93 Ill.App.3d 298, 417 N.E.2d 131,
48 Ill.Dec. 729, 31 UCC Rep.Serv. 46
Appellate Court of Illinois, First District, Third Division.
FIREMAN'S FUND AMERICAN INSURANCE COMPANIES, Plaintiff-Appellant,
v.
BURNS ELECTRONIC SECURITY SERVICES, INC., Defendant-Appellee.
No. 79-2135.
Dec. 1, 1980.
As Modified on Denial of Rehearing March 11, 1981.
Insurer of buyer of burglar alarm services sued seller of services under
theories of breach of warranty, negligence and strict liability for damages
sustained in a burglary, which occurred after the alarm system failed to
function. The Circuit Court, Cook County, Myron T. Gomberg, J., dismissed,
and insurer appealed. The Appellate Court, Simon, J., held that: (1) a $250
limitation of liability clause in the contract between the buyer and seller
was not unconscionable, and (2) economic losses were not recoverable under a
strict liability theory.
Affirmed.
West Headnotes
[1] KeyCite Notes
372 Telecommunications
372IV Special Services or Activities
372k463 k. Alarm Systems. Most Cited Cases
Two hundred and fifty dollar liability limitation in contract between seller
and buyer of burglar alarm services was not unconscionable, since chance of
burglary and potential loss depended not only upon quality of alarm, but on
many factors peculiar to buyer's knowledge and control, it was not
unreasonable for seller to feel that buyer was better able than itself to
buy any desired amount of insurance at appropriate rates and there was
substantial risk that protection provided by alarm system would not be good
enough regardless of how good that particular alarm was.
[2] KeyCite Notes
379 Torts
379k5 k. Injury or Damage from Act. Most Cited Cases
Economic losses are not recoverable in tort.
[3] KeyCite Notes
372 Telecommunications
372IV Special Services or Activities
372k463 k. Alarm Systems. Most Cited Cases
Economic losses sustained by jewelry store in burglary, which occurred after
burglar alarm failed, were not recoverable from seller of burglar alarm
services under theory of strict liability.
[4] KeyCite Notes
313A Products Liability
313AI Scope in General
313AI(A) Products in General
313Ak5 k. Strict Liability. Most Cited Cases
Economic loss is not recoverable under strict liability theory; "economic
loss" should be contrasted with loss which parties could not reasonably be
expected to have in mind, such as hazards peripheral to product's function.
Jack F. Clifford and Associates, Ltd., Chicago (Jack F. Clifford and Harvey
Paulsen, Chicago, of counsel), for plaintiff-appellant.
Sweeney & Riman, Ltd. by Elliot R. Schiff, Chicago, for defendant-appellee.
SIMON, Justice:
This case concerns the law of liability for consequential economic losses
caused by a defective product and suffered by a user in privity with the
product supplier.
The defendant, Burns Electronic Security Services, Inc. (Burns), contracted
to provide a burglar alarm system to plaintiff's insured, Henry Kay Jewelers
(Henry Kay). The system was supposed to send a signal of any irregular entry
to the police and to Burns' office. Burns would then send someone to the
scene to investigate. The system remained the property of Burns. The
contract absolved Burns from any liability for losses caused by failure of
the system, even if caused by Burns' negligence. If Burns was held liable,
damages were to be limited to $250. The exculpation clause recited that
Burns' fee was unrelated to the value of the property at risk, and warned
that Henry Kay was responsible for procuring insurance if it wished any.
Contrary to the plaintiff's assertion at oral argument, the contract was not
one of adhesion. This is shown by typed and handwritten amendments to Burns'
printed form, mostly in Henry Kay's favor. The exculpation clause does,
however, appear to be standard in the industry.
Burglars stole $800,000 worth of jewelry from Henry Kay. Fireman's Fund paid
its insured the policy limits and sued Burns. It alleged that the burglary
was due to a failure in the alarm system. Count I of the complaint was for
breach of warranty, count II for negligence and count III in strict
liability for a defective product. The circuit court struck count III and
reduced the damages on counts I and II to $250 in keeping with the
limitation on liability in the parties' contract. By agreement, the whole
case was then dismissed and Fireman's Fund appealed.
[1] The plaintiff first argues that the exculpation clause of the contract
is unconscionable and therefore unenforceable, and that the ruling limiting
damages on counts I and II was therefore erroneous. However, an identical
clause was upheld in Pick Fisheries v. Burns Electronic Security Services
(1976), 35 Ill.App.3d 467, 342 N.E.2d 105. Accord, First Financial Ins. v.
Purolator Security, Inc. (1979), 69 Ill.App.3d 413, 26 Ill.Dec. 393, 388
N.E.2d 17.
The terms of this contract belie unconscionability. The chance of a burglary
and the potential loss depended not only on the quality of the alarm but on
many factors peculiar to Henry Kay and within Henry Kay's knowledge and
control. For example, the type and quantity of merchandise in the store,
perhaps the prime motivation for a break-in, was for Henry Kay to determine,
not Burns. It was not unreasonable for Burns to feel that the jeweler was
better able than itself to buy any desired amount of insurance at
appropriate rates. Burns could properly insist on the exculpation clause to
make certain that the risk of a burglary lay on the jeweler, not on Burns.
