Question:
Ken
I have read your newsletters for several years and find them invaluable.Now I have a issue that you may find interesting.
My company is in the Fire Alarm business (core business). Our primary goalis to do the Fire alarm inspections. With this we "partner with Sprinkler,Suppression and portable extignuisher companies and subcontract theinspection work in those areas to these partners. Recently there was afatal fire in the City where we are headquartered and because of thepossiblity of a loss our insurance underwriter has demanded the follwingclause be added to our Limit of Liability paragraph:This is specifically from our Monitoring contract but the clause was addedto our inspection contracts as well. Terms and Conditions . . .Force Majeure:
The Company shall not be responsible for failure to render service due tocauses beyond its control, including, but not limited to work stoppages,fires, civil disobediences, riots, rebellions, acts of God and similaroccurrences.
Limitation of Liability:
CUSTOMER AGREES THAT COMPANY SHALL NOT BE LIABLE UNDER ANY CIRCUMSTANCE FORANY LOSS OR DAMAGE DUE TO (I) A FAILURE OF THE COMPANY OR ITS AGENTS,ASSIGNS, OR EMPLOYEES TO PERFORM ANY OF THE OBLIGATIONS HEREIN, INCLUDINGBUT NOT LIMITED TO INSTALLATION, MAINTENANCE, MONITORING, OR SERVICE; (II)THE FAILURE OF THE SYSTEM OR EQUIPMENT IN ANY RESPECT WHATSOEVER, WHETHEROR NOT CAUSED BY COMPANY'S NEGLIGENCE, ACTS OF GOD, THEFT, DESTRUCTION ORUNAUTHORIZED ACCESS; (III) CUSTOMER'S ACTS OR OMISSIONS; OR (IV) THE ACTSOR OMISSIONS OF THIRD PARTIES.
CUSTOMER AGREES THAT COMPANY'S MAXIMUM LIABILITY UNDER THIS AGREEMENT FORALL DAMAGES, LOSSES, COSTS AND CAUSES OF ACTIONS FROM ANY AND ALL CLAIMS(WHETHER IN CONTRACT, TORT OR OTHER LEGAL THEORY) SHALL BE LIMITED TO THELESSER OF (A) THE TOTAL AMOUNT CUSTOMER HAS PAID UNDER THIS AGREEMENT ATTHE TIME OF THE LOSS AND/OR DAMAGE OR (B) TWO THOUSAND FIVE HUNDRED DOLLARS($2,500.00) AS LIQUIDATED DAMAGES/LIMITATION OF LIABILITY AND NOT AS APENALTY AND THIS LIABILITY SHALL BE EXCLUSIVE.
I am getting serious objections from customers to the numeral I in thefirst paragraph (underlined), where it starts "Customer agrees that companyshall not be liable...". They feel that it wants them to agree that even ifwe fail to complete the contract, such as not plug in the phone cable)there's nothing that they can do. Our company's position is that thecustomer cannot expect us to "double insure their building and contents,that is why they pay for liability coverage of their own.This clause does seem unreasonable and unenforceable. Please give me yourthoughts on this and possible alternative wording.
Regards,
Forrest
ANSWER:
The insurance carrier is wise to insist on a Limitation of Liabilityprovision in a security contract. Unfortunately I the clause they arerecommending is not what I would consider properly drafted.A limitation of liability clause is indeed enforceable in all jurisdictionsI am aware of. While the carrier's language may be acceptable to it, andmay be enforceable, I would not approve it. For one thing, calling for the"lesser" option to apply is objectionable.I realize that you are in the first instance interested in gettinginsurance coverage.You may be finding resistance from your subscribers because you may not beusing contracts now and may not be accustom to selling these contracts toyour subscribers.The Force Majeure clause is standard in many types of constructioncontracts.
If you go to my web site you will see that I offer standard contracts, someof which are related to fire. I suggest you get these contracts and presentthem to your carrier. If you are getting alarm e&o you should also bedealing with an insurance broker who knows that business. You can contactme for recommendations if necessary.
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Follow up - Limitation of Liability and fire issue
The lesser of two argument [meaning the difference between "lesser of" or"greater of" when it comes to the limit of liability] has been tossed aboutfor years and it just is a point of debate I rather not go to with acustomer. When I used it, the argument ended up flipping it to the greaterof the two. The real problem is it's also a business problem, as you moveor may desire to move to a new insurer from year to year, they may notagree with the new or special wording.I would have Ken draft a change suitable to both the insurer, mostinsurers, and is clearly defendable and not take the change from just oneinsurance company as gospel.On another note I certainly would not sub out inspection work on any firesystem. There is just too much chance for short cuts, bad habits and selfserving documentation. When RFID sensor inspection based software finallymakes this industry perk, then we can have accountability and omissionreporting.For right now, we are still a manual records industry - sad.
JR
Thanks for the input Jerry, but the lesser or greater of argument doesn'treally measure up to a debate. Lesser of is unacceptable [and I am sureit's been enforced somewhere]. Using lesser of does not really permit thelimitation to increase; it's always going to be the fixed lesser amount.You are right on the money when you mention that it's not just your currentinsurance carrier you have to please. You need to be sure your contractmakes sense and will be enforceable long after your carrier has dropped youor stopped writing alarm errors and omissions insurance. Anyone in theindustry for any length of time certainly knows how carriers come and go.Your contracts are out there for a long time [the commercial lease is for10 years].
Regarding subcontracting out fire work, all I can add is that you shouldhave a subcontract agreement in place. If you are the one giving out thework you want to be sure that the subcontractor knows the scope of the workand is obliged to stand behind it. Standard subcontract agreements for thealarm industry [these are most definitely not AIA forms] are available onmy web site contract order form.
I am happy to circulate all relevant and informative comments andobservations.