In a recent decision in the state of Connecticut, the United States District Court of Appeals clarified the distinction between a premium paid for insurance based on the value of a property as opposed to a fee paid to an alarm company that has no relation to the value of a property. In the decision, the United States District Court of Appeals affirmed the previous decision of the District Court and limited the plaintiff’s recovery to the amount provided in the contract’s limitation of damage clause.

The plaintiff corporation had sued the defendant alarm company for failing to perform its contractual obligation to monitor the plaintiff’s store for possible flooding.  The contract between the parties limited the recovery of the plaintiff to the amount provided in the contract’s limitation of damages clause.  The District Court upheld the limitation of liability clause in the contract and limited the plaintiff’s recovery to the amount provided in the clause and dismissed the plaintiff’s claim under the Connecticut Unfair Trade Practices Act (CUTPA).

 

The store owner argued that exculpatory agreements or limitation of damages clauses violated public policy.  In referring to the decision of the lower court, the appeals court ruled that a previous decision by the Connecticut Supreme Court did not categorically hold that exculpatory agreements or limitation of damage clauses violated public policy.  The court ruled that the issue could be determined only by reference to the factual circumstances of the particular case in light of current societal expectations. 

 

In the case at hand, the premises at issue were maintained and controlled by the store owner, a commercial entity.  The store owner was better able to discern and ensure that the premises were reasonably maintained to minimize the risk of flooding than was the alarm company, which was retained simply to monitor the site and provide notice if any flooding was detected.  Moreover, the court pointed out that the store owner specifically represented that it had adequate insurance to protect its premise and property. To conclude otherwise would have placed the alarm company in the role of an insurer. 

 

With this in mind, the court held that the rationale for upholding an agreement between the purchaser and the manufacturer of an alarm system to limit the liability of the manufacturer is that most persons, especially operators of business establishments, carry insurance for loss due to various hazards. 

 

Presumptively, 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.  Therefore, the court held that the District Court correctly enforced the limitation of liability provision and the judgment was affirmed.

 

With reference to the claim that it was a violation of CUPTA, the court indicated that the plaintiff must demonstrate aggravating circumstances beyond a simple breach of contract.