United States Fire Insurance Co.; Commonwealth Insurance
Co.; Core-Mark Midcontinent, Inc.; and Core-Mark
International, Inc., Plaintiffs-Appellants, v. Sonitrol
Management Corporation, n/k/a Sonitrol Corporation,
Defendant-Appellee. Core-Mark Midcontinent, Inc. and
Core-Mark International, Plantiffs-Appellants, v. Sonitrol
Management Corporation, n/k/a Sonitrol Corporation,
Defendant-Appellee.

Court of Appeals No. 07CA0060, Court of Appeals No. 07CA0061

COURT OF APPEALS OF COLORADO, DIVISION TWO

192 P.3d 543; 2008 Colo. App. LEXIS 1172


July 24, 2008, Decided

PRIOR HISTORY:
Adams County District Court Nos. 03CV3836 & 04CV1978. Honorable John E.
Popovich, Jr., Judge. Adams County District Court No. 04CV1978. Honorable
John
E. Popovich, Jr., Judge.
Western Innovations, Inc. v. Sonitrol Corp., 2008 Colo. App. LEXIS 813 (Colo.
Ct. App., May 15, 2008)

DISPOSITION: JUDGMENT REVERSED AND CASE REMANDED WITH DIRECTIONS.


COUNSEL: Davis Graham & Stubbs, LLP, Andrew M. Low, Elizabeth H. Titus,
Denver,
Colorado; Cozen O'Connor, Thomas M. Dunford, Denver, Colorado; Pirece &
Weiss,
LLP, Brian S. Letofsky, Anaheim, California, for Plaintiffs-Appellants.

Hall & Evans, L.L.C., Alan Epstein, Brian P. Molzahn, Devi C. Yorty, Denver,
Colorado, for Defendant-Appellee.

JUDGES: Opinion by: JUDGE NEY *. Taubman and Rovira *, JJ., concur.

* Sitting by assignment of the Chief Justice under provisions of Colo.
Const.
art. VI, § 5(3), and § 24-51-1105, C.R.S. 2007.

OPINION BY: NEY

OPINION

In this case concerning a contract for burglar and fire alarm services, two
groups of plaintiffs who had filed separate actions appeal two orders for
summary judgment issued in favor of the alarm company, Sonitrol Management
Corporation (Sonitrol). The two cases were consolidated in the district
court.
Plaintiffs contend on appeal that the district court incorrectly applied the
economic loss rule and erroneously enforced a limitation of liability
clause. We
agree in part, reverse the judgments, and remand for further proceedings.

Plaintiffs in the first case, United States Fire Insurance Co., Commonwealth
Insurance Co., Lexington Insurance Co., United Insurance Co., United Fire &
Casualty, Tartan Products Co., and Western Innovations, Inc. (Insurers), and
the
plaintiffs in the second case, Core-Mark Midcontinent, Inc. and Core-Mark
International, Inc. (Core-Mark), argue the same legal issues in similar
briefs,
with similar answers from Sonitrol. Accordingly, we have consolidated the
appeals.

I. Background and Proceedings

A. Course of Dealing Between Core-Mark and Sonitrol

Core-Mark distributes merchandise to convenience stores. It leased
approximately 90,000 square feet of a 120,000 square foot warehouse for
storing
inventory. The Insurers insured the warehouse and inventory.

Sonitrol markets security and fire alarm services, and in 1995 contracted
with Core-Mark to install and monitor an alarm system to protect the
warehouse.

Pertinent provisions of the contract are as follows:


12. LIMITATIONS OF DAMAGES:

A. It is understood and agreed by the parties hereto that DEALER
[Sonitrol] is not an insurer and that insurance, if any, covering
personal injury and property loss or damage on CLIENT'S premises shall
be obtained by CLIENT [Core-Mark], at CLIENT'S sole expense; that the
payments provided for herein are based solely on the value of the
service as set forth herein and are unrelated to this value of
CLIENT'S property or the property of others located on CLIENT'S
premises;

. . .