It should also be noted that the product was designed to outwit the
ever-advancing burglary profession. The risk that the protection provided by
the alarm system would not be enough was substantial regardless of how good
the particular alarm was.
Allocating the risk to Henry Kay was thus not a bargain "which no man in his
senses, not under delusion, would make * * * and which no fair and honest
man would accept" (First Financial, at 419, 388 N.E.2d at 22). It does not
suggest unfair surprise or oppression (Ill.Ann.Stat.1963, ch. 26, par. 2-
302, Uniform Commercial Code Comment 1). On the contrary, the exculpation
clause was a commercially sensible arrangement and the plaintiff is bound by
it.
Plaintiff cast its third count in strict tort liability in an effort to
circumvent the contractual limitation of liability. In arguing that this
count should be reinstated plaintiff asserts that the loss of the jewelry
was equivalent to its physical destruction and its value is recoverable
therefore under a theory of strict tort liability.
[2] [3] [4] The basic dispute is over the nature of an economic loss. In
Illinois, economic losses are not recoverable in tort. (Album Graphics, Inc.
v. Beatrice Foods Co. (1980), 87 Ill.App.3d 338, 350, 42 Ill.Dec. 332, 341,
408 N.E.2d 1041, 1050; Alfred N. Koplin & Co. v. Chrysler Corp. (1977), 49
Ill.App.3d 194, 7 Ill.Dec. 113, 364 N.E.2d 100.) Although Album Graphics and
Koplin both proceeded on negligence theories, if economic loss resulting
from negligence is not recoverable in tort, we see no reason for permitting
recovery for loss of the same character in tort without fault.[FN1] If Henry
Kay suffered economic loss, the circuit court properly dismissed count III.
FN1. See, however, Mead Corp. v. Allendale (N.D.Ohio, 1979), 465 F.Supp.
355, 367, holding that economic loss can be recovered in Ohio under strict
liability in tort, but not under a negligence theory.
Economic loss, as we view it, is the loss of the benefit of the user's
bargain. It is the loss of the service the product was supposed to render,
including loss consequent upon the failure of the product to meet the level
of performance expected of it in the consumer's business. In Koplin (at
199), the court defined "economic loss" as loss resulting from a product
"inferior in quality" which "does not work for the general purposes for
which it was manufactured and sold," and we agree with that statement. We
differ from the Koplin definition of economic loss, however, because in
Koplin the court added to its definition a dichotomy between physical harm
and economic loss. We see no reason to make the presence or absence of
physical harm the determining factor; the distinguishing central feature of
economic loss is not its purely physical characteristic, but its relation to
what the product was supposed to accomplish. For example, if a fire alarm
fails to work and a building burns down, that is "economic loss" even though
the building was physically harmed; but if the fire is caused by a short
circuit in the fire alarm itself, that is not economic loss.
The principal concern of the buyer is, of course, whether the product will
accomplish what it is designed to do. Economic loss should be contrasted
with loss which the parties could not reasonably be expected to have in mind
such as hazards peripheral to what the product's function is. For example,
if a defect in the fire alarm sets off a fire or even causes a stench which
drives customers away and consequently results in loss of profits, without
any physical harm, this is a peripheral hazard producing a non-economic
loss.
The definition of economic loss is inextricably linked to the reasons why
that type of loss is removed from the field of tort liability. When goods
are sold, their soundness is the core of the bargain. It is for the parties
to decide what the consequences will be if the bargain founders. An entire
body of law, contracts-of which product warranties is a part-is available to
govern those areas of the relationship concerning which the bargain is
silent. There is thus no need for the law of torts to define the rights of
parties in privity when they have done so themselves. When a buyer loses the
benefit of his bargain because the goods are defective, that is, when he
suffers economic loss, he has his contract to look to for remedies. Tort law
need not, and should not, enter the picture. Album Graphics.
The case might be different had the alarm done or threatened personal
injury, which has a special place in the law (cf. U.C.C. (Ill.Rev.Stat.1979,
ch. 26) s 2-719(3) (limitation of damages for personal injury prima facie
unconscionable)); but it did not. Nor do we detect here any other reason to
abandon contract law and allocate risks by an inflexible rule of tort law,
as the plaintiff asks.
Henry Kay suffered economic loss. It wanted a workable alarm system; despite
its bargain, it did not receive one. Instead it was provided with an alarm
system which failed. It is true that the losses it suffered as a consequence
of this failure were very large, but the fundamental character of Henry
Kay's grievance is that it was sold a poor burglar alarm. This was not an
uncontemplated side effect. The soundness of the system was the core of the
commercial bargain. Henry Kay should have known the system might fail and
that under its contract with Burns it bore that risk. If it did not want to
do so, it should have spoken up before it signed. Because it was in privity,
it could easily have done so.
As economic loss, the value of the lost jewels cannot be recovered in tort.
If Henry Kay did not get an alarm of the quality it thought it had paid for,
that is a matter for the law of warranty, not strict tort liability. Count
III was correctly dismissed.
JUDGMENT AFFIRMED.
RIZZI, P. J., and McGILLICUDDY, J., concur.
Ill.App., 1980.
Fireman's Fund American Ins. Companies v. Burns Electronic Sec. Services,
Inc.
93 Ill.App.3d 298, 417 N.E.2d 131, 48 Ill.Dec. 729, 31 UCC Rep.Serv. 46