Subrogation & Recovery Law Blog : Insurance Subrogation Lawyer & Attorney : Cozen O'Connor Law Firm : Property Damage & Insurance Commentary

Imagine Mr. and Mrs. Johnson are recent first-time homeowners in California. Last year, they purchased a new home built by Lemon Construction. Shortly after moving into the home, the Johnsons went on a short vacation. To their dismay, they returned the following week to find the entire upstairs of their new house completely flooded.

Investigation revealed that Lemon Construction built the home with a poorly constructed roof, which did not hold up in the first major rainfall of the year. After discovering the flood, the Johnsons immediately hired a friend who was a roof installer to repair and finish their roof. The Johnsons also promptly notified their insurance carrier, which agreed to cover the cost of the roof repair. The Johnsons' insurer also immediately hired a company to restore the second floor of the home. Two months later, when repairs were almost complete, the Johnsons and their insurance carrier decided to file suit against Lemon Construction.

In the above hypothetical, did the Johnsons and/or their insurer create a legal obstacle in the planned action against Lemon Construction?

Unfortunately for the Johnsons, California's "Right to Repair Act" will likely be used as a defense by Lemon Construction because they were not given the opportunity to inspect and offer to repair the home prior to commencing repairs.
 

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On January 10, 2012, BMW of North America, LLC, announced a voluntary recall of 88,911 Mini and Mini Cooper cars manufactured between 2006-2011 and equipped with 4-cylinder turbocharged engines. The recall arises from overheating of a circuit board which electronically controls an auxiliary water pump that cools the turbocharger in the vehicles. In extreme cases, the overheating of the circuit board can lead to smoldering of the water pump and could result in a vehicle fire. There have been 12 fires reported to the National Highway Transportation Safety Administration, though none have resulted in accidents or injuries. Per BMW, each of the reported fires occurred while the vehicles were standing still. The recalled models include: 2007-11 Mini Cooper S; 2008-11 Mini Cooper Clubman; 2009-11 Mini Cooper S Convertible; 2009-11 Mini JCW; 2009-11 Mini JCW Clubman; 2009-11 Mini JCW Convertible; 2011 Mini Cooper S Countryman.

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Practitioners and judges frequently use the terms subrogation and contribution interchangeably. This is legally incorrect and, as one insurance company recently learned, the distinction between the two concepts can be fatal.

In American States Insurance Company v. National Fire Insurance Company of Hartford 2012 DJDAR 197, an insurance carrier attempted to subrogate against another carrier to recover defense and indemnity costs incurred on behalf of the same insureds. The trial court determined that the action was barred by the two year statute of limitations for equitable contribution. The carrier then attempted an "end run" by amending its complaint to assert a cause of action for equitable subrogation. The Court of Appeal held that the sustaining of a demurrer to the amended complaint on the grounds that the underlying case was one for equitable contribution and, therefore, was time-barred.

The Court of Appeal distinguished equitable contribution from equitable subrogation. It held that equitable contribution is the right to recover not from the party primarily liable for the loss, but rather from a co-obligor who shares liability with the party seeking contribution. Conversely, equitable subrogation is a purely derivative cause of action and may only be asserted against the wrongdoer who caused the loss incurred by the insured.

The moral of the story-it is essential to properly identify whether a case is for equitable contribution or equitable subrogation. The statute of limitations differs for the two causes of action and may time-bar an otherwise properly pled claim!
 

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EDRs or "black boxes" now are contained in a wide range of consumer products including copiers, household appliances, alarm systems and cars. "EDRs" can provide a final data picture of how a product was last operating before a failure happened. Technological advances include building EDRs with a read write tamper proof cabability. For example, an unexpected rise in temperature or surge in power can trigger an EDR that may support an eye witness observation that a product was on fire, smoking or operating erratically. Critics condemn EDRs suggesting they are surveillance monitors akin to those used by "Big Brother" in George Orwell's novel "1984." The reality is far different. EDRs objectively record data within state prescribed privacy legislative requirements.