C. CLIENT UNDERSTANDS AND AGREES THAT IF DEALER SHOULD BE FOUND
LIABLE FOR ANY LOSS OR DAMAGE DUE FROM A FAILURE TO PERFORM ANY OF ITS
OBLIGATIONS OR A FAILURE OF THE EQUIPMENT TO PROPERLY OPERATE,
DEALER'S LIABILITY SHALL BE LIMITED TO A SUM EQUAL TO THE TOTAL OF
ONE-HALF YEAR'S MONITORING PAYMENTS, OR FIVE HUNDRED DOLLARS ($ 500)
WHICHEVER IS THE LESSER, AND THIS LIABILITY SHALL BE EXCLUSIVE AND
SHALL APPLY IF LOSS OR DAMAGE, IRRESPECTIVE OF CAUSE OR ORIGIN,
RESULTS DIRECTLY OR INDIRECTLY TO PERSONS OR PROPERTY FROM PERFORMANCE
OR NON-PERFORMANCE OF ANY OF DEALER'S OBLIGATIONS OR FROM NEGLIGENCE,
ACTIVE OR OTHERWISE, OF DEALER, ITS EMPLOYEES OR AGENTS.



Sonitrol's services included remote monitoring of microphones that could
detect sounds made by intrusions into the warehouse. These microphones, or
audio
detectors, would send an audio activation signal when they detected a sound
exceeding a minimum volume, and record and store five seconds of the audio.
The
alarm system would also make an automated telephone call to a central
monitoring
facility. The operators monitoring the console in that facility were
instructed
to replay the five seconds of stored audio recording and listen to live audio
transmission for at least forty-five seconds. If the operator heard a
burglary
in progress, he or she would dispatch the local police. However, if the
operator
determined the activation was a false alarm, the operator could reset the
alarm.
Resetting the alarm erased the stored audio and terminated the telephone
connection to the monitored premises.

In December 2002, a burglar entered Core-Mark's warehouse while it was
closed
over the weekend. He returned a little later with two confederates, and the
three looted the warehouse for approximately three hours. They made no
effort to
be quiet, but shouted to each other, threw boxes around, and used a noisy
gravity chute lined with steel rollers to move boxes. When they were ready to
leave, one of the burglars smashed boxes of flammable liquids, pulled down
large
jugs of methanol, and set two fires at 8:42 a.m. The fire department arrived
on
the scene eleven minutes later at 8:53 a.m., alerted by a passerby, but it
was
too late to save the property.

During this episode, Sonitrol's off-site monitoring center received audio
activations caused by the noise the burglars created. Two different Sonitrol
employees received the alarms and reacted as follows: (1) audio activation at
1:35 a.m., no replay of stored audio, alarm reset in 36 seconds, no call to
police; (2) audio activation at 6:50 a.m., no replay of stored audio, alarm
reset in 4 seconds, no call to police; (3) audio activation at 7:29 a.m., no
replay of stored audio, alarm reset in 40 seconds, no call to police; (4)
audio
activation at 7:56 a.m., no replay of stored audio, alarm reset in 1 minute
and
49 seconds, no call to police; (5) audio activation at 8:36 a.m., no replay
of
stored audio, alarm reset in 2 minutes and 10 seconds, no call to police; (6)
audio activation at 8:44 a.m., operator replayed stored audio, no call to
police; (7) 8:46 a.m. (four minutes after fire started), the telephone
connection between warehouse and monitoring center was severed. At 9:05, the
Sonitrol employee called the fire department, which had been at the scene for
twelve minutes.

Despite the fire department's efforts, the fire burned for a week and
destroyed the building and all the inventory, resulting in a loss of
approximately $ 20 million.

B. Course of Litigation

Core-Mark and the Insurers filed separate lawsuits against Sonitrol. As
pertinent to this appeal, they asserted claims for (1) negligence, (2) gross
negligence, and (3) breach of contract. These lawsuits were consolidated
with a
number of others related to the warehouse fire.

The district court granted Sonitrol's motion to dismiss Core-Mark's claims
for negligence and gross negligence. Sonitrol moved for summary judgment
against
both Core-Mark and the Insurers, which was granted. Cf. Western Innovations,
Inc. v. Sonitrol Corp., P.3d , 2008 Colo. App. LEXIS 813 (Colo. App.
No.
06CA2275, May 15, 2008)(in litigation arising from the same incident, tort
claims of another tenant, not a party to the contract between Sonitrol and
Core-Mark, summarily dismissed).

