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08/30/95 NORTH RIVER INSURANCE COMPANY v. JAMES O.

August 30, 1995

THE NORTH RIVER INSURANCE COMPANY, A NEW JERSEY CORPORATION, AS SUBROGEE OF STEPHEN B. BYER, BARBARA L. BYER, BYER MUSEUM OF THE ARTS, AN ILLINOIS NOT-FOR-PROFIT CORPORATION, STEPHEN BYER ASSOCIATES, AN ILLINOIS CORPORATION, CHICAGO TITLE AND TRUST COMPANY, AS TRUSTEE UNDER TRUST NO. 10800885, AND FIRST ILLINOIS BANK OF EVANSTON, N.A., A NATIONAL BANKING ASSOCIATION, ET AL., AND INTERNATIONAL INSURANCE COMPANY, AN ILLINOIS CORPORATION, AS SUBROGEE OF BYER MUSEUM OF THE ARTS, AN ILLINOIS NOT-FOR-PROFIT CORPORATION, AND STEPHEN BYER ASSOCIATES, AN ILLINOIS CORPORATION, PLAINTIFFS-APPELLANTS,
v.
JAMES O. JONES, INDIVIDUALLY AND D/B/A BRUNDERMAN ELECTRIC COMPANY, PETER H. WINANDY SONS, INC., AN ILLINOIS CORPORATION, MICHAEL A. WINANDY, MORTON ELECTRIC COMPANY, AN ILLINOIS CORPORATION, HOLMES PROTECTION OF ILLINOIS, INC., A DELAWARE CORPORATION, API ALARM SYSTEMS, INC., A CALIFORNIA CORPORATION, AND ILLINOIS BELL TELEPHONE COMPANY, AN ILLINOIS CORPORATION, DEFENDANTS-APPELLEES.



APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. HONORABLE ARTHUR SULLIVAN, JUDGE PRESIDING.

Petition for Leave to Appeal Denied December 6, 1995.

The Honorable Justice Rizzi delivered the opinion of the court: Cerda, J., concurs. Greiman, P.j., dissents.

The opinion of the court was delivered by: Rizzi

The Honorable Justice RIZZI delivered the opinion of the court:

Plaintiffs North River Insurance Company (North River) and International Insurance Company (International) brought this action as subrogee of their insureds to recover damages resulting from the defendants' alleged negligence involving a fire alarm system that did not function during a fire that caused substantial damage and loss to the insureds' property and its contents. Defendants Holmes Protection of Illinois, Inc., API Alarm Systems, Inc., and Illinois Bell Telephone Company, filed motions to dismiss, which were granted. Plaintiffs have appealed from the dismissals. We affirm.

The center point of this case is property located at 1700 N. Hinman Avenue in Evanston Illinois, owned by Stephen and Barbara Byer, as beneficial owners of a land trust. On the premises was located the Byer Museum of the Arts and a business known as Stephen Byer & Associates. On February 1, 1982, Holmes Protection, Inc. of Illinois, signed a Sale and Service Agreement contract (the Contract) with Stephen Byer, as president of Byer Museum of theArts (the Museum) to furnish, install and provide maintenance service for a fire alarm system (alarm system) at 1700 N. Hinman Avenue. API Alarm Systems Inc. purchased the assets and business of Holmes Protection, Inc. of Illinois by an agreement dated October 12, 1984, and is the successor corporation. Hereafter, the successor corporation and its predecessor will collectively be referred to as Holmes.

The alarm system was not limited to the portion of the building used by the Museum, but instead covered all areas of the property on the premises. The Contract for the alarm system provided that Holmes was not an insurer. It also contained a limitation of damages clause that limited any liability on Holmes' part, whether based on breach of contract or negligence, to $250. The Contract, however, provided an option for additional liability by Holmes if the purchaser wished to pay for such additional coverage. Stephen Byer declined to exercise the option. Although there were riders to the Contract, none of the riders modified or otherwise altered the limitation of damages provision or other pertinent provisions in the Contract.

Specifically, the Contract states:

Purchaser acknowledges that Holmes is not an insurer; that insurance shall be obtained by Purchaser, if any is desired; that the sum payable hereunder to Holmes by Purchaser are based upon the value of services offered and the scope of liability undertaken, and such sums are not related to the value of the property belonging to Purchaser or to others located in or adjacent to the Purchaser's premises. Purchaser does not seek indemnity by this agreement from Holmes against any damage or losses caused by hazards to such property. Holmes makes no presentation or warranty, and expressly disclaims any warrant, express or implied, of merchantability, fitness or otherwise, and Purchaser relies on no representation or warranty, express or implied, that the system it installed or the services it furnishes will avert or prevent occurrences, or the consequences therefrom, which the system and services are designed to detect. Purchaser agrees that Holmes shall not be liable for any of Purchaser's losses or damages irrespective of origin, to person or property, whether directly or indirectly caused by performance or non-performance of obligations imposed by this contract or by negligent acts or omissions by Holmes, its agents or employees and further agrees that the amounts payable by the Purchaser are not sufficient to warrant Holmes assuming such liabilities or any risk of consequential or other damage. Holmes will, however, by amendment give the Purchaser the option to pay an annual service charge consonant with additional liability. Unless the Purchaser has elected to pay such increasedannual service charge by executing an amendment to the agreement, the Purchaser does not desire this contract to provide for such indemnification by Holmes and the Purchaser does hereby waive and release any rights of recovery against Holmes that it may have hereunder. In view of the nature of the business of Holmes and the hazards involved and it being difficult to foresee the type and extent of losses that may arise from a breach of this agreement or negligence on the part of Holmes, it is agreed that if Holmes should be found liable for loss or damage due to a failure on the part of Holmes or its systems, in any respect, its liability shall be limited to the refund to the Purchaser of an amount equal to the lesser of $250 or 10% of the annual service charge, as liquidated damages and not as a penalty, and this liability shall be exclusive.

