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

A severe recent federal court decision in New York state emphasized the importance of having your subrogation counsel identify and notify the insurer for potentially responsible parties of subrogation claims as soon as possible.

In 2008, the New York legislature amended Insurance Law § 3420 to require an insurer, in disclaiming liability coverage in which notice is given to the insurer within two years of an otherwise covered occurrence, to show that it was prejudiced by untimely notice. See An Act to Amend the Civil Practice Law and Rules and the Insurance Law, in Relation to Liability Insurance Policies § 8, 2008 N.Y. Sess. Laws 388 (McKinney 2008). Previously, New York courts had applied the "no-prejudice" rule under which an insurer had only to prove late notice and prejudice would be presumed. The amendment to the New York Insurance Law applies to insurance policies that were issued or delivered after January 17, 2009.

A New York federal court recently sided with an insurer fighting coverage for a roof collapse in its interpretation of this 2008 law.  Atlantic Casualty Ins. Co. v. Value Contracting, Inc., 2013 U.S.Dist. LEXIS 6044 (SDNY 2013). 

In this case, a landlord owned a commercial property at 685 Lenox Avenue in New York City.  Shortly before February 26, 2010, the landlord hired a contractor, Value, to work on carpentry issues related to the roof at this property. A major snow storm in New York City occurred on February 25th and 26th, leaving approximately 20 inches of snow on the roof, resulting in a roof collapse. The landlord was aware of the collapse by February 27th and contacted Value’s principal that same day to inform him of the collapse. One or two days later, the landlord called Value’s principal again to request Value's certificate of insurance. 

On March 1, Greenwich, the landlord’s first-party property insurer, also received notice of the partial collapse. The Property was inspected by U.S. Adjustment Corp., an adjuster hired by Greenwich, on March 1, 2, 5 and 12.  The landlord knew the identity of Value’s liability insurer by March 9, 2010. Following the collapse of the roof, the New York City Department of Buildings ordered the demolition of the second floor of the property. Demolition activities began at the Property on March 3 and were completed by March 17.  Yet it wasn’t until September 2, nearly six months after the collapse that Greenwich’s subrogation counsel sent a letter to the adverse party’s liability carrier.

Because the adverse party’s liability carrier did not receive timely notice of the subrogation claim prior to the demolition, the Court noted that it would have to rely on its adversary's investigation to defend its insured in the underlying subrogation action. The Court held that this was prejudicial and supported the disclaimer, and granted declaratory judgment in favor of the liability carrier.

The lesson to be learned is to make sure that your subrogation representatives get notice of claim letters out to potentially responsible parties and identify their insurance carriers as quickly as possible. Failure to do so can result in a good case not having a viable insurance policy to recover from.

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A California court has given new meaning to the judicial maxim “on a clear day you can foresee forever!”  In Collins v Navistar 2013 DJAR 4169, the Court of Appeals, Third Appellate District, held that a manufacturer could be held strictly liable for damages allegedly caused by a defectively designed truck windshield.  In Collins, it was undisputed that the plaintiff was injured by a rock thrown by a juvenile from a freeway overpass.  The 2.5 pound piece of concrete penetrated the truck’s windshield, struck plaintiff in the head causing him severe brain injuries.  The manufacturer predictably argued that the criminal acts of the juvenile, who pled guilty to three counts of assault with a deadly weapon and received a 12 year prison sentence, constituted a superseding cause cutting off tort liability.  The appellate court found otherwise-emphasizing that the windshield failed to provide exactly the protection for which it was designed-i.e. shielding a truck driver from foreseeable road hazards.  The court’s rationale was summarized as follows-“so long as the road hazard is reasonably foreseeable, the manufacturer must take steps to address common risks caused by negligent drivers, debris thrown into roads by acts of nature, and even third-party criminal acts.”   As the Collins court explained, “a windshield is not any less defective because it is pierced by an intentionally, rather than unintentionally, thrown rock.”   The Collins court, citing from the landmark California Supreme Court case of Soule v. General Motors Corp. (1994) 8 Cal.4^th 548, concluded that “strict products liability does not depend on the criminal or noncriminal nature of the source of the risk but on its foreseeability.”

