Legal Side

What obligation does an insurance broker have to advise and guide you regarding the adequacy of your insurance coverage? Is the relationship between you and your insurance broker considered a "special relationship" which creates "special" and continuing obligations and duties?

You have a relatively new business and estimate that the value of your corporate assets do not exceed several hundred thousand dollars. You contact your insurance broker and seek advice regarding insurance coverage, liability and errors and omissions, and after hearing the various premium quotes decide on a minimum policy with the most minimum coverage available. So you start off with $300,000 in E&O insurance and five or ten years later when your business is worth several million dollars, you have the same insurance broker and you are carrying the same $300,000 E&O policy. One of your subscribers suffers a serious loss which the alarm was intended to detect, you do not have one of my standard alarm contracts, and the loss far exceeds your E&O insurance coverage. You put up a fight, the case is tried, you lose, and now there is a judgment against you for an amount which easily exceeds the value of your entire company. You begin to wonder whether you can sue your insurance broker for not recommending or at least suggesting that you increase your insurance E&O coverage. Well, the answer is, unless there are some very special facts which create a special relationship, that you cannot.

An insurance broker owes no duty to advise his customer to obtain additional coverage in the absence of a request by the customer for additional coverage or a special relationship between the parties which gives rise to a duty on the part of the insurance broker to make such a recommendation. The general rule is that insurance brokers have a duty to obtain only the coverage requested by their client, within a reasonable time, or to inform the client of the broker's inability to place the insurance. Insurance brokers have no continuing duty to advise, guide or direct the client to obtain additional coverage.

The rationale for this general rule is that insured are in a better position to know both their own assets and their ability to protect themselves more than an insurance broker. Thus, insured, and not the broker, are the final decision makers in such risk management determinations. In fact, insurance agents or brokers are not personal financial counselors and risk managers, and there is no "guarantor status."

It has further been recognized that the insurance agent--insured relationship is not a generally recognized professional relationship in which continuing obligations to advise might exist but, rather, is nothing more than an ordinary commercial relationship which does not usually give rise to a duty to provide such on-going guidance. The duty is thus defined by the customer's request for coverage.

To be sure, your insurance broker plays an important role in your business, and it is sheer folly, despite the fact that you may be using my standardized contracts, to conduct your business without Errors and Omissions Insurance.

If your insurance broker is not taking a pro active role in assisting you in deciding on your insurance coverage needs, give me a call so that I can recommend a new broker.

ELIMINATING COUNTERCLAIMS

Counterclaims, meritorious or frivolous, continue to be used as a strategic device to defend against collection actions brought by alarm companies against subscribers who have breached their contract. More often than not counterclaims, interposed by subscribers who are now defendants in lawsuits brought by you, are without merit. Often these counterclaims are poorly drafted and typically have no factual support. Counterclaims typically allege that the equipment never worked, that monitoring response was too slow, that repair service was too slow or ineffectual, that false alarms annoyed the police resulting in fines, or annoyed the subscribers at all times of the day and night. It is not unusual for these counterclaims to fail to plead any loss by the subscriber which the alarm system was designed to detect.

So why are counterclaims so often interposed in collection actions? Defendants and their attorneys reason that collection actions are often handled on a contingency basis, therefore the alarm company has little or no legal fees in commencing the collection action. However, alarm companies typically have to pay for legal professional services in the defense of counterclaims. Counterclaims also complicate the issues in a lawsuit, cause more legal work to be done, thus resulting in additional expense and fees. The subscriber hopes the counterclaim will cause the alarm company to withdraw the collection action.

So what can you do to reduce or eliminate counterclaims? Hot off the press is a decision which we just achieved in my office. The order granted our motion dismissing a counterclaim. The Court held as follows:

"A party may move for judgment dismissing one or more causes of action asserted against him on the ground that...with respect to a counterclaim, it may not properly be interposed in the action." [statute omitted] At paragraph number thirteen of the contract signed by the parties, the document states that: "In any action commenced by [alarm company] against lessee, lessee shall not be permitted to interpose any counterclaim." —"A waiver of the right to assert a setoff or counterclaim is not against public policy and has been enforced by this Court." [citations omitted]

A provision prohibiting counterclaims in actions brought by you is easily inserted into your contract. You should find it effective in deterring counterclaims, and you should be successful in having courts dismiss counterclaims (see my order form at

Of course, the provision does not eliminate lawsuits against you, but your subscribers will be compelled to bring separate actions for their meritorious claims.

Federal Consumer Regulations

Residential sales require a three day cooling off period, and also require you to give a copy of the signed contract to the consumer. The Code of Federal Regulations, 16 CFR section 429. The Federal regulation specifically does not preempt or supersede state laws that provide for stricter requirements.

The Federal regulation and most state laws require the three day notice for cooling off for "door to door" sales. This is required for sales, monitoring and service contracts. The only exception is where the transaction takes place solely at your place of business and not at the residence.

Your residential contracts must have the three day Notice of Cancellation, and it must be in 10 point type directly above the customers signature. You must also provide a filled out Cancellation Notice that your customer can use to actually cancel within the three days. The form of this notice is statutory. The customer gets two copies of this notice.

Subscribers have the right to cancel until they have received the three day notice of cancellation. They are required to return anything you have delivered if they cancel.

The only way the subscriber can waive the three day notice of cancellation is by a written letter in the subscriber's handwriting, which must be separate than the contract, stating that the installation must be done immediately and specifically waving the cooling off period.

Electronic Signatures and Copies

Can you introduce an electronic signature into evidence in a court of law? Many of you know that I have become a great proponent and user of email (and if you're not getting my email articles, email me and ask to be added to the list). It facilitates doing business; its faster and cheaper.

So you put your contracts on computer and send it out to a prospective subscriber who after review adds its name to the signature line and sends it back to you (or however its done for those of you who are more technical than me). The system gets installed and some payments are made and ultimately a lawsuit follows. Can you rely on the contract as having been signed by the subscriber? Is the subscriber bound by the contract?

New York has a new law which became effective March 26, 2000. State Technology Law, Chapter 57-A of the Consolidated Laws, Article I, entitled Electronic Signatures and Records Act provides, in section 106, that:

"Admissibility into evidence: In any legal proceeding where the provisions of the civil practice law and rules are applicable, an electronic record or electronic signature may be admitted into evidence pursuant to the provisions of article forty-five of the civil practice law and rules including, but not limited to section 4039 of such law and rules."

A related issue is the use of electronic copies in court in place of an original document. New York, like many other states, has adopted the Uniform Photographic Copies of Business and Public Records as Evidence Act. In New York a reproduction created by any process which stores an image that does not permit deletions or changes without leaving a record, when authenticated by competent testimony as to how the reproduction was made, is admissible into evidence as an original.

As with original documents questions of authenticity and authority will continue to be raised as defenses, and we can expect case law to develop this interesting area of law. One thing you can count on, you need to keep up with the times and learn how to use electronic communication to grow your business.

ARE SUBCONTRACTORS PROTECTED FROM LIABILITY?

Subcontractors routinely work without contracts in the alarm industry. Whether installing burglar, fire or other electro protective devices, subcontractors are often happy to get work and give little thought on anything other than getting paid when they are done with the job. Recently a subcontractor called me because he had been asked by the General Contractor (in this case another Installing Alarm Company who had the contract with the subscriber) to obtain a certificate of insurance naming the General Contractor as additional insured. Not an unusual request. However, the subcontractor's insurance company refused to issue the certificate unless the subcontractor could produce a contract with the General Contractor in which the General Contractor agreed to hold the subcontractor harmless.

Under these circumstances it would be highly unlikely that a General Contractor would agree to indemnify and hold the subcontractor harmless. In fact, since the subcontractor was the one actually doing the work it is more likely that the subcontractor should be required to indemnify the General Contractor.

Putting aside the question of who should indemnify whom, perhaps a more important question for the subcontractor, and its insurance carrier if it has one, is what liability and exposure does the subcontractor face? Typically the subcontractor does not have a contract with the subscriber directly. The subcontractor relies on the contract between the General Contractor and the subscriber.

So, lets skip to what happens after the job is completed, everyone's paid, and the subscriber suffers a loss. Lets use a burglary loss just to keep it simple, as opposed to a multi building fire that destroys life and property. In our hypothetical lets also assume that experts can establish that several protective devices where improperly wired into the panel and were undetected until after the burglary, and that it was through the unprotected areas that the burglars gained access and committed their deeds. The subscriber's lawyers do their homework and find out the name of the subcontractor. A lawsuit names the General Contractor and the subcontractor.

The General Contractor relies on several defenses. First it claims that it has no liability because it was the subcontractor who actually did the installation and was negligent. Secondly the General Contractor produces its contract with the subscriber which contains an exculpatory clause and limitation of liability provision. The General Contractor is off the hook.

Now the subcontractor. Unfortunately he can not claim someone else did the work. He also can not produce any contract with any protective provisions; or can he? The only contract that the subcontractor can look to is the one between the General Contractor and the subscriber. Either it provides some protection or it doesn't. A properly drafted alarm contract (see contains a provision that provides that the Alarm Company has the right to subcontract services required under the contract, and that the protective provisions of the contract extend to protect the subcontractors. If that provision is in the General Contractor's contract then the subcontractor will escape liability. Without the contractual protection to rely on the subcontractor will most certainly face a trial, the cost of which will likely put him out of business, not to mention the impact of a sizable award against him.

A subcontractor should be certain that the General Contractor's agreement with the subscriber contain language protecting the subcontractor. There should always be a written contract between the General Contractor and subcontractor, but it is unlikely that the General will indemnify the sub. A subcontractor should also take the precaution of having errors and omissions insurance with a reputable company, and the subcontractor needs to know the requirements of the insurance policy to trigger coverage. If a contract is a requirement for coverage than the subcontractor needs to be sure to satisfy the carrier's underwriters in that regard by finding out if the contract between the General Contractor and subscriber will satisfy the coverage requirements. Otherwise a sub may need to get the subscriber to sign a contract, something that the General Contractor ( and subscriber) is likely to object to.

Automatic Renewal Provision

Why is there such a problem with this topic? Alarm contracts have automatic renewal clauses in them. Some contracts are for an initial term of 3 to 5 years, some 10 or more. The renewal can be for 1 year, 5 years, or whatever you make it.

An automatic renewal clause should and will be enforced (its legal) unless:

1. there is a statute that prohibits it

2. there is legal case law that refuses to enforce it (usually on the grounds that the particular provision is unconscionable [shocks the conscience of the court).

I am not aware of a Federal law that deals with the automatic renewal clause (if you know of one let me know the statute). Some states do have statutes that deal with the issue. In New York for example an automatic renewal clause is not enforceable unless the provider of the service (the alarm company) sends a separate notice advising the customer of the provision. The notice has to be sent by certified mail or personally delivered between 15 and 30 days prior to the renewal date. Failure to give the notice renders the automatic renewal provision unenforceable.

Check the statutes in your state to find out if there is a similar provision that you must comply with.

If there is no state law provision then you only need to be concerned that your contract term does not run afoul of common sense or decency. A 5 year initial term with a 10 year renewal written in obscure print buried in the contract may not be enforced. I think you get the idea. The standardized contracts that I offer to the trade are 5 year initial term and 5 year renewal. We have not had difficulty with those terms. We have also had success with 10 year initial term contracts with 5 year renewals.

For a list of the standardized contracts see our web site at

Some alarm companies have a policy of sending out new contracts rather than relying on their renewal provision. Unless the new contract is for an extended period and the renewal is for a shorter period, like one year, I don't see the wisdom in going to the trouble of preparing and sending a new contract. If you are required to send a notice of the automatic renewal you should comply with that; after all, the new contract may not get signed and returned.

Another little mistake I think some companies make is to send out a new contract and call it a renewal contract. The phrase "renewal contract" has caused many different types of problems in litigation. One thing you need to be mindful of is that the contract, now labeled a "renewal contract" may have several provisions in it that have triggering events that will not be taking place with the renewal contract, such as an installation of equipment, or a provision that says the contract is for 5 years after the installation of equipment. In a renewal situation that provision can cause the subscriber to claim that the equipment was installed long time ago when the first contract was signed and therefore the 5 years ran before the renewal contract was even signed, thereby permitting the subscriber to cancel anytime; not a position you need to litigate and one you can easily avoid by knowing what is in your contract.

If your contract has an automatic renewal provision in it then I suggest you rely on it. If you want to have a new contract signed during the term of an existing contract that is fine. You should probably offer some incentive for a subscriber to sign a new contract, such as a free inspection, free piece of equipment, an upgrade in equipment or a rate freeze or decrease. Giving something for the new contract will help establish your consideration and avoid an issue that the subscriber was duped into signing a new long term contract. Let a sense of fairness be your guide.

Confidentiality of Client Lists

Recently an alarm client emailed me and asked whether subscriber lists are confidential. More specifically, whether a former employee could leave with the customer list in his personal computer data base. I provided a rather lengthy analysis that concluded with the thought that the list was probably not confidential. The following recently published case illustrates the legal concepts.

Plaintiff moved for a preliminary injunction to enjoin the defendant's use of an alleged confidential client database allegedly misappropriated from plaintiff while defendant was in plaintiff's employ.

