Two issues came to the forefront of a case in New York: the definition of gross negligence and contract interpretation. An insurance company filed suit against an alarm company to recover insurance payments made to the insured following a fire at the insured’s premises, a restaurant. The alarm company filed a motion to dismiss.

The alarm company agreed to sell to the insured a fire alarm system and install it at the restaurant. The alarm company agreed to “make every reasonable effort” to notify the police and fire department upon receiving a signal. The alarm company allegedly made inspections and repairs to the alarm system after the installation.

A fire broke out and the alarm system failed to detect the fire in its early stages due to alleged “defects.” Weeks prior to the fire, the alarm company had repaired the alarm system and installed new parts, and indicated to the insured that the system was working. The fire caused significant damage to the restaurant, and the insurance company paid its insured to cover the losses.

The insurance company’s complaint asserted claims for negligence, breach of contract and “gross negligence” of the alarm company in its failure to properly install, test, monitor and repair the alarm system. The contract between the insured restaurant and the alarm company contained a disclaimer of warranty, an exculpatory clause and a limitation of liability provision.

The alarm company argued that the agreement’s exculpatory clause barred any liability resulting from the fire.

In discussing the motion to dismiss, the court pointed out that whether the exculpatory clause barred the insurance company’s claims was a matter of contract interpretation.

The insurance company claimed that the contract governed only the installation and monitoring, and did not apply to claims relating to the alarm company’s other obligations; to install, test, maintain and repair the alarm system itself. The court pointed out that the contract could not be read so narrowly. The paragraphs limiting the alarm company’s liability expressly encompassed the alarm system as a whole. The contract also stated that the alarm company was absolved from liability or loss or damage resulting from “any cause whatsoever.”

Most importantly, the court held that the rule was well settled in New York that the court could not, under the guise of interpretation, make a new contract for the parties or change the words of a written contract so as to make it express the real intention of the parties if to do so would contradict the clearly expressed language of the contract. The court concerned itself with what the parties intended, but only to the extent that they evidenced what they intended by what they wrote.

With reference to the insurance company’s claim for gross negligence, the court pointed out that a burglar alarm company’s failure to wire its skylight, “while perhaps suggestive of negligence or even ‘gross negligence’ as used elsewhere, does not demonstrate recklessness necessary to cancel an agreement to absolve the alarm company.”

In this case, the complaint alleged no more than the alarm company’s failure to properly install, monitor, adjust and repair the alarm system, coupled with a broad conclusory statement that the alarm company was “reckless and/or grossly negligent.” Such an allegation was deemed insufficient to state a cause of action for gross negligence when there was not a single fact to suggest why the alarm company was grossly negligent.

Between the contract interpretation and the insurance company’s failure to plausibly allege gross negligence on the alarm company’s part (and other factors), the alarm company’s motion to dismiss was granted in its entirety.

Readers Ask

Q: We recently received a phone call from an irate customer, as the customer had a fire and the alarm system didn’t work. The reason that the system did not work was because the phone line was down, unknown to us and apparently unknown to the customer. The customer advised us that they contacted the phone company and the phone company said they would be out to repair it and apparently did not. My question is: What is the responsibility of the telephone company?

A: The phone companies in each state are governed by a state tariff. It is my understanding that although the tariffs may vary, the telephone companies are shielded from liability other than an adjustment for rates when the phone system is down. I am not certain about the tariff in your state, but I would assume that the phone company has no liability and if the subscriber pursues the claim against you, your contract will protect you from any claims for negligence or breach of contract.