The security industry is often most vulnerable and insecure in the case of its own legal and financial protection. The potential liability when a sys tem does not provide absolute protection requires that the dealer safeguard himself through proper contract terms and insurance protection.
By George L. Tanty [George Tanty is Assistant Vice President for Avreco. Inc., a Chicago-based insurance brokerage. as well as Program Development Manager for PFC Management Corporation, a sister company of Avreco. He specializes in insurance for alarm companies and is the exclusive representative for the California Union Insurance Company.]
The security industry in this country is a necessary part of the society in which we live. It has grown dramatically in the last two decades to a point where several thousand companies provide security related products and services to businesses and individuals who annually pay millions of dollars for protection.
There are many services which can be provided within the security field.
These include: guard and watchman services, card key access systems, closed circuit television, detective and surveillance work, and a wide range of intrusion and fire detection devices sold to the public, designed to make them feel safer.
The alarm part of the security business is a multi-million dollar business in itself. However, it also necessitates certain skills and other protections. The companies in the alarm business are staffed with highly trained, competent personnel.
The owner should be constantly educating himself in the latest developments, since many common alarm systems employ technological advances unheard of twenty years ago. However, reading magazines and at tending trade shows simply isn't sufficient today. That's why alarm companies must avail themselves of two specific areas of protection: sound subscriber contracts, and a comprehensive insurance policy.
Both of these will help the alarm company protect itself from the problem best stated by "Murphy's Law" -if something can go wrong, it will go wrong; and at the worst possible time." Let's assume, for the moment, that your employees are well versed in the equipment they're installing, they protect every opening, they correctly hook the system up and never miss a signal. There is, then, no way to get sued, right? Wrong! No matter how good a job you did, if your subscriber suffers a loss due to a burglary, you'll probably be sued, either by your customer or his insurance company. Because of this, there must be some way to limit your liability; and there are several ways.
The contract.
The courts have ruled for some time that language in a subscriber contract limiting the company's liability in the event of a claim is valid. In part, they base their decision on the following logical argument: Alarm services exist for the public good and are a necessary part of business and the private sector. If an alarm company is held responsible for any claim which arises on an area it is protecting, its fee would have to be commensurate with the exposure, and this much higher fee structure would make it impossible for all but the wealthy few to purchase alarm protection. Secondly, the courts recognize that the charge you are making to your customer is de pendent on, among other things, your cost of the equipment, leased line charges, and your monitoring expenses, plus a profit margin. It is very important to note that you are not making your charges based on the values you are protecting. In other words, if you are asked to provide identical protection to two side-by-side identical warehouses, your charges will most likely be the same, despite the fact that one has old news papers stored in it, and one has $10,000,000 in furs.
These, then, are two valid reasons you should be able to limit your liability in the event you make an error. There are also other things that can go wrong, over which you have no control; telephone lines down, blackout, uncertain police response time, etc.
You should, however, remember two things: First, you can't limit your liability for gross negligence. You can't simply lock up your monitoring station at 5:00 p.m. and go home. You can't install a system, leave the wires dangling, and leave the premises. Secondly, when the courts have ruled that limitation clauses in your contract are valid, all they are doing is ruling on a matter of contractual law by stating that the contract is not one-sided or unconscionable. They have ruled that alarm companies can agree with their customer to limit their liability to a maximum amount (limitation of liability), or that their responsibilities in the event of a claim shall be fixed at a specific amount (liquidated damages). The important distinction here is that it is not enough to just be an alarm company to take advantage of the protections granted by the courts; it is necessary to state it in a contract signed by your customer. Thus, a contract containing protective clauses should be one of the most essential tools utilized by an alarm company.
Alarm subscriber contracts have been in use for quite sometime, as evidenced by court cases upholding this language.
New York, for example, has a case ruling in favor of alarm companies that was decided in 1912. This is important to remember because you may encounter a customer who objects to the language.
It should be pointed out to him that this is standard procedure, and he will probably find a contract is a necessity if he goes to your competition.
A properly executed contract will do many things. It will state what you intend to do for the customer, how much it will cost, how long you will provide service, who owns the equipment, what the duties of the customer are, what your liability is limited to, who pays for false alarms, who bears the cost of a telephone line tariff increase, how the contract can be cancelled, etc.
