Legal Watch: Selling the Contract

Oct. 9, 2014
Educate your subscribers on its importance as part of their relationship with an alarm company

Generally, our legal system allocates liability to the party who causes a loss. We expect the guilty party to pay. As every first-year law student learns, however, every rule has exceptions.

Historically, the allocation of risk in the alarm industry is an exception to the general rule. It is much more likely to be the alarm company’s acts or omissions — not those of the subscriber — that cause some portion of a subscriber’s loss. Rather than accepting liability for wrongful conduct, the industry has consistently sought to re-allocate the risk of loss, primarily by contract, to subscribers and their insurers.

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. A well-written industry contract works on several distinct, yet inter-related levels. For example, a well-written industry contract should:

  • require the subscriber to insure against the loss of property and third-party claims and limit recovery to these coverages;
  • include an exculpatory and limitation of liability clauses to limit liability to no more than an agreed sum;
  • require the subscriber to indemnify the alarm company for third-party claims, even if caused by the alarm company’s negligence (putting the subscriber’s assets and insurance at risk, which can be key in resolving claims); and
  • include a waiver of the subrogation rights of the subscriber’s insurers, which effectively waives the insurers rights against the alarm company following a loss.

There are other provisions to be sure. At the end of the day, however, the contract should limit the alarm company’s liability to subscriber and insurer for all claims except those that cannot be limited as a matter of law — such as gross negligence, wanton and willful misconduct and intentional torts.

Subscribers, their lawyers and their insurers often contend that these sorts of provisions are unfair. After all, they argue, an alarm company should be liable for negligence or breach of contract. Of course, these critics are right if the issue of fairness is to be determined solely by which party is at fault and what portion of the fault caused the subscriber’s loss. These comments — and a subscriber’s reluctance to enter into a contract — arise primarily because subscribers simply don’t understand or appreciate the economic realities underlying their relationship with an alarm company.

We must educate subscribers that, in the context of providing electronic security equipment and services, the issue of fairness is not so much about fault as it is about the subscriber’s opportunity to protect against risk the risk of loss, primarily through the use of insurance. After all, the subscriber, not the alarm company, is in the best position to determine how much insurance is necessary to protect the subscriber’s economic interests. Nothing in life, including electronic security, is foolproof or without risk. Subscribers must appreciate that the potential risk of loss simply has no relationship to the amount they are paying for the goods and services.

This is a difficult message to convey, particularly when trying to close a sale. I think these sorts of educational efforts should be part of the process of negotiating the service contract after a subscriber has decided to do business with you. In my experience, subscribers are often willing to be reasonable if they really want to do business with you. Moreover, there are means and methods to make both sides comfortable when negotiating these contracts. If a subscriber is unwilling to agree to these terms, the question for the alarm company is not whether it can afford not to do the work; rather, the question is whether the alarm company can afford to do work for other subscribers following a catastrophic loss.

Eric Pritchard is a Philadelphia Lawyer who spends his workday making the world safe for electronic security providers. Reach him at [email protected]. This column does not constitute legal advice; contact an attorney with questions. 

About the Author

Eric J. Pritchard

Eric Pritchard is a partner in FisherBroyles, a law firm with offices throughout the United States and in London. He spends his days trying to make the world safer for the security industry. You can reach Eric at [email protected].