Failure to Perform Insurance for Security Contractors
Author: Andrew Cartwright
There are thousands of companies involved in the security industry throughout Canada. These companies diligently provide Canadians with the piece of mind that their homes and businesses are protected by the various security devices and monitoring services offered. Security contractors rely on these products in order to perform their contractual duties.
But what happens if there is a failure and one of the installed devices does not perform as required? What if a fire alarm fails to activate? Well, we have seen through litigation that the security contractor is likely to be sued for this failure.
Thankfully you have insurance to protect you against such risk, right? If you have what the industry refers to as ‘Failure to Perform’ insurance for security companies than you are protected. However if you are relying on a standard liability policy, coverage may be excluded for these types of loss.
What is a Failure to Perform exclusion?
The overwhelming majority of commercial general liability insurance policies issued for Canadian businesses include a “Failure to Perform” exclusion. This common condition implies that a commercial general liability policy will exclude coverage for losses that occur as a result of the product or service failing to perform as warranted by the Named Insured.
Here is a real-world example to illustrate the effect of a ‘Failure to Perform’ exclusion:
A fire broke out at a commercial building one evening, causing extensive damage to the building and contents inside. After an investigation, it is discovered that the fire alarms did not activate as a result of a faulty cabling issue which prevented the smoke detector from triggering the monitored fire alarm. Since the monitored fire alarm did not perform as intended, the building incurred significantly more damage than it would have had there been a quick response by the nearest fire department.
In this scenario, the alarm installation company could be found liable for the portion of the fire damage that’s attributed to a delayed response from the fire department.
While settling the claim, the building owner’s insurer looks to recover excess damage from the alarm company who installed the system. However, the alarm installation company’s insurer refuses to assume liability for the incident, citing the Failure to Perform exclusion contained within the installer’s commercial general liability policy. As a result, the installation company is found partially liable for the fire damage and directly on the hook for 20% of the total loss.
Why is it important for companies in the Security Industry to understand the Failure to Perform Exclusion?
The presence of this exclusion in standard commercial general liability insurance policy purchased by most security contractors will create considerable gaps in coverage for a business operating in the Security Industry. It’s worth noting that a standard commercial general liability policy will respond in many instances of alleged property damage brought forth by a third party. An example would be when an alarm installation company punctures a plumbing pipe during installation, causing water damage.
However, this exclusion precludes coverage for the security industry’s primary exposure – an alarm or device failing to trigger during an event in which the alarm or device is warranted to respond to.
How does this impact Security Contractors that specialize in residential alarms?
Burglars enter a residential home while the owners are away, activating the theft detection sensors installed around the windows and doors of the home. However, the home security system fails to send the distress signal to the central monitoring station due to a botched installation of the system’s control panels. The monitoring station is not aware of the burglary and does not notify the local police department to respond. As a result, the burglars are afforded ample time to ransack the home, leaving with many valuable items.
How does this impact medical alarm and monitoring companies?
A senior citizen wears a monitored fall detection bracelet while alone at their condominium. The individual experiences a fall one morning, but the emergency response service is not activated due to poor synchronization of the wireless network connecting the bracelet to the monitoring station. As a result, the individual suffers further harm and discomfort.
Does my Products Liability or Professional Liability insurance not cover these claims?
A prevailing misconception is that if an alarm fails to activate when required this would constitute either a Products or Professional Liability claim. Unfortunately, this is not the case.
Product liability insurance responds in the event that an individual has consumed or purchased a product, and a defect within the product has caused that individual or a third-party direct bodily injury or property damage. An alarm which overheats and causes wall damage due to poor quality manufactured materials is an example of a products liability claim.
Professional Liability insurance responds in the event that a third-party experiences financial loss due to error in the professional services offered by a company or individual which they have contracted to perform that particular service.
An example would include a commercial building installing an elaborate fire alarm system based on the recommendations made by an Alarm Installation Consulting firm they have contracted. After installation, it is determined that the alarm system does not meet the local building code requirements. The commercial building owner sues the Alarm Installation Consulting firm to recoup the money they have lost by having to install another new fire alarm system.
How can the Security Services Industry ensure they are adequately insured?
There are only a select number of companies that specialize in insurance for security contractors and these companies will include the ‘Failure to Perform’ provision within their commercial general liability policies. It is essential that firms operating within the security industry partner with a knowledgeable broker who will place their insurance coverage with an appropriate market. This will ensure that their policy includes this specialized coverage, eliminating exposure to substantial uninsured losses.