In granting summary judgment on Core-Mark's claims, the district court
concluded as pertinent here: (1) the economic loss rule applied to bar tort
claims; and (2) the limitation of damages clause in the contract was
enforceable. Although the district court acknowledged Core-Mark's argument
with
respect to willful and wanton conduct, it did not address that argument.

In granting summary judgment on the Insurers' claims, the district court
concluded as pertinent here: (1) the economic loss rule barred tort claims
(applying a previous order as the law of the case); and (2) the limitation of
liability clause was enforceable as to the Insurers as well as Core-Mark
(adopting the reasoning of a previous order).

The parties dismissed their remaining claims, limited by the district court's
orders to $ 500 (as provided under the contract), to the extent and only to
the
extent they were not previously dismissed by the court's orders. The district
court issued a C.R.C.P. 54(b) certification, stating the orders for summary
judgment fully disposed of the claims against Sonitrol.

Core-Mark and the Insurers appeal only the orders granting summary judgment.

C. Standard of Review

We review a district court's grant of summary judgment de novo. A.C.
Excavating v. Yacht Club II Homeowners Ass'n, 114 P.3d 862, 865 (Colo. 2005).
"Summary judgment is appropriate when the pleadings and supporting documents
clearly demonstrate that no issues of material fact exist and the moving
party
is entitled to judgment as a matter of law." Id. "The nonmoving party is
entitled to the benefit of all favorable inferences that may be drawn from
the
undisputed facts, and all doubts as to the existence of a triable issue of
fact
must be resolved against the moving party." Id.

II. Economic Loss Rule

Core-Mark and the Insurers contend the district court erred in dismissing
their negligence claims under the economic loss rule, because Sonitrol owed
an
independent duty of care. Sonitrol argues that the duty specified in the
burglar
alarm contract and the alleged duty in tort are identical, and so there is no
duty independent of that created by the contract. We agree with Sonitrol.

"Economic loss is defined generally as damage other than physical harm to
persons or property." Parr v. Triple L & J Corp., 107 P.3d 1104, 1108 (Colo.
App. 2004). "The proper focus in an analysis under the economic loss rule is
on
the source of the duties alleged to be breached." Grynberg v. Agri Tech,
Inc.,
10 P.3d 1267, 1269 (Colo. 2000). "The essential difference between a tort
obligation and a contract obligation is the source of the parties' duties."
BRW,
Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 72 (Colo. 2004). "Contract
obligations
arise from promises the parties have made to each other, while tort
obligations
generally arise from duties imposed by law to protect citizens from risk of
physical harm or damage to their personal property." Id. "[A] party suffering
only economic loss from the breach of an express or implied contractual duty
may
not assert a tort claim for such a breach absent an independent duty of care
under tort law." A.C. Excavating, 114 P.3d at 865. "In distinguishing
between a
tort obligation and a contract obligation, it is essential to discern the
source
of the party's duty." Id.

The contract between Sonitrol and Core-Mark defined Sonitrol's duties with
respect to reasonable care.


5. DEALER agrees to monitor the system from the time CLIENT causes
the system to be activated until CLIENT causes the system to be
deactivated. Upon receipt of a signal indicating an unauthorized entry
into CLIENT's premises or an emergency, the DEALER's operator will use
reasonable efforts to identify the signal and, when warranted, will
transmit notice of said signal to the local authority having
jurisdiction.



Accordingly, the contract contains the duty that Sonitrol allegedly breached.
Sonitrol's duties to Core-Mark were defined under the contract, and did not
exist except for the contract. See BRW, Inc., 99 P.3d at 74 (BRW contract
required BRW to meet a standard of care and so contained the duty that BRW
allegedly breached). Core-Mark does not state an independent tort duty
because
the alleged tort duty and the duty outlined in the contract are identical.
Thus,
Core-Mark's losses are economic losses proceeding from the breach of a
contractual duty, and Core-Mark's tort claim is barred by the economic loss
rule. A.C. Excavating, 114 P.3d at 865.

