WE ARE FREQUENTLY ASKED BY CLIENTS whether or not they should eliminate the waiver of subrogation clause from their contracts. A decision in New York state clearly points out why every effort should be made to retain the provision in the contract.

In that case, the plaintiffs, who owned a jewelry store, contracted with an alarm company to install and monitor an alarm system along with a closed-circuit television. The contract provided the normal provisions, which stated that the alarm company was not an insurer and that it was the responsibility of the owner to obtain adequate insurance covering the premises and its contents. The contract further provided a limitation of liability provision and that the subscriber would look exclusively to their insurer for financial protection from risks and liabilities. It included the statement, “You waive all rights and remedies against us, including all rights of subrogation, that you, any insurer, or any other third party may have due to any losses you or others may incur.”

The plaintiffs’ premises were burglarized and apparently the perpetrators had accessed the alarm system’s power supply. After disrupting the power, the perpetrators allegedly waited for the “back-up” batteries in the store’s alarm system to dissipate and thereafter cut a hole through the roof and descended into the store stealing an excessive amount of jewelry.

The plaintiffs filed a claim with their insurance carrier who had issued a policy covering losses up to $80,000; however as a consequence of the stolen merchandise having been “out of safe or vault while closed to business,” the insurance carrier paid only $5,000 on the claim. The plaintiffs then commenced an action against the alarm company asserting a breach of contract, detrimental reliance, violations of the General Business Law Section 349, gross negligence, negligence and res ipso loquitor.

The defendant alarm company moved for an order dismissing the complaint.

The court pointed out that the allegations in the amended complaint sufficiently alleged conduct on the part of the defendant that, if true, may constitute gross negligence. The court indicated, however, that notwithstanding any alleged gross negligence, the risk allocation/waiver of subrogation provision of the agreement, which required plaintiffs to obtain insurance for all losses occurring at the jewelry store and whereby plaintiffs waived any remedies against the alarm company, functions as a complete defense to the breach of contract, gross negligence, negligence and res ipso loquitor claims asserted in the amended complaint.

The court further noted that while an exculpatory clause in an agreement will not protect a defendant from liability for gross negligence, a waiver of subrogation clause which releases and discharges an alarm company from and against all hazards covered by insurance clearly precludes any insurer, as subrogee, from seeking return of nay proceeds covered by insurance, notwithstanding any claim of gross negligence.

Accordingly, the waiver of subrogation clause conclusively established a defense to the plaintiffs’ insurer’s claims against the alarm monitoring company. In the case, the plaintiffs also alleged that the alarm company violated General Business Law Section 349 when it used technical language in the agreement and failed to direct the plaintiffs, whose primary language is not English, to particular provisions in the agreement which limited their liability. The court pointed out that a party who executes a contract is presumed to know its contents and to assent to them. A party who signs a contract without any valid excuse for having failed to read it is conclusively bound by its terms. Persons who are not fluent in the English language are not automatically excused from complying with the terms of the contract which they signed simply because they could not read it. Such persons must make a reasonable effort to have the contract read to them.

The defendants’ motion to dismiss was therefore granted.