FACTS: An alarm dealer installs a fire alarm system for a linen service business. The agreement includes service and monitoring. Sometime after the system is installed, the subscriber's premises is severely damaged by a fire. The subscriber's insurance carrier, after paying the claim, attempts to recover its losses and files a suit against the dealer. The suit alleges that the system had malfunctioned, and therefore, failed to perform as promised. A request is made for full reimbursement of losses. The alarm company turns the case over to its errors and omissions carrier.

An investigation is conducted by the errors and omissions carrier, which reveals the dealer didn't have an approved subscriber contract with the customer, so the claim is denied. The dealer's errors and omissions carrier then files a suit in federal court and requests a formal judgment that it not be obligated to defend the claim.

It was the contention of the carrier that the policy insuring the dealer contained a Customer Contract Warranty form. A Customer Contract Warranty form states that, in the event of a claim, no coverage would be provided unless there was a subscriber contract in force; and that the contract must include a liquidated damages clause, limiting the liability of the dealer to $250 or 10 % of the annual service charge, whichever is greater. Since there was no such contract between the dealer and the subscriber, the carrier did not feel obligated to defend the claim.

The alarm company argues to the court that it is unreasonable to assume that after paying nearly $9,000 in annual premiums, that coverage is, in effect, limited to $250 or 10 percent of the alarm company's service fee.

RULING: After hearing both sides, the federal court rules in favor of the Errors and omissions carrier. The court says its decision is based on the presumption that the alarm company should have understood the terms and conditions of the entire policy, including the Customer Contract Warranty, before purchasing the policy.

MORAL: Today, there are numerous carriers insuring alarm dealers, and every carrier's policy is different. For example, one policy will exclude coverage for subcontractors, another will have a time limit on reporting claims, and still another will require a subscriber contract with specific language. Additionally, each carrier has its own way of establishing a rate for the coverage provided. In essence, you get what you pay for. One thing is clear, the courts will uphold the terms and conditions of an insurance policy ... even if they are not understood by the policy holder.

CSSS does not endorse very many companies. But we have done business with Rick Gombar of Rick Gombar Insurance Services for the last 15 years and have recommended him to many of our customers.

If you are an alarm dealer and would like to talk over your insurance needs, Rick can be reached at 1-800-446-6227.