Gross negligence claim in cyber-security context relies on alarm cases May 22, 2025

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Gross negligence claim in cyber-security context relies on alarm cases
May 22,  2025
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Gross negligence claim in cyber-security context relies on alarm cases *******
   A recent case in the United States Bankruptcy Court in Southern District of New York involved a company providing a BadgerDAO system that was hacked, causing significant damages. A complaint was filed alleging Negligence and Gross negligence and a motion to dismiss the causes of action for failure to state a cause of action was denied, the bankruptcy court finding that sufficient facts, if established as true, were provided. Apparently the company providing the service allegedly knew of defective equipment. The facts are not particularly relevant to the alarm industry, but the court’s discussion of negligence and gross negligence is instructive.
   Keep in mind that negligence is well defined and generally the same in all states; not so for gross negligence; it is defined differently and in some states not even recognized as a separate cause of action. In New York, and most other states, the distinction is important for the alarm industry because the alarm industry relies on certain protective provisions [which you will find in the Standard Form Agreements] including the Exculpatory Clause and the Limitation of Liability Provision, and though these provisions will protect the alarm company from claims for negligence the provisions will not be enforced if there is a finding of gross negligence.
   There are a slew of cases in the alarm industry throughout the United States explaining what constitutes negligence and gross negligence in the context of alarm services. This is because there are many cases against alarm companies and while just about all of them are for breach of contract the Plaintiffs add causes of action for negligence and gross negligence. There are courts that have found that allegations of gross negligence have not been pleaded sufficiently, though there are cases where the court found that the allegations could be found to be grossly negligent by a jury or after trial by a judge without a jury. Of course each case presents different facts and it’s interesting to read the judge’s interpretation of what constitutes gross negligence in the state and whether the particular facts of the case meet that criteria.
   Before quoting from the case I will go somewhat out on a limb and state that I am not aware of a single case in the United States [or elsewhere] where an alarm company was actually found to be guilty of gross negligence. Again, almost all of the court decisions addressing the issue involved pre-trial motions to dismiss the case. What undoubtedly happens is that if the motion to dismiss is denied, and the alarm company now loses significant defense strategy, the case settles. So just be mindful that none of the cases where the judge denies the motion to dismiss has there been a final finding of gross negligence. If any of you know of such case let us know.
   Here is quote from the decision in Celsius Network v Spadfora and Couldfare, USBC, SDNY 22-10964.
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"B. Gross Negligence Claim
Under New York law, “to prevail on a claim for gross negligence, plaintiff must establish” the elements necessary to prevail on a claim for negligence—(1) duty; (2) breach; and (3) injury—plus a fourth element, namely, that defendant's conduct “evinces a reckless disregard for the rights of others or ‘smacks’ of intentional wrongdoing.” Farash v. Cont'l Airlines, Inc., 574 F. Supp. 2d 356, 367–68 (S.D.N.Y. 2008), aff'd, 337 F. App'x 7 (2d Cir. 2009) (quoting AT&T v. City of New York, 83 F.3d 549, 556 (2d Cir. 1996)). To constitute gross negligence, the act or omission must be of an aggravated character, as distinguished from the failure to exercise ordinary care. Am. Auto. Ins. Co. v. Rest Assured Alarm Sys., Inc., 786 F. Supp. 2d 798, 807 (S.D.N.Y. 2011) (citation omitted).
New York courts have analyzed whether conduct is sufficiently aggravated to constitute gross negligence in an analogous context: the provision and maintenance of fire and burglar alarm services. “Generally, no issue of gross negligence is raised where the claim is based upon either inappropriate installation of an alarm system or an inappropriate response to an alarm.... On the other hand, a sufficient issue regarding gross negligence has been held to have been raised in cases referred to as including ‘outrageous acts of folly.’ ” Metro. Prop. & Cas. Ins. Co. v. Budd Morgan Cent. Station Alarm Co., 95 F. Supp. 2d 118, 122–23 (E.D.N.Y. 2000) (citation omitted). Thus, for example, the New York Court of Appeals has found that a plaintiff “alleged much more than mere failure to install a proper working alarm system and inspect it,” because the plaintiff alleged that “defendants had knowledge—for weeks, if not months—that the equipment had been malfunctioning” and “that defendants not only failed to investigate the source of their equipment malfunction, but they failed to put anyone at the branch on notice of the potential security breach.” Abacus Fed. Sav. Bank v. ADT Sec. Servs., Inc., 18 N.Y.3d 675, 944 N.Y.S.2d 443, 967 N.E.2d 666, 669 (2012). Similarly, the First Department has found that a jury could find that an alarm company was grossly negligent when it failed to send guards to a jewelry manufacturer eleven hours after a weekend break-in and the manufacturer had not alerted the alarm company that it would be open over the weekend. Rand & Paseka Mfg. Co. v. Holmes Prot. Inc., 130 A.D.2d 429, 515 N.Y.S.2d 468, 469–70 (1st Dep't 1987); see also Hanover Ins. Co. v. D & W Cent. Station Alarm Co., 164 A.D.2d 112, 560 N.Y.S.2d 293, 295–96 (1st Dep't 1990) (finding summary judgment for alarm company inappropriate where the record indicated that the alarm company received three signals over four hours, did not notify the police, and directed the guard sent to investigate the issue to “forget the assignment” when he encountered difficulty entering the building). But courts have found insufficient to find gross negligence “failure to wire a skylight,” which burglars broke through to steal paintings, Colnaghi, U.S.A., Ltd. v. Jewelers Prot. Servs., Ltd., 81 N.Y.2d 821, 595 N.Y.S.2d 381, 611 N.E.2d 282, 284 (1993), or “an alarm company's delayed or inadequate response to an alarm signal, without more,” Abacus Fed. Sav. Bank v. ADT Sec. Servs., Inc., 77 A.D.3d 431, 908 N.Y.S.2d 654, 656 (1st Dep't 2010), aff'd as modified, 18 N.Y.3d 675, 944 N.Y.S.2d 443, 967 N.E.2d 666 (2012) (collecting cases); Am. Auto. Ins. Co., 786 F. Supp. 2d 807. In Yuille v. Uphold HQ Inc., 686 F. Supp. 3d 323 (S.D.N.Y. 2023), the court found that the plaintiff sufficiently alleged gross negligence where the defendant was aware of increased hacking activity, was explicitly warned about a potential security breach, and failed to act for over two days while unauthorized transactions occurred."
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com