The Purchaser acknowledges that he has read and understands the terms of this agreement, including the terms of the reverse side hereof.

Since the Contract provides "that insurance shall be obtained by Purchaser, if any is desired," fire loss insurance policies were obtained to cover any damages or losses suffered by fire on the premises. North River issued a fire loss insurance policy covering the building and personal property on the premises. The named insureds in the insurance policy are the "Byer Museum of the Arts" and "Stephen Byer & Associates 1700 Hinman Avenue, Evanston, Illinois." The policy includes as "Additional Insureds: Chicago Title & Trust Co. (as trustee under a land trust), and First National Bank and Trust Co. of Evanston (as mortgagor of the property); Stephen B. and Barbara L. Byer."

In addition, International issued a reinsurance "Mini-Computer/Word Processor Policy" covering fire loss on the premises. The named insureds on the policy are Byer Museum of the Arts and Stephen Byer & Associates. Also, International issued an "Inland Floater Policy" for "Museum Collections Coverage," which includes fire loss coverage on the premises for "property of rarity or of artistic, scientific or historical significance." The named insureds on the latter policy were Byer Museum of the Arts and Stephen Byer & Associates; by an endorsement, the named insureds on the policy was amended to read Byer Museum of the Arts and Stephen B. and Barbara L. Byer.

On December 31, 1984, two years after the alarm system was installed, a fire occurred causing substantial damage to the property on the premises and its contents. As a result, the insureds submitted joint proofs of loss toNorth River and International. It is undisputed that the insureds were treated as one entity for purposes of claims adjustment.

North River and International denied coverage for the loss, contending that the amount of the claims that were filed by the insureds were fraudulent. They then filed a lawsuit contesting coverage based on the alleged fraud by the insureds. After a judgment was entered in favor of the insureds and against North River and International, a settlement was reached in the approximate amount of $3.5 million.

The present action was then filed by North River and International against Holmes and Illinois Bell, and other defendants, to recover from defendants the settlement money that was paid by North River and International to their insureds. As to defendant Holmes, the trial court entered summary judgment in favor of Holmes, ruling that the limitation of damages clause in the Contract is applicable to the case. The trial court then dismissed the action after Holmes deposited $250 with the trial court, which is the maximum amount of Holmes' liability under the limitation of damages clause in the Contract.

As to defendant Illinois Bell, the trial court dismissed the action because the amendment to the Second Amended Complaint fails to state a cause of action against Illinois Bell. As to the other defendants that were named in North River and International's pleadings, they were dismissed by the trial court and are not part of this appeal.

We first address North River and International's arguments relating to Holmes. North River and International contend that the limitation of damages clause in the Contract is an exculpatory clause and is therefore void pursuant to the Construction Contract Indemnification for Negligence Act (the Act). 740 ILCS 35/1 (West 1992). The Act provides:

With respect to contracts or agreements, either public or private, for the construction, alteration, repair or maintenance of a building, structure, highway bridge, viaducts or other work dealing with construction, or for any moving, demolition or excavation connected therewith, every covenant, promise or agreement to indemnify or hold harmless another person from that person's own negligence is void as against public policy and wholly unenforceable.

North River and International argue that in enacting the Act, "the legislature manifested a clear intent to void exculpatory clauses that purport to hold a person harmless from his own negligence in construction related activities," and that the Act "expresses the Legislature's policy of motivating contractors to take all necessary precautions for the safety of construction workers and the general public." While we agree with plaintiffs' general propositions vis-a-vis the Act, it is clear that the Act is not applicable to this case.

North River and International do not refer us to any case, and we do not know of any case, in which a court has held that the Act is applicable to alarm systems contracts to protect property, after installation of an alarm system is completed. The reason that no court has held that the Act is applicable under such circumstances is because the Act is intended and serves to protect construction workers in the construction industry and the public as well from the dangers associated with construction work. Contrariwise, once the alarm system is installed, alarm systems contracts are to protect property and people after the construction work is completed. Thus, the Act and alarm systems contracts do not serve the same purpose.

It follows that alarm systems contracts are not covered under the Act after the alarm system is installed. Rather, for incidents that occur after the alarm system is installed, alarm systems contracts fall under the tenet that parties are free to contract as they wish, and the contract that they freely enter into will be enforced unless, unlike the present case, it would be against the settled public policy of the State to do so, or there ...


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