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Court of Appeal, Third District, California.

HOLZ RUBBER COMPANY, INC., a California corporation, et al., Plaintiffs and Respondents, v. GENERAL ACCIDENT AND LIFE ASSURANCE CORPORATION, LTD., et al., Defendants,

U. S. Fidelity and Guaranty Company and American Star Insurance Company, Defendants and Appellants. AMERICAN STAR INSURANCE COMPANY, Cross-Complainant and Respondent, v. Max ELSON, dba Max Elson Insurance Company, and Bill Joseph, Cross-Defendants and Appellants.

U. S. FIDELITY AND GUARANTY COMPANY, Cross-Complainant and Appellant, v. Max ELSON, dba Max Elson Insurance Company, and Bill Joseph, Cross-Defendants and Respondents.

Civ. 13465.

Decided: January 07, 1974

William Frank Roberts, Stockton, for plaintiffs and respondents Holz. Long & Levit by John S. Hook, San Francisco, for American Star Ins. Co. Albert E. Cronin, Jr., Stockton, for U. S. Fidelity. Mayall, Hurley, Knutsen, Smith & Green by Edwin Mayall, Stockton, for Elson & Hurley.

Defendants, U. S. Fidelity and Guaranty Company, hereinafter ‘U.S.F.&G.,’ and American Star Insurance Company, hereinafter ‘Star,’ appeal from a judgment following jury verdict in favor of plaintiffs. The complaint sought declaratory relief and damages founded upon the denial by U.S.F.&G. and Star of coverage under insurance policies for a fire-induced stock loss. During trial and at the conclusion of plaintiffs' case, the trial court granted motions for non-suit in favor of other insurance companies holding equipment coverage. Defendant Max Elson, doing business as Max Elson Insurance Company, hereinafter ‘Elson,’ prevailed in the action brought against him by plaintiffs, but in turn appeals from the jury verdict against him and in favor of Star on its indemnity cross-complaint. A similar cross-complaint for indemnity filed by defendant U.S.F.&G. against Elson and Bill Joseph, employee of Elson, was unsuccessful, the jury finding in favor of both cross-defendants. Plaintiffs' motion for a directed verdict against Elson for the amount of the equipment loss was granted. No appeal was taken from this latter action.

The litigation arises from the refusal by U.S.F.&G. and American Star to pay claims submitted by plaintiffs for losses incurred in a fire which destroyed plaintiffs' warehouse in Lodi, California together with fixtures, equipment, and stocks of rubber inventory situate therein.

The initial complaint sought a ‘declaratory judgment determining the amount of damages due plaintiff,’ and also sought $200,000 damages. A first amended complaint in 2 causes of action sought substantially the same relief but alleged representations to plaintiffs by Elson that coverage for the losses incurred was extended whether or not the insured premises were sprinklered.

The principal issue presented involves the interpretation and application of a so-called ‘Automatic Sprinkler Warranty’ contained in the applicable policies.


Commencing in 1936, William G. Holz, one of the plaintiffs and the president of the various corporate plaintiffs, commenced the operation of a rubber specialty manufacturing business on South Sacramento Street in Lodi, California. The business flourished. Holz expanded and continued his operations in new buildings and warehouses, eventually totalling 15 in number, which were constructed on both sides of South Sacramento Street.

Over the years, Holtz' insurance needs had been handled by defendant Max Elson, an insurance agent and broker in Lodi. Elson had placed fire coverage on buildings, equipment ansd stock in companies of Elson's selection. Elson employed defendant Joseph, among whose specific responsibilities were the handling of the Holz Rubber Company accounts and the placing and servicing of the policies in question.

Commencing in January of 1966, Elson Agency caused the issuance of two types of coverage on the fire exposure of Holz' operations: specific coverage on the buildings and equipment, designating the particular location; and blanket coverage on the stock inventory, covering that personalty wherever located on the insured's premises. We are concerned with the latter coverage only. Elson placed one-half of the insurance on the stock inventory with defendant U.S.F.& G. and one-half with defendant Star. Each of the policies was a California Standard Form Fire Insurance Policy insuring plaintiffs Holz Rubber Manufacturing Co., Inc., William G. Holz Company and Holz Plastics Inc., at 1129–1201 Sacramento Street, Lodi, California.