The Collins case is another reminder that even in cases that initially do not appear to have subrogation potential (in this case a third party criminal act caused the loss), it is important to review them with counsel for potential avenues for recovery.

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Can a landlord’s insurer subrogate against a negligent tenant in Indiana?  Before answering, be sure you are aware of recent caselaw in Indiana on the issue.  Indiana Courts have addressed this issue two times, and their recent decision confirms that courts in Indiana are to look at the individual facts of the case and the specific lease provisions for guidance rather than adopting any broad sweeping rule. 

When pursuing subrogation against a negligent tenant, other jurisdictions have adopted one of three approaches.  These include (1) the anti-subrogation approach, which, absent an express agreement, a landlord’s insurer is precluded from filing a subrogation action against a negligent tenant because the tenant is held to be a co-insured along with the landlord under the landlord’s policy.  This approach is also referred to as the implied co-insured doctrine; (2) the pro-subrogation approach, in which subrogation actions by landlords against negligent tenants are permitted unless there is express language in the lease to the contrary; and (3) the case-by-case analysis approach, in which the individual facts of the case are reviewed with particular emphasis on the reasonable expectations and intent of the parties when entering into the lease. 

The first time Indiana courts have reviewed the subrogation issue was in the case of Farm Bureau Mutual Ins. Co. v. Owen, 660 N.E.2d 616, (Ind. App. 1996).  In that case, the Appellate Court did not adopt either an anti-subrogation or pro-subrogation approach, choosing in that case to focus on the lease language.  Interestingly, although the Appellate Court came to their conclusion by reviewing the specific facts of the case and in particular, the lease provisions, the Court noted that it was necessarily not adhering to the case-by-case analysis approach.

More recently, an Indiana Appellate Court was confronted with whether an insurer of a landlord could pursue subrogation against a negligent tenant in the case of LBM Realty, LLC v. Mannia, No. 71A03-1205-PL-231, 2012 WL 6608104, ---N.E.2d---(Ind. App. 12/19/12).  The facts of the case involved the negligent disposal of smoking materials on the apartment’s balcony by the tenant and/or guests, which resulted in a fire that caused approximately $745,000.00 in property damage.  The Trial Court dismissed the landlord insurer's lawsuit on a summary judgment motion by the tenant, applying the anti-subrogation rule and concluding that the tenant was an implied coinsured under the landlord's policy.  After the case went up on appeal, the Appellate Court reversed and remanded the case back to the trial court level and concluded that Indiana Courts have not adopted any particular approach (either an anti-subrogation approach, a pro-subrogation approach or a case by case analysis approach) in determining whether a landlord's insurer may maintain a subrogation action against a negligent tenant.  The Appellate Court in this case was again unwilling to adopt a specific approach, as in the Owen case.  However, they concluded Indiana law does not preclude a landlord's insurer from bringing a subrogation claim against a tenant.  In this case, because the Plaintiff's Complaint established circumstances in which relief could be granted, the Appellate Court remanded the case back to the Trial Court level for further proceedings.

In summary, it appears that the Appellate Court in this case, although not determinative, concludes that the specific facts of the case, which would include the specific lease provisions and the reasonable expectations of the parties when entering into the lease, should be examined before the Trial Court decides whether a subrogation claim can be made.  Again, although the Appellate Court never states a hard and fast rule, their conclusion is looking more and more like the case-by-case analysis approach.

The Indiana Appellate Court’s decision is yet another reminder that subrogation claims against a tenant should be reviewed with counsel to determine how the jurisdiction where the loss occurred will treat the facts of the particular case at issue. 