The court denied the motion because the plaintiff failed to demonstrate a likelihood of success in the case, and failed to provide any evidentiary support showing that defendant misappropriated the database or that it was being used to compete against plaintiff. The court also found that the plaintiff's claim that the list was not public information and constituted a trade secret was not proved, and that there was no proof that the list was confidential.

Another issue in the case was a restrictive covenant not to solicit the former employer's customers for one year after leaving the employ. This court found that such provisions are "disfavored" by the law and will only be enforced to extent necessary to prevent disclosure of trade secrets or confidential information, or where the former employee's services are unique or extraordinary, which was also not proven in this case.

Of course not every customer list is public information, and certainly information about each customer is not public information. But whether the list and information constitutes trade secrets entitled to confidential information status (and this entitled to proprietary protection) often will depend on the nature of the employers business, the effort that went into developing the list and how confidential the employer actually kept the information from competitors and employees.

The typical alarm company provides pretty much the same services as its competitors, and provides its services to the same type of customers. The prospective list of customers can be found in the phone book or by walking down the street. Of course the precise type of alarm, pricing and specific services would not be common knowledge to competitors, but protecting that information, including the list, needs to be weighed against the strong public policy that favors open competition in the market place. For sure your former employees cannot copy or remove your records, but proving that they have and are using the information to unfairly compete is easy to allege but very difficult to prove. Without the such proof you are unlikely to prevail in an action to enjoin competition.

Assuming you do not provide a service that is so unique that only a select clientele that you have developed after much effort uses the service what steps can you take to make it more difficult for your former employees to unfairly compete against you? Start with an employment contract that clearly provides an agreement between you and the employee that your customer list and customer information are confidential and trade secrets. And, you should treat that information that way. Your employees should have access to only the information they need to perform their job. If access is to be available then the employment contract should address that and express the employee's unique position and need for the access. Copies and personal files should not be permitted. If you do not treat your information as confidential then don't expect a judge to at a later date.

The more information you have for a customer the more likely a judge is going to recognize that you put a great deal of effort creating the database. In other words a customer list that merely lists name and address would not really contain anything more than the phone book. The fact that such customer have your alarm service would not likely make it special enough to identify or protect as a trade secret. However if that list also contained contacts, type of alarm, dates of contracts, pricing, and other pertinent information that would be particularly helpful to a competitor and yet unavailable, you have a better chance of convincing a judge that it is confidential and entitled to protection.

Each case needs to be evaluated on its own facts. The legal principles are fairly well defined; its the application that causing so much confusion. Keep in mind that the way you treat the information and conduct yourself and your business will undoubtedly be a factor to a judge asked to protect the information as a trade secret and prevent its use against you.

Premises Liability

A 14 year old girl was raped by an unknown assailant who forced his way into her apartment. She was alone and when she looked through the door peephole. She thought the man was a delivery man from UPS. The building had a history of significant criminal activity, including loitering, robberies, drugs, and sexual assaults. The building's intercom system was broken, as was the front door locks, and they had been broken for a long period of time. The landlord had in fact already been reprimanded by NYC officials and agreed to fix the violations regarding the intercom and lock.

The plaintiff (little girl who had been raped) sued the building owner on the grounds that the owner had negligently breached its duty to take precautions against foreseeable criminal assaults on tenants. The motion court granted the motion to dismiss the action based on the current law that since plaintiff could not identify her assailant nor be certain how he gained entry into the building she could not demonstrate a triable issue of fact as to whether he was an intruder rather than a tenant or guest of a tenant.

On appeal, the Appellate Division reversed, reinstated the complaint, and is now sending the case to trial.

The reason for the reversal is a change in the law in New York State based on decisions by our highest Court.

Landlords have a duty to take minimal precautions against foreseeable criminal activity by third parties. A tenant victimized by a criminal in the building may recover damages from the landlord, if the failure to provide adequate security was a proximate cause of the assault. Many prior cases established the well accepted principle that if the victim could not identify the assailant ruling out the possibility that he was a tenant or guest, there could be no action against the landlord even where there was proof of broken locks and intercoms and no security. This standard has now been rejected as an overly stringent burden of proof.

The new standard needed to overcome a motion for summary judgment to dismiss the complaint (and at trial to establish liability) is that a plaintiff must present evidence from which intruder status may reasonably by inferred. Thus a plaintiff need not rule out all other possibilities, but merely show that the evidence renders it more likely than not that the assailant was an intruder who gained access to the premises through a negligently maintained entrance.

The new decisions by the courts will most certainly encourage building owners and their insurance carriers to take building security more serious. The potential exposure for liability is staggering and landlords will no longer be able to take comfort in law that has recently fallen out of favor. You should bring this change of law to the attention of your building owner subscribers and encourage them to increase their building security. Front door locks and intercoms are mandatory in NYC. CCTV, proper lighting, and panic alarms make sense.

LIQUIDATED DAMAGES v. LIMITATION OF LIABILITY PROVISIONS

Perhaps the most important provision in a properly drafted alarm contract, from a defense standpoint, is the limitation of liability provision, or liquidated damage clause. Though some courts treat the two provisions similarly, and will enforce either provision under the same circumstances, the limitation of liability provision and the liquidated damage clause are in fact two distinct different types of provisions. Often the courts in a state will be willing to enforce a limitation of liability provision, but not a liquidated damage clause. Other states will favor the liquidated damage provision in an alarm contract. It is essential that you know which type of provision is preferred and enforced in your state and make certain that your alarm contracts contain the proper wording.

How do you know which provision your contract has? A "liquidated damage provision" typically contains at least some of the following wording:

The parties agree that in the event subscriber suffers any damages as a result of alarm company's breach of contract or negligence that it would be impractical and extremely difficult to anticipate or fix subscriber's actual damages. Therefore subscriber agrees to accept $250.00 in full and final damages in the event of alarm company's breach or negligence.

Courts will enforce a liquidated damage provision where the agreement is clear in its terms, and the court further finds that the specified liquidated amount is not a penalty. To determine whether it is a penalty as opposed to estimated damages, the court would normally have to find that there was an uncertainty as to the amount of potential damages or difficulty of proof and that the contract as a whole is not manifestly unconscionable, unreasonable, and the liquidated damages is not disproportionate in amount so as to justify the conclusion that it does not express the true intentions of the parties.

A limitation of liability provision is subject to scrutiny, but there is a different analysis. The "limitation of liability provision" typically reads as follows:

Should there arise any liability on the part of the alarm company as a result of its breach of contract or negligence, the parties agree that the alarm company's liability shall be limited to $250.00.

The analysis regarding the enforceability of a limitation of liability provision is whether the limitation on damages is so disproportionate to both the amount of the actual damages involved and the contract price so as to be unconscionable.

The following case best illustrates the analysis, and the importance of having the proper provision in your alarm contract.

Alarm company installed a fire alarm system. A fire broke out, the alarm company received a trouble signal which was not interpreted as an actual fire condition, and there was a delay by the alarm company to report. In the meantime, someone else reported the fire. There was an loss in excess of $500,000, and the alarm company was sued on the theory that their delay in reporting the fire caused significant additional damage which would not have occurred except for the alarm company's failure to properly report the alarm condition. The alarm company, one of the nationwide companies, had a contract which incorporated language for both a liquidated damage clause and a limitation of liability provision. When the alarm company moved for summary judgment dismissing the complaint based upon its "liquidated damage/limitation of liability clause", the plaintiff argued that the clause was a liquidated damage clause and therefore not enforceable in that state (Ohio). The Court did an analysis of the two clauses. Luckily for the alarm company the Court chose to interpret the provision as a limitation of liability clause, and not as a liquidated damage provision, despite the fact that the clause did have the language commonly found in a liquidated damage provision. (Impractical and extremely difficult to fix the actual damages...")

The Court analyzing the contract noted that as a liquidated damage clause the alarm contract provision would not be enforced because the amount of the liquidated damage, in this case $1,000, was indeed disproportionate to the amount of actual damages, and the amount of the potential actual damages could have been estimated; the nominal liquidated amount could not possibly been the potential actual damage contemplated by the parties.

However, as a limitation of liability provision, the liquidated amount ($1,000) was not disproportionate to the amount that the subscriber was paying for the alarm service, a much different criteria than comparing it to the actual damages ultimately suffered by the subscriber. Thus, the Court in this case recognized that the alarm company could not afford to undertake a potential liability greater than the contractual limited amount in view of the price it was charging for its system and alarm service. The contract provision was therefore enforced as a limitation of liability provision.

Of course, the entire analysis could have been avoided if the alarm company had a properly worded limitation of liability provision. Many alarm companies think they are protecting themselves by combining the language from both types of clauses into a single clause. It's not a good idea. If you operate in a single state then you should find out which provision your state prefers and enforces. Sometimes it is a matter of which provision has been reviewed, addressed, and enforced in your state. Ohio, like New York, enforces the limitation of liability provision. For further information on alarm contracts see our site at.

CONTRACT ENFORCEMENT - Acceleration and Counterclaim

A vital component of the alarm business is to actually collect payments in exchange for services. Breach of contract by subscribers is an issue every claim company experiences. Litigation often follows. Here is a recent case for your consideration.

The plaintiff (alarm company) sued the defendant (a home owner) to recover payments due under a monitoring contract. The plaintiff was hoping to collect $1,438,89 – a figure derived from calculating all money due over the promised five years stated in the contract. The defendant interposed a counterclaim based on breach of contract, claiming a defective installation. In other words, the home owner also sued the alarm company for "installing a defective alarm." Relying on the acceleration clause, the plaintiff demanded $27.00 per month for a five year period for alarm monitoring services.

At trial the judge focused on the contract to determine two issues: the defendant's right to counterclaim, and the plaintiff's right to recover the balance of the contract payments. The contract provided that should the company institute legal action to collect money, the purchaser waives the right to interpose a counterclaim. Stated verbatim, the contract reads:

"As aforesaid, in any action or legal proceeding arising directly or indirectly, from this sale or any guaranty hereof, Purchaser and any guarantor waive trial by jury; Purchaser shall not be permitted to interpose any counterclaim..."

Secondly, in addition to waiving its rights to a counterclaim, the purchaser agreed to an acceleration of the payments in the event of default. The contract reads:

"In the event Seller institutes legal action to recover any amounts owed by Purchaser to Seller hereunder, the parties agree that the amount to be recovered, and any judgment to be entered, shall include the full accelerated unexpired term of the agreement..."

Concentrating on the counterclaim, the judge noted that, as a general rule, a clear waiver of the right to asset a counterclaim is consistent with public policy under New York law, in the absence of fraud. The judge found that since the defendant did not assert fraud, and since the contract clearly and unequivocally waived his right to impose a counterclaim, the counterclaim should be dismissed.

The judge then treated the acceleration clause as a liquidated damage provision. He noted that it is well established that stipulated liquidates damages will be upheld only where they bear a reasonable relation to the actual amount of probable damage, otherwise, it is considered a penalty and will not be enforced. In this case, the Judge found it unreasonable to charge the defendant for five years worth of service where only several months of monitoring was provided. It was established at the trial that the defendant paid for the installation of the alarm system and that monitoring payments ceased a few months thereafter. Only $128.84 was the amount due and owing for services already rendered when monitoring was terminated, and that's all the judge was willing to award.

I have recommended that you replace the acceleration clause with a liquidation damage clause. The difference is that the liquidation damage clause will ask for something less than the full amount that would have been paid had there been no breach. Keep in mind that the liquidated damages needs to be a fair estimate of damages, not the full amount that would be paid (unless that is the proper measure of damages). In my contracts I have settled on 80% of the full amount. The acceleration clause was one of the first provisions to be found in alarm contracts, and it is commonly found in most alarm contracts today. Overcome your resistance to change and try the liquidation damage clause; I think you will have better success with your collection cases.

Designing Free or nominal charge Alarm Systems contracts

There continues to be interest in selling (or giving away) free alarm system installations to subscribers. How can these transactions properly be designed to provide maximum protection and account value to alarm companies? The transaction typically involves a residential subscriber. (commercial subscribers usually lease the alarm system and the lease would therefore provide for no installation charge and a monthly charge which would include continued lease of the equipment, monitoring and service). However, the residential transaction usually involves a sale of the system, equipment installed, and then a monitoring contract.

I have found that the preferred procedure is to have a separate contract for installation, monitoring and service. (that's three separate contracts). Though this does require more paperwork sometimes, not every transaction starts with the sale, and the separate contracts permits you to use the one that you need. If you are contracting for just monitoring, or just service, you don't have to try and modify an all in one contract.

The free alarm system contract provides for a standard alarm system at a standard price. What you want to include in the standard installation is a business decision, as is the price you want to specify for that standard installation. The contract then has a provision that waives (or discounts) the standard price. That waiver is however conditioned on the subscriber entering into and fully performing a standard monitoring contract.

The monitoring contract is designed to tie into the sales contract. The monitoring contract provides that if the monitoring contract is breached by the subscriber then the alarm company can recover not just the monitoring charges, but the waived installation charge as well.

The sales and monitoring contracts for the free systems look very much like the standard alarm and standard monitoring contracts except for the waiver provision and the reference in each contract (sales and monitoring) to the other.