You should, however, keep in mind that a contract with acceptable protective clauses is useless if it is not utilized correctly. You cannot, for example, be protected on a claim arising due to monitoring error if your contract makes no mention of monitoring, or install sprinkler supervisory, medical alert, and temperature control alarms on a con tract entitled "Fire Alarm Purchase Agreement." What, exactly, must a contract say? It changes from state to state, but basically it should contain the following types of statements:
1. The alarm company will agree to do certain specified work for the customer in return for the payment of an indicated price.
2. Customer will be responsible for increases levied by the phone company, any other utility, or governmental body.
3. How the various parties to the agreement can cancel it.
4. What the alarm company will do in the event it receives a signal from the subscriber (assuming you are providing the monitoring).
5. The subscriber should be told to test the intrusion system periodically and set the system at every closing (commercial customers only).
6. A sub-contract may state that repairs and service after the warranty period lapses will be done at additional charge on a time and material basis.
7. The responsibilities of the alarm company will cease if it is unable to per form its obligations due to some valid reason, e.g. phone lines down, monitoring facility destroyed by fire or Act of God.
8. If there is a conflict between the contract and the subscriber's purchase order or any other document executed prior or subsequently, the alarm contract will take precedence.
9. A denial of implied warranties including merchantability or fitness for a particular use.
10. A clause limiting your liability regardless of cause, to a fixed amount. Also, a provision to increase the limit.
11. A clause in which the subscriber agrees to indemnify and hold you harm less from any third-party claims.
12. Whether or not you currently use subcontractors, there should be a clause allowing them to invoke any of the protective clauses in the contract.
Several of these clauses need further explanation.
8. Quite often, especially when dealing with commercial accounts, you will receive an invoice or purchase order from the customer, even though he signed your contract. Routinely, the purchase order will contain a "hold harmless" clause favoring the customer. Clause 8 above will effectively negate the hold harmless. Sometimes it is company policy for it not to sign any contract. In some instances, it is possible to have the customer copy the important clauses from your contract on his purchase order and have it held valid in court.
9. It is important to deny warranties (other than those which you pass on from the equipment manufacturers) for two reasons. First, no alarm system is foolproof. Therefore, the customer must be advised that the system should re duce the chance of loss, but can't eliminate it. Secondly, this clause is designed to protect you from an overzealous salesman making untrue statements regarding the system.
10. The ability to limit your liability is probably the most important single clause in the contract. The reasoning for being able to do this has been discussed earlier. It is important to offer a higher amount. This is because both the theory of "limitation of liability" and "liquidated damages" assume that the amount you will be responsible for was freely bar gained. Most of you have preprinted amounts, so an increased amount must be offered. However, you should not refer to a "graduated scale of rates" because this does not exist. Your insurance company should be able to quote the additional premium to you once they have details on the subscriber. You should also be cautioned that the decision to use either a "limitation of liability" clause or a "liquidated damages" clause should be based on case law in your own state.
California is currently one of the very few jurisdictions where "liquidated dam ages" has been preferred over "limitation of liability".
11. Your contract is with the subscriber. Therefore, if he is in a position of routinely having property of others on his premises, the owner of that property can sue you if it's stolen or damaged, and you have no way of limiting your liability.
However, if your subscriber does have a situation like this, he can purchase insurance to protect himself. A good example would be a jewelry store which you might be protecting. The owner probably has a Jewelers Block policy which will pay for stolen or damaged property regardless of ownership. Some alarm companies have language at the end of this clause which provides that the hold-harmless wording will not apply to claims which occur while the alarm company employees are on the premises, and which claims are solely and directly caused by acts of said employees.
12. Even if you don't subcontract installation or service, many of you have someone else monitor the signal. These are usually other alarm companies, telephone answering services, a police panel, or one of the numerous nationwide monitoring companies. Because they did not supervise the installation, they may want protection from you. To an extent, you can pass this obligation to your sub scriber by having him agree that the clauses in the contract are applicable to and inure to the benefit of any subcontractors employed by you.