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“This is a maritime case about a train wreck” is how Supreme Court Justice Sandra Day O’Connor began the 2004 Supreme Court decision in Norfolk Southern v Kirby, 543 U.S. 14 (2004).  Since Kirby, other cases have tested legislative overlaps and conflicts when goods are transported using over water and land using "through bills of lading." Multi-modal transport has spawned clashes over the interplay of the Carriage of Goods by Sea Act (COGSA), the Carmack Amendment, Pomerene Act and the Harter Act.

In another case about a train wreck, the Southern District of New York in September, 2012 dismissed most of cargo’s claims against the rail carriers upholding through bill of lading provisions which prohibited suit against parties other than the carrier that contracts with the shipper. Sompo Japan Insurance Company of America et al v Norfolk Southern Railway Company, et al, 2012 U.S. LEXIS  125398, 2012 AMC 2409

Plaintiffs in Sompo were subrogated insurers of various shippers whose cargoes traveled by ocean, rail and truck from China and Japan to various locations in the United States. The ocean carriers and NVOCCs issued through bills of lading to the shippers. The bill of lading contained “Himalaya clauses”[1] that among other things, prohibited suit against any party other than the carrier contracting with the shipper. Defendants were inland rail carriers subcontracted by the original upstream carriers.

The Sompo plaintiffs asserted claims in contract, bailment, tort and the Carmack Amendment. They argued that the Himalaya clause violated the Harter Act, COGSA and the Hague Rules which prevent a carrier from avoiding its liability. Circuit Court Judge Denny Chin, sitting by designation,  questioned whether the Harter Act even applied to an overland loss, ruling that event if it did, the language in the bills of lading were a limitation of liability not an avoidance and were therefore enforceable.

Judge Chin also dismissed plaintiffs’ Carmack Amendment claims based upon the Supreme Court’s ruling in Kawasaki Kisen Kaisha Ltd v Regal Beloit Corp., 2010 U.S. LEXIS 2433 (2010) which held that Carmack does not apply to a shipment originating overseas under a through bill of lading.

The surviving claims for now, were based upon the Court’s finding that the NVOCC’s bill of lading language was ambiguous and that additional evidence was required to discern the parties’ intent.  Nonetheless, the Court’s decision in Sompo is another important reminder to review limitations of liability provisions with counsel when reviewing a case for subrogation potential. 

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Imagine that your insured’s house has caught on fire, but when a firefighter attempts to connect the water hose to the hydrant nearest the home, he cannot open the valve because he turned the valve in the wrong direction, breaking the stem of the hydrant.  The firefighter moves on to the next hydrant, but that one is frozen, forcing the firefighting crew to connect to a third hydrant much further from the home, causing a delay of 30 minutes, making it too late to save any portion of your insured’s home.

The investigation into the fire reveals that an employee for the water public utility had painted over the top of the first hydrant, thereby covering the arrow that shows which way to open the valve.  Further inquiry reveals the water utility’s inspection records show that the second hydrant had earlier been described as “very hard to open” and “hard to open”, but no remedial actions were taken.  Certainly, after paying out the claim, you think you have viable subrogation claims against the water utility for negligent maintenance.  But before proceeding further, you will want to check out the water utility’s tariff, which is filed with the respective state administrative agency that regulates public utilities. 

A tariff is a public document setting forth the services of a public utility, rates and charges with respect to services and governing rules, regulations and practices relating to those services.  In our scenario, the water utility has a tariff which provides, “It is agreed by the parties receiving service that the Company shall be free and exempt from any and all claims for injury to persons or property by reason of fire, water, failure to supply water pressure or capacity.”  This may significantly impact your claim, due to the legal doctrine known as the “filed rate doctrine.”

The filed rate doctrine “forbids a regulated entity from charging rates other than those filed with the regulatory agency.”  Also known as the filed tariff doctrine, it serves two purposes: recognizing the agency’s autonomy in setting fair rates and preventing service or rate discrimination among customers.  In a sense, the doctrine treats tariffs as a matter of contract: on one side is the utility, and on the other is the state representing all its citizens.  In accordance with this treatment, courts will consider the provisions of the tariff as part of the contract between the customer and the utility.  See, e.g., Krasner v. New York State Elec. & Gas Corp., 90 A.D.2d 921, 921-22 (N.Y. App. Div. 1982).  In other states, however, the tariff will have the force and effect of a statute.  See, e.g., Dyke Water Co. v. Public Utilities Com., 56 Cal.2d 105, 123 (1961).