If you are ordering the sales and monitoring contracts and want the ones designed for the free installation, please let us know when you place the order so that we can send the proper contracts. Contract orders that do not specifically request the free alarm system provision will be sent the standard sales and monitoring contracts, which make no provision for waiving any charges.

For an order form see Alarm Contracts . You need to send a separate email to advise that you want the free system provision.

Unfortunately a request that the contract be free cannot be recognized. :-)

Valuation of Equipment

A minor change has been made to the standard lease and the standard monitoring contracts. Alarm Contracts Both of these contracts provide for the "agreed value of equipment." The change is that the provision now reads "agreed value of installed equipment." The purpose of the provision and the reason for the change follows.

The provision is found in the lease and monitoring contracts. In both of these contracts the subscriber is not being asked to pay for the equipment; in each case the equipment is leased. So why bother with agreed valuation? It's in case there is a default by the subscriber in the contract. In the event of default the contract provides that at the alarm company's option the subscriber can be required to permit removal of the equipment, or be charged and required to pay the "agreed value." By agreeing to this agreed value the idea is that in a lawsuit for breach of contract the alarm company will not have to prove the value of the equipment since the value has been agreed to. This could avoid the necessity of a judge holding a hearing to determine valuation, reason enough to include the provision in the contract.

Subscribers should not complain about the provision since they are not being asked to pay the price, and even though the price kicks in if there is a default, few subscribers will consider this when entering into the contract because they are not focused on defaulting and the default provisions. Most will be primarily interested in when you can do the installation and how much it will actually cost.

In collection cases we have sometimes experienced subscribers and Judges challenging the valuation of the equipment. Needless to say, we often find the valuation exceedingly high. After all, the subscriber is not being asked to pay the value of the equipment, and the subscriber may in fact be impressed that the alarm company is willing to install such expensive equipment for a minimal installation charge and a low monthly charge for the lease, service and monitoring of the equipment. So a commercial subscriber who is getting a free installation and being charged $40 a month may not raise an eyebrow, an objection, when the lease provides that the value of the equipment is $4500.00.

When there is a default and lawsuit however and the alarm company is seeking 80% of the balance of the monthly charges and 80% of the agreed value of the equipment, the valuation issue first comes to light.

Of course we argue that the equipment value is not a permitted issue since it is agreed to in advance in the contract. But further argument is usually necessary. Is the price the alarm company's cost, a wholesale or retail value? Well, simply, it is the price that the alarm company would want for the equipment, installed. Wires and piping may have little value purchased new, and even less value after its used and installed on a job, but to the subscriber it could have higher value since it is installed already in the premises, removal could be costly and leave damage, and replacement could be expensive.

I thought it would be easier to support a higher price for "installed" equipment than just the value of the equipment. Hence, the additional word was added to the contract provision. (the copyright date on this latest revision is now 11/01, in case you are wondering how outdated your contracts may be -- they are upgraded a few times a year).

While I am at it, one other change was made in this revision. Additional language was added to make it crystal clear that no service to the system is required if the subscriber is in default under the contract. This is for the lease, service and monitoring contracts.

Who Protects the Central Station - Securing receivables.

This article is for the central station companies providing wholesale monitoring services, and the alarm dealers who install alarms and contract for third party monitoring. Let's look at the relationship from the perspective of the monitoring company, which I usually refer to as the Central Office, or CO.

The CO has made a substantial investment in a facility, office space, equipment, telephone lines, and trained personnel. COs doing wholesale monitoring all have substantial advertising and sales budgets and expenses. The competition is fierce. Monitoring rates can go anywhere from $6 to $2 a month, and when you throw in some start specials, the price is even less. COs do have their "better" customers, just like any business does. But one of the problem issues COs face, like other businesses, is the customers who don't live up to the bargain, in this case, those who don't pay their bills for the monitoring service. The CO usually feels particularly bitter about the non payment since it knows that the alarm company has in all likelihood collected the monitoring charges from its subscribers, and that the amount charged by the alarm company to the subscriber is likely 5 to 10 times or more than the amount the CO is charging the alarm company. How can the CO guard itself against these alarm companies that don't pay their bills, often moving from one CO to another once the bill is high enough or the special deal is over?

Recently I sent a notice out that the "standard" alarm contracts I offered to the industry were being upgraded and that one change was the addition of a clause that gave the alarm company a security interest (by filing a UCC-1) against the subscriber. Well, that change has now been added to the my standard contract between the CO and the dealer (the Installer Contract).

The provision works like this. The alarm company grants the CO a security interest, or lien, on the subscriber accounts being monitored by the CO, and any other property that can be included, such as equipment. In the event the alarm company attempts to sell its alarm contracts the lien will show up. If the alarm company goes bankrupt, the lien will make the CO a secured creditor. If the alarm company tries to avoid payment and seeks to abscond, the CO can assert its lien and grab the collateral. The perfect protection? No, but another level of protection.

I remember that when I was fairly new representing the alarm industry a CO decided to exercise self help by going after the subscriber accounts of a non paying alarm company. I was surprised. This CO (long gone now) was also an installing company, and therefore was in direct competition with the many alarm companies it provided third party monitoring for. These alarm companies were apprehensive about giving the CO their subscriber information, and I thought that the CO's action of soliciting the subscribers of the defaulting alarm company would, once it got out in the industry, cause more economic harm than could be gained by going after the accounts. As far as I knew there was no precedent for that type of remedy.

Well, time went on and one of the innovative provisions I added to a contract between the CO and the alarm dealer, was that very remedy. So if you have signed such a contract the CO can solicit your subscribers if you default; but it's still not secured, and solicitation sometimes is quite ineffective. A security interest adds an additional remedy that may prove to make a difference between recovering what's owed, and losing it and watching the alarm company slip away, only to surface being monitored by one of your competitors.

In order to perfect its security interest the CO will need some additional information from the alarm company, including the type of business entity, state of organization, tax id and state id if one is issued. The UCC-1 is then filed in the state where the alarm company is organized, not necessarily the state where the CO is located or where the alarm company has offices.

This protection for the CO is entirely appropriate. There is little sympathy for the alarm company who beats its CO, and the CO is entitled to all the protection it can reasonable get. The security interest provision is therefore something that should be acceptable to the alarm dealer.

Collections- 10 Year Term

The latest contract modifications to the standard contracts [ Alarm Contracts] (with recurring revenue -- which would be lease, monitoring and service) included a change in the initial term. The term of the contract, which years ago was typically 3 years, changed to 5 years well over 10 years ago, and is now 10 years. Of course there is also an increase provision and I have retained the right of the alarm company to terminate or withdraw the increase if the subscriber does not want to pay an increase.

Just a few weeks ago we got a decision on a collection case that went to trial. We sought 80 percent of the balance of a 10 year term (about 8 years left), pursuant to the liquidated damage clause, and 80% of the stated value of the equipment, which was something like $3000.

There were other interesting issues in the case that the Judge had to deal with, but the issue for this article is the enforcement of the term, the liquidated damages and the equipment value.

The Judge gave the full amount calculated on the liquidated damage clause on the 10 year term, plus legal fees of approximately 33% on that amount. However the Judge gave nothing for the value of the equipment (we were seeking 80% of that amount also) because the Judge reasoned that if the customer had paid for 10 years, as she was being charged in the judgment, then the equipment would depreciate and have no value after that passage of time.

Though there was nothing in the record to support the Judge's speculation of the declining equipment value, the enforcement of the 10 year term and the recovery of legal fees, made the award high enough.

The contract also has the automatic renewal clause, but many companies are remise in sending out the required renewal notice. Will subscribers sign a 10 year term contract? Well, several of our clients have been using contract with that term for some time without issue. Your ability to sell it will depend on your marketing and sales pitch.

Restrictive Covenants in Buy/Sell Agreements

When you sell your business, or your subscriber accounts, you expect to be asked by the buyer to sign a restrictive covenant that prevents you from competing with the buyer. The scope of the restrictive covenant is defined by the terms of the agreement. I want to examine some of the characteristics of the restrictive covenant.

First, let me clear up a fundamental misconception; restrictive covenants are enforceable provided the terms are reasonable, necessary for the protection of the buyer and not unduly burdensome for the seller. Thus, a buyer who sells a business local to one state will not generally be restricted from competing in other states. If a buyer needs several years to establish itself and cement its relationship with its customers and in the industry, then a life time restriction prohibiting the seller from re entering the industry is over kill and won't be enforced. One except to this general rule, the seller can be and should be barred from dealing with the customers sold to the buyer, forever, or at least as long as they remain customers and for a reasonable time thereafter.

There are two aspects to the restrictive covenant that need to be considered: soliciting and servicing.

Be very careful how you word the restrictive covenant since it will be strictly construed, most narrowly, against you (if you are the one trying to enforce it). Some agreements just restrict "soliciting" subscribers. The problem arises when the party under such restriction claims that he did not "solicit," but that the subscriber contacted him; thus no violation of the restriction.

If the restriction precluded "servicing" then it would not matter who did the initial contact.

I have seen so many poorly worded buy out agreements where the restrictive covenant is inadequate to protect the buyer, or so obviously unenforceable due to the onerous and unnecessary scope of the restriction. Often the verbiage goes on and on about how the seller is to be restricted as "an owner, stockholder, partner, consultant, friend, employee -- on and on ad nausea." Your rule of thumb should be to keep it simple. Seller, in any and all capacity, should be precluded from soliciting and servicing all sold accounts, forever, and from competing against the buyer in the limited area where the seller use to be and where the buyer now intends to make its presence (if it was not there before), and the time duration should be reasonable, which criteria does change depending on the circumstances.

Outright sales and financed time payments

Typically alarm and other security sales contracts provide for a contract deposit and balance on completion. What happens when you permit the subscriber to pay off the purchase price over time, agreeing to finance the sale?

The answer is plenty, more than you need to or want to know. Permitting payments over time and charging a finance charge turns your sales contract into a retail installment contract, and there are all kinds of laws that govern those contracts, particularly if you are selling residential consumer contracts. Almost all of these laws effect the way the contract terms can be structured and the terms themselves.

Some of the laws require the term "retail installment contract" on the top and again by the consumers signature, actually competing for the space required by the infamous 3 day notice of cancellation, which needs to compete with the notice that the customer is entitled to a complete copy of the contract at time of signing. Waiver of juries are not allowed, nor can you require the customer to waive the right to interpose counterclaims if you start a suit. If your contract calls for you to get legal fees, then the customer will also be entitled to legal fees if successful in the action.

Of course all of the usual consumer protective provisions must also be in the contract, like estimated starting and completion dates, warranty notices, permit notices, license disclosure, type size.

Then there are the federal laws, Truth and Lending, requiring that you disclose the purchase price, the finance charge, the totals (in case your customer can't add I suppose), the percentage rate (as if anyone wants to be reminded they are paying 18 to 24%). Needless to say the laws require specific positioning of the provisions and disclosure.

Think you can piece together one of these retail installment contracts yourself? Think again. The laws are all over the place. And once you permit a payoff I am not so sure you can circumvent the laws by claiming that you are not charging a finance charge. One may be imputed, and since you don't make the disclosures, who knows how many laws you may be violating and the various penalties, none of which you will like.

So what's the answer. Stick to what we do know. If it's a sale, get a contract deposit and the balance on completion. You can find that type of security contract at www.alarmcontracts.com.

Contracts of Adhesion and enforcement

Alarm contracts contain numerous provisions which when read by a subscriber and even legal professionals unfamiliar with alarm law may appear to contain onerous provisions; Onerous from the perspective of the subscriber. When litigation arises one of the attacks against the contract is that it is unenforceable. While various grounds supporting that position are typical, one of the common issues is that the contract is one of adhesion. What precisely does this mean?

Arguing that a contract is one of adhesion a subscriber would claim that the contract is a standardized form; that the contract was preprinted and that the alarm company would not make changes. Along with that would be a claim that the parties had unequal bargaining power. What is the consequence of a finding that the contract is one of adhesion? Surprisingly that finding alone does not render the contract unenforceable.

The finding that a contract is one of adhesion is only the first step in determining its enforceability There must also be a determination that the terms of which the party claiming adhesion was unaware at the time of signing the contract are beyond the reasonable expectations of an ordinary person or are oppressive or unconscionable.

This standard of review when applied to alarm contracts routinely results in enforcement. Though novel 25 years ago, typical provisions in an alarm contract have received judicial review in almost all states, and enforcement is expected. Thus contracts with the exculpatory clause, limitation of liability provision, liquidated damages, indemnity clauses, are routinely enforced. You would be foolish to conduct business without a well drafted and time tested contract, and that is the case for sales, monitoring, service of all types of alarm and security equipment.

Collection Policy Ideas

Business has not yet turned for the better and keeping an eye on your receivables is as important as ever. Additionally by the time this article reaches print there won't be much time until the Christmas holiday season comes and goes. If you have been in business any length of time you know that marginally solvent business often hang on through end of December and then close. That could mean that bills, like the alarm bill, stop getting paid just about the time you are reading this Security Dealer article. Be vigilant. Check your receivables now and those in default warrant your attention. Creditors who act fast and furious are the ones who get paid first, and sometimes they are the only ones that get paid at all.