Remember, always, that contrary to some people, alarm contracts are not one-sided agreements favoring the alarm company. You are providing a service in return for a fee. Even though systems are capable of circumvention, they were designed to reduce (not eliminate) risk of loss. It is an established fact that the presence of a system will both act as a deterrent to burglary and serve to in crease the odds of apprehension of the criminal. If the subscriber is concerned about making sure he won't suffer a loss, or recover his loss if one occurs, he can hire guards and take other precautions.
Lastly, he can purchase insurance to protect himself. You can insure almost anything these days, whether you are a homeowner or a "Fortune 500 Company". You should make it clear to the subscriber that your service is in addition to his insurance policies, not in lieu o them.
Insurance All companies should make sure they are properly insured against the type o risks they have. These include workers compensation, automobile liability and property insurance on an "all risk" basis, covering your property and contents. For large central station operations, you might wish to purchase "extra expense" coverage (to cover the additional cost of continuing to operate if your station is damaged). In addition, there are many other insurance policies you can buy that will cover anything from plate glass to life and health.
General liability, however, creates some needs which you, as an alarm company have, which are generally unavailable except through a few carriers who have a policy written especially for alarm companies providing special coverage for your special needs. If you haven't purchased your general liability coverage from one of these specialty houses, chances are excellent that you are not properly insured. To find out what coverage you are lacking, have your agent answer these questions:
1. Has "property damage" been re defined to include loss of property? Most policies cover loss of use and destruction of property. Insurance companies have successfully argued that just because a burglar stole $100,000 in jewelry doesn't mean it can't be used anymore, because the burglar still has the use of it.
2. Do you have full, unqualified, "care, custody, and control coverage?" Insurance companies sometimes offer this i a limited form called "broad form property damage", but this isn't good enough.
3. If you don't have "products/completed operations" liability, you should. But make sure it covers claims arising due to a failure of the product to perform its intended function. Most companies will pay a claim if the system itself creates a claim, but the only way that can happen is either it falls off the wall or starts a fire. If it didn't ring a signal, almost all insurance companies will deny coverage.
4. Are you covered for dishonest acts of employees? If you have them bonded and they steal from you, you're covered, but you need coverage if they steal something from a customer while on their premises.
5. Each installation will be slightly different, and you will have an exposure arising out of your design of the system.
Thus, if you miss a skylight or you don't provide protection for all of the areas of the premises--and that's where the robbery occurred-you will need design errors and omissions coverage.
6. Probably the most difficult coverage to obtain is monitoring errors and omissions. Even if you subcontract this exposure, you still need the coverage so that your legal bill, possibly thousands of dollars, will be paid in the event you are sued.
Lastly, errors and omissions is usually written on a "claims made" basis. This means that you must notify your insurance company of a loss when it occurs and before the policy expires, or it won't provide coverage. This never is a problem when you first sign up on this form, but if you ever leave that insurance company (or they stop writing coverage and leave you), any claim reported after expiration will be denied. Instead, only buy "occurrence" coverage. As long as the claim occurred within the policy period (and you are in compliance with all the other terms of the policy) you are covered, regardless of when you first discover a claim. When choosing an insurance carrier, there are a few things to check. Just because you might not have heard of it doesn't mean it isn't any good. Ask your agent to explain the best system of insurance company rating, and then choose a high-rated company.
Also, check into their "track records". Have they been writing this coverage for a long enough period of time? If so, they probably know what they are doing and will probably be writing this coverage for a long time to come. In other words, you should be looking for stability. In the last ten years, at least six insurance companies tried to write this class of business, but no longer do so.
It is an ironic twist of circumstance that the security device industry is often most vulnerable and insecure in the case of its own financial protection. In order to cover yourself and your company from every possible angle, you must be discriminating in your choice of agencies.
Discuss these issues with your agent, regardless of the confidence you have in his judgment or ability to design an adequate program of coverage. Ultimately, it is your responsibility to educate your agent on the nature and liabilities of your business, or you will suffer in the event of loss or damage. Ignorance, as they say, is no defense in the eyes of the law, and small comfort in the face of loss.
(source: Electronic Technician/Dealer)
Also see: Alarm systems service (Oct. 1981)