Both the U.S.F.&G. and Star policies by appropriate attachment and reference incorporated as an integral part of the policies an identical ‘Automatic Sprinkler Warranty’ which warranty reads (as to American Star):

‘STANDARD FORMS BUREAU FORM 20 (July 1933) AUTOMATIC SPRINKLER WARRANTY. Attached to and forming part of Policy No. 715471 of the AMERICAN STAR INSURANCE COMPANY Issued to HOLZ RUBBER MANUFACTURING CO., INC., ET AL. Dated 2/9/66. Agency at LODI, CALIFORNIA, Agent MAX ELSON. Commencement of Policy 1/1/66 Expiration of Policy 1/1/69; Effective Date of this Endorsement 1/1/66; Amount Insured $35,000.


More than one year after the issuance of the policies in question, construction commenced on plaintiffs' warehouse structure described at trial as Building No. 5. At the time of construction, Holz proposed to have the building sprinklered. Indeed the plans filed with the City of Lodi, on the basis of which he received his building permit, indicated that the building was to be sprinklered. Nonetheless, as constructed, the building was not sprinklered. When the building was essentially completed in March of 1967, Holz' office manager Folsom commenced to negotiate a contract for the installation of sprinklers from two different companies, Alves and Associates of Redlands, California and California Automatic Water Sprinkler Company of Menlo Park, California. Alves and California both submitted bids but Alves' bid was for an ‘extraordinary’ hazard system. At Holz' request, Alves submitted a second bid for an ‘ordinary’ hazard on the basis of which in July of 1967, Holz signed a purchase order for installation of the system. In October 1967, the Pacific Fire Rating Bureau recommended installation of a ‘calculated system’ of sprinklers (as contrasted with an ordinary or extraordinary hazard system), and the Bureau returned the plans to Alves without approval. Negotiations thereafter continued among Holz, Alves and the Bureau regarding installation costs of the calculated system, which negotiations were unfruitful. Holz again called upon California to submit a bid on a calculated system and on January 2, 1968, California received a verbal order from Holz purchasing the system. Appropriate plans were submitted to and approved by the Bureau on January 31, 1968. On February 10, 1968 necessary papers and equipment for the installation of the system were shipped to Lodi and placed at the building site.

During the early morning hours of February 13, 1968, Building No. 5 was totally destroyed by a fire apparently of incendiary origin. Equipment and stock in the building were totally destroyed. At trial, it was stipulated that the stock loss was in the sum of $122,398.44. This figure constituted the basis upon which the jury assessed the damages to U.S.F.&G. and American Star each in the sum of $61,189.22.

The trial court viewed the automatic sprinkler warranty as requiring the insured plaintiff to use due diligence to procure the installation of sprinklers in Building No. 5. It rejected the contention that plaintiffs' installation of a sprinkler system constituted a condition precedent to coverage. Its interpretation of the warranty can most accurately be summarized in the following instruction which it gave to the jury:

‘The sprinkler warranty which is contained in the two insurance policies on stock which are in evidence in this case have been interpreted as a matter of law by the court to require that under the facts of this case the plaintiffs were required to use due diligence in bringing about the installation of a sprinkler system in the new building referred to as Building No. 5. This is the court's interpretation of the policy provision despite the fact that the warranty provision uses the word maintain. Plaintiffs have the burden of proving by a preponderance of evidence that they complied with the provisions of the sprinkler warranty as interpreted by the court.’

