Question:

Ken - Have read with interest your article in Security Dealer for December.
We find the Indemnification clause the hardest to retain in our contracts with
large sophisticated customers.
I am interested in your statement, "Third party lawsuits are rare; most claims
or lawsuits are from the subscriber or its insurance company suing in
subrogation, which is different from a third party claim, so the provision is
not often needed."

Would you explain further the underlined phrase?

Keith M. Ladd
The Protection Bureau
197 Philips Road
Exton, PA 19341


Answer:

     I agree with you that the single most questioned provision in the alarm
contracts is the indemnity provision.
     You want to know the difference between a "third party" claim and one
brought by the subscriber or its insurance carrier.  The contract you enter
into with your subscriber creates a contractual duty owed by you to the party
with whom you are in contractual privity, your subscriber.  The nature or scope
of your obligation (or duty) is defined by the terms of the contract.  While
creating certain performance duties the contract also serves to further define
the duties and obligations, and by doing so limits your exposure to liability.
     If you breach the contract you can be sued by the subscriber because it is
in privity of contract with you.  If the subscriber has insurance that pays a
claim the carrier generally has subrogation rights which it acquires by the
insurance contract (policy) and by operation of law.  A claim by the insurance
carrier however is treated as a claim by the subscriber.  As subrogee of the
subscriber the insurance company stands in the shoes of its subrogor (the
subscriber).  So a lawsuit by the subscriber or the carrier is a suit by one in
direct contractual privity of contract with you.
     A third party claim is one brought by a party who is not in privity of
contract; someone foreign to the contract.  Such a party can claim that it is
an intended third party beneficiary of the contract, or that you owed it a duty
outside of the contract (this would be a tort - negligence - claim).
     The remark that I made that you asked about was, as I recall, in
connection with comments about the wording of indemnity clause.  Many clauses
call for indemnity for "third party claims" and I suggested that the clause be
broadened to include all claims, so that it could be invoked even if the
subscriber or its carrier made a claim (and there are certainly better clauses
to protect you in that event, but the there is no reason to limit the language
of the indemnity clause).