NATIONAL UNION LIFE INS. CO., et al., Plaintiffs-Appellees v. WELLS FARGO
ALARM SERVICES, Defendant-Appellant

Court of Appeals of Ohio, Ninth Appellate District, Summit County; 1990 Ohio
App. LEXIS 4596; October 17, 1990
October 17, 1990, Filed

PRIOR HISTORY:Appeal from Judgment Entered in the Common Pleas Court County
of Summit, Ohio, Case No. CV 89 06 1795.


PROCEDURAL POSTURE: Plaintiffs, an insurance company and its insured,
appealed an order of the Common Pleas Court, County of Summit (Ohio), which
entered partial summary judgment in favor of defendant alarm company in
plaintiffs' action to recover for water damage to the insured's factory from
the sprinkler system installed by the alarm company. The trial court also
entered judgment in favor of the alarm company on its counterclaim for
services rendered.

OVERVIEW: The insured contracted with the alarm company for the installation
and maintenance of a sprinkler and fire alarm system at the insured's place
of business. A clause in the contract limited the alarm company's liability
to a sum equal to the lesser of the annual charge, which was approximately $
800, and $ 10,000. After the insured suffered over $ 500,000 in water
damages from the sprinkler system, the insurer sought to recover the amount
it paid the insured pursuant to its subrogation rights. The court concluded
that the relevant question was whether the limitation of liability clause
was valid, and not, as suggested by the insurer, whether a liquidated damage
provision should be treated as unenforceable. The court held that in a
commercial setting, absent unconscionability, the parties to a contract
should have the freedom to fashion whatever relationship they desired, which
included allocating the risk of loss. The court concluded that there had
been no unconscionability in the formation of the contract between the
OUTCOME: The court affirmed the judgment of the trial court.

COUNSEL: ROBERT G. MILLER, Attorney at Law, Cleveland, Ohio, for Plaintiffs.

DAVID W. HILKERT, Attorney at Law, Akron, Ohio, for Defendant.

JUDGES: Daniel B. Quillin, for the court. Reece, P. J., Baird, J., concur.



This cause was heard upon the record in the trial court. Each error assigned
has been reviewed and the following disposition is made:

The issue presented in this case is whether a clause in a commercial
contract which limits liability for negligent breach of contract is
enforceable. We hold that it is enforceable, and, therefore, we affirm.

On June 20, 1985, appellant, Cotter Merchandise Storage Company ("Cotter")
contracted with appellee, Wells Fargo Alarm Services ("Wells Fargo") for the
installation and maintenance of a sprinkler and fire alarm system at
Cotter's place of business.

Clause (D) of the contract provides:

"D. It is understood that Wells Fargo Alarm is not an insurer; that
insurance shall be obtained by Subscriber, if any is [*2] desired; that
the sums payable hereunder to Wells Fargo Alarm by Subscriber are based upon
the value of services offered and the scope of liability undertaken and such
sums are not related to the value of property belonging to the Subscriber or
to others located on Subscriber's premises. Subscriber does not seek
indemnity by this agreement from Wells Fargo Alarm against any damages or
losses caused by hazards to Subscriber's property. Wells Fargo Alarm makes
no warranty, expressed or implied, that the systems it installs or the
services it furnishes will avert or prevent occurrences, or the consequences
therefrom, which the systems and services are designed to detect. Subscriber
agrees that Wells Fargo Alarm shall not be liable for any of Subscriber's
losses or damages, irrespective of origin, to person or to property, whether
directly or indirectly caused by performance or nonperformance of
obligations imposed by this contract or by negligent acts or omissions of
Wells Fargo Alarm, its agents or employees. The Subscriber does hereby waive
and release any rights of recovery against wells Fargo Alarm that it may
have hereunder. It is agreed that if Wells Fargo Alarm should be found [*3]
liable for any losses or damages attributable to a failure of systems or
services in any respect, its liability shall be limited to a sum equal to
the annual charge hereunder or $ 10,000.00, whichever is less. The
Subscriber may obtain a greater limitation of liability, if desired, by
payment of an increased annual rate, which shall be negotiated between the
Subscriber and Wells Fargo Alarm upon the request of the Subscriber in

The annual service charge was $ 719.00.