Smart Technology

Smart Technology refers to systems that monitor and diagnose appliances while in use to include home energy and security systems. Those systems can control heating and air conditioning systems to increase safety while saving energy. These systems can take measurements at pre-determined intervals by use of meters and controls.

Major companies such as Panasonic, General Electric and LG offer Smart Technology systems. LG offers appliances with THINQ Technology that meters and controls "smart" refrigerators, dishwashers, stoves, ovens, etc. LG offers a smart diagnosis program that claims to notice when a home appliance does not operate properly and issues alerts. That system will soon become WI-FI capable. Panasonic has a product line called ECONAVI, that covers 30 household appliances and will monitor usage and a user's living environment. GE offers a similar program called Nucleus Energy Manager that collects real time information on a product's usage.

Conclusion

Subrogation professionals should encourage their consultants to actively seek out and recover EDR information when available. That data may provide a wealth of information about the operating parameters of a product believed to have been involved in a failure. That data can then be evaluated and assessed as part of the overall subrogation investigation.
 

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How airtight is a confidentiality provision in a settlement agreement?   In a recent case out of Florida, the court protected a confidential settlement agreement from disclosure to a remaining party.    Wal-Mart Stores, Inc. v. Nicolette Strachan et al., ___ So. 2d __, 36 Fla. L. Weekly D2262, Case No. 4D11-2539 (Fla. 4^th DCA Oct. 12, 2011). However, is the Wal-Mart decision particular to its facts and jurisdiction?   How do other courts view confidentiality provisions?   As illustrated below, there are three basic approaches to discoverability of confidential settlements. The prevailing approach is a balancing approach, but there are also two opposing bright-line approaches: the “not discoverable” approach (even if relevant) and the “discoverable” approach (if relevant).

The Wal-Mart Case

The Wal-Mart court hinged on the relevance of the settlement terms. The plaintiffs settled with three out of four defendants, leaving Wal-Mart as the only remaining defendant. Wal-Mart moved to compel production of the amount of the settlement paid by each of the settling defendants. The trial court denied the motion. On appeal, the Fourth District Court of Appeal agreed with the lower court.   But the reasons for non-disclosure were particular to a quirk of Florida law.   In 2006, the Florida legislature essentially abolished joint and several liability. Therefore, because Wal-Mart would not be responsible for the fault of anyone but itself, the amounts of the settlements could not lead to the discovery of admissible evidence at trial. The opinion does is consistent with the balancing approach of other jurisdictions.

Balancing Approach

The balancing approach weighs the interests of the party seeking disclosure against those of the settling parties, usually siding with the settling parties unless the terms are relevant.    A good example of the balancing approach is Hinshaw, Winkler, Draa, March & Still v. Superior Court (Kauffman), 51 Cal. App. 4^th 233, 58 Cal. Rptr. 2d 791 (1996). There, the California Court of Appeal balanced the constitutional right of privacy against the interests of “facilitating ascertainment of trust in connection with legal proceedings.” 

The balancing approach will sometimes allow for discovery of the agreement.   For example, limited discovery of settlement amounts was allowed in the case of New York v. Solvent Chemical Co., 214 F.R.D. 106 ( W.D.N.Y. 2003). There, a non-settling defendant/third-party plaintiff sought to take the deposition of a third-party defendant corporation still actively a party in the case. The party seeking discovery sought to explore the nature and extent of settlement negotiations. The court held that the amounts of the settlements were indeed relevant and allowed that issue to be explored. However, nothing else about the settlement agreement or the negotiations leading up to it were subject to discovery as they were irrelevant to the case and invaded the attorney-client privilege and work product doctrine. 

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Fine art losses come in many shapes and sizes. Oftentimes, fine art is a relatively small piece of a homeowner's or commercial property claim. Occasionally, however, the art represents the vast majority of a claim. You may have heard of the story in 2006 about casino mogul, Steve Wynn, who accidentally poked a hole in his own Picasso painting, "La Reve", which he had previously agreed to sell to another collector for $139 million. Post-conservation, Wynn decided to keep the painting.

