The Legal Corner: Understanding Third Party Indemnification Provisions

A well-constructed contract in our life/safety industry will include a provision requiring your customer to indemnify your company from any losses suffered by third parties (a third party in this context is any person or entity who did not have a contract with your company for any security alarm equipment or service, but was damaged because the security alarm system failed; i.e., a guest of a customer). These indemnification provisions are so broad that they require your customer to indemnify your company from third party losses, even if your company is negligent. I am often asked whether it is reasonable to request a customer to indemnify a security alarm company from third party losses, even if the security alarm company is negligent. To state it another way, why should your customer indemnify your company from third party losses, even if your company negligently causes those losses?

Generally, asking a customer to indemnify a contractor from third party losses caused by the negligence of the contractor is an unreasonable “ask.” However, this is not the case in our life/safety industry for the following reasons:

  • Third party liability risks and related losses are generally unknowable to a security alarm company because it does not generally know who is coming or going from the protected premises, the value of property of third parties stored on the protected premises, or all activities of third parties on the protected premises.  Therefore, the security alarm company does not generally know if it is insured, or adequately insured, for all third party risks.
  • The security alarm company is never the cause of the event (i.e., fire, theft, burglar, water flow) that, in turn, causes third party losses. Nor does the security alarm equipment itself ever cause the events that, in turn, causes the third party losses.  At best, the security alarm is a contributor of enhanced or additional damage which is extremely difficult, if not impossible, to quantify.
  • The customer is always in the best position to prevent the events (i.e., fire, theft, burglary and water flow) that causes losses to third parties, 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 third party losses.  Moreover, the customer generally has more visibility of the potential for, and amount of, third party losses than the security alarm company and, therefore, is in a better position to insure against those losses.
  • Finally, because of all of the foregoing, 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 third party liability risk and related losses. Rather, the risk allocation methodology of a well-constructed contract in our life/safety industry is to allocate — or shift — the risk of third party losses to the customer, who is in the best position to insurer against them.

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.