Do your own due diligence

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Monday, December 1, 2008

After many years of doing account acquisitions in the alarm industry, I am perplexed by how many alarm company owners are working without an acceptable sales/monitoring contract (a contract between the subscriber and the alarm company). After news reports of several sizeable lawsuits against security companies, where the validity of a contract was a central issue, one would think that dealers would take a hard look at their own contracts.

Many of them don’t.

Often, I find dealers simply using the central station agreement, which in many cases will include terms, limits of liability, etc. The dealer believes it is offering him adequate contractual protection when the reality is that these agreements are written to protect the central station, not the installing dealer. I have also come across scenarios where the “contract” was actually created by a commercial subscriber’s legal counsel, providing little to no protection for the alarm dealer. I occasionally hear from a dealer that he does not want to use a contract, since he would not feel comfortable forcing a subscriber to continue to pay him if they wanted to cancel.

In each of these scenarios a dealer should wonder: Is the income worth the risk?

I have seen many contracts where a dealer cut and pasted what seemed to be the best “parts” of other companies’ contracts to create his own. Unfortunately when this is done, important elements may be left out or stated incorrectly. As important as it is to have a contract on file with each subscriber, that contract must contain certain elements if it’s going to be valid and effective.

Here are some basic starting points (any contract should be approved by an attorney):

It should always include initial terms (how long the contract lasts), renewal terms and the cancellation policy. The contract should clearly define what services are to be provided under the terms of the contract, but should also define that there is no guarantee of these services.

The front and back of a contract should reference one another. If the contract includes a warranty, the time frame and provisions under that warranty should be clearly detailed. The contract should include a signature for the company representative as well as the subscriber.

Limits of liability are one of the most important elements of a contract and are written expressly to protect the dealer. The language should explain that if the company is found liable for any loss or damage due to its negligence or the failure to perform its obligations that are communicated throughout the agreement, the company’s maximum liability will be a specific dollar amount.

The contract should include assignment language that allows the owner to transfer ownership of the contract while not requiring any acknowledgement of the subscriber. It should also explain that the subscriber does not have the right to assign the contract without explicit written permission from the company, or that they cannot assign the contract at all. A phrase in the assignment language that requires any acknowledgement from the subscriber can mean difficulty and significant time delays for a dealer that is looking to transfer accounts to a new owner. The language in your contract should allow for any assignee of the contract to carry out the provisions within and be protected by the language as well.

Another important and often misunderstood element of the contract is third-party indemnification. Industry attorney Tracy Ambler suggests: “The third party indemnity clause helps the alarm company avoid an end run around the limitation of liability clause by requiring the customer to protect the alarm company from claims made by anyone other than the customer him/her self (like an insurer, or a neighbor or other person who is injured or whose property is stolen or damaged).”

There are many segments that a dealer may opt to include in their contract, but most importantly, seek your attorney’s advice! There are several industry attorneys that have a standard contract that can be customized to meet the needs of your alarm company. Having an approved and clear-cut contract is worth the investment and ultimately directly relates to the value of your business.

Unless you want to be the next alarm company in the headlines, do your own due diligence and make sure your contracts protect you.

Kelly Bond is vice president of sales and marketing at Alarm Capital Alliance. She can be reached at kelly.bond@alarmcapital.com.