Breach of Contract: Insurance Says 'No,' Court says 'Yes'
In a case in the state of Colorado, an alarm company was found liable for willful and wanton breach of contract in the failure to perform its obligations for installation, repair, maintenance and offsite monitoring of burglar alarm equipment installed in a warehouse damaged by a fire following a burglary.
The alarm company’s insurance carrier refused to pay, contending that the jury’s finding that the breach was willful and wanton precluded enforcement of the policy under established Colorado common law that insuring agreements were actually void and contrary to public policy when they ended up protecting an insured from intentional wrongdoing or reckless conduct.
The alarm company filed suit against the insurance company. The insurance company filed a motion for summary judgment of dismissal claiming that it could have no liability for payment under its commercial umbrella policy because the alarm company was found liable for willful and wanton breach of contract.
The insurance company cited a Colorado case stating that the Colorado courts would not enforce an agreement to indemnify a party for damages resulting from intentional or willful wrongful acts. The court indicated that the cases were not applicable because they were based on tort law. The underlying judgment in the case at hand resulted from a jury’s finding that the alarm company breached the contractual promise and the good faith and fair dialing obligation implicit in the contract.
The court pointed out that Colorado has conflated tort and contract law in a confusing and unclear manner. Whatever it means to breach a contractual promise in a willful and wanton manner, it is not equivalent to the type of conduct that Colorado courts find so reprehensible that the actor’s liability for compensatory damages cannot be indemnified.
Therefore, the defendant insurance company’s motion for summary judgment was denied.
Q: I am negotiating an agreement with a potential subscriber. Included in our contract is a waiver of subrogation clause. Our subscriber wants the provision removed from the contract. What should I do?
A: The waiver of subrogation provision is very beneficial to you, however, if the subscriber insists on removing it, I would not let it stand in the way of closing the deal.
The waiver of subrogation provision basically says that in the event of a loss and if your customer or subscriber collects from its insurance carrier, then its insurance carrier cannot file an action for subrogation against you. Normally, the insurance company would stand in the shoes of your subscriber. So if you have the appropriate limitation of liability language in your contract or third party indemnification, that should protect you.
There was a recent case in the state of New York where there was a loss and the insurance company paid the subscriber. The insurance company then subrogated against the two alarm companies that were providing service. Included in the cause of action against each of the alarm companies was an action for breach of contract along with a claim for “negligence.” In the case, the court concluded that the pleadings adequately alleged that defendants were grossly negligent and New York’s public policy was that a party could not “insulate” itself from damages caused by grossly negligent conduct. With that in mind, exculpatory clauses and liquidated damage clauses in contracts were not enforceable against allegations of gross negligence.
The court concluded, however, that one of the alarm companies had a waiver of subrogation clause in its contract that required the plaintiff to obtain insurance to cover 100 percent of losses and the plaintiff expressly waived all rights to seek damages against the defendants. Therefore the court indicated that there was a distinction that must be drawn between contractual provisions that seek to exempt a party from liability… and contractual provisions that, in effect, simply require one of the contract’s parties to provide insurance for all of the parties. The court therefore dismissed the alarm company that had a waiver of subrogation provision in its agreement. The court indicated that the other alarm company did not have a similar waiver of subrogation clause; therefore the contract was not a total defense to the plaintiff’s claim and required that case to go to trial, thus proving the benefit of a waiver of subrogation clause.
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