Insurer & Alarm Dealer Litigate Enforceable Agreement

LIMITATION OF LIABILITY

The dispute in question arose in the wake of a burglary and fire loss. A property owner and an alarm company entered into a written alarm services lease agreement whereby the alarm company agreed to install, maintain and monitor an intrusion system.

The contract was to be enforced for a period of 36 months and thereafter until cancelled by either party. The contract contained a limitation of liability provision, which among other things, stated, “It is understood and agreed that contractor is not an insurer, that insurance, if any, shall be obtained by subscriber … ”

The defendant alarm company entered into a stock purchase agreement with a subrogor and acquired all of the subrogor’s installation and monitoring agreements, which included the contract in question. Neither the original subrogor nor defendant ever attempted to cancel the security service. For 18 years, between the two companies, the service provided was never cancelled and service was never disrupted. At one point an addendum to the agreement was entered into which basically renewed the original contract for a new term. The new term indicated that it was “Subject to Terms and Conditions Outlined in Client Agreement.”

The premises was burglarized and the building set on fire. The property owner held an insurance policy with the plaintiff, which provided building, business personal property and business interruption coverage. Plaintiff insurance company compensated the business owner under the policy for the losses sustained in the incident.

The plaintiff’s insurance company filed this subrogation action against the alarm company and  alleged — not any breach of contract claims — but rather only claims of negligence, gross negligence, breach of implied warranties of merchantability and fitness for a particular purpose, and negligent and intentional  misrepresentation. The defendant filed a motion for summary judgment.

The court pointed out that there is no dispute that the original agreement at issue contained a provision which, if valid and enforceable, would limit the defendant alarm company’s liability to $250 in the event that the property owner seeks to hold the alarm company liable for a loss incurred. Thus, the main issues to be decided are whether the original agreement was still in effect at the time of the fire and whether it is an enforceable agreement.

The plaintiff argued that the terms of the original agreement are immaterial because it has not sued on the contract, only on tort and implied warranty theories. The court readily disposed of their argument indicating that this is a subrogation action. The plaintiff’s insurance company as subrogee to property owner’s steps into the shoes of the subrogor and obtains only those rights possessed by the subrogor and assigned to the subrogee.

The court pointed out that if the original agreement would limit the subrogor’s recovery, it also limits the insurance company’s recovery. Had the original subrogor brought the claim, it would not be able to circumvent the terms of a contract by simply suing in tort, particularly when the limitation clause appears to apply to all liability, including defendant’s negligence.

The court said that where damages sought in tort are the same as those for breach of contract, a plaintiff may not circumvent the contractual relationship by bringing an action in tort. Therefore, if the original agreement was in effect and enforceable, the limitation of liability could apply to tort, as well as contract theories.

The court said that contrary to plaintiff’s assertions, the addendum to the agreement was not a “new contract” because, like the original addendum, it is unambiguous and it merely added additional equipment and services and effectively incorporated the terms of the original agreement. The court also pointed that there being no genuine issues of material fact, the two addendums only modified the original contract pertaining to the security systems at subrogor’s premises.

The two addendums to the original agreements did not change the validity or effectiveness of the terms of the original agreement, as both incorporated all of the terms and conditions therein, including the limitation of liability provision. Therefore the court found that the original agreement along with the terms and conditions remained in effect up until the time of the fire.

The plaintiff then contended that if the original agreement is applicable, it is unenforceable because it is substantively unconscionable in that it is a contract of adhesion. The court pointed out that the Mississippi Supreme Court and the Mississippi Court of Appeals had addressed the enforceability of exculpatory and limitation of liability clauses and have enforced such provisions.

The court therefore ordered that the alarm company’s motion for summary judgment be granted in part and denied in part. The motion was granted insofar as the court finds that the original agreement is a valid and enforceable contract in effect at the time of the fire and that the limitation of liability provision contained therein is likewise valid and enforceable and applicable to all of the plaintiff’s claims.

As to each of the alarm company’s alternative theories for summary judgment, the court declined to address such grounds and the motion was denied in that respect.