## Facts

- Harvey’s Wagon Wheel, Inc. (Harvey’s) operated a casino and restaurant business in a building with automatic sprinkler systems serving both the casino area and the restaurant area.
- Harvey’s began reconstruction work in both areas before the policies were issued and continued that work during the policy period.
- On July 11, 1972, two insurers—American Home Assurance Company and United States Liability Insurance Company—issued business-interruption policies to Harvey’s.
- Harvey’s negotiated premiums that were roughly one-eighth of the rates typically charged for buildings without automatic sprinklers.
- Each policy included an “Automatic Sprinkler Warranty” endorsement stating in capital letters that, because the policy was written at a reduced rate based on sprinkler protection, it was a condition of the policy that:
  - so far as the sprinkler system and its water supply were under the insured’s control, the insured would use due diligence to keep them in complete working order; and
  - no change would be made in the sprinkler system or the water supply without the insurer’s written consent.
- The policies also contained an increased-hazard provision excluding coverage for loss occurring while the hazard was increased by means within the insured’s control or knowledge, and a provision permitting reconstruction or enlargement if the insurer’s written consent was obtained.
- The insurance was placed through brokers; the soliciting broker submitted proposals for the insurers’ acceptance and had no authority to bind the insurers.
- Two broker employees knew about Harvey’s reconstruction project before the policies were issued but did not convey that information to the insurers.
- During the policy period, Harvey’s shut off the water supply servicing the casino-area sprinklers without obtaining the insurers’ written consent, and the casino sprinkler system was not functioning at the time of the fire.
- A fire occurred. The restaurant-area sprinkler system operated and the restaurant area was not damaged, but the casino area suffered fire damage, interrupting the casino business for more than 60 days.
- Harvey’s submitted a claim for business-interruption loss tied to the casino interruption. The insurers filed consolidated actions seeking a declaratory judgment that the loss was not covered.

## Issues

1. Whether the “Automatic Sprinkler Warranty” was a true policy warranty/condition affecting coverage, or merely a premium-rating term that would only justify charging a higher premium after a breach.
2. Whether shutting off the water supply and having an inoperative casino sprinkler system—without the insurers’ written consent—breached the sprinkler warranty (and/or increased the hazard within the insured’s control) so as to bar coverage for the casino business-interruption loss.
3. Whether the insurers were barred by waiver or estoppel from relying on the sprinkler warranty because brokers knew of ongoing reconstruction, or because the policies contemplated reconstruction or enlargement with written consent.

## Decision

- The court entered judgment for the insurers and granted declaratory relief that they were not liable for the claimed business-interruption loss arising from damage to the casino area.
- The court held the automatic sprinkler endorsement was a warranty and an express condition of the policies, not a term dealing only with premium rates.
- The court found Harvey’s breached the sprinkler warranty by allowing the casino sprinkler system to be inoperative and by shutting off the water supply without the insurers’ written consent.
- The court concluded the breach existed at the time of the fire and relieved the insurers of liability for the casino business-interruption loss.
- The court rejected waiver and estoppel arguments based on broker knowledge because the broker lacked authority to bind the insurers, and the policies required written consent for changes to the sprinkler system or water supply.

## Legal Principles

- When a policy states it is written at a reduced rate based on sprinkler protection and provides that “IT IS A CONDITION OF THIS POLICY” that the insured maintain the sprinkler system and water supply in working order (within the insured’s control) and make no changes without the insurer’s written consent, the provision functions as a warranty/condition of coverage.
- A breach of an automatic sprinkler warranty—such as shutting off the water supply or permitting the system to be inoperative—precludes coverage for a loss occurring while the breach exists.
- An increased-hazard clause excluding loss occurring while the hazard is increased by means within the insured’s control or knowledge can independently bar recovery where the insured disables fire-protection measures.
- A broker that solicits insurance and submits proposals for insurer acceptance, without authority to bind the insurer, cannot waive policy conditions or impute knowledge to the insurer so as to create coverage contrary to a written-consent requirement.
- A policy’s permission for reconstruction or enlargement (subject to written consent) does not nullify a separate sprinkler warranty requiring written consent for changes to the sprinkler system or its water supply.

## Conclusion

The court declared that the insurers owed no business-interruption coverage for the casino interruption because Harvey’s received reduced premiums tied to sprinkler protection but shut off the casino sprinkler water supply without written consent, leaving the casino sprinklers inoperative at the time of the fire; broker knowledge of reconstruction did not bind the insurers or waive the written-consent condition.


American Home Assurance Co. v. Harvey's Wagon Wheel, Inc., 398 F. Supp. 379 (1975)