In U.S. Fire v. Sonitrol, et al, Case No. 07CA0060 (July 24, 2008), available through LEXIS at 2008 Colo.App. LEXIS 1172, Division Two of the Court of Appeals of Colorado reviewed a case concerning a contract for burglar and fire alarm services, two groups of plaintiffs who had filed separate actions appeal two orders for summary judgment issued in favor of the alarm company, Sonitrol Management Corporation (Sonitrol). .

Plaintiffs in the first case, United States Fire Insurance Co., Commonwealth Insurance Co., Lexington Insurance Co., United Insurance Co., United Fire & Casualty, Tartan Products Co., and Western Innovations, Inc. (Insurers), and the plaintiffs in the second case, Core-Mark Midcontinent, Inc. and Core-Mark International, Inc. (Core-Mark).

A. Course of Dealing Between Core-Mark and Sonitrol

Core-Mark distributes merchandise to convenience stores. It leased approximately 90,000 square feet of a 120,000 square foot warehouse for storing inventory. The Insurers insured the warehouse and inventory.

Sonitrol markets security and fire alarm services, and in 1995 contracted with Core-Mark to install and monitor an alarm system to protect the warehouse.

Pertinent provisions of the contract are as follows:

12. LIMITATIONS OF DAMAGES:

A. It is understood and agreed by the parties hereto that DEALER [Sonitrol] is not an insurer and that insurance, if any, covering personal [*3] injury and property loss or damage on CLIENT'S premises shall be obtained by CLIENT [Core-Mark], at CLIENT'S sole expense; that the payments provided for herein are based solely on the value of the service as set forth herein and are unrelated to this value of CLIENT'S property or the property of others located on CLIENT'S premises;

. . .

C. CLIENT UNDERSTANDS AND AGREES THAT IF DEALER SHOULD BE FOUND LIABLE FOR ANY LOSS OR DAMAGE DUE FROM A FAILURE TO PERFORM ANY OF ITS OBLIGATIONS OR A FAILURE OF THE EQUIPMENT TO PROPERLY OPERATE, DEALER'S LIABILITY SHALL BE LIMITED TO A SUM EQUAL TO THE TOTAL OF ONE-HALF YEAR'S MONITORING PAYMENTS, OR FIVE HUNDRED DOLLARS ($ 500) WHICHEVER IS THE LESSER, AND THIS LIABILITY SHALL BE EXCLUSIVE AND SHALL APPLY IF LOSS OR DAMAGE, IRRESPECTIVE OF CAUSE OR ORIGIN, RESULTS DIRECTLY OR INDIRECTLY TO PERSONS OR PROPERTY FROM PERFORMANCE OR NON-PERFORMANCE OF ANY OF DEALER'S OBLIGATIONS OR FROM NEGLIGENCE, ACTIVE OR OTHERWISE, OF DEALER, ITS EMPLOYEES OR AGENTS.

Sonitrol's services included remote monitoring of microphones that could detect sounds made by intrusions into the warehouse. These microphones, or audio detectors, would send an audio activation signal when they detected a sound exceeding a minimum volume, and record and store five seconds of the audio. The alarm system would also make an automated telephone call to a central monitoring facility. The operators monitoring the console in that facility were instructed to replay the five seconds of stored audio recording and listen to live audio transmission for at least forty-five seconds. If the operator heard a burglary in progress, he or she would dispatch the local police. However, if the operator determined the activation was a false alarm, the operator could reset the alarm. Resetting the alarm erased the stored audio and terminated the telephone connection to the monitored premises.

In December 2002, a burglar entered Core-Mark's warehouse while it was closed over the weekend. He returned a little later with two confederates, and the three looted the warehouse for approximately three hours. They made no effort to be quiet, but shouted to each other, threw boxes around, and used a noisy gravity chute lined with steel rollers to move boxes. When they were ready to leave, one of the burglars smashed boxes of flammable liquids, pulled down large jugs of methanol, and set two fires at 8:42 a.m. The fire department arrived on the scene eleven minutes later at 8:53 a.m., alerted by a passerby, but it was too late to save the property.

During this episode, Sonitrol's off-site monitoring center received audio activations caused by the noise the burglars created. Two different Sonitrol employees received the alarms and reacted as follows: (1) audio activation at 1:35 a.m., no replay of stored audio, alarm reset in 36 seconds, no call to police; (2) audio activation at 6:50 a.m., no replay of stored audio, alarm reset in 4 seconds, no call to police; (3) audio activation at 7:29 a.m., no replay of stored audio, alarm reset in 40 seconds, no call to police; (4) audio activation at 7:56 a.m., no replay of stored audio, alarm reset in 1 minute and 49 seconds, no call to police; (5) audio activation at 8:36 a.m., no replay of stored audio, alarm reset in 2 minutes and 10 seconds, no call to police; (6) audio activation at 8:44 a.m., operator replayed stored audio, no call to police; (7) 8:46 a.m. (four minutes after fire started), the telephone connection between warehouse and monitoring center was severed. At 9:05, the Sonitrol employee called the fire department, which [*6] had been at the scene for twelve minutes.