When an item of fine art is damaged, how do you quantify the damage? Art is considered personal property. In most jurisdictions, the amount that may be recovered in a subrogation claim for damage to personal property is market value, which is defined as the price the property would bring if it were offered for sale by a willing but not obligated seller and purchased by a willing but not obligated buyer. If market value cannot be determined or the property is not subject to market valuation, other methods of valuation may be used, such as replacement value, actual or intrinsic value, and sometimes sentimental value.

With a loss that involves damage to fine art, the nature and extent of the damage must be determined. Was the art damaged by fire, smoke, water, or physical impact? Transferring the art to a temperature and humidity controlled environment is essential to mitigate the damage. There, the art can be held for inspection, storage and preservation. Art handlers experienced in removing, crating, transporting and storing fine art should be considered depending on the value of the art in question.

To prove up damages on a fine art loss, the pre-loss market value of the art must be established. Relevant information, such as a description of the work of art, purchase price, photographs, condition reports, provenance (history of ownership), appraisals, etc., should be gathered. Auction sales of an artist's work may be available through online services such as www.artnet.com and www.askart.com. Market value of art can rise and fall significantly over relatively short periods of time. Relevant factors include economic conditions and the demand for a specific artist's work. Therefore, it is critical to establish the market value as of the time immediately before the damage occurred. It may be necessary to engage a someone with expertise in the market value of the specific type of art, or the specific artist, involved. Art appraisers are not all alike. Some have little or no experience in marketing or selling the work of a particular artist. Some are private art dealers or work at auction houses like Christie's or Sotheby's with expertise in that artist's work. While sales history and comparable sales are sometimes available, art valuation can be a subjective undertaking. The appraisal expert needs to be someone who is qualified, competent and credible, and someone who has done his or her homework. 

In addition, a determination must be made as to whether conservation efforts can help mitigate or remediate the damage. The American Institute for Conservation of Historic and Artistic Works (AIC), with over 3,500 members, encompasses groups and individuals that specialize in specific formats and topics, such as paper, electronic media, objects, painting, photographs, textiles, wood, etc. Hiring the right conservator can also greatly mitigate the damage. The more valuable the work of art, the more valuable the selection of conservator. If the work of art is not totally destroyed and can be treated by a conservator, a treatment plan should be established before any conservation work is undertaken. In the best case scenario, the art can be completely restored to its pre-loss condition. More often, however, the damage can be treated only to the extent possible without risking or causing further harm to the artwork. In those cases, the artwork cannot be fully restored, and to a certain extent remains permanently damaged.

Therefore, it will also be necessary to establish the post-conservation market value of the art. This can be particularly challenging because the person or entity that owned the work of art before the loss usually retains ownership of the item after the loss. In those cases, the loss in market value can only be estimated in terms of a percentage loss. For example, if the work of art had a pre-loss market value of $100,000, and the post-conservation market value is 25% less than the pre-loss market value, the provable loss of market value would be $25,000. This may be established by the same expert who establishes the pre-loss market value of the art. If the art is actually sold shortly after conservation is completed, that price will probably be sufficient evidence of post-conservation market value.

Given the highly subjective nature of art and price volatility in the art market, paying attention to the damages aspects of fine arts losses will pay dividends with respect to your first-party exposure, and it will significantly improve your ability to maximize your subrogation recoveries.
 

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When to draft an expert report is an area of disagreement amongst subrogation professionals, attorneys and experts. Typically the attorney will request that an expert wait to draft a report until discovery is complete and the deadline to designate testifying experts is on the horizon. Conversely, most adjusters ask for a report as soon as possible in order to finalize the claim. Luckily, the recent changes to the Federal Rules of Civil Procedure helps both the subrogation professional and adjuster achieve their goals.