On June 20, 1987, Cotter sustained a $ 528,079.75 loss from water damage.
Cotter's insurance carrier, appellant National Union Life Insurance Company
("National"), paid Cotter $ 523,079.75, and pursuant to a written agreement
between Cotter and National, became subrogated to Cotter's rights.

National and Cotter brought suit against Wells Fargo for $ 528,079.75,
alleging that Wells Fargo breached its contract with Cotter, causing the
water damage. National and Cotter also alleged that Wells Fargo negligently
monitored the sprinkler and fire alarm system. Wells Fargo counterclaimed
against Cotter for $ 8,903.67 for services rendered to Cotter.

Wells Fargo moved for partial summary judgment contending that its [*4]
liability was limited to the annual service charge of $ 719.00. On the basis
of clause (D), the trial court granted partial summary judgment for Wells
Fargo. National and Cotter waived any right to recover the annual service
charge. The trial court held for Wells Fargo on its counterclaim. National
and Cotter appeal from the entry of partial summary judgment and from the
final judgment. Cotter did not appeal from the judgment on the counterclaim.

Assignment of Error

"The lower court erred in granting defendant's motion for partial summary
judgment which upheld the contract clause as a liquidated damages clause."

National contends that Samson Sales, Inc. v. Honeywell, Inc. (1984), 12 Ohio
St. 3d 27, requires that clause (D) be construed as an unenforceable
penalty. Wells Fargo claims that Royal Indemn. Co. v. Baker Protective
Services, Inc. (1986), 33 Ohio App. 3d 184 controls. We follow Baker.

In Samson, the parties contracted for the installation and maintenance of a
burglar alarm system. The contract provided:

"* * * It is agreed by and between the Parties that Company is not an
insurer; and that this Agreement in no way binds Company as an insurer of
the [*5] premises or of the property of the Subscriber, and that all
charges are based solely. on the value of the service, maintenance and
installation of the system. In the event of loss or damage to Subscriber
resulting by reason of failure of the performance of such service or the
failure of the system to properly operate, Company's liability, if any,
shall be limited to the sum of Fifty Dollars ($ 50.00) as liquidated damages
and not as a penalty and this liability shall be exclusive.

Id. at 28.

The Ohio Supreme Court focused on the liquidated damages portion of this
clause. The court held that the damages clause acted as a penalty and,

"* * * the contract provision as a whole, fails to evince a conscious
intention of the parties to consider, estimate, or adjust the damages that
might reasonably flow from the negligent breach of the agreement."

Id. at 29.

In Baker, the limitation of liability clause was essentially identical with
the limitation of liability clause before us. The Baker court considered
Samson and distinguished it because the issue in Samson was whether a
liquidated damage provision should be treated as unenforceable. The Baker
court concluded [*6] that the issue presented by the clause before it, and
now before us, was whether the limitation of liability clause was valid.

We agree with Baker that in a commercial setting, absent unconscionability,
which we do not have here, the parties to a contract should have the freedom
to fashion whatever relationship they desire. This includes allocating the
risk of loss. Cotter chose to insure its risk of loss through National.

It is both interesting and significant that Samson was written by Judge
Joseph D. Kerns while sitting by assignment on the Ohio Supreme Court. The
same Judge Kerns was on the Baker case which construed Samson.

The assignment of error is overruled.

The judgment is affirmed.

The Court finds that there were reasonable grounds for this appeal.

We order that a special mandate issue out of this court, directing the
County of Summit Common Pleas Court to carry this judgment into execution. A
certified copy of this journal entry shall constitute the mandate, pursuant
to App. R. 27.

Immediately upon the filing hereof, this document shall constitute the
journal entry of judgment, and it shall be file stamped by the Clerk of the
Court of Appeals at which time [*7] the period for review shall begin to
run. App. R. 22(E).

Costs taxed to appellant.