After investigating the claim, Scottsdale brought suit in district court seeking a declaratory judgment that the policy did not cover the damage because the fire system did not activate on the day of the fire and that, even if it had, missing parts would have prevented the system from effectively suppressing a fire.

In district court Logansport argued for coverage, stating that it maintained the fire suppression system in a diligent and reasonable manner, as required by the policy. Scottsdale, on the other hand, contended that the policy's terms required Logansport to not only maintain the system, but more importantly, to maintain it in complete working order. The district court agreed with Scottsdale's interpretation and granted it summary judgment.

On appeal Logansport argued that the policy's language to "maintain in complete working order" was ambiguous, that the interpretation of the policy by the district court led to absurd results, and that the proper standard for determining compliance with the policy was that of due diligence.

The court of appeals found that Logansport waived the ambiguity and absurdity arguments on appeal by not raising them before the district court. Thus, it considered only whether it should accept evidence of Logansport's due diligence in determining the application of the policy's exclusion for failure to maintain any protective safeguard in complete working order.

It found the plain language of the policy never suggested that maintaining the system in complete working order meant maintaining the system with due diligence only. To the contrary, the court read "complete working order" to mean that the fire system must work on the day of the fire in order to receive coverage under Logansport's CGL and the property policy's protective safeguard endorsement. Because insured had already conceded that the fire system in fact did not work on the day in question, the court of appeals affirmed the ruling of the district court in favor of Scottsdale.

Editor's Note: This case reminds us of the importance of preserving issues for appeal. Had the court reached the ambiguousness of "complete working order," the ruling here may have been different. Moreover, this case highlights how critical it is for insureds to understand exactly what it is required of them under the CGL for coverage to apply. 

Originally published March 10, 2014