In 2011, Rule 26(b)(4) (expert disclosures) was amended to “protect drafts of any report or disclosure required under Rule 26(a)(2), regardless of the form in which the draft is recorded.” Originally, drafts of an expert’s report were discoverable when the testifying expert was disclosed. The expert had one chance to draft a complete report. Any changes to the report that were suggested by counsel, however mundane, subjected the expert to a scathing cross-examination and an inference that the lawyer was telling the expert what to say. Now, all drafts are protected from disclosure by the work-product privilege. This permits the lawyer to work with the expert to craft a thorough report and avoid incomplete or lazy report writing that may provide opposing counsel the necessary ammunition to damage a case.

But the question is--what is a draft and what is a final report? Because the rule was only recently amended, the case law interpreting the rule has not yet developed. The only decision thus far is out of the Western District of Louisiana. Magistrate Judge Mark Hornsby denied the plaintiff’s request for a report that was drafted 5 months before counsel was retained and the lawsuit was filed. See Greenwood 950, LLC v. Chesapeake Louisiana, LP 2011 WL 1234735 (W.D. La). The opinion is unpublished and carries no precedential value, however, it may provide guidance to other district judges and magistrates that are confronted with this issue.

The Advisory Committee to the rule amendment noted that the work-product privilege was extended to draft reports because unlimited access to expert discovery has “had undesirable effects.” 2010 Notes of Advisory Committee ¶ 2. The Advisory Committee specifically noted that the changes to the rule were due to rising costs under the old rule and the old rule hindered the free exchange of information between the attorney and expert. Id. The notes from the Advisory Committee imply that the rule should be interpreted broadly. A court will likely consider whether the report was drafted in anticipation of litigation and when counsel was retained. Determining what is a draft report and what is a final report is yet to be settled, but we will be closely monitoring any new developments.

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Over the last several years, the insurance industry has experienced significant losses due to wildfires. In many instances, the wildfires resulted from the carelessness of a camper, or the criminal conduct of an arsonist. Wildfires have also been caused by damaged power lines, or fallen utility poles.

One other potential cause of large-scale wildfires involves situations where containment of a "prescribed" or "controlled" burn is lost. Although the terms are generally used interchangeably, prescribed and controlled burns are actually different. A prescribed burn is a fire set under specific weather conditions and with sufficient personnel and suppression equipment to achieve certain land management objectives. When utilized properly, a prescribed burn can enrich soil by adding nutrients and making the plant community healthy again. Conversely, a controlled burn is a fire set without specified weather conditions or vegetation management objectives. Common examples of controlled burns include burning brush piles or large quantities of trash.

Because of the inherent risk of either type of burn escaping, most states have enacted statutes governing liability for damages caused by an escaped fire. Many of the statutes actually recognize the importance of prescribed fires for wildfire risk mitigation, and provide specific instructions for ensuring that the burn is completed in a safe manner. Many of the statutes also have detailed procedures for notifying neighbors, applicable state agencies and local fire authorities before a burn is conducted.

In general, most states with prescribed burn statutes generally fall into one of two categories: those which follow the negligence rule, or those which adhere to a strict liability approach. For those states adhering to the negligence rule (and the vast majority do), it is necessary to show that the individual conducting the burn was negligent or failed to exercise the requisite degree of care to impose liability. Typical examples of acts and omissions that may constitute negligence include failing to properly utilize fireguards or barriers during the burn, attempting to burn at inopportune times, or failing to develop and follow a prescribed burn management plan ("PBMP").

Only four states (Connecticut, North Dakota, New Hampshire and Oklahoma) adhere to a strict-liability approach for prescribed burns. In general, those states impose liability on the landowner and/or individual responsible for the burn for damage from an escaped fire regardless of his or her efforts to safely implement or control the burn. For example, the prescribed burn statute in Oklahoma specifically imposes liability on the landowner who owns the land where the fire originated for actual damages sustained by third-parties. Essentially, if a fire escapes, negligence is assumed and the only remaining issue to determine is the amount of actual damages sustained by third-parties. Interestingly, research has shown that the frequency of escaped prescribed fires tends to be lower in those states with more stringent prescribed burn statutes.

