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Gross Negligence Defeats a Limitation of Liability Clause but Not a Waiver of Subrogation Clause

Subrogation Alert | April 25, 2012
by: Edward A. Jaeger Jr. and William Doerler

In Abacus Federal Savings Bank v. ADT Security Services, Inc., -- N.E.2d --, 2012 N.Y. Slip Op. 02120, No. 33 (N.Y.), New York’s highest court considered whether the limitation of liability and/or waiver of subrogation clauses in the contracts of two different burglar alarm companies were enforceable with respect to claims based upon grossly negligent conduct. The court held that the limitation of liability clauses in both contracts were unenforceable. However, the waiver of subrogation clause in one of the contracts was enforceable.

In Abacus, the plaintiff, a bank, filed suit against ADT Security Services, Inc. (ADT) and Diebold Incorporated (Diebold) to recover damages for losses the bank incurred as the result of a burglary. ADT contracted with Abacus Federal Savings Bank (Abacus) to install and maintain a central station security system. Diebold contracted with Abacus to provide a back-up alarm system that included central station monitoring and signal monitoring that would activate an alarm if ADT’s alarm system failed to operate properly. The gravamen of Abacus’ complaint was that the defendants violated their contractual obligations by installing woefully inadequate security systems. Abacus also alleged that, due to a series of malfunctions in the weeks leading up to the burglary, the defendants knew that the security systems were malfunctioning but failed to investigate the malfunctions or notify anyone at the bank of the problem.

As is common in alarm system contracts, the contracts for both alarm companies contained clauses that exculpated the defendants from liability for their own negligence and limited their liability, under all circumstances, to $250. Diebold’s contract also contained an insurance and waiver of subrogation clause, whereby Abacus agreed to obtain insurance to cover its losses in the event of a theft, look solely to its insurer for recovery of its losses, and waive any claims for such losses against Diebold. ADT’s contract did not contain a similar waiver of subrogation clause. Rather, ADT’s contract merely provided that it was Abacus’ responsibility to obtain insurance, if any, covering property loss damage. 

Although the Court of Appeals recognized the general rule that parties are free to enter into contracts that absolve a party from its own negligence, it also recognized that, in New York, public policy dictates that a party cannot insulate itself from damages caused by grossly negligent conduct. Consequently, in New York, neither exculpatory clauses nor liquidated damages clauses in contracts are enforceable against allegations of gross negligence. 

Discussing the claims against ADT, the court held that, because the allegations in the complaint sufficiently alleged conduct that, if true, constituted gross negligence, Abacus could pursue its breach of contract claim against ADT. However, with respect to Abacus’ claims against Diebold, who had a waiver of subrogation clause in its contract, the court affirmed the lower court’s dismissal of all claims. 

The court affirmed the dismissal of all claims against Diebold by drawing a distinction between limitation of liability clauses and clauses which, in effect, simply require one of the parties to the contract to provide insurance for all of the parties. With respect to insuring agreements, the court found that an agreement to purchase insurance and to waive subrogation is enforceable even as to allegations of grossly negligent conduct. Although the ADT contract contemplated that Abacus would secure insurance, the court noted that the decision to obtain insurance was discretionary, and the contract did not contain an express waiver of all rights for damages covered by any insurance Abacus may have obtained. Thus, the insurance clause in the ADT contract did not act as a total defense to Abacus’ claims.

Although the pursuit of a subrogation claim against alarm companies is often precluded by the terms of the alarm companies’ contracts, the analysis in Abacus suggests that, in limited circumstances, where the facts establish grossly negligent conduct, a subrogation claim is possible. Based on the analysis in Abacus, an alarm company seeking to exculpate itself for liability for grossly negligent conduct in New York should include both a exculpatory clause and a waiver of subrogation clause in its contract. Absent a clause requiring the alarm company’s customer to both purchase insurance to cover losses and expressly waive subrogation claims against the alarm company, an insurer may be able to pursue an alarm company in a subrogation action where grossly negligent conduct is alleged.

For more information regarding this alert, please contact Ed Jaeger (215.864.6322 / or Bill Doerler (215.864.6383 /

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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