KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Comments on Should you be willing to buy fire alarm accounts that have no or poor contracts
June 10, 2023
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Comments on Should you be willing to buy fire alarm accounts that have no or poor contracts from article June 3, 2023
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Ken,
Reading Joe Pfefer post about the Seller of a Fire Alarm company telling him that they “don’t need any contracts,” reminded me of something that happened about seven years ago. I have a Texas Alarm License and, even though I no longer have an alarm company, I keep it active by monitoring my house, office and my warehouse full of old fire alarm parts. Even though I am technically the “Alarm Company” and the customer, I still have signed contracts (by me) between the “Alarm Company” and the Customer. I will also point out that even though we do due diligence reviews and see about 100,000 alarm contracts a year, I didn’t DIY it by stealing someone else’s contracts, I used Kirschenbaum Contracts.
A few years ago the warehouse was burglarized. The Central Station operator didn’t follow the instructions on the account and called my office instead of my home and cell phone. She called the Response Company and gave them the wrong customer name. The Response Company couldn’t find the warehouse on their customer list and called back thirty minutes later to say that they weren’t going. She then called the Police and they were on the scene in five minutes, but the doors were locked and lights were out so they cleared it as a false alarm. Lots of common mistakes here but definitely a lawsuit in the making. Most people would think, well he isn’t going to sue himself, and they are correct. The potential problem came about when I filed an insurance claim with the warehouse insurance company. They asked for a copy of the Monitoring Agreement. They saw that it had the limitation of liability, and the underwriter called me and said “well we can’t collect anything from your alarm company.” I didn’t want to collect from my “alarm company” but the insurance company certainly wanted to, that’s their job. The contract kept me from having two claims on two policies… and two increases in premiums.
Mitch Reitman
817 698 9999 XT 101
Reitman Consulting Group
|Fort Worth, TX
http://www.reitman.us
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Another comment with a different perspective
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Ken
It is difficult to argue against the benefit of having contracts signed where liability is concerned on either alarm or fire installations. I always recommend that Security Company owners try to get at least a one year contract signed that deals with liability.
However here in Canada where things are perhaps not as litigious as they are in the US, my experience is that most of the smaller fire companies do not have contracts in place with their inspection accounts.
It would appear that the same is true in the US. 2 out of 2 fire companies talked about in your article did not have contracts. And guess what? Life goes on.
Fire businesses are bought and sold up here in Canada without contracts and to the best of my knowledge with no real repercussions. Generally, it is only the large national fire companies that as a buyer insist on getting contracts signed. Maybe it is because they have more to lose and is considered a set procedure.
Thou shall not do business without a contract! But to not buy a fire business because it does not have contracts in place appears short- sighted to me. If as a buyer you are that concerned about contracts, it is not that difficult to go out and get a 1 year contract signed after the fact. The same is true with alarm contracts. To suggest that buyer should steer away from even looking at good fire companies that don’t have contracts is my view does not make sense and is being out of touch with what is really going on in the industry.
Victor Harding
Harding Security Services Inc
victor@hardingsecurity.ca
70 Shaftesbury Ave., Unit 10
Toronto, ON M4T 1A3
416.925.7474
cell: 647.290.7902
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Response
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Regarding Mitch’s comment, the interesting take on that is that you never really know how many law suits are avoided, never brought, because the subrogation carrier or subscriber, takes the time to read the contract and realizes how futile it will be to pursue a case.
Of course there are plenty of cases all over the country where alarm companies have prevailed in a law suit because of the alarm contract.
As for Victor’s comment I agree that some alarm companies still operate with no contracts and a lot more operate with, let’s just call it subpar alarm contracts. Many of these alarm companies operate for years, never have a problem – meaning a law suit – and end up selling their accounts. One question which Victor doesn’t address is, what price – what multiple – are they getting? If fire alarm accounts under proper contract – and that means a Kirschenbaum Fire All in One for commercial fire alarm accounts – can expect 35 to 40 times [and larger companies, let’s say $100,000 RMR commercial fire can certainly ask for multiples in the 40s and sometimes even higher] what can a company with no fire alarm contracts expect for its RMR?
I’ll answer the question; 30 to 34 times, but the pool of potential buyers is going to be limited because many potential buyers won’t consider the purchase without contract. Note that Victor’s comments focus on inspection accounts. That leaves a few open questions, for Victor and others. What about accounts that do have a proper contract for the fire alarm monitoring; maybe even for repair service [though most fire alarm companies that don’t have contracts covering inspection also won’t cover repair service – they get the monitoring contract reluctantly because their central station asked them to – or insists on it, which the cs should]. In that scenario the alarm company selling its fire alarm accounts is going to find out that the buyer is going to pay only for the monitoring RMR; nothing for the repair or inspection revenue which is per call and not under contract. So that selling fire alarm company is not really selling its inspection accounts, it’s selling the monitoring accounts with contracted RMR for monitoring.
And before I go on, yes some fire alarm companies with no contracts will sell to another fire alarm company that doesn’t care about contracts. That, I assure you, is not legitimate justification for not bothering with contracts.
Let me suggest the following scenario to drive home the risk.
Buyer purchases fire alarm accounts having no contracts. Day after the sale the buyer performs fire alarm inspection and reports no issues. Fire that night and it’s determined that the inspection should have found deficiencies, should have reported the deficiencies, and that deficiencies could have contributed to the loss. Was the fire loss one or one hundred million dollars?
Let me make it worse, because I don’t think the original by Joe Pfefer was limited to inspection. Buyer closes on the purchase; it now owns the accounts. The central station doing the monitoring is informed that the buying alarm company is now responsible for paying the central station for monitoring the account. The buying alarm company is either already a Dealer with that central station, or was required to become a Dealer prior to the purchase of the account. Unless that Dealer managed to find a central station that doesn’t require a Dealer Agreement to be signed by the Dealer before monitoring will be performed [and that means the central station owner is just plain stupid] that Dealer Agreement requires the Dealer to indemnify the central station. Now, just to make it worse and drive this point home, the subscriber loss is directly attributable to an error by the central station; the central station operator was negligent, plain and simple. Subscriber, or more likely its subrogation carrier, sues the central station. The central station relies on the Dealer to have a proper contract with the subscriber, which in this case it doesn’t have. The central station doesn’t have any contractual protection against the claim, and since we have already know it was in fact negligent, it will be liable for damages. Again, are the damages one or one hundred million?
Even if the buying alarm company isn’t sued by the subscriber or its carrier, the central station [or really its insurance company] is going to seek indemnity from the Dealer. The loss exceeds the Dealer’s insurance coverage [and after this loss the Dealer will be looking for another E&O carrier because it’s going to be dumped by its carrier [unless the Dealer has managed to find the dumbest E&O carrier out there – and how lucky is this Dealer who managed to find the dumbest central station and dumbest E&O carrier – not really good odds]. But the loss exceeds the Dealer’s coverage anyway, so its carrier throws in the policy limits and then leaves the Dealer exposed for the rest of the damaged.
You tell me, was the purchase of those accounts with no contract worth it? Use updated Fire All in One for commercial fire, for installation, service, inspection and monitoring.
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com
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