If confronted with damages caused by a prescribed burn, it is essential to determine whether the state where the burn occurred has a specific prescribed fire law. When reviewing the statute, particular notice should be paid to whether notification requirements and/or prescribed burn procedures were followed. It should also be determined whether the state follows the negligence rule or adheres to a strict-liability approach. For those states that adhere to the strict liability approach, there will typically be statutory language

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In a recent opinion filed by the United States Court of Appeals for the Third Circuit in Liggon-Redding v. Sugarman, the Third Circuit decided that Pennsylvania Rule of Civil Procedure 1042.3, requiring the filing of a certificate of merit in malpractice cases, is substantive law that federal courts must apply under Erie v. Tompkins, 304 U.S. 64 (1938). Prior to the Third Circuit’s decision, several federal district courts had held that Rule 1042.3 is a substantive rule of law that applies in professional liability actions proceeding in federal court. The Third Circuit has now conclusively decided this issue in Pennsylvania.

Although the Third Circuit’s opinion involved a legal malpractice case against an attorney, Rule 1042.3 applies to claims against any licensed professional, including architects and engineers. Several other states, including Arizona, California, Colorado, Georgia, Maryland, Minnesota, Nevada, New Jersey, Oregon, Pennsylvania, and Texas, have enacted similar laws that require a plaintiff to file a certificate or affidavit from a third-party design professional declaring that the plaintiff’s claim against an architect or engineer has merit. The general purpose of such laws is to provide a basis for the trial court to conclude that the plaintiff’s claims have merit and to prevent needless waste of judicial time and resources which would otherwise be spent on claims that have no material basis or justification in fact or in law.

Malpractice or negligence claims against architects and engineers that seek recovery for property damages caused by design defects can be brought in or removed to federal court if there is diversity of citizenship between the parties and the amount in controversy exceeds $75,000. Pursuant to the United States Supreme Court’s decision in Erie v. Tompkins, a federal court sitting in diversity must apply state substantive law and federal procedural law. Since certificate of merit laws have been enacted by states, federal courts must determine whether a certificate of merit law is substantive or procedural. As noted above, the Third Circuit recently concluded that Pennsylvania’s certificate of merit law is substantive state law. Therefore, a plaintiff must comply with Pennsylvania’s certificate of merit law when filing a lawsuit against an architect or engineer in a federal district court in Pennsylvania.

Not all certificate of merit laws are written the same and the filing requirements, including the deadline to file the certificate, may vary depending on the state, so not all of the Third Circuit’s reasoning in Liggon-Redding v. Sugarman will be applicable in other states. Prior to this most recent opinion, the Third Circuit had previously determined that the New Jersey certificate of merit law is substantive state law that plaintiffs in diversity cases must comply with. On the other hand, federal district courts in Georgia have found that Georgia’s certificate of merit law is not applicable to actions filed in federal court, but the Eleventh Circuit has declined to decide the issue. Similarly, the Fifth Circuit has not determined whether Texas’ certificate of merit law is substantive or procedural, but at least one federal district court has determined that it is a procedural rule that does not apply in a federal diversity case, while other courts have assumed, without examination or explanation, that Texas’ certificate of merit law applies in a federal diversity case.

When faced with a claim for property damage caused by a design defect, it is important to determine whether state law requires a certificate of merit when filing a lawsuit against a design professional. If you intend to pursue the claim in federal court, the prudent practice is to retain a third-party design professional to review the facts and circumstances surrounding the loss and comply with the requirements of the applicable certificate of merit law.

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A mobile crane collapse can cause devastating results in terms of production, property damage and personal injury. Despite the potential for significant costs, a mobile crane collapse can provide recovery opportunities depending upon the circumstances of the accident. The following is a summary of things to do and issues to consider to maximize your recovery potential for a crane collapse claim.

