Understanding The Limitation Of Liability Clause

Table of Contents


Background

Over the last several years a number of representatives of construction companies and property management companies have raised issues with regard to the limitation of liability/liquidated damages provisions (the “limitation of liability”) frequently found in installation, service and monitoring agreements submitted by electronic security services companies.

We believe these issues usually result from a misunderstanding of the nature and purpose of the clauses rather than from fully formulated objections based on risk to the customer.

Therefore, the Legal Affairs Committee of the Central Station Alarm Association believes it is important for the Regular Members, themselves, to understand, from a legal perspective, the legal and practical justifications of the clause.

Scope of Limitation

Often, misunderstandings arise when a customer believes that the limitation of liability is intended to release the company from the direct consequences of its on-site negligence. But, like any other contractor, most security companies, in their contracts, either accept or are willing accept liability for damage to persons or property resulting from the physical actions of their employees when on the customer’s site. Thus, if an employee injures someone by dropping a hammer, negligent driving, or other negligent cause directly causing injury the security company can and should accept liability for the damage thus caused. Likewise, if property is destroyed negligently and other than in the ordinary course of normal installation, security companies should be willing to accept liability for such physical damage to property.

Nature of Limitation

As stated above, most security companies do not seek to limit or disclaim liability for injuries or damage directly caused by the physical actions of the employees or agents of the company. Liability is disclaimed, however, for what is often called consequential damages. Those are damages which are suffered by the customer or other third parties as a result of the failure of a system installed by the security company to function as intended or by the negligence of an employee of the security company in the performance of his or her duty in response to a signal. These kinds of losses can include physical injury or death resulting from criminal actions of third parties or fire. They also can include damage to real property by fire or other means. It can include loss of personal property by theft or other means. With regard to this type of potential loss security companies often disclaim liability or seek to limit it to an agreed amount. Sometimes, the security company will through a separate rider take on an increased specified amount of liability for their own negligence in return for a fee.

Reasons for the Limitation of Liability

The main reasons for the limitation of liability are as follows: (1) The cost of insuring all the potential liability for the consequential losses of customers of security companies would be substantial and would pose a prohibitive cost to most security companies making the service uneconomic or undesirable; (2) The nature and extent of the exposure that the security company would be liable for is not predictable at the time of installation of a security system thus pricing would be elusive, some potential losses would be threaten the survivability of the installing or serving security company; (3) The process of determining the percentage of the loss caused by responsibility of others as compared to the responsibility of the security company could lead to prohibitive and expensive litigation on a frequent basis which would substantially increase the cost of alarm company services. Therefore, most security companies price their services predicated on the value of the service provided without regard to the individualized potential exposures on the site. Services and equipment can, therefore, be provided at a much more reasonable price.

Liability of Security Company is of Little Benefit to Customer

The customer is encouraged to insure itself for the various exposures it may face as a result of fire, burglary, or other on site loss. Typically the customer is insured for this potential loss in any event, importantly, the installation of the security service equipment does not increased this exposure and, to the contrary, in the view of many insurance companies has decreased this exposure sufficiently to provide the customer with a discount on liability insurance. Thus, whether the customer is a builder or property manager, they have typically insured themselves for the liability that may arise in the event that the security system does not avert an untoward event. Why should they incur an increased cost for security services for a benefit that flows almost exclusively to their insurer? We think emphasis of this point is critical.

Why Won’t You be Responsible for Your Own Negligence?

This question is posed thousands of times a year to security companies. The answer is that the security company is not the cause of the loss. The burglar, robber, rapist, arsonist or other negligent party is the direct cause of the loss. Security companies can do no more than detect. The process of detection is not perfect. THERE WILL BE FAILURES, human or otherwise. The allocation of the cost of that risk to the security company would endanger the viability of the industry by creating exposures vastly disproportionate to the income derived.

The Limitation of Liability is Reasonable and Enforceable

Courts have almost uniformly upheld the limitation of liability as being a reasonable division of exposure between contracting parties. In a strong line of cases the courts of almost every state to consider the issue have held the limitation of liability appropriate in light of the risk/benefit quotient of the typical security services transaction. In the industry’s experience both builders and property managers can insure themselves for any exposure resulting from the negligent installation or provision of service by security service companies.

Increasing the Limitation of Liability

Typically, the limitation of liability clause affords the customer the option of increasing the standard limit by agreeing to pay an additional periodic fee to the alarm dealer. When asked, the alarm dealer should be prepared to increase the limit by a reasonable amount for the appropriate fee, which is generally 10% to 15% per annum of the amount of the increase (e.g. an increase to $10,000 would require an annual fee of $1000 to $1500). If adequately explained, most customers will agree to accept the standard limitation. Generally, the customer will be better served by spending the same dollars to improve the customer’s property coverage by lowering the deductible and/or increasing the amount or scope of coverage. Increasing the alarm dealer’s limit of liability only benefits the customer in those rare instances where the loss is proven to be the fault of the alarm dealer. On the contrary, improved property insurance coverage will benefit the customer who can prove he sustained a loss whether or not the alarm dealer was at fault. We suggest you consult your attorney regarding laws in your state regarding “insurance” to assure that your addendum cannot be interpreted as an “insurance policy” or subject the alarm dealer to the insurance regulations of the state.

Conclusion

In conclusion, because there are good reasons for the use of limitation of liability and because there are adequate and inexpensive methods by which customers can insure themselves against the potential risk of failure of security systems, these clauses are a reasonable effort to allocate the exposure resulting from the failure of the system to operate in its intended manner.