Provisions in insurance policies are reviewed in the light of well accepted principles. The construction of the contract presents a question of law for determination by the court, rendering inapplicable the rule precluding an appellate court from disturbing the determination of the trial court when there is substantial evidence to support the trial court's conclusion. (Wall v. Equitable Life Assurance Society (1939), 33 Cal.App.2d 112, 117–118, 91 P.2d 145; Texas Co. v. Todd (1937), 19 Cal.App.2d 174, 185, 64 P.2d 1180; 1 Couch on Insurance (Anderson 2d) § 15:4, 639) The purpose of such construction is to ascertain the intent, understanding and reasonable expectations of the parties in entering into the agreement. (Atlantic Nat. Insur. Co. v. Armstrong (1966), 65 Cal.2d 100, 112, 52 Cal.Rptr. 569, 416 P.2d 801; 1 Couch on Insurance (Anderson 2d) § 15:9, 649)

Although ambiguities in contracts of insurance are to be construed strictly in favor of the insured, since the carrier, as the author, created the ambiguity, ‘Construction is not to be employed for the purpose of refining to the point of abolition the terms of a contract which are expressed with sufficient clearness to impart the plain meaning of the parties and which embody requirements, or conditions, compliance with which is made the condition to liability on the contract. Where the language evidences the insured's intention to do, or omit to do, an act material to the risk, it must be so construed, unless he has reserved the right to change his intention by explicit language.’ (1 Couch on Insurance (Anderson 2d) § 15:10, 658; Fiske v. Niagara Fire Ins. Co. (1929), 207 Cal. 355, 359, 278 P. 861) Further, ‘An insurance policy must be interpreted in the light of the reasonable and normal expectations of the parties as to the extent of coverage. [Citations] The understanding of the ordinary person is the standard to be used in construing an insurance contract [Citations], and a policy should not be interpreted in such a manner as to withhold coverage that a layman would normally expect from it.’ (Migliore v. Sheet Metal Workers' Welfare Plan (1971), 18 Cal.App.3d 201, 204, 95 Cal.Rptr. 669, 671.) We ourselves have recently had occasion to discuss at some length the nature and implications of the rule of reasonable expectancy as applied to a public liability policy. (Otter v. General Insurance Co. et al. (1973), 34 Cal.App.3d 940, 949–951, 109 Cal.Rptr. 831)

Another rule of construction of more specific application is that ‘A fire policy must be construed with business sense. An insurer's obligation thereunder cannot be enlarged or varied by judicial construction, and the court cannot construe the terms thereof where clear and unambiguous, and where reasonable men would not place more that one interpretation upon the meaning. The court, in construing a fire policy, may not modify the contract by adding to or striking conditions from the policy.’ (13 Appleman, Ins. Law & Practice, § 7461, Construction of Insurance Policies, p. 176, fns. omitted)

Bearing in mind the foregoing rules of interpretation we address to the facts before us three relevant inquiries: (1) was the ‘Automatic Sprinkler Warranty’ truly a warranty; (2) if a warranty, what was its scope and was it material; and (3) if a material warranty, was it breached?


As we have noted, the endorsement in question is denominated ‘Automatic Sprinkler Warranty.’ A series of provisions of the California Insurance Code, sections 441, 442, 444, 445, 447, 448 and 449 dealing with the nature and effect of warranties and insurance contracts is germane to our consideration at this point. Section 441 provides: ‘A statement in a policy of a matter relating to the person or thing insured, or to the risk, as a fact, is an express warranty thereof.’

Section 442 states: ‘A particular form of words is not necessary to create a warranty.’

Section 445 reads: ‘A statement in a policy, which imports that there is an intention to do not to do a thing which materially affects the risk, is a warranty that such act or omission will take place.’ Section 448 indicates: ‘Unless the policy declares that a violation of specified provisions thereof shall avoid it, the breach of an immaterial provision does not avoid the policy.’

Section 449 provides: ‘A breach of warranty without fraud merely exonerates an insurer from the time that it occurs, or where the warranty is broken in its inception, prevents the policy from attaching to the risk.’