Despite the fire department's efforts, the fire burned for a week and destroyed the building and all the inventory, resulting in a loss of approximately $ 20 million.

Core-Mark and the Insurers filed separate lawsuits against Sonitrol. As pertinent to this appeal, they asserted claims for (1) negligence, (2) gross negligence, and (3) breach of contract. These lawsuits were consolidated with a number of others related to the warehouse fire.

The district court granted Sonitrol's motion to dismiss Core-Mark's claims for negligence and gross negligence. Sonitrol moved for summary judgment against both Core-Mark and the Insurers, which was granted.

In granting summary judgment on Core-Mark's claims, the district court concluded the limitation of damages clause in the contract was enforceable. Although the district court acknowledged Core-Mark's argument with respect to willful and wanton conduct, it did not address that argument.

In granting summary judgment on the Insurers' claims, the district court concluded as to the limitation of liability clause was enforceable as to the Insurers as well as Core-Mark.

Core-Mark and the Insurers appeal only the orders granting summary judgment.

Core-Mark and the Insurers contend the district court erred in holding that the limitation of liability clause in the contract with Sonitrol was enforceable, because the issue of whether Sonitrol acted willfully and wantonly should have been decided by the fact finder. The Court of Appeals agreed.

Sonitrol argues that the limitation of liability clause in the contract is not an exculpatory clause but a liquidated damages clause, and therefore the analysis for willful and wanton conduct does not apply. Accordingly, Sonitrol contended the limitation of liability clause was enforceable regardless of its own conduct. The court disagreed.

Exculpatory clauses insulating a party from its own negligence, though disfavored, are permitted in Colorado if one party is not at a significant disadvantage in bargaining. However, an exculpatory clause is against public policy if it enforces a release from willful and wanton conduct.

In the present case, the court considered whether this public policy exception for willful and wanton conduct that applies to an exculpatory clause also applies to a limitation of liability clause. Although this issue has not previously been addressed in Colorado, the court concluded that the general rule applies to both exculpatory and limitation of liability clauses

Sonitrol argued that a limitation of liability clause in a burglar alarm contract is in reality a liquidated damages clause and therefore, Sonitrol argued, the willful and wanton exception should not apply.

A liquidated damages clause may be treated as an exculpatory clause, when it denies liability for all but a nominal amount of damages.

The court did not decide here whether the clause in question is a limitation of liability clause, a liquidated damages clause, or an exculpatory clause, because the general rule applies to all of them. The court held that if the effect of such a clause is to insulate a party from its own negligence, it does not shield against a claim for willful and wanton conduct.

Sonitrol's argument that the damage limitation in its policy is not a nominal sum was not relevant to the holding that clauses insulating a party from liability for its own willful and wanton conduct are against public policy.

Therefore, although the district court properly found that the limitation of liability clause shielded Sonitrol from claims for simple negligence, because Core-Mark and the Insurers properly raised the issue of willful and wanton conduct supported by evidence, the district court should not have granted summary judgment before determining the issue of willful and wanton conduct.

Core-Mark and the Insurers contend they have presented ample evidence of a triable issue of fact as to whether Sonitrol's failure to notify emergency services was willful and wanton. Sonitrol contends that, as a matter of law, plaintiffs' allegations amount to simple negligence. Because all inferences from the evidence must be drawn in favor of the nonmoving party, we agree with Core-Mark and the Insurers that a triable issue of fact exists.

"Willful and wanton conduct is purposeful conduct committed recklessly that exhibits an intent consciously to disregard the safety of others. Such conduct extends beyond mere unreasonableness." "Willful and wanton conduct or willful and reckless disregard" means: conduct purposefully committed which the actor must have realized as dangerous, done heedlessly and recklessly, without regard to consequences, or of the rights and safety of others, particularly the plaintiff.

The trier of fact determines whether there has been negligence. Ordinarily, determining whether a defendant's conduct is willful and wanton is a question of fact.

Here, multiple audio activations were received by two different operators over a period of several hours. The operators reset the alarms without listening to recorded audio or live audio, or calling police. On deposition, one operator could offer no explanation of her conduct, and appeared to have little memory of what happened. Had the operators listened, they could have heard the intruders shouting sending boxes along steel rollers, and dropping and smashing merchandise. Even after the last telephone connection was severed by fire, nineteen minutes elapsed before the operator called the fire department.

A jury could conclude this was purposeful conduct committed recklessly with conscious disregard for the rights and safety of others The court noted that although the claim for gross negligence was dismissed with respect to Core-Mark, the claim for breach of contract alleged "willful and wanton disregard for the safety of persons and property at the Core-Mark Warehouse." Thus, Core-Mark properly pleaded willful and wanton conduct.

Giving Core-Mark and the Insurers the benefit of all favorable inferences as we must, the Court of Appeals concluded that whether Sonitrol's conduct was willful and wanton is a question of fact for the jury to determine. Accordingly, the Court of Appeals further concluded that the district court was premature in granting summary judgment as to the applicability of the limitation of liability clause.

The summary judgments were reversed, and the cases remanded to the district court for further proceedings consistent with this opinion.