Here are some perhaps obvious ideas that you should implement regarding your collection practices:

1. The process starts with knowing the full and correct name of your subscriber; the full corporate or partnership name. [the correct name belongs on the contract -- which you must have with every subscriber]. 2. Be certain to get the title of the person who signs on behalf of a non person entity, such as a corporation. 3. Confirm the name of your subscriber by checking a posted license, sales tax notice, or corporate filing receipts if you can get to see them. Many subscribers will have licenses posted in the premises that you can easily look at. 4. Make a copy of the checks you receive from your subscribers, especially if the bank account is a new one. Retain the copy with your subscriber's records. 5. Try and get your subscribers tax id number. In fact the new contracts call for that information so that you can fill out the UCC form for your security interest. 6. Retain records of service requests and calls. 7. Obtain records from the central station to confirm that the alarm system was tested and working when installed and get periodic test signal confirmation and retain those records in your subscriber's file. 8. Be mindful of your subscriber's payment practice history. In other words, if the customer typically pays within a particular time frame then you need to be alerted to a failure to pay within that period. You need to contact the subscriber to ascertain why payment is not being made in the customary manner. If you do not receive a satisfactory answer then that is the time to refer the subscriber to "collection." Each subscriber therefore establishes its own schedule based on past payment history. One subscriber may be fine running 4-6 months in arrears, and another may cause you reason for concern if payment is not received within 15 days. 9. Remember to keep matters on a professional level. Do not get into a personality conflict with your subscriber over late payment of default. 10. Refer the matter to a lawyer familiar with alarm collection practice; avoid collection agencies and your relatives.

Individual Bankruptcy and Protecting Your Rights

As I write this article the much talked about bankruptcy reform legislation remains in Legislative Committee in the Senate and House. It is not anticipated that the legislation will reach a favorable vote until after the summer [2002]. You may be wondering how this proposed change in the bankruptcy law may effect you and your business. For additional bankruptcy information you can visit my web site at www.KirschenbaumEsq.com (I have served as a trustee in bankruptcy for over 25 years).

The most talked about proposed change to the bankruptcy laws will establish a "financial means" test. If an individual filing has income exceeding a certain level for his geographical area then he will not be permitted to file under chapter 7 but will have to file under chapter 13.

Chapter 7 is a liquidation whereby an appointed trustee collects and sells the debtor's non exempt property, the proceeds of which is then distributed to the creditors according to a distribution priority. Most chapter 7 filings are what we call "no asset cases" which means that the debtors do not have sufficient assets to liquidate to create a bankruptcy estate. Unless there will be something meaningful to distribute to creditors after the Trustee pays administration expenses the Trustee generally will not open an "asset case" and liquidate property. When a chapter 7 case is filed that appears to be a no asset case the clerk of the court sends a notice to creditors that advises that it is not necessary to file a "proof of claim," (that is the procedure in the Eastern District of New York and may not be the procedure used in all districts). If assets are later found and the Trustee creates an estate then the clerk of the court sends out notice to creditors to file a proof of claim. Only those creditors who file a proof of claim will share in the distribution.

A chapter 13 filing is quite different. This is a wage earner's plan. An individual with regular income can propose a repayment plan over 36 to 60 months. The debtor will need to propose paying out over the life of the plan at least what a Chapter 7 Trustee would liquidate in a chapter 7. To participate in the distribution you must file a proof of claim.

You may experience an increase in bankruptcy filings in anticipation of the proposed changes in the law. Individuals who think that they will be forced into a chapter 7 because they have higher income than their geographical average may want to file now rather than be forced into a chapter 13 where that excess income will be used to fund a plan that pays back 25% of the unsecured debt.

There are several things that you should do if you receive notice that your subscriber has filed a bankruptcy petition.

File a proof of claim for the entire amount of your contract as if there was an immediate breach. In a 13 you should receive payments; in a 7 you will get paid if the Trustee finds assets. In either case your proof of claim can be examined and a motion brought to modify the claim if it is excessive. You can choose at that time to defend the motion or permit the proposed change in the proof of claim.

You are not permitted to seek recovery of any amount owed prior to the filing of the petition. You are not however required to continue providing any service to the debtor unless the debtor reaffirms your contract, or at the very least makes all payments due after the filing of the petition. Technically you can seek to have the debtor formally reaffirm the contract and require the contract to be brought current. Your contract with the debtor is what is known as an "executory contract" and the debtor has the right to terminate it in a chapter 7 or 13, in which case you can file a proof of claim for your damages.

In a chapter 7 or 13 you should notify the Trustee if you have any information regarding assets of the debtor that have not been disclosed.

Though you will be invited to attend the first meeting of creditors it is not necessary to attend unless you want to ask the debtor questions about his assets, particularly those not disclosed. Your attendance will not qualify you to participate in any distribution; for that you must file a proof of claim.

Do not take any steps to recovery money owed to you prior to the filing of the petition. There is an automatic stay of enforcement and you could be held in contempt of court, a serious matter.

If you are using the latest standardized contract forms [www.alarmcontracts.com] then you have the right to file a UCC making yourself a secured creditor. First of all, you cannot file the UCC after the debtor has filed the petition. Second, if you file the UCC within 90 days of the date the petition is filed it could be set aside as a preference. If you do file the UCC prior to the 90 days, or it is not set aside, then you can be a secured creditor, to the extent of the value of your security, and unsecured to the extent that the collateral is insufficient to satisfy the amount you are owed on the contract. The proof of claim you file will break down your status. As a secured creditor you have the right to remove the collateral, but you will need court permission unless you wait for the automatic stay to be lifted. You should consult with a bankruptcy lawyer before taking any action.

There is no reason to give up on a subscriber just because you get notice of a bankruptcy filing. With a little effort and assistance from a bankruptcy lawyer you can protect your rights.

Video Taping

Mechanical or electronic interception of audio is unlawful without a party to the conversation's consent. This is Federal Law and most states have similar statutes. Video taping is another matter. There is no Federal Law that prohibits video recording. Suffolk County in New York is proposing legislation to outlaw video taping in public rest rooms, dressing rooms or changing rooms. The impetus for the bill is a case of a landlord who installed a video camera in a tenant's bedroom and hooked it up to his VCR. The proposed legislation will also prohibit two way mirrors and peepholes in the designated areas. Interestingly enough, this year the New York legislature tried to pass a peeping tom bill covering areas where people had a "reasonable expectation of privacy."

The bill didn't become law. Years ago I defended an alarm company accused of installing a CCTV camera in a female employees bathroom, hooking it up to the vice president's office VCR. The proof in that case established that the alarm company had actually installed the camera in a warehouse area and the vice president of the subscriber moved it himself to the bathroom and hooked up the VCR. I got my client off the hook.

Video taping legislation is likely to pop up in most jurisdictions and you should watch for it.

Indemnity Provision

Every properly draft security contract will contain an Indemnification Provision. This provision will be required by all insurance companies that are wise enough to require contracts between their insureds (the alarm and security companies) and the subscribers. It is this provisions which also seems to generate the most scrutiny and objection from subscribers. When I am asked by the security company to negotiate with the potential subscriber and close the deal I typically agree to omit the Indemnity Provision from the contract. This article will review the provision, discuss why it's in the contracts, why I agree to take it out and what consequence might follow its omission from the contract.

My standard contracts [ Alarm Contracts ] contain the following provision:

INDEMNITY: Lessee agrees to and shall indemnify and hold harmless Lessor, its employees, agents and subcontractors, from and against all claims, lawsuits, including those brought by third parties or Lessee, including reasonable attorneys' fees, and losses asserted against and alleged to be caused by Lessor's performance, negligent performance or failure to perform its obligations under this agreement.

Though my paragraph containing the indemnity clause contains more than just the above quoted language, the quoted language constitutes the Indemnity Provision.

The provision is an important one because it offers the opportunity to recoup a loss should a third party to the contract prevail against the security company. Keep in mind that the contract is between the security company and the subscriber. Arguably someone who has not signed the contract would not be bound by the contract provisions, which typically will include the exculpatory clause and other protective provisions. A perfect example of a non party who might make a claim is a guest in a home which is burglarized, or a tenant in a building where only the landlord is the subscriber. Now I know that you are reading this and thinking that these third parties can't prevail against the security company because they are not 'intended third party beneficiaries of the contract" between the security company and its subscriber. That may be true, and most often is the case. However, that may not prevent a claim or lawsuit from being brought, and there could be any number of factual scenarios where a non contracting party can establish liability against the security company. The indemnity provision provides from reimbursement for the expense of defending claims and lawsuits, as well as reimbursing for damages which the security company has to pay.

It is just this benefit to the security company that causes so many subscribers to object to the provisions inclusion in the contract. Their argument is that the provision exposes them to unforeseen damages since they cannot anticipate who might seek to claim third party status and make a claim against the security company. While accepting the other protective provisions in the contract which clearly prevents them from making a successful claim against the security company and also requires that they insure against the loses that the security system is intended to detect, they object to the potentially limitless exposure that the Indemnity Provision presents.

When this is the only barrier to making the sale I typically agree to omit the Indemnity Provision from the contract. My standard contracts contain sufficient other language to protect the security company, and also makes it clear that the security company and the subscriber do not recognize any "intended third party beneficiaries" of the contract. Third party claims are rare; most claims or lawsuits are from the subscriber or its insurance carrier suing in subrogation [which is different from a third party claim], so the Indemnity provision is not often needed.

I will also more readily omit the provision when I know that my client has proper errors and omission insurance. Since the security company carries insurance that provides defense and damage coverage the indemnity provision is not usually necessary for the protection of the security company.

This brings us to the potential consequences of omitting the provision. First and foremost, be certain that you do not vitiate your errors and omissions coverage by deleting the Indemnity Provision. You need to check with your broker or carrier. While most carriers require that you produce a contract and represent that you use the contract in order to approve you for underwriting, coverage of a claim may not be conditioned on your actual use of the contract in the approved form; in other words, if you use the contract in approved form most of the time you will have coverage when you need it if the subscriber suing you has a contract with omitted or changed positions. The removal of the Indemnity Provision should not be a clause that prevents your coverage. One word of caution. Even if your carrier will not refuse to defend a claim for modification of the approved contract terms there may be changes that you make that would cause them to justifiably take that position, so consult knowledgeable counsel or the carrier before making the changes.

Another consequence of omitting the Indemnity Provision is that you may leave yourself exposed if the claim against you exceeds your insurance coverage, or for the amount of your deductible, or if your carrier for any reason does not provide coverage. But keep in mind that the Indemnity Provision is only as good as the party providing the indemnity. If you have a claim or lawsuit against you it is still your obligation to defend and pay the damages, if any. Indemnity is reimbursement after you have incurred the expense. If your subscriber is no longer in business or financially able to reimburse you then the indemnity isn't worth the paper it's written on.

Selecting a Central Station: Considerations

This is the first article in a series of articles regarding dealer's selection of central stations. Future articles will address the specific considerations mentioned below.

Alarm dealers who do not have their own central station facilities face the option of selecting from the plethora of companies that provide monitoring for other companies. This is known as "wholesale" monitoring or "third party" monitoring. Here are some issues that a Dealer should consider.

1. Does the dealer require UL certified monitoring, and can the central station (CO) provide that service?

2. Is the CO competitive in its prices for its monitoring service?

3. Does the CO carry industry accepted errors and omissions insurance?

4. Does the CO provide any type of support to the dealer other than monitoring the accounts, such as technical support, assistance with service or equipment, or discounted errors and omissions insurance premiums?

5. Does the CO require that the dealer sign a contract, and does that contract lock the dealer into a long term relationship with the CO, does it require the dealer to indemnify the CO, and does it give the CO aoption, first right of refusal, to purchase the dealer's subscriber accounts if the dealer wants to sell?

6. Is the CO also an installer that may actually be in competition with the dealer?

7. Is the CO a local company providing monitoring to dealers in its geographic area, or a nationwide monitoring company?

8. Will the CO permit the dealer to have its own telephone line coming into the CO?

9. Does the dealer require the dealer to have all subscribers sign the CO's monitoring contract, a "three party contract"?

10. Does the CO have a reputation for honesty, efficiency, providing good monitoring service, keeping good records and being responsive to the dealer when necessary?

Central Station UL certification

This is the second article in the central station selection consideration series.

As a security dealer you have many choices in selecting a central station to monitor your subscriber accounts. The type of security systems you install and monitor may dictate the central station that you must turn to for monitoring, though most systems can be monitored by any of the hundreds of central stations that offer their services.

One of the first issues that you might want to consider is whether the central station is UL certified. Underwriters Laboratories Inc. is an independent company that sets standards for electrical and other systems, including alarms, that are recognized by the insurance industry. You will find that some of your subscribers require UL approved systems in order to meet requirements established by their insurance company.

The UL approval may include the monitoring, i.e., certified central station monitoring. This can be done only by a central station that is UL certified. The UL certification involves lots of standards, well beyond my expertise and this article. However, for UL to approve a central station, or allow it to issue UL certificates to subscribers, that central station must meet certain minimal requirements, not only in the facility that the central station is housed in, but the equipment it uses, the personnel it employs, the number of personnel and their training, the central station's ability to provide guard response within designated times and methods as prescribed by UL, and other issues that UL monitors from time to time.

