There are five essential core protections required in every subscriber agreement – each clause does something different to protect your company.
On one level, the provisions work together to establish a comprehensive risk allocation structure – essentially limiting your company’s liability through insurance. On another level, the clauses act as a series of backup protections – like having one fire-rated door after another – to extinguish liability before you get burnt.
Courts have enforced these sorts of clauses in limiting the liability of security providers. Make sure your contract includes a well-drafted version of each and that the clauses work together. Give the lawyer defending you in litigation as many arrows in her quiver as possible.
1. Insurance Clause. This clause requires the subscriber to insure their interest in any property (the premise and items inside), and against possible liability claims (including the subscriber’s indemnity obligation discussed below). In a well-drafted clause, the subscriber acknowledges it is in the best position to obtain, quantify and pay for insurance covering the premises and contents. It also specifically obligates the subscriber to look exclusively to its insurance in the event of a claim, thereby transferring risk to the subscriber’s insurance. Case law supports enforcing these provisions, especially in the commercial context.
2. Exculpatory Clause. Think of this as a “get out of jail free card” that states your company has zero liability in the event of a loss. Exculpatory clauses can be enforced under certain circumstances, however, courts do not always give security providers a free pass; thus, you should include the clause, but do not rely on it as your sole line of defense.
3. Limitation of Liability. This clause says “if we do have liability, that liability is limited to a certain amount.” These provisions are more likely to be enforceable than exculpatory clauses. Some contracts refer to these as liquidated damages clauses (I do not). The law varies from state to state but in my experience, a liquidated damages clause is only enforceable if it reflects a good-faith attempt to estimate a party’s (here, the subscriber’s) damages and is not deemed to be a penalty.
A standard industry-issue $250 liquidated damages clause may not be a penalty – but certainly it is not a good-faith estimate of the subscriber’s damages in the event of a loss. Some courts hold that these two questions are to be answered by the jury, not the court; therefore, when defending alarm companies, I would rather be in front of a dispassionate arbiter legally trained to enforce contracts (a judge) rather than a jury comprised of disappointed subscribers.
Another note: It is not 1974 anymore. Increase you limitation to $2,500. It can make a difference in enforcing a limitation of liability, and it is a small price to pay to avoid costly litigation.
4. Indemnity. Properly drafted, an indemnity means the subscriber will reimburse your company for all defense costs (legal fees, etc.), any settlement amounts, or the amount of any judgment entered against you. On one level, this clause is only as good as the subscriber standing behind it (you can’t get blood from a stone).
Indemnity is another reason the insurance clause is so important – under some circumstances, a subscriber’s insurer may have to indemnify the subscriber to reimburse your company. Indemnity is tricky, and if you do not draft it just the right way, you very well could be out of luck.
5. Waiver of Subrogation. Subrogation permits an insurer to sue third-parties (like alarm companies) to recover for losses sustained by the insured – for example, where the alarm company somehow contributed to the loss. Subrogation can be waived by the insured, and these waivers can be legally effective to bar subsequent claims against potential defendants, including alarm companies. The insurance clause and the waiver of subrogation clause work together to transfer the risk of loss to the subscriber’s insurer.
Eric Pritchard is a Philadelphia Lawyer who works to make the world safer for security and life safety providers. Contact him at [email protected]. This column does not constitute legal advice; contact an attorney with questions.
