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FEDERAL INS. CO. v. HONEYWELL

August 28, 1986

FEDERAL INSURANCE COMPANY, et al., Plaintiffs, against HONEYWELL, INC., d/b/a HONEYWELL PROTECTION SERVICES, Defendant.


The opinion of the court was delivered by: GOETTEL

GOETTEL, D.J.:

In July 1978, defendant Honeywell, Inc. d/b/a Honeywell Protection Services ("Honeywell") agreed to install, maintain, and operate an alarm system at the Bronx, New York premises of the Sentry Armoured Courier Corporation ("Sentry"). Sentry paid Honeywell $ 1,080 for installation and agreed to pay $ 139 per month for ongoing service. The written contract that both parties executed expressly provides that Honeywell is not an insurer and specifically limits Honeywell's liability for its "negligent performance or failure to perform" under the contract to one-half the annual service charge, of $ 834. *fn1" Affidavit of K. Ann McDonald, Exhibit A.

 In the late evening or early morning of December 12-13, 1982, Sentry's premises were burglarized. Over $ 10 million was lost in the burglary. The plaintiffs in this diversity action are underwriters that have paid out on policies of insurance for Sentry covering Sentry's liability to its customers arising out of the burglary. The plaintiffs claim that Honeywell is liable to them for the amount paid out because the Honeywell alarm installed at Sentry failed to prevent or detect the crime.

 The plaintiffs assert two claims. *fn2" They first seek to recover against Honeywell, as Sentry's subrogees. They allege that Honeywell's gross negligence and/or willfulness, wantonness, or recklessness caused the burglary and the resultant losses. The plaintiffs' assert a second claim on their own behalf. That claim alleges that Honeywell owed a duty to the plaintiffs to properly operate, maintain, and monitor the Sentry alarm. Honeywell allegedly breached that duty by negligently operting the Sentry system.

 Honeywell moves, pursuant to Fed. R. Civ. P. 56, for summary judgment on both claims. For the reasons stated below, the motion for summary judgment on the first claim is denied, and the motion for summary judgment on the second claim in granted.

 I. Discussion

 A. The Motion for Summary Judgment on the First Claim

 Honeywell's motion on thee first claim is twofold. It first contends that the terms of the Honeywell/Sentry contract limit Honeywell's liability, even for gross negligence, to one-half of Honeywell's annual service charge, or $ 834. Honeywell also asserts that it is entitled to summary judgment on the issue of gross negligence.

 1. The Contractual Limitation on Liability

 Both parties agree that the Honeywell/Sentry contract limits Honeywell's liability for negligence to $ 834. The plaintiffs contest Honeywell's further assertion that the contract also limits Honeywell's liability for gross negligence. The plaintiffs must prevail on this issue.

 The defendant has brought to our attention a recent Massachusetts trial court decision construing the same language that limits Honeywell's liability in this action. The decision, Boston Silver & Stone Corp. v. Honeywell, Inc., No. 65270, slip op. (Mass. Sup. Ct. Suffolk Co. March 10, 1986), held that the contract properly limited Honeywell's liability for gross negligence as well as for negligence.

 No New York court has considered whether a burglar alarm contract could properly limit liability for gross negligence. The defendant asserts that Melodee Lane Lingerie Co. v. American District Telegraph Co., 18 N.Y.2d 57, 218 N.E.2d 661, 271 N.Y.S.2d 937 (1966) supports the validity of such a limitation. In Melodee Lane, the New York Court of Appeals considered whether a limitation of liability clause in a contract involving a sprinkler alarm system could limit a party's liability for negligently repairing that system. Because the contract was considered an agreement affecting real property, section 5-323 of the New York General Obligations Law, N.Y. Gen. Oblig. Law § 5-323 (McKinney 1978), *fn3" applied. That section applies to agreements in connection with any contract affecting real property. It voids any such agreement that exempts a contractor from liability for his own negligence. In construing section 5-323's effect on the limitation of liability clause, the Court of Appeals noted, "notwithstanding a statute such as [section 5-323], it is possible for parties to limit their liability provided that there is a voluntary choice of obtaining full or limited liability by paying under a graduated scale of rates proportioned to the responsibility in transportation or other service rendered." Id. at 946 (citation omitted). The Court proceeded to invalidate the clause in issue because the subscriber had not had an opportunity to pay a service charge consonant with full liability.

