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Colorado Court Holds That an Alarm Contract’s Limitation of Liability Clause Cannot Defeat a Willful or Wanton Breach of Contract Claim

Subrogation Alert | August 16, 2012
By: Edward A. Jaeger Jr. and William L. Doerler

In Core-Mark Midcontinent, Inc. v. Sonitrol Corp., -- P.3d --, 2012 WL 2994956 (Colo. Ct. App. July 19, 2012), the Colorado Court of Appeals addressed, among other things, the enforceability of a limitation of liability clause in a burglar alarm contract and the apportionment of fault to a nonparty under Colorado’s comparative negligence statute, Colo. St. § 13-21-111.5.  With respect to limitation of liability clauses, the court held that a limitation of liability clause in an alarm contract does not apply to claims based upon willful and wanton breach of contract.  Addressing the apportionment of fault to a nonparty, the court held that Colorado’s comparative negligence statute allows apportionment of fault to nonparties who are liable in tort, not contract.

In Core-Mark, the plaintiff, Core-Mark Midcontinent, Inc. (Core-Mark) contracted with the defendant, Sonitrol Corp. (Sonitrol) to have Sonitrol install and monitor a burglar alarm system at one of Core-Mark’s warehouses. The contract between the parties purported to limit Sonitrol’s liability for damages arising from Sonitrol’s performance or nonperformance under the contract or from negligence to a sum equal to the total of one-half year’s monitoring payments, or the sum of $500, whichever was less. 

In December of 2002, a burglary occurred at Core-Mark’s warehouse. Sonitrol failed to detect or respond to the burglary and one of the burglars, David Ottersberg (Ottersberg), a nonparty, started a fire in the warehouse, destroying the building and its contents. Core-Mark recovered part of its losses from its insurers, and then sued Sonitrol to recover its uninsured losses. Core-Mark’s insurers filed a subrogation suit against Sonitrol, which was consolidated with Core-Mark’s action. Both Core-Mark and its insurers asserted tort and breach of contract claims against Sonitrol. Sonitrol moved for, among other things, summary judgment on the breach of contract claims to the extent that those claims sought damages in excess of the limitation of liability clause in Sonitrol’s contract. The trial court granted Sonitrol’s motion. The appellate court held that the trial court erred by holding that Sonitrol’s claims for willful and wanton breach of contract were subject to the limitation of liability clause and remanded the case for further proceedings. See United States Fire Ins. Co. v. Sonitrol Mgmt. Corp., 192 P.3d 543 (Colo. App. 2008) (Sonitrol I).  On remand, a jury found in Core-Mark’s favor on its claims for willful and wanton breach of contract and willful and wanton breach of the contractual duty of good faith and fair dealing, and awarded damages to Core-Mark and its insurers.  After the jury’s verdict, the appeal discussed herein followed.

On appeal, Sonitrol argued, initially, that the appellate court in Sonitrol I, erred by ruling that its limitation of liability clause was not enforceable as to claims based on willful and wanton breach of contract. After concluding that the issue was not controlled by the law of the case doctrine, the appellate court re-examined the question of whether the limitation of liability clause was enforceable to limit damages recoverable for willful and wanton breach of contract. Although the court recognized that limitation of liability clauses in alarm contracts are generally enforceable, the court noted that limitation of liability clauses are not enforceable if they are contrary to public policy or are unconscionable. The court held that, because of the “egregiously wrongful nature” of willful and wanton conduct, enforcing a limitation of liability clause to protect a party from such conduct would be contrary to public policy.  In addition, limiting liability for a willful failure to monitor a burglar alarm system or a deliberate disregard of an alarm contractor’s contractual duty would not be consistent with the intended protection service set forth in the contract. Thus, the court reaffirmed the holding in Sonitrol I and held that the limitation of liability clause was not enforceable as to Core-Mark’s willful and wanton breach of contract claims.

On appeal, Sonitrol also argued that the trial court erred in holding that Sonitrol could not designate Ottersberg, the fire-starting burglar, as a nonparty at fault under § 13-21-111.5.  The appellate court affirmed the trial court’s holding that § 13-21-111.5 only permits the apportionment of liability to a nonparty who is at fault in a tort action, not in a contract action.  Thus, Sonitrol could not apportion any of its contract-based liability to Ottersberg.

Although the pursuit of a subrogation claim against alarm companies is often precluded by the terms of the alarm companies’ contracts, to the extent that the facts of a claim against an alarm company suggest willful or wanton conduct by the alarm company and to the extent that the state whose law controls the claim employs a public policy analysis similar to that utilized in Colorado, you may be able to use the analysis in Core-Mark to argue that a limitation of liability clause is not enforceable, on public policy grounds, as to claims based upon a willful and wanton breach of contract. 

For more information regarding this alert, please contact Ed Jaeger (215.864.632; jaegere@whiteandwilliams.com) or Bill Doerler (215.864.6383; doerlerw@whiteandwilliams.com).

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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