Last week, a federal judge ruled that a lawsuit filed by an insurance company seeking to recover more than $40 million in damages from Tyco Integrated Security - stemming from a massive pharmaceuticals theft at an Eli Lilly & Co. warehouse in Connecticut - will move forward despite motions filed by the systems integrator to have the case dismissed. The trial is scheduled to begin later this month.
The lawsuit, which was initially filed by National Union Fire Insurance Company in 2013, claims that Tyco, formerly known as ADT Security Services, inadequately protected sensitive information which enabled thieves connected to a Florida-based burglary ring to break into the Enfield, Conn., warehouse in 2010 and steal about $80 million worth of prescription medication.
Eric Pritchard, a partner at the Philadelphia-based law firm of Kleinbard Bell & Brecker and a legal columnist for SD&I magazine and SIW, said that unlike many of the lawsuits that are brought against security firms for breaches of contract related to equipment failures and so forth, the claim in this case is that Tyco failed to safeguard a security survey referred to in the lawsuit as a “Confidential System Proposal” that detailed various security vulnerabilities at the site. National Union alleges that a former employee at Tyco, who was also a relative of one of the burglars, still had access to this confidential information long after his employment was terminated.
“In the ordinary alarm lawsuit, the counts of the plaintiff would be breach of contract, negligent failure to detect, negligent design of the system or something like that depending on the particular facts,” said Pritchard. “Here, the plaintiffs have gone outside the contract and they said that Tyco failed to protect Eli Lilly’s confidential information regarding the system.”
According to the complaint filed by National Union in 2013, Amaury Villa and Amed Villa, who later pleaded guilty to charges related to the heist, “crossed the entire length of the roof of the distribution warehouse to arrive at a small area comprising less than one percent of the total surface area of the roof. This location was identified on the 2010 ADT/TYCO Confidential System Proposal as above an area unmonitored by the existing security equipment and adjacent to the MCC room, which was identified in the 2010 ADT/TYCO Confidential System Proposal by “x” and “y” coordinates as requiring additional intrusion detection devices and cameras.”
Tyco argued that National Union failed to demonstrate “causation” with respect to these negligence claims as they did not produce any evidence that the company allowed criminals to obtain this information and that the plaintiff instead had to rely on the “stacking of inferences,” according to court documents. In fact, the criminals responsible for the burglary have admitted in court documents that they never obtained any confidential information; however, U.S. District Judge Beth Bloom rejected Tyco’s argument and ruled that National Union had demonstrated sufficient evidence to support their claims.
Perhaps the most significant part of this case for the industry, according to Pritchard, was the court’s ruling that Tyco’s subrogation waiver did not prohibit litigation from moving forward as it fell outside the company’s contract with Eli Lilly. Subrogation essentially paves a way for insurers to step in the shoes of their clients to sue on their behalf. Pritchard said any good contract in the alarm industry should contain a waiver of subrogation, but even though Tyco had one in this case, the court has decided not to enforce it.
“It seems to me like the court is bending over backwards not enforce that clause,” said Pritchard. “The court here is refusing to enforce the subrogation clause because, as I read the opinion, the claim is arising outside the contract and the court says the waiver of subrogation only deals with claims within the contract.”
In her ruling, Bloom described the subrogation clause in the contract the companies initially entered into in 2004 as being “exceedingly broad.”
“The claims pursued by National Union do not relate to the provision of security services or any related obligations, but instead focus on extra-contractual events, namely, the failure to safeguard confidential information and the failure to disclose prior incidents. These occurrences and alleged failures exist independent of the 2004 contract,” wrote Bloom.
While he believes that the court is wrong on this matter, Pritchard said that it is important for companies to check the subrogation clauses in their contracts to ensure they cover claims both inside and outside the contract.
“Here, the waiver says, ‘Waive all rights to subrogation,’ and still the court is not enforcing it which I find to be somewhat incredible, because all rights to subrogation to me would mean all rights, no matter what,” added Pritchard. “But the court is not interpreting it that way; the court is interpreting it as limited claims that arise under the contract. I think it’s an example, and what I think people in the industry need to understand is, courts don’t like to enforce these clauses because they are basically a get out jail free card. Courts are hesitant to say, ‘Ok, you have no liability even though you may have screwed up.’ That’s why it’s important to have a good contract, that’s why it’s important to have good contract clauses.”
The trial is set for July 20.
