January 31, 2011
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Comment
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Dear Ken,
I am surprised to read that you approve alarm dealers deleting the protection afforded them in their subscriber contract. Stating that it is acceptable to strike the limitation of liability or the third-party indemnification clause in their contracts “as long as they have E & O insurance” is leading your readers down the wrong path and I believe it is not your best advice. In fact, if it weren’t for this language, alarm dealers would find it virtually impossible to find General Liability insurance much less E & O coverage.
Years ago an alarm dealer contacted stating that he could take over an entire school district if only I could find him an insurer that didn’t require standard alarm company contracts. I let him know that I did have a carrier but discouraged him from doing business without a limitation of liability clause in his contract. The allure of the new business outweighed the fear of the risk and the dealer switched carriers and took over the account. Six months later on a Saturday afternoon and for the lack of anything better to, two teenagers broke into the chemistry lab of a high school and started experimenting with the chemicals. You can guess what happened. By the time all the dust settled, the loss totaled $3.6M. The insurer for the alarm dealer paid policy limits of $1M and the alarm dealer was held responsible for the uninsured amount of $2.6M. This forced the dealer to sell his business to pay off the uninsured loss amount. Needless to say, dealers who alter their contracts are putting themselves at risk and that’s exactly why insurers insist on these clauses when they underwrite a dealer’s policy.
When clients of mine get resistance from prospective customers to sign their contract, I personally get involved and explain to the prospect that alarm dealers are not there to insure against a loss but only to provide additional protection. Sometimes I can convince the prospect with one telephone call and other times it requires a softening of the language in the contract to win the argument. But whatever the circumstance, I never let any of my clients do business naked and without proper language in their contracts. It’s just not worth the risk.
Rick Gombar, President
Rick Gombar Insurance Services
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Response
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It is not all right to omit the "limitation of liability" provision; I did not suggest that it was something I'd approve. My comments from the December 18, 2010 article are below. I suggested that the "indemnity" clause could be omitted to save the deal, and only if necessary, the "waiver of subrogation" clause. Both of these provisions certainly belong in a properly drafted alarm contract, but these provisions, particularly the indemnity provision, are more important to the alarm company's insurance company than the alarm company.
Keep in mind that my remarks were in the context of what provisions can come out to save the deal. The indemnity clause and the waiver of subrogation probably cause the most questions. Too many alarm companies will agree to use the subscriber's contract form, or no contract at all, in order to get the job. Tough times make for even harder choices, and many alarm companies are willing to take the risk. The horror story above is of course terrible to hear. I hesitate to comment on the case because I don't know the facts, haven't seen the contract, and don't know how the case was handled. All I can say is that in more than the hundreds of cases I have defended no alarm company has had to come out of pocket for any loss, and no insurance carrier has paid more than nuisance value to get out of a case.
The observation and advice to use proper contracts and keep in all the language is sound advice. Every paragraph in the Standard Form Contracts has been inserted for a reason, to protect the alarm company. Taking anything out- and usually adding anything, only serves to expose the alarm company to more liability. As the above case illustrates, once the insurance coverage is exhausted, the alarm company is at risk.
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From the December 18, 2010 article:
The indemnity provision [though mine is not limited to third party - so I don't know if you have my contract or just used wrong terminology] typically is one of the more problematic provisions. As long as you have E&O insurance, and your policy does not have an endorsement requiring the production of a carrier approved contract form as a condition precedent to coverage on a claim, you can omit the first sentence of the indemnity provision. That first sentence is in fact the indemnity provision.
You can also omit the waiver of subrogation, but I'd fight a little harder to keep that provision in the contract. Most lawsuits against alarm companies are brought by insurance companies suing under their subrogation rights. Incredibly some of these insurance companies even write for the alarm industry, such as Hartford [and don't deserve alarm industry support]. The waiver of subrogation clause is typically enforced so you should try and keep in the contract.