Here’s an interesting case arising out of the State of Arizona. The defendant, an alarm company, had installed a burglar and fire alarm system in a commercial facility, then subcontracted the monitoring to a third-party monitoring company.

The facility burned down and due to a faulty signal, the police department contacted the fire department, which notified the monitoring company of the fire, which notified the owner (the plaintiff), at which time the building had already been destroyed.

The plaintiff, among others, was a named insured under a commercial insurance policy. After a suit was filed, the insurance company paid the insureds. Subsequently, the plaintiff sued the alarm company for negligence and breach of contract for an amount it claimed exceeded the loss paid by the insurance company. The alarm company filed a third-party claim against the third-party monitoring company, seeking indemnity. On the third-party monitoring claim, the court awarded partial summary judgment in favor of the monitoring company based on a term in the subcontract, capping the monitoring company’s liability to the plaintiff alarm company to $250.

Both the plaintiff and the defendant alarm company moved for summary judgment. Both motions were denied, but specifically with respect to the defendant alarm company, the court pointed out that the alarm company had intended to include — but had mistakenly omitted — a term which would have contractually capped its liability to the plaintiff at $150.

The defendant alarm company filed a second motion for summary judgment on different grounds, claiming there was a waiver in the contract shifting the risk of the subject hazards, burglary and fire, to the plaintiff’s insurance — meaning that the plaintiff could and did recover from its insurance, but could not recover from the alarm company, further claiming that its conduct did not amount to gross negligence.

This time, the superior court granted summary judgment for the alarm company, distinguishing the incomplete limitation of liability clause at issue in the alarm company’s first motion from the waiver. The court entered judgment in favor of the alarm company and awarded the alarm company attorney fees. The plaintiff appealed.

On appeal, the court pointed out that the contract included the waiver provision, and the clause released the alarm company from liability for “all hazards covered by customer’s insurance.”  The court further pointed out that the waiver of subrogation expressly waived an insurer’s subrogation claim against the alarm company, but it did so by having the plaintiffs release its own potential claims against the alarm company. Additionally, although the contract noted the alarm company was not an insurer, nothing in the waiver or the rest of the contract required the plaintiff to secure insurance coverage in any specified amount.

The court pointed out that, as the superior court correctly described, the waiver operates as a risk-allocation provision under which the plaintiff and the defendant agreed in advance that the plaintiffs’ insurance would be a primary responsibility for the risk of a loss in cases in which it applied. In essence, the waiver contemplated that “one of the parties to the contract would provide insurance for all of the parties.”

Then, the court observed that the plaintiffs’ insurance paid a substantial amount for damages resulting from the fire, and to the extent the plaintiffs’ damages exceeded coverage, the alarm company remains liable despite the waiver. Enforcing the waiver simply recognizes exactly what the parties bargained for; no-cost alarm service within an agreed-to allocation of risk requiring that the plaintiffs look first to its own insurance before pursuing damages from the alarm company, noting that unlike liability-limiting exculpatory clauses, subrogation waivers “encourage parties to anticipate risks and to procure insurance covering these risks, thereby avoiding future litigation, and facilitating and preserving economic relations and activity,” all while still preserving the injured parties’ ability to recover through insurance.

The court indicated that even if the plaintiffs could prove gross negligence, the waiver would remain enforceable. However, it concluded that the waiver applies to damage caused by all types of hazards for which the plaintiffs’ insurance provided coverage, but only to the extent that the plaintiffs insurer is contractually obligated to pay a policy limits approach. The alarm company apparently intended to include a similar fixed dollar amount liability — limiting term separate from the waiver, but neglected to include the amount of the intended damage cap.

In conclusion, the court reversed the judgment in favor of the alarm company, vacating the award of attorneys’ fees in favor of the alarm company without prejudice, and remanded the case for further proceedings to determine whether the plaintiffs’ damages exceeded the policy limits of its fire and burglary policy or included a loss based on the deductible amount under the policy.