1. Secure the Scene
As with most subrogation investigations, maintaining the accident scene in its post-loss condition until the scene can be properly documented and photographed is critical. Experts need to examine the condition and location of the cranes after the accident, the site conditions and load configurations as they existed at the time of the accident.

2. Locate the Witnesses-Obtain Statements
As soon as possible after the accidents, identify and locate all of the witnesses who may have knowledge regarding the activities taking place at the time of the collapse. Construction workers are notorious for being transient if they don’t have any ties to the community. Critical witnesses may disappear shortly after the accident occurs. As soon as possible, obtain detailed recorded or written statements from all witnesses who may have relevant knowledge regarding the activities taking place at the time of the accident while memories are fresh. Be prepared to provide a qualified interpreter. Avoid using the witness’s supervisor as an interpreter if possible.

3. Establish Relationships and Responsibilities
The use of a mobile crane on a construction site involves significant coordination between the crane owner, crane operator, crane user and lift director. Establish these relationships as soon as possible. Determine whether the crane owner is providing the crane as a service to the user or renting the crane to the user. Determine whether the crane operator is an employee of the crane owner or crane user. Obtain copies of the relevant contracts to determine whether the user was required to insure the crane and whether the contract contains a waiver of subrogation between the crane owner and crane user. Determine whether the crane operator was properly trained and certified on the type of crane involved in the accident. Also identify the lift director and site supervisor. The duties, responsibilities and qualifications for crane operators, site supervisors and lift directors are discussed in ASME B30.5, Mobile and Locomotive Cranes.

4. Examine the Lift Plan – Was This a Critical Lift?
The most frequent causes of crane accidents include instability caused by overloading, operating the crane on a site that is too soft or not level and a lack of communication between the crane operator, signalman and lift director. All of these causes can be attributed to improper planning or not adhering to a properly prepared lift plan.
 

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A recent 5th Circuit Court of Appeals case held that spoliation of evidence may not necessarily be fatal to a product liability claim. The case, A.K.W. v. Easton-Bell Sports, Incorporated, et. al, 11-60293 (October 18, 2011) stemmed from a head injury to a minor, “A.K.W.”, that occurred during football practice while A.K.W. was wearing a helmet manufactured by Defendant Ridell. On the final play of practice, A.K.W. stepped up to tackle the opposing quarterback and was joined in that tackle by two additional defenders. All of the players involved in the tackle landed on top of A.K.W.; his head was the first to hit the ground. Shortly after practice, A.K.W.’s right eye blurred and he collapsed on the field.  His coaches removed the helmet, which was later lost. A.K.W. was subsequently diagnosed with a carotid artery tear that rendered him partially paralyzed.

A.K.W., through his mother, filed suit against various manufacturers of football helmets in Mississippi State Court claiming that his helmet was defectively designed due to the padding. The matter was removed to Federal Court which applied Mississippi substantive law including the Mississippi Products Liability Act (MPLA). The MPLA sets out three elements for a defective design claim: (1) the product was defectively designed; (2) the design defect made the product “unreasonably dangerous”; and (3) the design defect caused the injury. Mississippi common law further requires that plaintiffs prove that at the time of the injury, the product was in substantially the same condition as when it left the defendant’s control.

A.K.W. was unable to produce the helmet he was wearing at the time of the injury.  He testified that he was wearing a Riddell helmet at the time; however, there were four (4) different types of Riddell helmets in use by the team. Ridell filed a motion for summary judgment contending that A.K.W. was unable to prove that the helmet he was wearing was in substantially the same condition as when it left the defendant’s control. A.K.W.’s expert assumed that the football helmet was in perfect condition as if it just left the defendant’s control. The expert opined that all four types of Riddell helmets were defective per se upon leaving the manufacturer. Plaintiff argued that since the comparison product for the feasible design alternative is not the exact, individual product involved in the injury, proof as to substantial similarity is unnecessary. The appellate court reversed the trial court’s grant of summary judgment, holding that because the opinion of A.K.W.’s expert was not based on the actual helmet, there was no need for A.K.W. to have produced the actual helmet. Where an expert opinion about defect is based upon a perfect condition product that is straight from the manufacturer, and that opinion applies to all potential products that could have caused the injury, there is no requirement to produce the actual product that caused the injury.
 

