The Legal Corner: Understanding Limitation of Liability Provisions

My last article on Understanding Third Party Indemnification Provisions was well received – thank you! In fact, so well received that I was asked by many of you to do a similar article to discuss “Understanding Limitation of Liability Provisions.” Ask and you shall receive!

A well-constructed contract in our life/safety industry will include (in addition to a Third Party Indemnification provision) a Limitation of Liability provision which limits the damage (often to as little as $1,000 or less) that can be recovered against your company by your customer, even if your company is negligent. Here is an example to illustrate how this works: Let’s assume your company has a contract with a customer that includes a Limitation of Liability provision capping damages not to exceed $1,000, even if your company is negligent. Your customer suffers a $1 million dollar property loss in a fire because your company negligently designed and/or installed a fire alarm system. The maximum amount that customer could recover against your company for that $1 million dollar property loss (if your company is proven in court to be at fault) is $1,000 per the Limitation of Liability provision. Pretty powerful stuff!

I am often asked whether it is reasonable to ask a customer to agree to a Limitation of Liability provision in your security alarm contract, even if your company is negligent. In other words, if your company negligently causes a loss to a customer, why shouldn’t your company be on the hook for the full amount of the customer’s loss?

Generally, asking a customer to agree to limit the damages recoverable against a negligent contractor is an unreasonable “ask.” However, this is not the case in our special life/safety industry for the following reasons:

  • The security alarm company is never the source of the event that causes a customer’s loss. Rather, an event such as a fire, theft, burglary or water release is the source of the loss. At best, the security alarm company (i.e., a malfunction of a security alarm system) merely contributes to a loss started from another source, and that contribution is extremely difficult, if not impossible, to quantify.
  • The customer is always in the best position to prevent the source of the loss (i.e., fire, theft, burglary or water release) in the first place, as the customer is in day-to-day possession or control of the protected premises – not the security alarm company.
  • The customer can, and typically does, insure against the risk of losses from sources such as fire, theft, burglar, water release and others.  Moreover, the customer generally has more visibility of the potential for, and amount of, possible losses than the security alarm company and, therefore, is in a better position to insure against those losses.
  • The prices charged by the security alarm company for its products and services (e., central station monitoring) simply do not account for the assumption of unlimited liability risk and related losses suffered by a customer from a source (i.e., fire, theft, burglary or water release) that the security alarm company did not cause.
  • If the contracts for our life/safety industry did not contain Limitation of Liability provisions, think of the far reaching consequences:
    • Fewer insurance companies would provide insurance policies to the security alarm industry because the risk of loss would be greater.
    • Those insurance companies who continued to offer insurance policies to the security alarm industry would charge higher premiums; that is, more money – substantially more money!
    • Security alarm companies would, in turn, pass those increased insurance cost along to its customers.
    • Fewer and fewer customer would be able to afford security alarm systems.
    • And, consequently, fewer and fewer people and businesses would have security alarm systems which, in turn, would present a greater and greater life/safety risk to people and businesses in our society, as a whole.

So Limitation of Liability provisions in our security alarm contracts are entirely fair to your customers, and those provisions actually help to hold down the costs of security alarm systems for all of us – for society as a whole – so more and more people and businesses across our country can afford the protection of your vital life/safety products and services.

MICHAEL J. REVNESS, ESQ., is the founder of AlarmLegal.com and a founding partner at the law firm of KURTZ & REVNESS, P.C. Please contact me at mrevness@kandrlaw.com (or 610-688-2855) if I can be of assistance with the drafting security alarm contracts, purchase or sale of security alarm accounts or other related security industry legal services.

HAPPY THANKSGIVING!

This article is for information purposes only and does not constitute, and should not be relied upon as, legal advice.