The Supreme Court of the State of Alabama recently upheld the limitation of liability provision in a contract between a plaintiff owner and a security company.

The security company agreed to provide alarm equipment and monitoring service to the plaintiff's nightclub. The owner agreed to purchase the system and to pay a monthly fee. Shortly after it was installed, the system began displaying an error message. The company instructed the owner to use the bypass button. Several days later, the club was burglarized and set on fire, and the security company never received the signal.

The owner settled with its insurer and filed a lawsuit against the alarm company and its parent. The alarm company offered to settle for the liquidated damage amount and the owner refused.

The trial court found that the limitation of liability provision in the contract was valid, and when the plaintiffs did not accept the amount set forth in the limitation of liability clause, the trial court dismissed the breach of contract and negligence claims.

On appeal, the court indicated that the courts have considered the validity of limitation of liability clauses in contracts with the provision of fire alarm systems and have found those clauses to be permissible. The rationale is that most people, especially operators of business establishments, carry insurance for loss due to various types of crimes. Insurance companies who issue such policies base their premiums on their assessment of the value of the property and the vulnerability of the premises.

No reasonable person could expect that the provider of an alarm service would, for a fee unrelated to the value of the property, undertake to provide an identical type of coverage should the alarm fail to prevent the crime.

"If the fee paid is not sufficiently high to include a premium for theft insurance, a clause limiting the alarm company's liability in the event the alarm service does not function properly is not unconscionable," the court ruled.

The court pointed out that the rationale for permitting the provider of a burglar alarm system to limit its liability is equally applicable to the provider of a fire alarm system.

The supplier of either type of system paid for its equipment and services, and the price does not generally include a design to anticipate the possible need to pay the purchaser the value of the property that the system is designed to protect.

The owner or custodian of the property is in a far better position than the alarm system seller to know the property's value and to bargain with an insurance company for appropriate coverage and an appropriate premium.

The court cited a New York appeals case, which stated that the alarm seller's limitation on liability helped keep alarm services affordable. It pointed out that construing a security equipment or security monitoring contract as an insurance policy would render such a contract cost-prohibitive.

Therefore, the limitation of liability provision contained in the contract is valid and enforceable as to the breach of contract and negligence claims. The court affirmed the trial court's ruling that the maximum amount of damages recoverable for the breach of contract and negligence is limited to the limitation of liability amount.

Lessing E. Gold, of Mitchell, Silberberg & Knupp, is counsel to the California Alarm Association.