The language of the endorsement in question contemplates that since a reduced rate is afforded, it is a condition of the policy that due diligence shall be used to maintain the sprinkler system and that it will not be changed without the consent of the carrier or the rating bureau. While we are in no sense controlled by the denomination of the endorsement as a ‘warranty,’ nonetheless, bearing in mind the Insurance Code provisions and particularly those of section 441, defining express warranty, we apprehend that the endorsement in question is what its title suggests—an express warranty. Considering the reasonable and normal expectation of the insured under the circumstances here present, we have no difficulty in concluding that an obligation to ‘maintain’ presupposes an obligation to ‘install.’ To require the insured to maintain in working order a non-existent sprinkler system and its supporting water supply would make no sense and would not constitute the reasonable or normal expectation of anyone.


We apply the interpretive standard that the language of the warranty is to be construed in a reasonable business sense to the second area of inquiry, namely the materiality of the warranty, and conclude that the warranty affected more than premium rate but concerned the insurance exposure or risk as well. In considering the materiality of the warranty, a fair reading of the language in the endorsement leads us to the conclusion that the obligation of the insured under the language was neither to use ‘due diligence’ in the maintenance of a non-existent sprinkler system nor alternatively to use due diligence to install such a system (as the jury was instructed) but rather to install and to use due diligence to maintain the sprinkler system in operable condition without change except with the consent of the insurance company. Such a construction neither tortures nor strains the language of the warranty. The policy before us contemplated coverage of a large stock inventory of rubber products. It is common knowledge that rubber is highly combustible; it is subject to fire and, depending upon conditions, may burn fiercely and spread. Plaintiffs had been in the rubber business for many years and must be presumed to know these propensities of its inventory. The obvious purpose of a water sprinkler system is to prevent fires from starting and to damp down and control those fires which do start and which, if uncontrolled, would spread, increasing destruction and loss. The policy, itself, protects against such loss from fire. We conclude, accordingly, that the warranty reasonably interpreted in a business sense, was a material warranty since it affected directly and intimately the hazard or risk involved.


Finally, we conclude that the warranty was breached. As we have noted, negotiations had been conducted and did solicitations effected over many months for the purposes of installation of the sprinkler system. Meanwhile the stock inventory had been placed in Building No. 5. These facts, of course, were known to plaintiffs. The insurance considerations attendant upon the deposit of the inventory in the unsprinklered Building No. 5 were brought to the attention of plaintiffs no less often than once a month, since the coverage of inventory, being of the ‘blanket’ type, required plaintiffs to, and they did, submit monthly inventories to the carrier on the changing amounts of the rubber stocks stored in the building. The record before us discloses that plaintiffs knew of the substantial difference in premiums between the sprinkler and the unsprinklered rate. The record also shows that plaintiff Holz knew the policies in question required sprinklers and he also knew of the hazard involved in non-sprinklered Building No. 5, which building was not in existence at the time of the original issuance of the policy. No justifiable reason was given why Building No. 5 was not sprinklered as required by the approved plans and upon which plans the building permit was issued. Nonetheless, although required to install a sprinkler system, plaintiffs thereafter, for ten months, stored flammable stock in very substantial quantities in a new and unsprinklered building. This did not constitute compliance with the provisions of the warranty viewed in a reasonable business sense.

The trial court relied on Sandberg v. Dubuque F. & M. Ins. Co. (1939), 32 Cal.App.2d 673, 90 P.2d 586 for its interpretation of the warranty expressed in the hereinabove quoted instruction. Our research does not disclose that Sandberg has ever been cited by a subsequent California appellate opinion. The Sandberg policy extended coverage against fire loss in a building at a specific address in Los Angeles. Two buildings at the address were sprinklered and the one in which the loss occurred was not. The Sandberg warranty was substantially similar to the warranty presented to us. Sandberg involved loss of stock in an unsprinklered building and the appellate court held that the policy extended coverage to the contents of the non-sprinklered building. In so holding, it stressed two well established principles of construction that ‘If the language in a policy of insurance may be understood in more senses than one, it is to be construed liberally in favor of the insured, and any uncertainty or ambiguity in the contract is to be interpreted most strongly against the insurer.’ The Sandberg holding in turn relied on Studley Box & Lumber Co. v. National Fire Ins. Co., 85 N.H. 96, 100, 154 A. 337, 339, 75 A.L.R. 248, for the proposition that a clause in an insurance policy reciting a special premium rate because of the installation of a sprinkler system and which requires it to be maintained but does not express a limitation of coverage ‘. . . is not determinative of the extent of coverage . . .’. The Sandberg court, after quoting Studley, noted ‘It is immaterial whether the building in which the property was located was equipped with an automatic sprinkler system or not, in view of the fact that two buildings located on said property were so equipped at the time the insurance was issued and the sprinkler systems had been maintained in the same condition from the time of the issuance of the policy to the date of the fire.’ (p. 677, 90 P.2d 587)