Obviously not every central station is UL approved. Central stations run the gamut of receiving equipment set up in someone's bedroom and monitored by one person, to well manned operations that either do not comply with UL or do not want to pay UL for its certification, to operations that have the approval of UL to call themselves certified central stations. Even UL certified has its qualifications, and limits. In New York City for example, in order to monitor fire alarm systems a central station not only has to be UL approved, but must also be approved by the New York City Fire Department, and only a few companies are. I am sure this same situation exists throughout the country. Additionally, many municipalities have licensing requirements. While some of these may be strictly revenue raising and require nothing more than the payment of a fee, many impose operational requirements that not all central stations can meet. You need to be sure that the central station you select is permitted to operate in the areas where you install security.

It is not always the case that UL certified central stations provide the best service. You may have your own ideas of what type of service you want to provide to your subscribers, and perhaps only a local central station operated by a one man show is willing to provide you with that service. Or you may offer inexpensive monitoring to your subscribers and find that a UL certified central station is too costly for you. If all of your systems are non UL perhaps UL certified monitoring is unnecessary.

When making your selection of a central station there are many factors that you will need to consider. UL certification is one of them.

Central Station Pricing

This is the third article in the central station selection consideration series.

The old adage, "you get what you pay for" undoubtedly holds true for central station monitoring as well as in other situations. If you shop around you will find that central stations provide their services for a wide range of prices. Non UL burglar alarm monitoring without daily reporting can range from less than $2 to over $6 a month. That's a wide spread, especially if you have several hundred accounts. Not all central stations can offer the all the services that you need, such as fire, medical alert [personal emergency response], radio backup or certified central station monitoring. Obviously you can expect to pay more for these services, as well as any special reporting or response instructions you may want that is in excess of what the central station ordinarily provides.

More often than not the selection of the central station turns more on personality between you and the central station representative, whether it be the owner or a salesman, than it does on pricing. This is not necessarily wrong, and in fact may be justified, since your comfort level dealing with companies that service you, such as your selected central station, is important. I think that pricing, while a consideration, is perhaps the least important consideration, and certainly the other considerations that I have suggested and will cover in this serious of articles are far more important in my opinion.

Having said that however, which no doubt will endear me to my central station clients, be keenly aware that your central station knows the pricing of its competitors, and is sensitive that you are interested in keeping your expenses down. Don't be shy about suggesting that perhaps a discount is in order, or a special rate, for whatever reason you can imagine.

Central Station Support for Dealers

This is the fifth article in the series on central station selection considerations, and focuses on item 4, whether the central station provides any type of support besides its monitoring service. A central station located on the other side of the country may not be able to provide some of the assistance or support that a local central station can provide. On the other hand, a nationwide monitoring company may offer the kind of support that you need and can't get from a local company. One issue you should consider is what type of support are you likely to seek from your central station.

A dealer can expect its central station to provide some or all of this type of support, and this list is by no means all inclusive: keep the dealer apprised of the local laws pertaining to alarm installations and monitoring, and other laws effecting the dealer; newsletters with current informative information; information on current and proper contracts [my favorite of course]; information on errors and omissions insurance, as well as discounts if you use the central station's insurance carrier; technical support for installations; covering UL certificates; monitoring fire or other special systems that the dealer is not licensed to monitor; covering service calls; providing certain clerical services such as invoicing subscribers for the dealer; newsletters directed to the subscribers that promote services of the dealer; financial support; available to purchase subscriber contracts when the dealer is ready to sell.

I am sure I have left out services that a central station could provide, and may have included items that no central station does provide. However, as a dealer you need to consider what items are important to you when selecting your central station. For you it may not be important that the central station keep you up to date on new laws or offer to cover your service calls in a pinch. For others service calls coverage may be a life saver for the dealer. Perhaps the clerical service provided by a central station saves the dealer the expense of an employee, maybe even an office. Even if you are a dealer that believes himself totally self sufficient and not in need of any of the support I mention above there is no reason not to consider the possibility of such need in the future when making you selection. Remember this is only one of the several items I mentioned in the overall process of making your selection.

Central Station Contracts

This is the sixth article in the series on central station selection considerations.

This article discusses the fifth consideration in selecting a central station and deals with contractual issues. Not all central stations use the same contracts, and in fact some may not use any contracts. You should read and understand what your central station s asking you to agree with.

First of all, let me comment on one of the more common misconceptions, and that is the monitoring contract itself. A smart central station doing third party wholesale monitoring would be wise to use three party contracts, signed by the dealer, subscriber and the central station. This monitoring contract is for the benefit of the central station, not the dealer. Dealers who use the central station's monitoring contract as the only monitoring contract are making a huge mistake, one that will cost them significantly if there is a loss and when they go to sell their subscriber accounts. Dealers need their own monitoring contract in addition to whatever monitoring contract the central station requires. The reason for this is that the central station's contract is designed to protect the central station, rarely the dealer, usually have no monetary provision, may not have a term provision, cannot be used by the dealer as a salable and transferable contract, and I could go on and on. Dealers, get your own monitoring contract [www.alarmcontracts.com].

You may also be asked to sign what I call an Installer Contract. This is a contract between you and the central station. It might provide for what rates you will be paying, the minimum number of accounts you need to maintain, the minimum length of time you must leave some or all of your accounts at the central station, and it may also contain some provisions that you need to understand, such as an indemnity provision and a first right of refusal if you want to sell your accounts. While I am not necessarily adverse to such provisions I do think that a dealer should understand what it is agreeing to, and the consequences. This should be an important consideration when selecting a central station.

The indemnity provision is exactly what it sounds like, similar to the one hopefully in your subscriber contracts; it obliges you to defend actions against the central station and pay damages that the central station incurs. It can be broadly worded, or narrowly tailored; it can be full or partial; and it can cover counsel fees or not. If you do agree to indemnify the central station make sure that your errors and omissions insurance company will issue you an endorsement for contractual indemnity covering that contract relationship. Using the same carrier as the central station may help.

The right of first refusal is something you may give little thought to until you try and sell your subscribers and find out that you can't, at least until you give the central station the right to either match the offer that you have, or, believe it or not, exercise its option to purchase at some prearranged price or formula, which could be and probably is much lower than the offer you have. So as you can see, the contracts you will be asked to sign are another important consider when selecting the central station.

Central Station and Insurance

This is the fourth article in the series on central station selection considerations. Insurance; errors and omissions specifically. Why should you care what insurance your central station carriers, or if in fact it carries any insurance at all? Well, the answer is rather simple, when both you and the central station get sued you are going to want to know that your central station has sufficient coverage to respond to the lawsuit and any damages that may be awarded.

Errors and omissions insurance provides coverage for losses arising from the operation of the business, in this case monitoring service, and is triggered by both an occurrence and damages within the scope of coverage. While the insurance policy may contain familiar language that an occurrence resulting in "property damage or loss" be sustained, in alarm and security insurance policies the occurrence is failure to detect or property respond to the intended incident for which the alarm system is intended to detect, and resulting loss to the property within the premises. Thus a burglar alarm system is designed to detect a break in and the loss of property is the items stolen [and not necessarily the damage to the building where the break in occurred].

When a loss within the context of security alarm systems occurs, unless the loss is easily reconstructed and the failure of the protection identified, the subscriber is likely to sue for negligent design of the system, installation, service and monitoring. Obviously the subscriber will be suing the central station and the dealer, both of whom are involved in one of more of the four elements of the system {design, installation, service, monitoring]. While you will certainly be responding to the first three elements the central station will have to account for the monitoring.

There is much to be said for using a central station that has a policy from the same insurance carrier as you. If you both have the same carrier and the loss is within the policy limits of the policies then it is unlikely that the attorneys hired by the carrier will be looking to you, and your attorney looking to the central station. [the carrier may want to hire two attorneys, one for you and one for the central station, though I have counseled carriers that this practice is unnecessary in many situations, especially when I am the assigned counsel]. That sort of in fighting is only good for the plaintiff in the action who can sit back and wait for you and the central station to finish blaming each other and making the plaintiff's case for it.

One thing you can take comfort in is that your insurance carrier cannot sue you, and it won't even try. So if you and the central station have the same carrier that carrier will try and have a united front defending the lawsuit, which is the way it should be. Some carrier's may be willing to give you a discount if you and the central station both have policies with it. That is something worth looking into.

Of course in the event of a catastrophic loss you want to be sure that the central station has sufficient insurance. In this industry there is never enough, but you know the type of accounts you have the potential for exposure.

Don't be shy about asking for insurance coverage information from the central station, and be sure to ask if it can arrange a discount for you if you use the same carrier.

Police Response - Contractual Obligations

Recently there was a spirited exchange of ideas regarding alarm systems and police response. [if you are not getting my emails then email me at Kenesq050@aol.com) and ask to be added to the list]. The comments ranged from those sympathetic to police criticisms of false alarms caused by shoddy alarm companies to those who thought the there was not problem except lazy police misrepresenting what actually constituted a false alarm. Whatever the alarm industry's contention however, one thing we all can probably agree upon is that more and more police departments are doing all they can to avoid police response to alarm systems.

How announced policies of no police response to certain types of alarms or all alarms will effect the alarm industry remains to be seen. Again the alarm industry is not uniform in their opinions. Some see non police response as the beginning of the end for the alarm industry, and other see it as a great opportunity to install more equipment and provide additional services such as guard response.

For those alarm companies providing alarm monitoring service, threats to or changes in police response policy, there is an immediate need to examine their relationship and responsibility with their subscribers.

Obviously alarm systems, and alarm monitoring specifically, contemplate some response when the alarm detects what it is designed to detect, i.e., unauthorized entry, smoke, fire, etc. Alarm systems may be more difficult to sell, or command less money (if that's possible - is anyone paying a subscriber to install a system yet?) if potential subscribers believe that municipal response is not available, and existing subscribers who come to believe that municipal response, fire or police, may decide that the system is no longer worthwhile or that they are paying far too much for the new limited service and benefit.

If you don't have a contract with the subscriber then what happens when police response is permanently terminated is anyone's guess. If however you have a contract that deals with and addresses that contingency then its the contractual agreement that governs the situation.

My standard monitoring contract clearly provide that police or municipal response is beyond the control of the alarm company. Also, in the event police response is terminated the subscriber remains liable for all payments for the entire term of the contract. There is no reason this provision should not be enforced by the court. If you don't have this provision then I suggest that you get it and put it into your contract.

Sales Contracts

It's surprising how many alarm company owners don't appreciate the need for aproper sales contract. Questions that you have regarding what you are supposed to do and what rights you have under certain circumstances are almost always governed by your contract. Your obligations and rights in connection with the sale, design and installation of the alarm system should be covered by the sales contract.

There are typically two principal issues regarding the sale. First, you want to be sure you will be paid, and second, you want to be sure your subscriber can't sue you and win.

Let's start with what is absolutely not acceptable. A proposal. I don't care if the proposal is a form proposal that you purchased, or a letter proposal that you put together. Most "proposals" are written in such a way that it calls for the subscriber to sign an approval on the proposal, and as soon as that is done, the proposal becomes the sales contract.

If you insist on using a proposal then it should state on its face that "this proposal is subject to subscriber signing alarm company's standard sales contract." Also, there is no need for the proposal to call for the subscriber's signature on the proposal. The proposal is your offer to enter into a formal contract and the only way for a subscriber to accept that offer is by signing your formal sales contract.

You don't have a formal sales contract? Well, get one; right now. If you are doing sales you need a sales contract. Only the sales contract will cover the design and installation of the system. It will provide for collection issues if you're not paid. It will contain protective provisions in the event your subscriber suffers a loss related to what the alarm was intended to detect against.

If your subscriber does suffer a loss, unless the failure of the alarm company is easily determined (such as failure to call police when signal received) the complaint against you is likely to claim defective design and installation as part of the negligence. Only the sales contract will cover that. The monitoring contract and service contract will not cover the design and installation.

You need protection for all the services you provide. Sales, monitoring and service are 3 separate relationships you have with the subscriber, and you need 3 separate contracts. You can get them at www.alarmcontracts.com. Visit my website at www.kirschenbaumesq.com for previously published Legal Side articles.

Duty to third parties

Here is a potentially dangerous case for the alarm industry in New Jersey and elsewhere. Alarm company installs burglar alarm in sporting goods store where guns are The monitoring company receives a signal, broken front window, makes 3 calls in attempt to verify the alarm, can't reach anyone, calls police in little more than 2 minutes of receiving the alarm. Police arrive within minutes; the burglars are gone. Guns are stolen.

Several weeks later one of the guns is used to kill two people. The burglar was eventually caught and convicted. The families of the two murdered people then sued the sporting goods store and the alarm company. The alarm company sued the monitoring company. There are two court decisions and neither mentions any alarm contracts.

The sporting goods store moved for summary judgment to dismiss the complaint brought by the families (plaintiffs). The main arguments were that the sporting goods store owed no duty to the murdered people, and furthermore, any negligence by the sporting goods store was not the proximate cause of the deaths; rather the criminal acts were the cause. The court rejected the argument and refused to dismiss the complaint.

The alarm company also moved for summary judgment. It proffered the same arguments. That motion was also denied. The alarm company now finds itself in an appeal from that order.