III. Enforceability of Limitation of Damages Clause

Core-Mark and the Insurers contend the district court erred in holding that
the limitation of liability clause in the contract with Sonitrol was
enforceable, because the issue of whether Sonitrol acted willfully and
wantonly
should have been decided by the fact finder. We agree.

A. Nature of Limitation of Damages Clause

Sonitrol argues that the limitation of liability clause in the contract is
not an exculpatory clause but a liquidated damages clause, and therefore the
analysis for willful and wanton conduct does not apply. Accordingly, Sonitrol
contends the limitation of liability clause is enforceable regardless of its
own
conduct. We disagree.

Exculpatory clauses insulating a party from its own negligence, though
disfavored, are permitted in Colorado if one party is not at a significant
disadvantage in bargaining. Chadwick v. Colt Ross Outfitters, Inc., 100 P.3d
465, 467 (Colo. 2004)(upholding exculpatory agreement as to simple
negligence).
However, an exculpatory clause is against public policy if it enforces a
release
from willful and wanton conduct. Id. at 468; B&B Livery, Inc. v. Riehl, 960
P.2d
134, 138-39 (Colo. 1998)(enforcing an exculpatory clause for simple
negligence
but remanding for findings on willful and wanton negligence claims); White v.
Hansen, 837 P.2d 1229, 1233 (Colo. 1992)(separating willful and wanton
conduct
conceptually from ordinary negligence); Jones v. Dressel, 623 P.2d 370, 376
(Colo. 1981).

In the present case, we must consider whether this public policy exception
for willful and wanton conduct that applies to an exculpatory clause also
applies to a limitation of liability clause. Although this issue has not
previously been addressed in Colorado, we conclude that the general rule
applies
to both exculpatory and limitation of liability clauses. Fox Alarm Co. v.
Wadsworth, 913 So. 2d 1070, 1080 (Ala. 2005) (applying analysis of wanton
conduct to limitation of liability clause); Saia Food Distribs. & Club, Inc.
v.
SecurityLink from Ameritech, Inc., 902 So. 2d 46, 49 (Ala. 2004) (reading
contract language as a limitation of liability provision and an exculpatory
clause); see Royal Indem. Co. v. Sec. Guards, Inc., 255 F. Supp. 2d 497, 503
(E.D. Pa. 2003)(limitation of liability clause will not cover willful or
wanton
behavior unless the parties specifically so contracted).

Sonitrol argues that a limitation of liability clause in a burglar alarm
contract is in reality a liquidated damages clause, relying on Niccoli v.
Denver
Burglar Alarm, Inc., 490 P.2d 304, 306 (Colo. App. 1971) (not published
pursuant
to C.A.R. 35(f)) (holding provision was liquidated damages clause rather than
penalty). Therefore, Sonitrol argues, the willful and wanton exception should
not apply.

A liquidated damages clause may be treated as an exculpatory clause, when it
denies liability for all but a nominal amount of damages. Tessler & Son,
Inc. v.
Sonitrol Sec. Sys., 203 N.J. Super. 477, 497 A.2d 530, 532 (N.J. Super. Ct.
App.
Div. 1985)(similar contract with limit of $ 250 may not bar suit for willful
and
wanton misconduct); see Sommer v. Fed. Signal Corp., 593 N.E.2d 1365, 1368,
79
N.Y.2d 540, 583 N.Y.S.2d 957 (N.Y. 1992) (referring to a "liquidated damages"
clause as an "exculpatory clause"). Moreover, a liquidated damages clause may
not be enforced where it attempts to limit one party to nominal damage in a
claim for willful or wanton negligence. United Servs. Auto. Ass'n v. ADT
Sec.
Servs., Inc., 241 S.W.3d 335, 341 (Ky. Ct. App. 2006)($ 250 damage
limitation in
alarm contract as liquidated damages provision).

We need not decide here whether the clause in question is a limitation of
liability clause, a liquidated damages clause, or an exculpatory clause,
because
the general rule applies to all of them. We hold that if the effect of such a
clause is to insulate a party from its own negligence, it does not shield
against a claim for willful and wanton conduct. See B&B Livery, 960 P.2d at
138-39; Jones, 623 P.2d at 375.

