This article is a companion piece to this video
If your insured’s house burns down and that expensive alarm system they put in to lower their premiums fails, does the alarm company carry any liability exposure? In the above episode of On Subrogation: Emergency Response – Alarm Company Liability, RG attorney Jason Sullivan discusses viable subrogation strategy in the face of a fire and property subrogation claim involving an alarm system.
This is the second part of our three-part series on third-party liability in subrogation claims arising from emergency responses. You can find the other two episodes and links to their companion articles on our YouTube channel:
- On Subrogation: Emergency Response – Bystander Liability
- On Subrogation: Emergency Response – Fire Department Liability
Emergencies & Liability: When the Alarm Doesn’t Sound the Alarm
Jason begins with the same fact pattern that follows us throughout our three-part discussion on emergency responses and liability. In our hypothetical property subrogation claim, your insured’s house burns down.
The home had a smart alarm system in place that was set to call 911 when the smoke detectors go off. Your insured is away when their neighbor calls to tell them their house is fully on fire. After panicking, the first question is: what happened to the alarm system? It was installed specifically for an event like this.
No question – the smoke detectors worked, but the smart system did not. So – is the alarm company liable for any part of the damages caused?
Alarm Company & Fire Subrogation: Sources of Liability
As is standard in insurance subrogation, the alarm company bears the duty of care to provide its services in a non-negligent manner. In our case, that means:
- Properly setting up the system, including checking to make sure it operates properly after finishing installation.
- When the alarms go off, notifying the authorities immediately with all the correct information.
Should the alarm company fail to do these, they may be able to be held liable under one or more conditions:
- If the work was not done in a legal manner
- If there was a breach of contract (contractual liability)
- If they made a promise that was not kept (warranty liability)
As you likely guessed, alarm companies have developed contingencies and contractual clauses in order to reduce their liability in fire, utility and property subrogation:
- Exculpatory clause (bars all claims)
- Liquidated damages clause (sets damages amount)
- Limitation of liability clause (sets damages cap)
Liability Defenses & How to Subrogate Against Them
Jason goes into depth on each of these three liability-limiting strategies alarm companies use when presented with subrogation claims for fire damage:
1. Exculpatory Clause
This clause completely bars the alarm company from any claim of negligence. If that does not sound fair, the courts tend to agree, so they will look to see if the clause is unconscionable. Would a reasonable person agree to this clause? And would an honest and fair person expect someone to agree to it?
Courts will also look at public policy and consider questions like previous case law as well as future considerations. Is this a precedent we want to set? Is this something we want other companies to be allowed to do?
Often, an exculpatory clause will be deemed unenforceable.
2. Liquidated Damages Clause
These clauses set an X amount on damages the company agrees to be liable for. This means that, regardless of their responsibility and the extent of the damages, they will pay X in recompense. To determine if a liquidated damages clause is enforceable, a court will look at foreseeable damages and if said damages are subject to reasonable certainty.
For example, in our case, if the alarm company received a notification from the system but waited to call the authorities, they knew that would result in increased damage to the home. Home-related repairs can be defined with a reasonable degree of certainty. Does the liquidated damages clause reflect that reasonable certainty?
This type of clause is frowned upon because equitable subrogation is about compensating, not punishing, and courts want parties to be reimbursed no more or less than what they lost.
3. Limitation of Liability Clause
In a limitation of liability clause, the alarm company will set a cap of damages they agree to be held liable for. This may come in the form of a statement like “… will be responsible for damages up to contract service rate or $1000, whichever amount is less…”.
Varying subrogation laws by state come into play here:
Some states will evaluate the enforceability of a limitation of liability clause through the lens of evaluating an exculpatory clause. An Ohio subrogation attorney should know that Ohio reviews these clauses in this way – by asking, is it fair? A recent case saw a $50 limitation of liability clause and shot it down as unconscionable under the premise that every single home repair will always cost much more than $50.
On the other hand, some states evaluate limitation of liability clauses through the lens of liquidated damages, which can result in wildly different decisions on the same issue. For instance, in a California subrogation case, that same $50 clause applied to a similar property insurance claim. In this case, the court upheld the clause because they decided neither party had specified potential damages at the time the contract was signed.
Alarm Company Liability in Emergencies: Fairness vs Fine Print
If a subrogating carrier and their counsel find themselves in a situation such as this, the first thing to do once you know the alarm company has exposure is to go to the contract and work outwards from there:
- What does the contract say?
- What limitation clauses exist?
- How does your state approach these issues?
In any subrogation claim, getting ahead of the issue with a swift, thorough approach to the initial subrogation investigation will result in better-informed, efficacious strategy. Insurers should take care to retain counsel adept at navigating property, fire and utility subrogation in many jurisdictions to have the best chance at maximizing recovery while containing costs of pursuit.
Want to explore more topics in insurance subrogation? Rathbone Group lawyers discuss law and strategy on key issues in insurance law in every episode of On Subrogation, a free educational resource for industry professionals available in podcast and video, as well as accompanying articles. Have a question we haven’t yet covered? Reach out at [email protected] or [email protected] to see your topic addressed in a future episode.