Monitoring Contracts Examined

By Brian Rhodes, Published Feb 12, 2012, 07:00pm EST

Contracts for monitoring intrusion detection / alarm monitoring systems are one of the most fundamental elements of using such solutions. The terms and conditions in those contracts have a significant impact on the cost and flexibility to the user and the profitability of the provider. In this note, we examine the key issues and common problems found in renewal clauses, notification of terminations and penalties for termination.

Pricing / General Terms

These monitoring contract agreeements often constitute the bulk of the monetary outlay for these types of systems by no small accident: in the present market, the cost of installing these systems is fiercely competitive.

A very common ‘introductory’ price of $99 to acquire alarm intrusion equipment and begin monitoring of that equipment does not approach the true acquisition cost of such equipment.

If a generic home alarm system costs $1000 - $1200 to purchase, wire, install, and configure, consider that:

  • Buying the cost of the system upfront is prohibitive to many owners
  • Monitoring contract terms of 48 – 72 months are commonly proposed to finance the amortization costs of the system equipment and install, and still render the invoiced amount as ‘reasonable’ in the marketplace.

System Hardware Ownership

It is worth noting that the equipment installed is not always purchased by the owner of the monitoring contract, and that legal ownership of the system components are an issue to be determined by the specific contract language.

Purchasing Monitoring Service

For the ongoing persistent service of ‘monitoring’ the system – that is, to actively receive and interpret alarm signals sent from the panel- pricing is commonly billed ranging from $25 - $40 per month, per alarm panel. Consider that the vast majority of smaller installing dealers (and even some larger regional installing dealers) purchase this service via subcontract from 3rd party monitoring companies at wholesale rates. Typically, the wholesaling monitoring company bills from $4 - $8 dollars per monitored account.

This pricing is based on wholesale billing to the alarm dealer/installer, who then accounts for the administration cost of discrete account invoicing and contract management.

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The ability for the installed alarm system to operate independently of a persistent monitoring service is also a matter of specific contract language. In some cases, the alarm system is disabled for use once monitoring service is cancelled or discontinued.

A persistent source of poor public opinion for the alarms industry is the rather unscrupulous and sometimes illegal practice of ‘locking a panel out’ in such a manner as it cannot be reprogrammed to work with another monitoring entity beyond the initial monitoring provider. Similar to setting an ‘administrator’ password, often the most expedient option to resolve this issue is the costly replacement of otherwise functioning hardware.

Duration of Monitoring Contracts

The contract term of agreement for which the system is monitored is commonly written to be 3 or 5 years. This length is variable depending on prevailing conditions in both the local market and company writing the contract.

For the sake of illustration for this update, consider a common ‘Terms and Conditions’ for an alarm service [link no longer available]. In this example, the contract term is set a three (3) years.

Exceptions to this contract are highly dependent upon the specific language of the contract. For example: often times moving, being deployed in the military, or experience of other economically distressing conditions do not modify the contract and are not commonly appealed successfully. However, contracts are often transferrable from one party to another. A common first recommendation is to ‘sell the contract to a neighbor, or future home owner’ during dispute resolution.

Auto Renewal Clause

Perhaps the most despised, yet potentially profitable, element of the monitoring contract is the ‘auto renewal clause’. Here is an excerpt from an actual contract:

"The initial term of this Contract is for three (3) years. Our alarm monitoring and notification services will begin when the equipment is installed and is operational, and when the necessary communications connection is completed. This Contract will automatically renew for successive thirty (30) day terms unless terminated by either party's written notice at least thirty (30) days before the end of the then-current term. If terminated, this Contract ends on the last day of the then-current term."

In the example above, after three (3) years, the monitoring contract ‘auto renews’ for successive thirty (30) days periods, until the cancellation conditions are met. In some examples, ‘auto renew’ cycles are sometimes written for a year or multi-year intervals.

Notification of Termination

The cancellations conditions must also be met in order to ‘successfully’ cancel an auto renewing contract. Often times, some form of written notification (and outstanding balance payment) must be posted to the monitoring company via certified mail during an interval prior to the actual contract ending date. It is a common complaint for contract holders to attempt to cancel a monitoring contract before the ‘end date’, but yet after the ‘notification deadline’ and find themselves ‘auto renewed’ for another service interval.

Penalties for Termination

Examine the language from the example agreement:

YOU AGREE THAT THE CHARGES DUE UNDER THIS CONTRACT ARE BASED ON YOUR AGREEMENT TO RECEIVE AND TO PAY FOR THE SERVICES FOR THREE (3) FULL YEARS. ACCORDINGLY, YOU AGREE THAT: IF YOU TERMINATE THIS CONTRACT DURING ITS INTIAL TERM YOU WILL PAY US AN AMOUNT EQUAL TO 75% OF THE CHARGES TO BE PAID BY YOU DURING THE REMAINING INTITIAL THREE (3) YEAR TERM OF THIS CONTRACT. THIS AMOUNT IS AGREED UPON DAMAGES AND IS NOT A PENALTY."

You will notice the ‘early termination fee’ amounts to damages equal to 75% of the value of the remaining three (3) year contract. These penalties are wildly disparate depending entirely upon the writers of the contract.

It is important to understand these common elements of monitor contracts so that the ethical behavior behind these contracts can be contrasted. The attributes described above are common to most monitor contract agreements, but the scope and specific language of those elements can vary significantly from one provider to the next.

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