Legal Watch: That's Not Fair!

April 5, 2013
Subscribers may balk at contracts, so it's your job to tell them why allocation of risk to insurers is important

As a general rule, our legal system allocates liability to the party that causes a loss, requiring the responsible party to pay for any damages its actions may have caused to others. Our laws also allow parties to decide between themselves—in contracts and other agreements—that one party might assume responsibility for damages, even if that party did not cause the loss. The concept is called “allocation of risk” and historically the alarm industry has re-allocated the risk of loss to subscribers and their insurers, primarily through subscriber agreements.

Over the years, industry attorneys have developed a comprehensive and effective set of contract provisions designed to allocate the risk between subscriber and alarm company, limiting the alarm company’s liability to the subscriber and its insurer for all claims except those that cannot be limited as a matter of law (e.g., gross negligence, wanton and willful misconduct and intentional torts).

A well-written subscriber agreement should require the subscriber to insure against the loss of property and third-party claims and limit recovery to these coverages. The contract should include exculpatory and limitation of liability clauses to limit liability to an agreed sum and require the subscriber to indemnify the alarm company for third-party claims, even if caused by the alarm company’s negligence. The subscriber agreement also should include a waiver of the subrogation rights of the subscriber’s insurers, which waives the insurer’s rights against the alarm company following a loss.

The reason for this allocation of risk is simple: subscribers are in a better position to control the risk of loss and limit the economic impact through insurance. Convincing subscribers this makes sense is usually difficult. Subscribers, their lawyers and their insurers often argue that these risk-shifting provisions are “unfair” and that an alarm company should be liable for negligence or breach of contract. These arguments might be right –if the issue is fairness, and is based solely on which party is at fault and what portion of the fault caused the subscriber’s loss. But fairness isn’t really the issue, economics is, and a subscriber’s reluctance to enter into a contract arises primarily because subscribers, even sophisticated ones, don’t understand or appreciate the economic realities underlying their relationship with an alarm company.

Do due diligence with customers

We must educate subscribers that, in the context of buying electronic security equipment and services, contractual allocation of risk is less about fault and more about the subscriber’s ability and opportunity to protect against risk of loss, primarily through the use of insurance. Nothing in life, including electronic security, is fool proof or without risk, and the subscriber, not the alarm company, can best determine how much insurance is necessary (and purchase) to protect the subscriber’s economic interests. In this context, the potential risk of loss has no relationship to the amount they are paying for the security-related goods and services.

Although difficult to convey, particularly when closing a sale, educating the subscriber should be part of the process of negotiating the service contract after the subscriber has decided to do business with you. Subscribers are often willing to be reasonable, if they really want to do business with you based on the quality of your products and services. And, if a subscriber remains unwilling to agree to these important risk-allocation terms, the defining question for the alarm company is not whether it can afford not to do the work for that subscriber. Rather, the question is whether the alarm company will still be able to do the work for other subscribers following a catastrophic loss.