Since I am not handling the case and have not reviewed the proceedings I cannot comment on how the case was handled. Sometimes hard facts make for bad law, and that's one of the things you need to watch for when litigating any case. The court in this case noted that commercial gun sellers in NJ are regulated and have to have an approved plan for securing the inventory. Here there was some question if the alarm was properly operating (there may have been defect in audible alarm). In the decision denying the sporting goods store's motion, here is where the trouble began:

"Although there is no reported decision in the State requiring a gun dealer to exercise reasonable care in the storage and display of its firearms, there is no logical basis for rejecting such a duty." The court went on to hold:

"A licensed seller of firearms should not be immune from liability if it engages in conduct that contributes to gun violence... It is not unreasonable to require commercial gun sellers to take necessary preventative measures to safeguard and secure weapons capable of instant death... Thus, the existence of a duty in this case will promote reasonable conduct and discourage negligent security practices."

Regarding proximate cause the court held that it is usually a question of fact for a jury. Also, "Proximate cause is a limitation the common law has placed on an actor's responsibility for the consequences of the actor's conduct ... there may be any number causes intervening between a negligent act and the final injurious occurrence.... The fact that there were also intervening causes which were foreseeable or were normal incidents of the risk does not relieve the tort-feasor of liability... A proximate cause need not be the sole cause of the harm. It suffices if it is a substantial contributing factor to the harm suffered." As to foreseeability, "all that is required is that a harm is likely to befall a victim".

The court then applied the same reasoning to the alarm company, and denied its motion for summary judgment. The court went on to hold that a jury could find that "any negligence on the part of the alarm company was a substantial factor to the ultimate harm." The court was very impressed with an "expert's" report that said that it was negligence to try and verify the alarm when the signal was for a broken front window, and there was several minute delay in calling the police.

How to guard against increasing litigation risks? Properly drafted contracts that clearly specify what you intend to do and what your limitations are, is a good start. Carefully assessing your subscriber and potential risks to it, its customers and the public at large is becoming more important as plaintiff lawyers and judges are becoming more creative in finding ways to expand the net of liability. Making sure that you engage attorneys who know the alarm and security industry and have experience handling claims of this sort. It's not just another case to you, it could very well be your business and life's savings.

Using the UCC-1 form

The standard alarm contracts that I offer the trade contain a UCC provision. This permits the alarm company to secure the subscriber's obligation under the contract by placing a lien on the alarm equipment. The provision can be expanded to include all assets of the subscriber in the case of commercial accounts.

All states have the Uniform Commercial Code (except perhaps Louisiana). This is the statute that creates liens on personal property. Filing the UCC-1 in the designated governmental office creates the lien. Once the lien is filed it turns you into a secured creditor, rather than an unsecured creditor. Your subscriber will not be able to sell its liened assets free of the lien. If the subscriber files bankruptcy, you will be a secured creditor rather than unsecured.

Though the contract permits you to file the UCC-1 as soon as the contract is signed you should probably wait until you think the subscriber may be in financial trouble and going to default on the contract. However, if the subscriber files bankruptcy within 90 days of the UCC-1 filing the lien can be set aside as a preference, making you unsecured again.

The UCC-1 can be effective in protecting your receivable from the subscriber.

Collections - it's who you know

I am going to assume that if you read this column regularly you are using proper contracts with your subscribers. Whether your business is selling, servicing, monitoring, or leasing; whether is basic burglar alarms, panic, medical, temperature, water flow, fire, CCTV or any other condition susceptible to detection, you need a proper contract. Not only will it protect you from liability, but it will be essential when you have to sue for your money. That's what this article will focus on.

Unless finding subscribers and providing your service is your hobby, you are in it for the money. You do your end of the bargain and expect to receive what you bargained for, and you expect to receive it without any shenanigans. That doesn't always happen. Some subscribers will have unexpected circumstances that unfortunately delay or prevent them from paying you as they agreed, and others who think it's their right or just way of life to beat whoever happens to have the misfortune of doing business with them.

What should you be doing to help insure that you will end up with your end of the bargain once you have fulfilled you end? Of course a proper contract spelling out what you should be doing and what your subscriber is going to pay for it is essential. Also important is the "legal" paragraph that specifies what you are entitled to if the subscriber defaults, such as a liquidated damage, acceleration of payments, equipment value, legal fees, interest and costs, and the forum of your choice in which to litigate when necessary.

However, none of the above is as important as knowing who you are doing business with, and perhaps the fact that they know that you know who they are. I can't tell you how many times one of our clients complains that we are settling a case for far less than it should be worth, or give up trying to collect anything, because the contract is made with a non entity, or an individual who resides under an unknown rock someplace. If you do business with and don't know who you are doing business with, don't expect to be able to enforce your contract if that becomes necessary; and you have only yourself to blame.

You need to know your subscriber. You need to know the proper corporate name; you need to know the individual's name who signs the contract, and if on behalf of a corporation, you need to know the person's authority to act on behalf of that entity.

You should be getting tax identification numbers; social security numbers; you should be getting bank account information and credit references.

I am giving some serious thought to adding a provision in the standard contracts [for standard contracts see www.alarmcontracts.com] requiring a charge card and the right to charge over due items, or credit card charges as they become due. Though possibly unpopular, your subscribers might be amenable to such payment option if they received a discount if the pay that way.

Even without the credit card option, knowing that you have their credit information and their proper identification, and that you could possibly damage their credit information, may dissuade a subscriber from defaulting.

CCTV Lease

The recently designed CCTV contract deals with specific services available with that type of service. The contract deals with on site camera viewing, remote internet viewing and central station viewing upon activation. Data storage is also an optional service.

Designed as a commercial lease, this contract is suitable for commercial subscribers only. The lease covers the installation, service and monitoring.

There isn't anything particularly special about liability issues for CCTV, though there may be different and hightened expectation with CCTV so that your subscriber may look to hold you responsible for undetected burglarly or even inventory shortage. The contract of course needs to make clear that there is no liability and the tghe CCTV system, like all alarm systems, is intended as a deterent and is not designed or represented to guarantee to prevent the contingencies that it is designed to detect.

Those of you who want to continue using the Standard Sales contract for CCTV followed by the Service Contract, can still use those contracts, but the printed forms do not specify the services as they do in the CCTV lease

I have been asked about a sales contract for the CCTV, but it's not designed as yet. I thought the lease format would be more suitable for commercial subscribers who would be the market for monitored CCTV. A sales contract will have to include either a separate contract for service and monitoring, or have options for those services in the sales contract. If there is sufficient interest I will design the CCTV sales contract. The CCTV can be ordered on my web site at www.alarmcontracts.com.

Employment Contract and the Disloyal Employee

Most employers share a concern that employees may be disloyal. Disloyalty of course spans a wide spectrum, from merely intentionally failing to perform tasks, accepting benefits personally that rightfully belongs to the employer, to dishonesty and theft. Disloyalty can also follow an employee who leaves the employer's employment taking with him as much business as he can along with what the employer considers proprietary and confidential information. What then can an employer do to guard against this possibility?

First let's review what consequences a disloyal employee can expect. A case just decided by the Second Circuit Federal Court of Appeals (which covers NY) will likely be a pivotal decision. Federal courts apply what they believe to be the law of the state as annunciated by the states highest court. This court therefore found itself addressing what it believes is the law in New York. The facts of the case [Phansalkar v Andersen Weinroth & Co., LP] need not be reviewed. The court held that New York's faithless servant doctrine requires an employee to forfeit all compensation received after his first disloyal act.

New York's law regarding the disloyal or faithless employee is grounded on the law of agency. An agent is obligated to be loyal to his employer and prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties. This covers salaried as well as commission employees. The employer is entitled to return of salary, compensation or commission paid, and it does not matter that the services were beneficial to the employer or that the employer suffered no provable damages as a result of the breach of fidelity by the agent employee.

New York's policy developed over a century ago. The first decision held that a disloyal employee forfeits promised compensation only when the misconduct and unfaithfulness substantially violates the contract of service and permeates the employee's service in its most material and substantial part. Disloyalty would not be substantial where it was a single act or where the employer knew of or tolerated the behavior. Later a second standard developed, where the agent employee was said to owe the highest good faith duty to the employer, and if he acts adversely in any part of the transaction, or omits to disclose any interest which would naturally influence his conduct in dealing with the subject of the employment, it amounts to such fraud upon the employer as to forfeit any right to compensation for services.

Thus, the Second Circuit concludes that New York maintains a strict rule against limiting a faithless servants forfeiture, and misconduct by an employee that rises to the level of a breach of duty of loyalty or good faith is sufficient to warrant forfeiture. The law is clear that an employee is prohibited from acting in any manner inconsistent with his agency or trust. Absent an agreement from the employer, an employee who makes a profit or receives a benefit in connection with transactions conducted by him on behalf of his employer is under a duty to give such profit or benefit to his employer, whether or not is was received by the employee in violation of his duty of loyalty.

The is an exception to total forfeiture. Forfeiture may be limited to the time of the disloyalty where compensation is apportioned, meaning that the employee is paid on a task by task basis, commission basis, engaged in no misconduct at all with respect to certain tasks, and the disloyalty with respect to other tasks did not taint or interfere with the completion of the tasks as to which the employee was loyal. In such case the disloyal employee would forfeit only the compensation earned in connection with the specific task as to which he was disloyal.

Things you should be doing as an employer. You should be using employment contracts. I offer a standard form where you can fill in the duties and compensation. The contract clearly spells out that the employee is not permitted to compete or have outside business interests. The contract identifies confidential and proprietary information and contains a restrictive covenant, non compete agreement for both during and after employment. Certainly all salespeople and key personnel should sign an employment contract. The contract will serve to better define the employee's duties and your expectations, and specify prohibited conduct, the violation of which would be considered disloyal. You can order the contract from my web site at www.alarmcontracts.com.

Regarding the enforcement of the restrictive non compete provision, always an interesting topic, that is beyond the scope of this article. However, the inclusion of such provision will give your employee, or ex-employee, more than a moment of pause, before violating it, and courts will generally enforce the provision to the extent of protecting the employer's legitimate business interests.

Employment Law - age and sex discrimination

New York Federal courts have the same standards for determining age of sex discrimination in employment. Here's the standard:

New York Executive Law section 296 makes it an unlawful discriminatory practice for an employer because of the age or sex of any individual to refuse to hire or employ or to bar or to discharge from employment such individual or to discriminate against such individual in compensation or in terms, conditions or privileges of employment

A party alleging discrimination must demonstrate that he/she is a member of the class protected by the statute, that he/she was discharged from employment or barred from a position for which he/she was qualified or paid less in such position and that his/her discharge, exclusion from employment or receipt if of lower wages occurred under circumstances giving rise to an inference of age or sex discrimination.

Once a plaintiff demonstrates by admissible evidence a prima facie case of discrimination, the burden shifts to the employer to provide some legitimate, nondiscriminatory reason for the plaintiff's rejection.

Late charges and penalties for delinquent payment

My standard contracts don't include a provision for late charges and penalties for late payment of charges by subscribers.

There is nothing inherently illegal incorporating terms in the contract calling for late charges, though I would keep them very reasonable. The legal rate of interest [in NY] is 9% per annum, and that certainly would be permitted. If the late charge begins to approach a penalty amount, one that bears no relation to the late payment, then it will be treated as a penalty and not enforced.

My clients have expressed various positions on the late charge issue. Some want to include the provision in the contract so that they can charge it and hope that the subscriber pays it. Others want it in and insist on receiving it.

I don't like the late charge for another reason. My contracts call for payment when do, without any type of bill, invoice or notice. Failure to make payment constitutes a default. There is no late charge and there is no cure or reinstatement charge. Upon default you have the right to accelerate all payments, you are entitled to 80% of the balance of the contract and 80% of the value of leased equipment if you want to deem it sold to the subscriber [the sales, service, monitoring and commercial lease all have provisions specific to them of course]. Thus there is no late charge concept. Either the subscriber pays on time or risks default and runs the risk of you enforcing the contract upon default. No argument can be made by the subscriber that it-he -she thought that as long as the late charge was paid it was OK to pay late.

My feeling is that you should have one over riding concern, that your subscriber continues to make payment under the contract, even if it is late. Late payment is better than no payment. A late paying subscriber is better than a non paying subscriber, or one who wants to terminate over the imposition of a late charge.

So include a late charge if you want; collect it if you can; but don't risk the loss of your subscriber over it; it's not worth it.

Service contracts, service slips and completion certificates

Alarm/security companies should understand the difference and significance of service contracts, service slips and completion certificates. Each document is designed to protected alarm companies from liability arising from claims for losses suffered by subscribers. Most claims against alarm companies (and I include security companies who install, monitor or service security equipment, including fire, access control, CCTV and other security devices or services) claim that the loss was caused or contributed to by the alarm company's breach of contract, negligent design or installation of the system, monitoring or service of the system. In order to rely on your contracts protective provisions you must have a contract that specifically covers the alleged conduct. Design and installation, and warranty work is covered by the sales contract; monitoring by the monitoring contract (and you need your own monitoring contract -- not the one supplied by the central station); service to the system is covered by the service contract.