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There is a common misperception that a subrogee may never recover more than the amount of its subrogation interest. While it can be challenging to even make a 100% recovery, sometimes there are opportunities available to make a super-recovery – one in excess of the subrogation interest. 

The simplest way to recover more than the amount of the verdict is to seek taxable costs such as filing fees, witness fees, transcription fees, and expert preparation and testimony expenses. Whether, and which, costs are taxable vary from jurisdiction to jurisdiction, but taxable costs are usually fairly limited and will not include all litigation expenses.

A number of jurisdictions allow for statutory pre-judgment interest on the amount of the judgment. Historically, recoverable pre-judgment interest has been as large as 12% per annum (e.g., Florida), but it is much more modest in this economy. Since the discovery process often takes several years before proceeding to trial, a pre-judgment interest award can be a very significant percentage of the gross recovery.

In cases in which there are multiple defendants, consider settling with one or more, but less than all, of the defendants. In some jurisdictions (i.e., Minnesota), by doing so, the plaintiff “assumes the fault” of the settling defendants and is limited to recovering at trial from the non-settling defendants no more than their own percentage of the damages as allocated by the jury. However, if the amount of the partial settlement exceeds the settling defendants’ share of the damages allocated to them at trial, the plaintiff may recover more than its subrogation interest even before consideration of pre-judgment interest and taxable costs. While this methodology is not without risks and requires a keen understanding of the strengths and weaknesses of the case, we recently used this strategy to obtain a 120% recovery of a client’s subrogation interest.

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An Illinois Appellate Court recently issued an opinion which may make subrogating against a negligent tenant more challenging. Auto Owners Ins. Company a/s/o John Ellis v. Thomas Callaghan, 952 N.E.2d 119 (Ill.App.3d 2011) involved a landlord’s carrier that sued a tenant who was leasing a house. The plaintiff insurer alleged that the tenant was negligent in starting a fire that caused over $250,000 in damages to the house. The tenant filed a motion to dismiss the lawsuit based on Illinois’ implied coinsured doctrine. The trial court granted the tenant’s motion and the Third District Appellate Court affirmed.

The Court’s decision was based on its interpretation of the seminal case outlining the implied coinsured rule in Illinois, Dix Mutual Ins. Co. v. LaFramboise, 597 N.E.2d 622 (Ill. 1992). This Illinois Supreme Court case set forth the rule regarding tenant liability: “although a tenant is generally liable for the fire damage caused by his negligence, if the parties intended to exculpate the tenant from negligently caused fire damage, their intent will be enforced.” Because the language can vary, the courts were to interpret the lease “as a whole so as to give effect to the intent of the parties.” The Dix court ruled that the Defendant in that case was afforded implied coinsured status. A key factor in the decision was a provision in the lease requiring the landlord to maintain property insurance, which the court construed as the parties’ intent that property insurance would cover losses to the property. The court held that the tenant’s rent payments contributed to the premium for the property insurance, making the tenant an implied coinsured. Further, in the Dix lease, there was no provision making the tenant responsible for damages that he caused.

