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IntIf you monitor a fire alarm, is the building, its contents or the people inside the appropriate measure of potential damage? Image: Chor_muang/stock.adobe.com.

4.20.23 – SSI – Ken Kirschenbaum

The criteria for gross negligence or willful misconduct is quite high, though alleging it is of course a lot easier than proving it.

It is generally accepted that the exculpatory clause (which eliminates damages for breach of contract and negligence in a contractual setting) and a limitation of liability clause (limits damages to a nominal sum) are not enforceable when gross negligence or willful misconduct is alleged and subsequently proved. The limitation of liability clause was designed as a back-up to the exculpatory clause. When an all-damage waiver would not be enforced, the thought was to limit the damages, typically to a nominal amount; $250 is industry standard. These clauses are the subject to most challenges to the “printed” alarm contract.

To address the anticipated challenge in advance, both provisions were modified in Kirschenbaum Contracts by excluding gross negligence and willful misconduct from the provisions; in other words, accepting liability for gross negligence and willful conduct.

These are not abstract legal concepts, though they are defined differently from state to state. In New York, it’s defined: “[A]n exculpatory agreement, no matter how flat and unqualified its terms, will not exonerate a party from liability under all circumstances. Under announced public policy, it will not apply to exemption of willful or grossly negligent acts. More pointedly, an exculpatory clause is unenforceable when, in contravention of acceptable notions of morality, the misconduct for which it would grant immunity smacks of intentional wrongdoing. This can be explicit, as when it is fraudulent, malicious or prompted by the sinister intention of one acting in bad faith. Or, when, as in gross negligence, it betokens a reckless indifference to the rights of others, it may be implicit. In either event, the policy which condemns such conduct is so firm that even when, in the context of circumstances surrounding the framing of a particular exculpatory clause, it is determined . . . that the conduct sought to be exculpated was within the contemplation of the parties, it will be unenforceable.”

The criteria for gross negligence or willful misconduct is quite high, though alleging it is, of course, a lot easier than proving it. Sufficient facts will suffice to defeat a motion for summary judgment, and then it’s a risky trial you have to look forward to if the case isn’t settled (which it usually is).

In 2020 an important case in New York was decided, declaring that, though a nominal limitation of liability would not be enforced, if gross negligence was found, a “reasonable limitation” was enforceable. Significantly, the case did not address willful misconduct and enforcement of a limitation for willful misconduct remains uncertain.

The Court of Appeals held: “We have previously considered the application of the gross negligence public policy rule only in cases where the contract provision at issue was an exculpatory clause, purporting to wholly immunize a party from liability, or a nominal damages clause limiting damages to, at most, $250. We have not yet determined whether grossly negligent conduct may render unenforceable contractual provisions that do not wholly insulate a party from liability for its breach, but instead impose reasonable limitations on either liability or the remedies available to the non-breaching party. We conclude that, in a breach of contract case, grossly negligent conduct will render unenforceable only exculpatory or nominal damages clauses, and the public policy rule does not extend to limitations on the remedies available to the non-breaching party.”

Subscribers often ask that the limitation of liability clause be changed from $250 to the amount of the insurance policy; sometimes the full amount of the contract payments required from the subscriber. Offering up the insurance limits is likely a problem because 1) it’s not your money and 2) your E&O carrier expects you to have a limitation of liability clause with a $250 limit. Routinely increasing that limit to insurance limits is likely to get you a premium increase, or nonrenewal if not cancellation once the carrier catches wind that you’re altering that provision in the contract.

What change is needed to go beyond “nominal damages”? Certainly, the policy limits would meet that criteria. If you monitor a fire alarm, is the building, its contents or the people inside the appropriate measure of potential damage? If so, the policy limits may not be even close to covering the loss. Will what the subscriber paid to date (certainly less than the policy limits) be sufficient? Will other provisions in the Kirschenbaum Contracts provide other avenues of protection, such as the Insurance Procurement clause?

Feel free to contribute to the analysis and suggest changes