We think both Sandberg and Studley are distinguishable. The foregoing quoted Sandberg language would not be applicable to the facts before us, for, as we have noted, Building No. 5 in which the fire loss occurred, was not it existence when the policies were issued.

Studley, a 1931 case involving a business interruption policy, concerned a clause reciting a special premium rate because of the installation of a sprinkler system and requiring its maintenance. The Studley court found that such a clause was ‘inconclusive in showing the coverage.’ (1542 A. p. 337, 75 A.L.R. p. 251) In further clarification, the court said: ‘It may be assumed that the buildings mentioned in the policies contained such installation while the barn did not. But, so far as appears, the rate was not apportioned, and it depended upon the absence of the system in the barn as a factor in its computation as well as on the supply of the system in the buildings where it was installed. All that can be said is that the equipment in some of the buildings gave a lower rate for the entire insurance than would have been the case without it.’ (154 A. p. 339, 75 A.L.R. pp. 251–252)

We find no basis in the matter before us on which to support a conclusion that the carrier might have charged a premium at policy issuance based upon some ‘apportionment’ of the sprinklered buildings with a non-existent building.

Accordingly, the reasoning of neither Sandberg nor Studley is controlling. We think a closer analogy appears in an older California case, McKenzie v. Scottish U. & N. Ins. Co. (1896), 112 Cal. 548, 44 P. 922, wherein the insured warranted to keep watchmen on duty on the insured premises and to obtain permission of the insurer before shutting it down for more than 30 days. The Supreme Court reversed a jury verdict for the insured on the ground that the warranty was violated when a fire occurred after the mill had been shut down and while no watchman was on duty. Although McKenzie is of early vintage, it was recently cited in Los Angeles Mutual Ins. Co. v. Cawog (1973), 30 Cal.App.3d 378, 384, 106 Cal.Rptr. 307, 309, wherein the appellate court in referring to the presence of the watchman noted ‘This was a warranty directly affecting the risk.’

As to the defendant U.S.F.&G., there exists in the record some evidence of waiver of the sprinkler warranty. In March of 1967, Joseph applied to U.S.F.&G. for $20,000 insurance coverage on Building No. 5 which was added by endorsement to the existing policy. In connection with the issuance of the endorsement, a series of memos was exchanged between an employee of U.S.F.&G. and Joseph. In response to the U.S.F.&G. memo asking what coverage was desired, Joseph sent to U.S.F.&G. a memo containing the language: ‘Carol, sorry I confused you, the $20,000 should be on a new building only, so no sprinkler leakage required.’ A subsequent memo between the same parties contains Joseph's language: ‘Carol, this building is simply an addition to the existing structure which you insure and construction and occupancy are the same.’ The jury was instructed that the existence of a waiver of the sprinkler warranty was a question of fact to be resolved by it and that in any event there was no evidence of waiver on the part of defendant American Star. No special findings on waiver were either made or requested and general verdicts were rendered against both defendants.

On the basis of the general verdict against both defendants, we conclude that the jury under the trial court's instruction previously described, concluded that no issue of breach of material warranty existed. Accordingly, it did not reach the issue of whether any waiver of such a breach occurred. As to U.S.F.& G., the judgment accordingly must be reversed.

