Eric Pritchard co-chairs the electronic security group of Kleinbard Bell & Brecker LLP. Pritchard focuses his practice on the electronic security industry with an emphasis on acquisitions. This column does not constitute legal advice; contact an attorney with specific questions.
It is every owner’s nightmare — walking into the office to find out that one of your subscribers suffered a catastrophic loss the night before. You can barely think given all of the questions running through your head: What if the subscriber (or their insurer) points the finger at you? What if they sue? Who should you call? What should you say and, more importantly, what shouldn’t you say?
There are right and very wrong ways to handle subscriber claims that could result in a lawsuit. Here are the six critical steps to protect you if you end up in the danger zone. Some you should take immediately — before disaster strikes; others are some are the first steps you should take if that fateful day arrives.
1. Maintain written subscriber agreements that limit your liability.
Risk allocation clauses in well-written subscriber agreements are generally enforceable and are the first line of defense against claims by subscribers and their insurers. Insurers attempt to assert claims against parties who contributed to an insured’s losses through a doctrine called subrogation, which essentially gives insurers the right to “stand in the shoes” of their insured; thus permitting the insurer to pursue claims against third parties they believe may have caused all or a portion of a loss, once the insurer has paid the claim. Subrogation has become a sophisticated industry, and insurers and their investigators pore through rubble and records looking to recover from potentially culpable actors, including electronic security providers. Faced with a well-written subscriber agreement, however, subrogation lawyers often look for recovery elsewhere.
Another critical reason to have valid subscriber agreements in place before a loss is that many industry insurers require the insured to have a liquidated damages or limitation of liability clause in force as a condition of coverage. No provision may mean no insurance — leaving you to pay always-substantial defense costs, and to fund any settlement or judgment.
2. Maintain appropriate insurance.
Before you are faced with a claim, make sure you have adequate insurance to protect your company. Without it, a single subscriber claim could mean the end of your business. At a minimum, you need commercial general liability, errors and omissions, and automotive liability coverage. You should also want incidental contracts coverage, which usually provides coverage if you are contractually obligated to indemnify a service provider such as a third-party monitoring facility.
How much and what kind of insurance do you really need? There’s no rule of thumb — the best way to be sure is to consult with an experienced industry insurance agent. One issue you and your agent should consider: What would it cost to replace any of the premises you service? That answer differs based on your clients — do you provide service for sprawling multi-million dollar commercial facilities or detached single family homes? How many people inhabit or work at the premises? Where are the premises located? The cost to replace property in Philadelphia, Pa., likely differs from the cost to replace property in Philadelphia, Miss.
3. Promptly notify your insurer of claims and cooperate in their efforts to protect you.
If that terrible day ever comes that one of your subscribers suffers a loss, you should be breathing a little easier — provided you followed steps 1 and 2. Don’t drop the ball now! The insured (that’s you) is obligated to notify their insurers promptly when they receive a claim — or when they have reasonable notice that a claim may be filed. Make sure you follow this rule, otherwise your insurer may be able to disclaim coverage. The insurer will appoint a claims representative who should assist you in dealing with potential plaintiffs; and it will also likely appoint counsel to protect your interests if necessary.
4. Remember Sergeant Jack Friday on Dragnet: “Everything you say can and will be held against you in a court of law.”
This rule applies in civil cases, not just criminal proceedings. First, what you say may be used in court to prove liability. Apologizing to your subscriber could be viewed as an admission of liability. I once had a case where my client told a subscriber after a catastrophic loss: “I guess that’s why we have insurance.” I didn’t look forward to hearing that testimony at trial — it likely would be viewed as an admission of liability and it give the jury permission to award big damages since my client had insurance. Be careful!
5. Preserve evidence —good and bad.
The law imposes an obligation to preserve all evidence — electronic records, physical files, recordings of central station calls, video, etc. The temptation that clients have is to suggest — with a wink and a nod — that perhaps the evidence will somehow end up lost or destroyed. Don’t do it! If you fail to preserve evidence, you will create even more problems.
You should have a written policy that addresses the retention of documents, including electronic documents, and requires employees to retain copies for certain periods of time. You should also have a written policy that directs employees to retain files, records and documents in the event of a possible loss. The bottom line is that your inability to produce evidence can result in a number of problems, including significant penalties in a lawsuit, such as the presumption that if you had produced the documents or other evidence, it would prove the other’s side’s case.
6. Consult legal counsel.
Of course I’m going to suggest that you consult a good lawyer. But here is an important reason you may not know or understand — the only protected form of communications regarding a subscriber loss is likely to be communications with you lawyer. Conversations or other forms of communications, including e-mails, with anyone else are probably discoverable in litigation — meaning you will have to provide them to the other side. And it never ceases to amaze me the things that people say and do (especially in e-mail) that come out in discovery.
If you need to conduct an investigation, don’t do it yourself — every single thing you do as part of your investigation is discoverable by the other side in litigation. That means that if you decide to investigate, you might have to turn over all of your notes and any documents you create in connection with the investigation. Your communications with others (written or oral) other than with your lawyer are also be discoverable and could result in the opposing lawyer taking a deposition to get testimony from everyone you spoke to as part of your investigation.
If you want to undertake an investigation, or even if you just need some advice on what to do next in response to a subscriber claim, call your lawyer — preferably one who works in and has experience in the industry.
Eric Pritchard co-chairs the electronic security group of Kleinbard Bell & Brecker LLP. Pritchard focuses his practice on the electronic security industry with an emphasis on acquisitions. This column does not constitute legal advice; please contact an attorney with specific questions.