments to
Defendant, or “lull[ed] the insured into a false sense of security.” Mitchell, 796 N.E.2d at 621.
Here, Defendant itself asserted that it had a burglar alarm system covering the Building before
Plaintiff’s inspection, and that fact, coupled with the plain language in the policy requiring an

23

alarm system, demonstrates that Defendant did not detrimentally rely on any of Plaintiff’s
purported representations.
Accordingly, the Court finds that Plaintiff is not estopped from denying coverage.
V.

Ambiguity
Lastly, Defendant argues that the PSE is ambiguous and could reasonably be interpreted

to mean that loss or damage caused by fire was excluded from coverage only if Defendant failed
to maintain the applicable fire-related protective safeguard. Put simply, Defendant’s argument
fails because the language in the PSE was not ambiguous. The PSE provided that Plaintiff
would “not pay for loss or damage caused by or resulting from fire, water, or theft if, prior to the
loss, [Defendant] failed to maintain any protective safeguard listed in the Schedule.” (Am.
Compl., Ex. D, Policy National 70) (emphasis added.) As discussed above, an automatic
burglary alarm system protecting the entire building was one of the protective safeguards listed
in the Schedule. (Id. at 69.) The policy thus explicitly provided that fire damage specifically
would be excluded from coverage if Defendant failed to maintain a burglar alarm system, among
other protective safeguards. This language is not in any way ambiguous, and the Court will not
“strain to find ambiguity in an insurance policy where none exists.” McKinney v. Allstate Ins.
Co., 722 N.E.2d 1125, 1127 (1999). Indeed, several courts have found similar PSEs to be
enforceable and unambiguous. See, e.g. Burmac, 825 N.E.2d at 1255 (upholding jury verdict
enforcing similar PSE); Indian Harbor, WL 3155974, at *5 (rejecting ambiguity argument and
finding no coverage where endorsement required insured to “maintain a central station burglar
and fire alarm as a condition of coverage” and it failed to do so); see also Tuscany Bistro, Inc. v.
Sirius Am. Ins. Co., No. A-6293-08T2, 2011 WL 3517000, at *4 (N.J. Super. Ct. App. Div. Aug.
12, 2011) (finding no genuine ambiguity in PSE because it was not so confusing as to make it

24

difficult to determine the boundaries of coverage since it clearly denoted that an alarm system
was a condition of coverage). Here, the plain language of the policy is clear and unambiguous
and the Court need can apply the PSE as written, without considering Defendant’s alternative
interpretation. Pekin Ins. Co. v. Skender Const., 2013 IL App (1st) 123532-U, ¶ 27 (“[W]here
the language of an insurance policy is clear and unambiguous, it will be applied as written.”).
Accordingly, the Court finds that the PSE is not ambiguous.
CONCLUSION
For the foregoing reasons, the Court grants Plaintiff’s motion for judgment on the
pleadings in part and denies it part and finds that there is a genuine issue of material fact as to
whether Plaintiff waived its right to exclude coverage based on Defendant’s failure to maintain a
burglar alarm system covering the entire Building. The Court grants Defendant’s motion to
exclude the documents attached to Plaintiff’s Reply brief and Plaintiff’s arguments related to
those documents.

Dated: November 16, 2017
______________________________
AMY J. ST. EVE
United States District Court Judge

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