What, you don't have a service contract? Well, then, you don't have any contractual provision that protects the service you provided. If the complaint against you includes an allegation that your service was contrary to the contract (a breach of the contract) or that you were negligent in your service, then you will have to defend the action without benefit of a contract that would have certainly protected you; perhaps saved your company or a good deal of its assets.

A service contract covers all service that you will provide. My standard form is designed so that you or the subscriber can select either a per call relationship or one where the subscriber pays a recurring amount for service. The contract is signed once and self renews.

The service slip I offer (and it's not on the order form and has to be ordered separately by email or phone, is similar to the service contract but covers only a single service visit or job. It is not ongoing. It's application is therefore very limited and I do not prefer the service slip to the service contract.

A completion certificate is not a substitute for either the service contract or a service slip. Although the one I offer does have the exculpatory clause on it, it is more of an acknowledgment by the subscriber that you were there and that the alarm was fixed and working when you left. It's good practice to use the completion certificate after every installation and every service call, but it is not as comprehensive as a service contract.

Only the service contract will add value to your business, and only if you select recurring revenue instead of the per call relationship.

No subscriber should refuse to sign a service contract, especially if you offer the per call option. With that option the subscriber does not even have to call you for service and can use another, but if you are called and do provide the service, your service is governed by the service contract. You would be foolish to provide service without a service contract.

Exculpatory Clause

The exculpatory clause remains one of the more popular protective provisions in a properly worded alarm contract. This provision provides that the alarm company is not liable for damage in the event of breach of contract or negligence.

Judges, lawyers and subscribers have some difficulty with this provision until it is explained and the rationale considered and understood. More importantly, when explained that the provision is consistently enforced in all states the provision is better accepted.

Exculpatory clauses made their appearance a long time ago and received some notoriety when people started getting injured in Vic Tanny's gym, only to find out that their membership privileges included an exculpatory clause. States were quick to respond by enacting legislation outlawing such clauses in gym contracts, and the legislation soon expanded the list of those prohibited from using exculpatory clauses in their contracts. Fortunately that list does not include alarm companies.

Many court decisions express the reality of the alarm company relationship with the subscriber, recognizing that for a nominal sum the alarm company provides a level of protection, but not insurance coverage. For that reason courts accept the notion that alarm companies should not be liable for damages arising from a loss that the alarm was intended to detect. To achieve that result however the contract needs a properly drafted exculpatory provision.

The exculpatory clause is not full proof and other equally important provisions need to be in your contract. Additionally the exculpatory clause is not enforced in all situations, notably when gross negligence or fraud is alleged. Enforcement and treatment varies state to state. If you're not sure if your contract has the provision, or if you're not sure it's up to date, check it out. Your business could depend on it.

Who should instruct the central station?

Alarm Installers who rely on wholesale monitoring central stations to provide monitoring service generally select the central station. Most if not all communication is between the Installer and the central station, not between the subscriber and the central station. It's not uncommon for the subscriber not to even realize that the central station is separate from the Installer. The central remains unknown even though the subscriber talks to an operator when there is an alarm signal verification or notification.

The Installer, central station, subscriber relationship has only several variations. 1) The subscriber has signed the Installer's monitoring contract and the central station's three party contract (the best situation for Installer and central station); 2) the subscriber has signed only the Installer's monitoring contract (OK for the Installer and perhaps no protection for the central station); 3) the subscriber has signed only the central station's monitoring contract (OK for the central station and probably no help to the Installer); 4) the subscriber has signed no contract (good for the subscriber; the Installer and central station are obviously owned by idiots).

The contract or contracts signed by the subscriber should govern the relationship between the subscriber and the Installer and the central station. The contract will specify the alarm company's obligations, particularly what is supposed to happen when an alarm condition is received, typically call the police, fire, subscriber and sometimes the Installer. Most often the instruction for response is provided for in the contract, so that the central station has contact names and telephone numbers as well as any special instructions, such as verification or no verification, or call only Installer and not police or fire.

How are these instructions changed and who can change them? In almost all cases the central station will take instruction from the Installer. After all, it's the Installer who hired the central station, has other monitoring accounts with the central station and pays the central station. But what right does the central station have to take instructions from the Installer? Depending on the contract terms that the subscriber has signed, the answer may be "none."

An Installer may call the central and change a code, or calling instructions, or verification instructions, or call in testing, advising the central not to respond to a signal. If the subscriber's contract does not authorize the Installer to change monitoring instructions and procedures without authorization from the subscriber then the Installer has no authority. Since the central station does not want subscribers claiming that changes were made unless the subscriber makes the change in writing the central station contract most likely provides that no changes will be made unless in writing. How does that contract provision reconcile with a telephone call from the Installer or even a writing from the Installer? It doesn't. If the contract requires a writing for the subscriber then that's what is necessary. If the central station takes instruction from the Installer and those instruction make a change that contributes to a subscriber's loss, then the central station and the Installer face exposure.

The contract signed by the subscriber should appoint the Installer as the subscriber's agent for purposes of dealing with the central station if that is going to be the reality of the relationship. My three party central station contract has had that provision for years. So does the Installer's monitoring contract. www.alarmcontracts.com Make sure you have that provision in your contract, assuming you have a contract.

Errors and Omissions Coverage-What's Covered?

Hopefully you made the wise decision to obtain errors and omissions insurance to cover you for claims arising out of your security services. This coverage will provide defense cost and indemnity in the event a claim is made against you for negligence or negligent breach of contract to provide the security services you have contracted to provide. The coverage is not absolute however and you should understand what you should be covered for, and what you will not be covered for.

Lets start with what you will be covered for. You do the installation, provide the service or monitoring. Your subscriber suffers a loss which the security was intended to detect. Or, your employees cause some type of damage while performing their work. Under these circumstances you should have coverage.

What circumstances might not have coverage? You contract to provide security and you thereafter decide not to perform at all; in other words, you decide to breach the contract and not perform at all. This is not where you forget to protect an opening, but where you decide not to do the job at all. You will not have coverage for your breach of this contract.

You decide to solicit the subscribers of a competitor. You get a claim letter or you get sued for intentional interference of contract, inducing breach of contract or tortious interference of contract by the other security company. You will not be covered for this claim or suit by your errors and omissions carrier.

Be careful with your policy language. Coverage is triggered by an "occurrence" that causes "property damage or bodily injury." Your errors and omissions carrier needs to interpret that as including property loss which the security was intended to detect (or protect). The established E&O carriers, such as Cover X and the NBFAA risk group understands this. If your broker has you with other insurers make sure its claims department understands that a burglary loss will not have property damage or bodily injury, but you expect coverage.

Thanks to Bart Didden for suggesting this article.

Liability for Lawn Signs

Do you face any liability for putting a lawn sign in front of your subscriber's house, and no actual alarm system?

When I was in high school, over 38 years ago, a father of my friend's girlfriend had a little side business; he sold "electric alarm security" stickers. He ran an ad in the NY Times and I think in Popular Mechanics [or something like that]. My friend told me he made about $150 a week selling these "fake" alarm stickers. They were green and I bet all you old timers saw one. I don't know if someone still sells them. This reminds me of lawn signs and no alarm.

The answer to the question seems simple. If the subscriber knows that all it is buying is a sign and no alarm, then the subscriber would not be able to sue you if there is a burglary. Sure, I can think of some exceptions and twists.

One exception would be if you assured your subscriber that an actual alarm served little purpose and the lawn sign would be just as effective. Even though you might be able to find law enforcement officials who actually believe that, we in the business know it's not true. Alarms may have their limitations, but are worth the value of the installation and service. Someone who buys only the lawn sign and nothing more, gets the protection he paid for. Two signs, twice the protection.

What about visitors to the premises? Those who entered and stayed upon the premises under the false impression that they were in a protected area. After all, the police will be called, according to the sign. Though you would claim that you sold the sign to the subscriber and there are no third party beneficiaries to that agreement, the more likely facts are that if you are selling just lawn signs you don't have a contract. I'm sure someone could find a judge somewhere who would take the position that you should have known that others would be at the premises and rely on the false security of the impressive lawn sign. A judge who thinks like that may not actually be that hard to find.

Well, I am done amusing myself, so here's what I really think. As a security professional it would not be wise to sell just a lawn sign, just like it would not be a good idea to leave obvious areas of the premises unprotected, without clearly specifying in your contract exactly what areas remain unprotected; especially if the areas would customarily be protected.

So if your subscriber doesn't want upstairs windows protected, the garage door, or back door, you should be making note of that in your contract. I don't believe it is necessary to specify what other and additional equipment your subscriber has declined to purchase, since that list could be endless, but points of protection that are not to be protected should be identified.

So if you want to sell signs or stickers, you should use a contract and specify the limits of your protection. If you're just in the sign or sticker business, you no doubt don't use contracts, and probably don't need to. But, as a security professional you are going to he held to a higher standard than a guy who sells stickers through ads in Popular Mechanics [if its still published]. As one reader of my emails pointed out, the lawn sign is a great advertisement for your company, and if someone wants you to place it on their property it might very well pay off in new leads and sales.

Automatic renewal provision

Security contracts for monitoring, service and lease provide for recurring revenue. Recurring revenue is the goal for alarm companies because subscriber contracts can be sold based on a multiple of the recurring revenue. Most often purchasers do not care what the remaining term of the contract is since a properly drafted recurring revenue alarm contract will contain a renewal provision.

The renewal provision provides that when the term of the contract is to expire the contract will automatically continue for an additional term unless canceled by one of the parties to the contract.

Though the contract may provide for automatic renewal and specify how a subscriber can communicate an intention not to renew, you need to be careful to determine if the jurisdiction that governs your contract permits automatic renewal, and if so, whether you are required to give some notice of the renewal.

My standard contracts with recurring revenue have the automatic renewal. In New York the renewal provision is not effective unless a separate written notice is sent to the subscriber advising of the automatic renewal. Absent this notice, required by statute, the renewal is not effective.

I will have my office perform a state by state search of laws that effect the automatic renewal provision and post the statute or requirements on my web site [like the leading cases and the three day notice of recision is now posted]. Keep in mind that we will be searching for statewide laws and you may have local ordinances that apply that we will not necessarily find. You should check with your local attorney to determine if any laws effect your automatic renewal provision. Be careful about the advice. You are not asking what your attorney thinks is a good idea. You want to know what the laws are and what you are required to comply with.

I will keep you posted as we add the requirements state by state. Any of you aware of a statute in your state please let me know.

Automatic Renewal Clause Issue

Is it time for the alarm industry to change the way it conducts its business? Long term planning is essential for all businesses. The alarm industry has long employed term contracts with automatic renewal clauses to perpetuate recurring revenue. While this business plan has worked well it is increasingly coming under legislative attack. Let's deal with the issue now.

The alarm industry is different in several ways from other "home improvement" contractors, or other building trade contractors in the commercial setting. One laudable distinguishing factor is that you deal with security, an issue that has unfortunately become paramount in everyone's mind. But the less attractive aspect of the business is that it is terribly competitive. Unlike the typical home improvement contractor you can't figure a job with 100% profit. More likely you are concerned with how much you will lose on the installation. Your benefit comes from the long term relationship and the recurring revenue that you will receive. When you factor this in, you can actually make a good living and more importantly, develop a nest egg when you are ready to sell your business and retire.

Recurring revenue generating contracts require the subscriber to make periodic payments, typically monthly or quarter annually. The contracts that call for recurring revenue are usually the commercial lease, monitoring contract and service contract. If you are just installing and not monitoring you are walking away from the recurring revenue; Same with service. If you have a "per call pay as you go" relationship you do not have the benefit of recurring revenue.

We have seen the term of the contract increase. Long ago the typical term was 3 years. It is now common to see 5 years in consumer contracts and 10 or more in commercial leases, monitoring or service contracts. With automatic escalation or a provision allowing you to increase the charges, long term contracts become less risk for you.

The automatic renewal provision has always been a staple in the recurring revenue alarm contracts. But the provision is coming under attack in legislation around the country. The time to deal with this legislative assault is now, not when you find your contracts invalidated, or worse consequences.

If you go to my web site www.KirschenbaumEsq.com under Alarm Law Issues, you will see that we have posted legislation from several states. Our research has not found legislation in most states, but our search may not be complete, and it appears that this issue is receiving sufficient interest to put alarm companies in all states on alert.

There appear to be two variations with laws affecting the automatic renewal clause. At least one state outlaws renewal completely. Others have strict requirements on what notice you need to give the subscriber. While at least one statute provides that violation of the notice will constitute deceptive trade practice, you run the risk that law enforcement or the courts will consider persistent violations a deceptive trade practice, opening you to all kinds of damages, financial and perhaps more.

Your solution is easy to suggest, but perhaps difficult to digest. If your state permits the renewal clause but imposes notice requirements, you must comply with those requirements; not some of the time but all of the time. Compliance starts today, not next year.

If you know you won't, don't want to, or can't comply, then you must change the contract to a month to month renewal. Even in those states where no renewal is permitted the damages for month to month will be less severe.

The standard security contracts I offer to the trade will be updated immediately to provide for month to month renewal. I suggest that you take this time to upgrade your contracts with this change and others that have been made over the past year.