The judgment in favor of plaintiffs and against defendant American Star Insurance Co. must be and it is reversed with directions to enter judgment in favor of American Star Insurance Co. The judgment in favor of American Star Insurance Co. on its cross complaint for indemnity against defendants Elson Insurance Company and Joseph is reversed with directions to enter judgment in favor of defendants Elson Insurance Company and Joseph. The judgment in favor of plaintiffs against U.S.F&G., defendant, is reversed.

The judgment in favor of Max Elson, doing business as Max Elson Insurance Company, and Bill Joseph, on the cross-complaint of U.S.F.&G. for indemnity is affirmed.

Good cause appearing, the opinion is hereby certified for publication.

I dissent. Construction of ambiguous insurance clauses against the carrier is a fixed principle of California law. The ‘automatic sprinkler warranty’ in the policies sold to Holz Rubber Company is irrefragably ambiguous. I respectfully submit that the majority of the court indulge in an independent interpretation of this policy provision, ignoring equally plausible interpretations favoring the policyholder. The net effect is a violation of the principle of interpretation against the insurer. The majority opinion views the automatic sprinkler clause as a condition precedent, nonfulfillment of which defeats coverage. Had the carrier been alert to clear meaning, the clause might have looked like this: ‘The insured warrants that no property will be stored in any building or structure not equipped with a sprinkler system approved by . . .. Compliance with this warranty is a condition of coverage.’

Instead, the policy recited: ‘THIS POLICY BEING WRITTEN AT A REDUCED RATE BASED ON THE PROTECTION OF THE PREMISES BY AN AUTOMATIC SPRINKLER SYSTEM, IT IS A CONDITION OF THIS POLICY THAT . . . DUE DILIGENCE SHALL BE USED BY THE INSURED TO MAINTAIN THEM IN COMPLETE WORKING ORDER. . . .’ Construed favorably to the policyholder, this clause imports no more than ‘due diligence’ as a condition of coverage at the reduced premium rate. Such a construction is not forced; it is just as reasonable as that adopted by the majority opinion. The trial judge's jury instruction to that effect was entirely proper.

Ever since 1939, when Sandberg v. Dubuque F. & M. Ins. Co., 32 Cal.App.2d 673, 90 P.2d 586, was decided, California fire underwriters should have known that California decisional law viewed their standard automatic sprinkler clause as ambiguous; that it was susceptible to interpretation as something less than a condition precedent to coverage. Yet, as demonstrated by the two policies in suit, California fire insurance carriers have continued in the use of a ‘standard form’ first disseminated and used in 1933. The clause was ambiguous in Sandberg and it is just as ambiguous here. The factual distinction between this case and Sandberg does not rescue the clause from ambiguity.

Some of the griefs fail to comply with Rule 15, California Rules of Court, requiring statutory citations in the table of authorities. Apparently none of the briefs cites Insurance Code section 2032, which seems quite pertinent here. That section provides: ‘After the execution of a contract of fire insurance, an act of the insured does not affect the contract unless the act violates policy provisions, even though such act increases the risk and causes a loss.’

The damage award against Elson and Joseph should be reversed, but for a reason other than that given by the majority. Existence of a duty of care is a question of law for the court. (Richards v. Stanley, 43 Cal.2d 60, 66–67, 271 P.2d 23.) As a source of the broker's duty of care, the carriers rely solely on the ambiguous automatic sprinkler clause of the policies. The carriers do not refer to any other direction to the broker, no duty of inspection, notification or cancellation. The ambiguous sprinkler clause is too nebulous to supply the foundation for a duty of care on the broker's part. When the policies are properly construed, the only condition of a reduced premium rate was the policyholder's exercise of due diligence to maintain an approved sprinkler system in its storage building. If (as the jury ultimately found) the policyholder was exercising sue diligence, the broker had no duty to warn the company of a breach of policy conditions.

I would affirm the judgment in favor of Holz Rubber Company and reverse the judgment against cross-defendants Elson and Joseph.

RICHARDSON, Presiding Justice.

JANES, J., concurs.

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Docket No: Civ. 13465.

Decided: January 07, 1974

Court: Court of Appeal, Third District, California.

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