April 4, 2011

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Question

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Ken,

Thanks again for everything you and Jennifer do for our industry. My question is regarding limits of liability in Service Contracts. Is there something going on in the property management industry currently? We’re located in the Midwest and every single property manager is going back and forth with our legal regarding limits of liability for everything from monitoring to inspections. They are asking for unlimited liability and there are some national players in our area that are taking on these contracts without the limits on liability?

If our industry came together on this one item (which I was under the impression we had in order to maintain insurance) the property managers wouldn’t be able to bully us, but it’s not just the trunk slammers who are signing these contracts without limits. Has everyone gone mad and who are insuring these companies?!? Are we wrong to think it is unreasonable to ask for limits on liability on a small monitoring contract?

Thanks,

Sean in STL

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Answer

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One of the primary reasons to use properly drafted alarm/security contracts is the right to exclude or limit your liability for your negligence or breach of contract. With respect to the limitation of liability provision, the commonly used limit in the industry is $250. There is of course no rhyme or reason for that dollar amount, and just about any other number, higher or lower, would work just as effectively.

On occasion I've seen alarm companies change the limit in their printed form contract from $250 to $10,000. I recently had a client call to ask me what I thought about raising the limit to the amount demanded by the subscriber, one million [I told the client not to]. If you are being asked to increase the limit and you find yourself entertaining that notion, you need to brush up on your sales routine. It's your job to not only sell the security system, but the contract. It's the contract that you're going to be left with and figures into your business valuation equation. You need to be prepared to explain your relationship with the subscriber, your system's capabilities and limitations, that you're not an insurer, etc. You've heard it here before so I won't go into it in this article. You need to educate your subscriber so that no change to the limitation of liability clause is requested.

Raising the limitation of liability may be a way of fooling not only your subscriber but yourself. You are that confident that your subscriber won't suffer a loss that you would be willing to pay up to the limit? Of course that's not what the limitation of liability holds - your subscriber still has to establish that you were negligent or failed to perform the contract - we all know that subscriber's expectation is "prevention", not "deterrence", and the expectation with that limitation of liability is going to be that you will pay up to that limit if there is a loss, no questions asked. If you decide to put yourself in that position you better make sure that your E&O carrier is on board with that, unless you don't intend to ask it to pay the claim.

I have not heard that reputable companies are waiving or eliminating the limitation of liability provision, and certainly the insurance companies insuring the alarm industry are relying on that provision. Be careful if you change or waive that provision.