 The defendant urges us to expand upon the reasoning of Melodee Lane to uphold the validity of a clause in a burglar alarm contract limiting liability for gross negligence. The argument, as we understand it, is that because a limitation of liability clause can effectively override a statute prohibiting the exclusion of liability for negligent behaviour, a similar provision can limit liability for gross negligence even though the public policy of New York forbids the exclusion of liability for gross negligence.

 The fatal shortcoming in the defendant's analysis and reasoning is its failure to account for the difference in the manner in which New York courts treat clauses that exclude liability for negligence and those that exclude liability for gross negligence. Unless a statute such as section 5-323 provides otherwise, the public policy of New York does not prevent an alarm company from exculpating itself from its own negligence when the language of the exculpatory clause is sufficiently clear. *fn4" Gross v. Sweet, 49 N.Y.2d 102, 400 N.E.2d 306, 424 N.Y.S.2d 365 (1979); Dubovsky & Sons, Inc. v. Honeywell, Inc., 89 A.D.2d 993, 454 N.Y.S.2d 329 (2d Dep't 1982). The same cannot be said for gross negligence. The New York courts have consistently held that public policy precludes a party from exculpating himself from liability for his own gross negligence. Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 448 N.E.2d 413, 461 N.Y.S.2d 746, 749 (1983); Weld v. Postal Telegraph-Cable Co., 210 N.Y. 59, 67, 103 N.E. 957 (1913). This strong public policy voids any provision in a burglar alarm contract exculpating a party from liability for gross negligence or willful or wanton misconduct. Gross v. Sweet, supra, 454 N.Y.S.2d at 367; Modern Settings, Inc. v. American District Telegraph Co., No. 25764, slip op. (1st Dep't June 17, 1986) (available on Lexis, States lib., NY file); Dubrovsky & Sons, Inc. v. Honeywell, Inc., supra, 454 N.Y.S.2d at 331.

 Although limitation on liability, as opposed to a complete exculpation, in a sprinkler alarm contract must have influenced the Melodee Lane court, the absence of a strong public policy against either limiting or excluding liability for negligence, no doubt, was also persuasive. The strong, indeed intractable, public policy that favors making parties accountable for gross negligence precludes the extension of the Melodee Lane dicta urged by the defendant. Any limitation on gross negligence in the Honeywell/Sentry contract is void. *fn5" Honeywell is fully liable to the plaintiffs, as Sentry's subrogees, for any gross negligence, provided all of the requisites to liability are proven.

 2. Gross Negligence

 a. The Proper Standard

 The distinction between negligence and gross negligence is "shadowy and unsatisfactory," Dalton v. Hamilton Hotel Operating Co., 242 N.Y. 481, 487, 152 N.E. 268 (1926). From the struggles of the New York courts to supply a workable definition of gross negligence have emerged two lines of thought. According to the first, the failure to exercise even slight care, scant care, or slight diligence constitutes gross negligence. Food Pageant, Inc. v. Consolidated Edison Co., 54 N.Y.2d 167, 429 N.E.2d 738, 445 N.Y.S.2d 60, 62 (1981) ("slight care"); Dalton v. Hamilton Hotel Operating Co., supra, 242 N.Y. at 488 ("slight diligence"); Weld v. Postal Telegraph-Cable Co., supra, 210 N.Y. at 72, 78 (1913) ("slight diligence," "slight care"). The other line of authority defines gross negligence as thoughtless disregard for the consequences of an act without any attempt to avoid them and with indifference to the rights of others impacted by the act. Cauble v. Mabon Nugent & Co., 594 F. Supp. 985, 993 (S.D.N.Y. 1984); Veals v. Consolidated Edison Co., 114 Misc. 2d 626, 452 N.Y.S.2d 153, 155 (Civ. Ct. Kings Co. 1982); Denmark v. New York Telephone Co., 97 Misc. 2d 205, 411 N.Y.S.2d 506, 511 (Civ. Ct. Kings Co. 1978).