The lease in Auto Owners contained no provision regarding insurance. It did contain a provision stating that the tenant’s security deposit would pay for any damages that the tenant, their guests or invitees may inflict upon the dwelling unit, and that the tenant’s liability is not limited to the amount of the security deposit. Despite these differences, the Auto Owners court ruled that there was no provision in the lease that imposed liability upon the tenant for fire damage. The court further found that by the tenant’s payment of rent, he obtained the status of a coinsured under the landlord’s policy, and could not be sued for fire damage by the landlord or its insurer. The Auto Owners court distorted the rule in Dix. Instead of applying the rule that the tenant is liable unless the lease demonstrates intent to exculpate the tenant from liability, Auto Owners suggests that the rule is that the lease provision needs to place liability on a tenant. Further, even though there was no mention of insurance in the Auto Owners lease, the holding suggests that the tenant can be considered an implied coinsured if the landlord has property insurance.

It is still viable for a landlord’s insurer to pursue a tenant in subrogation in Illinois. However, Auto Owners may signal a trend that certain additional factors will need to be demonstrated to subrogate against a negligent tenant.

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A substantial body of law has emerged supporting the position that a plaintiff is entitled to recover the cost of conforming to updated building codes in repairing property damaged by a defendant's negligence. Florida, Illinois, Missouri, Massachusetts, Minnesota, and Wisconsin all have authority affirming the recovery of code upgrade costs. The costs of code-compliance are recoverable because:

(1) including such costs allows property owners to be placed in the position they occupied before the loss, by restoring the building to a condition in which it can be re-occupied;

(2) the upgrade expenses would not have been incurred but for the defendant’s negligence; and

(3) any other outcome would penalize property owners for the tortfeasor's negligence.

A minority of jurisdictions refuses to include expenditures for code upgrades in the cost of repairs. (West Virginia, Mississippi and Colorado) As such, recovery of such costs as repair damages would unduly and unjustifiably enrich the plaintiff and require the defendant to pay a sum greater than that resulting proximately from his negligence.

In jurisdictions that have not yet addressed the issue, a strong argument can be made for following the path taken by the majority. That argument proceeds as follows. Either the defendant or plaintiff must bear the cost of code upgrades. That is, either a defendant will be forced to pay for more damage than it actually caused, or a plaintiff will not receive compensation that fully restores the use of its property. As such, one party will be treated somewhat inequitably. It seems more appropriate, however, for the defendant to bear that cost. The 'but for' rationale is critical in this regard. If not for the defendant's negligence, the plaintiff's code upgrade costs would not have been incurred. As such, equity seems to favor the party necessitating the costs bearing those costs. A plaintiff should not be penalized, by having to bear the code upgrade costs, for a defendant's negligence.

Including code upgrade costs in a plaintiff's damage award is generally consistent with the underlying purpose of assigning an award sufficient to compensate the plaintiff. If the cost of code upgrades is not included in a plaintiff's damage award, the plaintiff is not made whole without additional expenditure of its own funds. That is, the plaintiff is unable to return its property to its pre-injury use without the code upgrades. If the plaintiff is denied the code upgrade expenses, the plaintiff is denied completely-restored use of its property, and it has not been fully compensated for its injury.

In response, a defendant seemingly would argue allowing recovery of the cost of code upgrades provides the plaintiff with a windfall. Were a plaintiff to attempt to prove its damages, including the cost of code upgrades, using the repair measure, the defendant's most effective response would be to use the difference in fair market value measure to demonstrate the plaintiff's damages were actually of a lesser amount. Additionally, if including code upgrades drives the cost of repairs above the property's pre-injury market value, a defendant could assert a plaintiff's recovery may not exceed the value of its property prior to the injury. A defendant making these arguments, supported by the Colorado, Mississippi, and West Virginia decisions, would argue the policy of fashioning equitable damage awards requires the defendant pay for no more than the damages directly caused by its negligence.

As such, in jurisdictions where the issue has not yet been addressed, arguments can be made both for and against allowing a plaintiff to recover the cost of code upgrades in its damages. A majority of the jurisdictions to have addressed the issue allow recovery of such costs. Additionally, allowing recovery of code upgrade costs is consistent with the general principles underlying damages jurisprudence. Accordingly, the argument that such recovery should be permitted seems one worth making.
 

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