Every so often, in a lawsuit, not only does the judge render an opinion, but the judge will explain the rationale for his decision, which is the reason why the following case is reviewed in this month’s column. The explanation of the ruling is worth a closer look.

The plaintiff in the case had a homeowner’s insurance policy and his insurance representative advised him that he would receive a discount on his insurance if he installed a home security system. The plaintiff subsequently contracted with the alarm company. The contract obliged the alarm company to install and monitor the system and to notify the homeowner and/or the police in the event of a break in. The plaintiff was given a contract to sign, but no one from the alarm company discussed the terms of the contract prior to the plaintiff signing. The contract contained a clause relieving the alarm company from any liability in connection with its performance under the contract. The contract also contained a clause limiting its liability.

While the plaintiff was out of the country, the alarm company received several low battery signals from the alarm system and a “trouble signal” from the alarm system for the front door, rear door and garage/carport door. The alarm company attempted to notify the plaintiff about the signals, but was unsuccessful. The plaintiff’s home was burglarized and the plaintiff filed suit in the state court.

The victim filed suit against the alarm company alleging a breach of contract, tortious breach of the implied covenant of good faith and fair dealing, negligence and consumer fraud. After the defendant filed its answer, the plaintiff filed a motion for partial summary judgment attempting to throw out the exculpatory and liability limitation provisions in the contract that the defendant set up as a defense in its answer.

In its discretion the court pointed out that it had analyzed the exculpatory clause and concluded that the clause was void because it could not be understood by the reasonably intelligent customer and it violated the customer’s reasonable expectation. The court then discussed the liability limitation clause, the focus of this column.

The plaintiff had argued the clause violated the reasonable expectations doctrine, was unconscionable, and against public policy. The court disagreed and found the limitation of liability provision to be valid. The court pointed out that ordinarily a party to a standardized contract is bound by all the terms of the contract even those terms that were not bargained for, understood, or even read by a party at the time of the contracting. The court pointed out, however, that there are exceptions to this general rule and cited examples. If the party offering the standardized contract “has reason to believe that the party accepting the contract would not do so if he or she knew that the writing contained a particular term, the term is not part of the agreement.” This is known as the “reasonable expectations doctrine.”

The plaintiff argued that the liability limitation provision “eliminated the dominant purpose of the transaction,” which was to provide “protection from loss.” The court concluded that while “protection from loss” in a general sense was something that an alarm contract would provide, the plaintiff’s expansive gloss on that term was not justified by the expectations of the reasonable consumer.

The dominant purpose of the alarm contract is to provide a monitoring service that will notify the homeowner or police in the event of a break-in. It is certainly hoped that this service will result in protection for the homeowner’s property, but if that property is stolen or destroyed, it is unreasonable to expect the alarm contract is the means by which the homeowner will be made whole. That, as the alarm contract notes, is the job of the homeowner’s insurance policy. An alarm contract is not an insurance policy. If it were, its price would be determined by the value of the contents of the home, and it is not.

The plaintiff further maintained that had he known of the liability limitation clause, he would have chosen to contract with a different security company. The court pointed out that the plaintiff’s subjective preference, however, is not the test. The test is whether the alarm company had reason to believe that the plaintiff would not have signed the contract had he known of the liability limitation clause. The court concluded that it did not.

With reference to the plaintiff’s argument that the liability limitation clause was substantively unconscionable, the court pointed out that “factors showing substantive unconscionability include contract terms so one-sided as to oppress or unfairly surprise an innocent party, an overall imbalance in the obligations and rights imposed by the bargain, and significant cost-price disparity. The court indicated that although the contract does favor the alarm company, the plaintiff could not show that it was so one-sided that it is unconscionable as a matter of law.

Finally, the court stated that in general, courts throughout the country have concluded that permitting an alarm company to limit its liability is not contrary to public policy. Because the homeowner is in a superior position to know the value of the contents of his house it makes sense to put on him the responsibility for acquiring the appropriate level of insurance. It would, in fact, be unfair to cast the alarm company in the role of home insurer in exchange for the “one-size-fits-all” alarm maintenance fee.

Therefore, the court determined that the liability limitation clause was neither unconscionable nor void as contrary to public policy. Therefore the court denied the plaintiff’s motion for summary judgment holding that the liability limitation clause did not violate the doctrine of reasonable expectations, was not unconscionable, and did not violate public policy.

READERS ASK

Q: I just learned that an alarm company who uses independent contractors was held responsible for unemployment compensation for one of its former contractors, after the contractor was terminated.  Can you comment on this?

A: If the party is truly an independent contractor, then the company should have no responsibility for unemployment compensation.  The question often arises, is the party truly an independent contractor?  Read the full answer at www.SDMmag.com.

To ask Les Gold a question, e-mail sdm@bnpmedia.com.