A case was recently decided by the United States District Court in the State of New York regarding the impact of a claim for gross negligence on a contract’s waiver of subrogation provision.

An alarm company installed a system at a home. The alarm system was connected via telephone line to the alarm company central station that monitored the system. A fire originated at the protected premises. The alarm system failed to send a signal to the central station due to the fact that the telephone service was disconnected. For a period of several months prior to the fire, the alarm company did not receive any test signals from the premises at their central station, nor did the alarm company inspect, repair or otherwise service the alarm system. The premises and property were severely damaged, and following the fire, the home owner submitted a claim to its insurance carrier, the plaintiff. The insurance company paid the claim and became subrogated to the rights of its insured.

The plaintiff alleged three causes of action claiming that the defendants owed a duty to its insured to properly examine, monitor, test, install, inspect, service, maintain and repair the alarm and telephone systems, further claiming that the damage was as a result of the fire that was caused solely by the gross negligence, carelessness and recklessness of the defendants.

The plaintiff insurance company argued that the waiver of subrogation provision found in the service contract between the alarm company and the insured was unenforceable against its claim for gross negligence, claiming that the waiver provision in the service contract should be limited to contractual claims related to the agreement and that the alarm company owed the insured a duty of reasonable care that was independent of its contractual obligations. The plaintiff abandoned its breach of warranty and breach of contract claims in light of the waiver of subrogation provision. The plaintiff insurance company also argued that public policy forbid the enforcement of a waiver of subrogation clause when the damages result from grossly negligent conduct.

The court pointed out that the relationship between the alarm company and the insured was defined by the contract wherein the insured contracted with the alarm company to install his alarm system. The court said that the alarm company did not owe the insured an independent duty to perform its contractual obligations with care and skill, simply alleging a duty of due care does not transform a breach of contract action into a claim.

In discussing the waiver of subrogation provision in the contract, the court ruled that the waiver of subrogation provision deprived the plaintiff of any standing to sue the alarm company and it was undisputed that the plaintiff became subrogated to the rights of its insured against the alarm company by virtue of paying its insured’s claim.

The court pointed out that the plaintiff rightly noted that public policy in New York will not permit a defendant to insulate itself from liability for its own grossly negligent conduct via an exculpatory clause. However, at issue here was a waiver of subrogation rather than an exculpatory provision. A waiver of subrogation provision that precludes a claim for gross negligence does not violate New York public policy as it does not “exempt” a party from liability. As such, the waiver of subrogation provision in the contract was enforceable regardless of the plaintiff’s allegation of gross negligence, and the defendant’s motion to dismiss was granted.