Of course the best solution is to constantly re-sign your subscribers on new contracts before the original term expires. That practice will avoid renewal issues and it will ensure that your subscribers have the latest contract forms, provided you are keeping current on your contract upgrades [for contracts see http://www.alarmcontracts.com/]. The practice of upgrading your subscribers to new contracts makes more sense then you might think. Periodic visits to your subscribers will have tremendous benefit to you. Not only will you be renewing and strengthening your relationship with your subscriber, but you will have the opportunity to inspect the security system, suggest upgrades and increase your recurring revenue. Remember, your existing subscriber base is often your best opportunity for new business, through upgrades, new or different protection and referrals. If you have the burglar alarm system, why don't you also have the fire alarm? What about CCTV, and I don't mean the stand alone system that you install and walk away, but the one where you provide data storage and central station monitoring so that you can generate recurring revenue. If you don't suggest new and other systems to your subscribers they may not be aware of the availability of the systems, or they might not think you provide and service those systems.

If you are aware of legislation involving the automatic renewal clause please let me know.

Account Stated

What is an accounted stated and what consequences arise regarding the use of this document?

All of us in business send and receive statements of account. It could be as simple as an invoice, or a consolidated statement of several invoices and previous balances due. If you are the sender of a statement of account you may be hard pressed at a later date to try and change the statement. Obviously mistakes can be explained and rectified, but the burden of showing justification for the change would be on the sender of the statement of account.

What about the party receiving the statement of account? If you are the recipient and you don't agree with the statement or don't intent to pay the statement because you believe you shouldn't for some reason, can you ignore it or is some other action on your part needed? After all, you didn't initiate the statement, you merely received it.

An account stated is established when the recipient of a statement of account 1) receives the statement; 2) retains the statement; 3) makes no objection to the statement; and 4) fails to pay the statement after a reasonable time. When an account stated is established an action can be brought for judgment on the account stated. This action is different from an action on the underlying reason for the debt because all that needs to be proved to establish the cause of action are the 4 elements above, statement was received, retained without objection and not paid. Unlike an action for breach of contract where the damages may not be set [the legal term is liquidated], an action on an account stated is for a liquidated amount and usually the clerk of the court will enter a judgment for the amount in the statement if the defendant fails to appear without the necessity of the plaintiff proving the amount due in court at a hearing, which is called an inquest.

In alarm collection cases we typically bring a cause of action for breach of the contract, and we bring a separate cause of action for an account stated [assuming a consolidated final statement has been sent]. What would happen if you enter into an alarm contract, the subscriber defaults, you send final bill, and you then sue for breach of contract and on an account stated, and the subscriber -- defendant defends the action claiming that payment was not made and the contract terminated because you failed to properly perform your end of the contract? Could you avoid the issue of whether you actually performed and if the subscriber was within its rights to cancel the contract because of your breach by pressing only the action on the accounts stated? Does your answer change if you sent a final bill and the subscriber received it and did nothing else, making no objection?

The general rule of law is that an account stated cannot be made the instrument to create liability where none exists. Thus sending a statement to someone with whom you have no agreement and provided no service and then suing them when they simply ignore the statement, would be to no avail. The subscriber would still be able to defend the action, either the breach of contract, or the accounts stated action, by claiming that it rightfully did not make payment.

When dealing with sale of goods the application of an accounts stated is different. A sale is made; defendant acknowledges receipt of the goods and of a statement of account, which it retains for a significant time without objection. Perhaps there is a partial payment on the account. A lawsuit on an account stated would most likely be successful even if the defendant tried to defend claiming that the goods were nonconforming or defective. Retention of a statement of account for a significant time or a partial payment without objection on a disputed account, constitutes strong evidence of the defendant's acknowledgment of the bill's validity and a virtual admission of the debt.

You should be sending statements of account consolidating all invoices. If not paid you will have an action for account stated as well as breach of contract.

Disclaimer Notice

Security companies have been asking for disclaimer language in the contract for subscribers opting not to have radio back up, warning notice for VOIP, and other disclaimers. I have resisted disclaimer language in the contract because I thought there is no end to the additional equipment or services that a subscriber could claim it was not offered. I recently had a case where a home owner was burglarized. The telephone wires were cut before the illegal entry and the central station did not get notice of the break in. The home owner commenced an action against the alarm company claiming that the homeowner had been defrauded because the alarm company did not tell them about radio back up even though the homeowner claims to have requested the best system available. A judge actually bought that claim, finding that it was tantamount to fraud not to offer radio back up. Of course the contract had the familiar language that the subscriber was offered additional equipment. I am confident that the alarm company's version of the facts is accurate and that radio was never discussed by the salesman and the homeowner, and that the "facts" were manufactured after the break in. In this case the additional equipment was a radio. However, there are any number of other items of equipment that could have come into play depending on the method of the break in and deficiency of the security system. For example, the break in could have been through an unprotected window, roof, garage entrance. The claim could have been that motion detectors were not offered. I am sure you can think of more examples than I can.

Since the list of additional equipment and services is extensive, inclusion in the contract is burdensome. Omitting an item could expose the company to liability. Additionally, if the claim against the alarm company is fraud in the inducement of the contract then the entire contract may be rendered unenforceable or the disclaimer provision disregarded. The more prudent approach seems to be a separate notice of disclaimer. I have decided to put the disclaimer in a separate form which should be signed by the subscriber with every contract.

The Disclaimer Notice form is to be signed when you get any other contract signed. It covers most if not all additional security services that may be available; those you offer and even those you may not offer. You should use the Disclaimer Notice to your advantage. Think of it as a selling tool rather than just another contract that you have to print and have your subscriber sign.

You may find that requiring your subscriber to sign the Disclaimer Notice will lead to the subscriber realizing that additional service is available and advisable. Be careful in your presentation because you don't want to be cornered into having to offer some of the additional equipment or services without getting additional compensation. You should be ready for that request by the subscriber.

The Disclaimer Notice may lead to additional compensation and I think will be helpful in disputes with the subscriber when the scope of your equipment or services is an issue. I have prepared a standard form for the Disclaimer Notice and priced it at $125.00. Order the form at http://www.alarmcontracts.com/.

Security Dealer

Will recent cases affect the alarm industry

A jury in New Jersey the ADT case awards $4.5 million dollars to the plaintiff to be paid by ADT for a burglary loss. A judge in Massachusetts decides that Protection One must face a jury to decide if Protection One is liable to its subscriber's employees who were robbed at gun point because, they claim, Protection One should have installed the alarm system differently so that a back door remained alarmed when the front door was deactivated. What do these cases have in common and what do they mean to the alarm industry?

Almost all alarm litigation throughout the country has been resolved by judges enforcing the alarm contracts. The contracts contain protective provisions exculpating or limiting liability damages for the alarm company. Interpretation and enforcement of contracts is a legal issue, not factual issue, and therefore a judge would rule on those contract issues Only when issues of fact are required to be decided would a judge defer to a jury as the decider of the facts [a judge would also be the decider of facts if the case is tried without a jury]. Fortunately for the alarm industry most cases have turned on issues pertaining only to the contract language and not other factual issues. Judges across the country have consistently and repeatedly enforced exculpatory and limitation of liability clauses, not just because of contract law, but public policy, which favors limiting alarm company exposure so that the service continues to be available and affordable to the public.

The alarm contract provisions relied upon by the alarm companies define the duty owed by the alarm company to its subscriber and others. When the contract is not precisely written, or when the alarm company does anything outside the scope of the contract, the alarm company faces exposure. There are several different theories of law that a plaintiff can use to pursue a claim against an alarm company. Two or the more common ones are breach of contract and negligence. The legal issues surrounding these theories or approaches are beyond this article, but simplified, breach of contract is just that. The alarm company by contract agreed to do something, failed to do it, and damages ensued. The measure of damages for breach of contract are usually the difference between what someone paid and what they actually got, so damages for breach of contract in an alarm loss context could be arguably limited in a breach of contract cause of action.

Negligence on the other hand, is not limited by contract constraints. The theory supporting a negligence claim is that a person who undertakes to assume a duty to others must exercise reasonable care in the performance of that duty. If the duty to exercise reasonable care is not met then there is liability for damages, and those damages are not limited, but anything and everything that reasonably flows from the breach of exercising reasonable care.

So what happened in the ADT case? The ADT contract provided that it was not enforceable unless it was signed by 3 ADT authorized personnel. Well, only two ADT employees signed it and the judge seized upon that and threw out the contract. That was the end of all of the protective provisions in that contract, and left ADT at the mercy of the jury to decide if ADT was negligent, in other words, failed to exercise reasonable care in the performance of its undertaking. Without getting into the facts, the jury decided there was a breach of the duty of reasonable care and that the breach caused the loss. You don't have to agree with it; that was the juries' finding and decision, and the judge, although he could have set it the jury finding aside as not being supported by the evidence, declined to do so and let the findings stand. During the trial the judge made some remarks about his opinion regarding the enforcement of protective provisions in the alarm contract, to the effect that they should not be enforced because since alarm companies are now licensed in New Jersey they should no longer be able to enforce an exculpatory clause. These remarks, called dicta, are not part of the judgment and are, for the most part, of no significance to the industry. Despite this the alarm industry got all worked up, hired counsel separate from ADT's counsel, begged for contributions to pay counsel, and asked the New Jersey Appellate Court to permit the alarm industry to file an amicus brief. ADT didn't ask for the outside help and the Appellate Court refused to permit the amicus brief. In the Protection One case the claim came from the subscriber's employees, not the subscriber. The employees signed no contract, were not bound by any contract and were certainly not limited in their claim or damages by any contract terms. Well, written alarm contracts will provide that there are no third party beneficiaries of the contract. That means that the alarm company intends to owe its duty only to the subscriber and no one else. It also means, by implication, that the duty owed to the subscriber is limited to the terms of the contract, and nothing more. Here the argument is made that any failure by the alarm company in its performance amounts to breach of contract only, and that the failure to perform, or the negligence performance of a contract, gives rise to a breach of contract only, and not a cause of action for negligence. These argument has held up throughout the country. A typical case would be a building owner who alarms his warehouse, which is leased out to multiple tenants, each of whom have their own space and some of whom may have their own alarm. Burglary occurs and a tenant claims loss. Alarm company defends claiming that its duty and the alarm installed was for the owner of the building and not any tenant. Tenant's claim should be dismissed. But different facts can change the result, and if you end up before a jury that result is not likely to be good for the alarm company. An employer installs an alarm system in its premises. Is it that unreasonable for a jury to conclude that the employees of those premises had a right to rely on the alarm system and feel secure, feel that intruders would be detected, that robbery was less likely because of the alarm, that help would be faster and loss averted? That question should never make it to the jury, because before that happens the alarm company should move to dismiss the case relying upon its contract. If that contract is not precise, or the alarm company undertook to do anything outside of that contract, then its an issue for the jury.

The law is an evolving system, changing with the times and society mores. Our legal system does have two components, legislation and case law. Judges rely on past cases to decide cases before them. Caselaw creates precedent which should be followed, but hard facts make for bad law, and not all cases are followed. They are recognized as being fact sensitive or just wrong. Hopefully the ADT and the Protection One cases will fall into that category. All you can do in the mean time is make sure you are using well drafted up to date contracts, conduct your business within the confines of the contract and keep your fingers crossed.

No third party beneficiary clause

A properly drafted alarm contract contains a provision that provides that there "are no third party beneficiaries to this contract." What does this mean, why is it important, and how much protection does it really provide?

When you enter into a contract with your subscriber [or any contract] you undertake certain obligations pursuant to that contract. You agree to perform. You assume a duty, or responsibility. To whom does that duty run? Generally, it runs to the other contracting party. However, it can also run to a non contracting party who claims that the contract was intended to create a duty to it. A good example would be a non signing spouse or a tenant in a building.

Under what circumstances a non party to the contract can claim to be a third party beneficiary is often ambiguous. To remove that ambiguity the parties to the contract can express their intent that a non party is intended to benefit, or that no non party is to benefit. For example, a landlord can install a security system throughout the building and provide that all tenants are intended to be protected. Conversely, the contract can provide that no tenants, no third parties, are intended to be protected.

Security contracts need to specify that there are no intended third party beneficiaries because typically non contracting parties will be occupying, using or visiting the protected premises. Inviting claims from those non contracting parties increases exposure immeasurably.

But can you completely shield yourself from third parties? Not under all circumstances. Duty, or perhaps more easily understood, responsibility, can arise not just by contract, but can arise by operation of law or conduct. A party who acts, conducts itself, is required to do so in a reasonable manner. Your conduct or actions can induce another to reasonably assume that you have now offered some protection for their benefit, giving them the legal right to also assume that you will have the responsibility for performing your service in proper manner. The circumstances that come to mind would be a fire alarm installation in a commercial premises, installed pursuant to code because the law required it. Even though the contract will provide that no third parties are intended beneficiaries, obviously anyone in the building is intended to be protected by the fire alarm, and the alarm company's duty then extends beyond just the subscriber. In that fact pattern, the alarm company could rely on the exculpatory and limitation of liability clause when defending against the subscriber, but since the non contracting third parties didn't sign the contract, they are not bound by those protective provisions. That is why the indemnity clause and insurance procurement clause are so important, because they kick in when the third parties come knocking on your door to reach into your pocket.