 Instead of reconciling these definitions or expressly choosing among them, many courts have simply incorporated both into their definition of gross negligence. These courts define gross negligence as "either a want of scant care or an indifference to the rights of others." Doe v. New York City Department of Social Services, 649 F.2d 134, 143 n.4 (2d Cir. 1981); Hong Kong Export Credit Insurance Co. v. Dun & Bradstreet, 414 F. Supp. 153, 160 (S.D.N.Y. 1975); Warren v. New York Telephone Co., 70 Misc. 2d 794, 335 N.Y.S.2d 25, 28 (Civ. Ct. N.Y. Co. 1972); see also 41 N.Y. Jur., Negligence § 27, at 40. Likewise, the New York Pattern Jury Instructions provide a two-pronged definition. That text states, "Gross negligence means a failure to use even slight care, or conduct that is so careless as to show complete disregard for the rights and safety of others." N.Y. Pattern Jury Instructions 2:10A (Supp. 1986). This instruction correctly summarizes the law of gross negligence that will be applied in this case. *fn6"

 It is this same form of gross negligence, in addition to any willful or wanton misconduct, that will overcome the limitation of liability clause in the Honeywell/Sentry contract. Thus, if there remains a triable issue of fact as to whether Honeywell did not exercise even slight care or whether it disregarded the consequences of its own actions with indifference to the rights of others, the Court must deny the defendant's motion for summary judgment on the plaintiffs' first claim.

 "[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment. . . ." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 54 U.S.L.W. 4755, 4757, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (U.S. June 25, 1986) (emphasis in original). "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted." Id. It is not the function of the Court to resolve ambiguities, choose between conflicting inferences, or determine credibility on a motion for summary judgment. Instead, the record is to be interpreted in a light most favorable to the non-moving party, with all reasonable inferences drawn, and any doubts and ambiguities resolved in its favor. Patrick v. LeFevre, 745 F.2d 153, 158 (2d Cir. 1984). "If, [so construed], the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law," Fed. R. Civ. P. 56(c), then summary judgment is proper.

 b. The Pertinent Facts

 Except where otherwise noted, the following facts pertinent to the motion for summary judgment on the first claim are not reasonably disputed.

 The Alarm System

 Honeywell wired numerous doors, windows, and other openings and installed various other protective devices at Sentry's premises. The premises were wired with both day and night circuits. On the day circuit were devices, wiring, and switches that could be kept "on" without inhibiting the normal movement of people around the building. Sentry kept the day circuit on all the time. The night circuit included the day circuit, several additional doors and windows, and a photoelectric eye located in one of the hallways.

 The Sentry alarm, together with other subscriber systems, was linked by telephone line to Honeywell's computerized central monitoring station. In the central station, a shift manager and two or three operators monitored computer screens and printouts that reflected signals from subscribers' premises. The computer screens displayed alarm signals and indicated other problems with subscriber systems. Computer terminals also provided a continuous paper printout of the activity at all Honeywell subscribers. Finally, the Honeywell computers stored a minute-by-minute log of the events at each individual subscriber. This "daily log" could be brought up on the computer at any time. A break in the day circuit or in the night circuit (if activated) would generate an alarm signal on the central station monitor and would show up on the daily log and on the printout. Sentry had complete control over whether and when to activate (or "set") the night circuit. The following schedule was in effect at the time of the burglary: Set - 1:30 a.m. Saturday Unset - 7:00 a.m. Saturday Set - 11:00 p.m. Saturday Unset - 7:00 a.m. Sunday Set - 9:00 p.m. Sunday Unset - 4:30 a.m. Monday

 Sentry's schedule was entered into Honeywell's computer. If Sentry did not set the alarm within 30 minutes of the designated time, the Honeywell monitor and the printout would show Sentry as "late to close." If the Sentry guard on duty did not call Honeywell to explain why Sentry had not set the alarm (or "closed"), the Honeywell central station operators would call the Sentry premises.

 The parties differ as to whether Sentry guards were authorized to tell Honeywell that Sentry would not be setting its alarm on a particular evening. According to the defendant, all those authorized to operate the alarm system, including guards, could make such temporary schedule changes. Honeywell asserts that guards could not make such changes, and it programmed its computer accordingly.

 In order to set the night circuit, the Sentry guard punched a code into the alarm box at Sentry and then threw a toggle switch. If the alarm set properly, Honeywell's computer caused a device to ring twice at Sentry's premises. This "ring back" feature notified the guard that the alarm was set. If the alarm did not set properly, the alarm would not ring back, and Honeywell operators checking on Sentry would see a "trouble" signal on the computer screen and on the printout. In addition, the system ...


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