Sonitrol's argument that the damage limitation in its policy is not a nominal
sum is in relevant to our holding that clauses insulating a party from
liability
for its own willful and wanton conduct are against public policy. Cf.
Jefferson
County Bank v. Armored Motors Serv., 148 Colo. 343, 346, 366 P.2d 134, 135
(1961)(limitation of liability clause for $ 30,000 enforceable for
negligence).

Therefore, although the district court properly found that the limitation of
liability clause shielded Sonitrol from claims for simple negligence, because
Core-Mark and the Insurers properly raised the issue of willful and wanton
conduct supported by evidence, the district court should not have granted
summary judgment before determining the issue of willful and wanton conduct.

B. Willful and Wanton Conduct

Core-Mark and the Insurers contend they have presented ample evidence of a
triable issue of fact as to whether Sonitrol's failure to notify emergency
services was willful and wanton. Sonitrol contends that, as a matter of law,
plaintiffs' allegations amount to simple negligence. Because all inferences
from
the evidence must be drawn in favor of the nonmoving party, we agree with
Core-Mark and the Insurers that a triable issue of fact exists. See A.C.
Excavating, 114 P.3d at 865.

"Willful and wanton conduct is purposeful conduct committed recklessly that
exhibits an intent consciously to disregard the safety of others. Such
conduct
extends beyond mere unreasonableness." Forman v. Brown, 944 P.2d 559, 564
(Colo.
App. 1996). "Willful and wanton conduct or willful and reckless disregard"
means:



conduct purposefully committed which the actor must have realized
as dangerous, done heedlessly and recklessly, without regard to
consequences, or of the rights and safety of others, particularly the
plaintiff.


§ 13-21-102(1)(b), C.R.S. 2007; accord CJI-Civ. 4th 9:30 (2002).

The trier of fact determines whether there has been negligence. Hesse v.
McClintic, 176 P.3d 759, 764 (Colo. 2008). Ordinarily, determining whether a
defendant's conduct is willful and wanton is a question of fact. Forman, 944
P.2d at 564.

Here, multiple audio activations were received by two different operators
over a period of several hours. The operators reset the alarms without
listening
to recorded audio or live audio, or calling police. On deposition, one
operator
could offer no explanation of her conduct, and appeared to have little
memory of
what happened. Had the operators listened, they could have heard the
intruders
shouting sending boxes along steel rollers, and dropping and smashing
merchandise. Even after the last telephone connection was severed by fire,
nineteen minutes elapsed before the operator called the fire department.

A jury could conclude this was purposeful conduct committed recklessly with
conscious disregard for the rights and safety of others. § 13-21-102(1)(b);
CJI-Civ. 4th 9:30; see Royal Indem. Co., 255 F. Supp. 2d at 499, 509
(security
employee did not contact supervisor upon sounding of four consecutive fire
alarms, instead attempting to reset alarms; genuine issue of material fact
as to
willful or wanton conduct); New Light Co. v. Wells Fargo Alarm Servs., 247
Neb.
57, 525 N.W.2d 25 (Neb. 1994)(remanding for further proceedings as to whether
failure to install fire-sensing device in room with main fire alarm control
panel was willful and wanton); Sommer, 593 N.E.2d at 1367-68 (untrained
dispatcher thought company intended system to be taken out of service and
ignored fire signals; question of gross negligence for jury to determine).
But
see Fox Alarm Co., 913 So. 2d at 1080 (failure to notify police of subsequent
alarm signals after dispatcher had notified police was not substantial
evidence
of wantonness).

We also note that although the claim for gross negligence was dismissed with
respect to Core-Mark, the claim for breach of contract alleged "willful and
wanton disregard for the safety of persons and property at the Core-Mark
Warehouse." Thus, Core-Mark properly pleaded willful and wanton conduct.

Giving Core-Mark and the Insurers the benefit of all favorable inferences as
we must, we conclude that whether Sonitrol's conduct was willful and wanton
is a
question of fact for the jury to determine. See Forman, 944 P.2d at 564.
Accordingly, we further conclude that the district court was premature in
granting summary judgment as to the applicability of the limitation of
liability
clause.

The summary judgments are reversed, and the cases are remanded to the
district court for further proceedings consistent with our holdings herein.

JUDGE TAUBMAN and JUSTICE ROVIRA concur.