This article appeared in the Sept. 2013 issue of SD&I.
There aren’t many absolutes in life, and there are even fewer absolutes in the law. One maxim I can assure you is the absolute best way to defend an alarm company in a liability lawsuit is on the contract — not in front of a jury comprised of actual or potential alarm subscribers untrained in the legal or practical realities of risk allocation, transference or mitigation.
Jurors are people, and all too often people make decisions based on emotions. The law doesn’t always lend itself to what may appear to be fair, particularly when looked at after the fact when one party suffered a significant loss because the other party made a mistake. Fortunately, courts enforce well-written risk allocation clauses in security contracts — especially when those contracts are between commercial players or involve insurance subrogation claims. The clear lesson for electronic security providers is to use good contracts to avoid risk, including the risk of losing your company in a potential catastrophic liability lawsuit.
Beyond Limitation of Liability
Virtually everyone in the industry knows about limitation of liability clauses — those magical $250 get-out-of-jail cards to be played when a subscriber’s loss seeks to force you to go directly to the courthouse and not collect $200. Limitation of liability clauses continue to be enforceable to be sure, but there’s a more elegant approach to limiting your liability that requires you accomplish the following three things in your subscriber contract:
1. Your contract should require the subscriber to maintain insurance of all applicable types and in an amount sufficient to cover all potential losses. This would include insurance for the loss of property (real or personal), whether owned by the subscriber, the subscriber’s neighbor or anyone whose property was on either property. It would also include coverage if the subscriber could not continue to operate its business (business interruption) and coverage if the subscriber somehow gets sued because of something the security provider does or does not do.
2. The contract should obligate the subscriber to look solely to the insurance coverage in the event of a loss. The security provider and subscriber are effectively agreeing to here is a limitation of liability clause far in excess of $250 — the subscriber’s insurance proceeds, a vastly more significant sum.
This is a superior strategy to winning a lawsuit — instead of standing in front of the judge arguing the subscriber gets $250 for a multi-million dollar loss, it is a much more sophisticated argument: “Your Honor, the parties agreed the plaintiff subscriber would maintain insurance sufficient to protect its interests in the event of loss — having agreed to look solely to the insurance it maintained, it cannot now look to the insurance (or assets) of the security provider.”
3. The contract must obligate the subscriber to waive the rights of the subscriber’s insurer to “subrogate” to the subscriber’s interests. Subrogation permits an insurer to “stand in the subscriber’s shoes” after paying off a loss. Essentially, under subrogation, the insurer can sue third parties that may be legally liable for some portion of the loss.
The law of subrogation varies from state to state so you want to make sure your waiver is written to provide maximum protection. One significant risk to avoid is causing the subscriber to waive its insurance coverage because it wasn’t legally permitted to waive the insurer’s rights of subrogation. That could end up being another disaster for all involved.
As always, don’t attempt to do this on your own; consult industry experienced counsel.
Eric Pritchard co-chairs the electronic security group of Kleinbard Bell & Brecker LLP. He focuses on the electronic security industry with an emphasis on acquisitions. This column does not constitute legal advice; contact an attorney with specific questions.