Implementing the filed rate doctrine, courts have limited the liability of a public utility for simple negligence whose tariffs contain limitation of liability clauses, like the one quoted above.  However, what is still uncertain in the United States is whether such provisions will be enforced where the utility acted grossly negligent or in a willful and wanton manner.  Very few courts have made actual holdings with precedential value that limitation clauses will be enforced in such cases.

One of the most recent courts to weigh in on the matter is the Delaware Supreme Court in Brown v. United Water Delaware, Inc., 3 A.3d 253 (Del. 2010).  There, the court adopted the filed rate doctrine and held that it could bar claims of simple negligence, but refused to rule on whether the doctrine could bar claims for gross negligence and/or wanton and willful misconduct.  On remand to the Delaware Superior Court, the Court looked to other state courts that have examined the issue.  The Superior Court wrote that the filed rate doctrine may bar claims for gross negligence because there was no “overwhelming” caselaw from other jurisdictions saying that filed tariffs cannot preclude claims for gross negligence and that there is no Delaware statutory authority or public policy to the contrary.  This discussion, however, was non-precedential dictum, which the Delaware Supreme Court acknowledges.  Therefore, the issue is still unresolved in Delaware, as well as elsewhere, where very few courts have made actual holdings with precedential value on the matter.

So how does the foregoing impact recovery potential against a utility?    First, as already discussed, you will want to examine the tariff your target public utility has filed, in particular to see if it contains any limitation of liability provisions.  Second, it will be important to conduct an extensive fact and legal investigation to determine how far from the standard of care the utility’s actions were.  This investigation will help determine if the utility’s conduct was simple negligence, gross negligence, or willful and wanton misconduct.  Use of an expert knowledgeable about the respective standard of care will help in this investigation.  Third, you will want to determine your state’s view on the filed rate doctrine and whether it has taken any stance on whether it will prevent claims for ordinary negligence, gross negligence, or wanton and willful misconduct.  Further, as ancillary research, because some states consider tariffs as contracts between the utility and the costumer, you will want to examine your respective state law on the enforcement of contractual limitation of liability clauses where the defendant committed gross negligence and/or willful and wanton misconduct.  This can be especially helpful in cases where the courts have yet to address the field rate doctrine’s impact on limitation of liability clauses where the utility was grossly negligent or worse.

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This past week an unfortunate nightmare came true - a family had the unthinkable horror of hearing and watching a loved one perish when a sinkhole opened under the man’s bedroom in his Florida home.  As has been reported, sinkhole losses have been increasing in magnitude and volume throughout the country, especially in certain jurisdictions such as Florida.  A study by the Florida Office of Insurance Regulation found the number of sinkhole claims in Florida more than tripled between 2006 and 2009.  And, it is only getting worse.

A sinkhole is a natural depression or hole in the Earth’s surface.  Sinkholes generally form through the natural process of underground streams causing erosion to surface layers.  Once the erosion occurs and the water dissipates, the layers above the erosion can collapse into the voids causing a hole.  However, these layers can also hold in place for years, and even after properties are constructed upon them.  Unfortunately though, once the layers fail and a sinkhole occurs, property constructed upon the void will be damaged.  And, in the worst cases, lives will be lost.

Generally, building codes and statutes in many states do not require a contractor to investigate for voids and the propensity for sinkholes.  Once would hope that after this terrible disaster, state legislatures would enact stricter construction codes.  However, in the interim, we will have to rely on the integrity of the construction professionals and their construction plans and specifications. 

Many engineering plans and specifications require a geotechnical engineering review of the ground that should identify issues related to voids.  If a building is not built pursuant to an engineering plan requiring such a review, and damages occur, a claim may be viable against the builder and any of its subcontractors who failed to comply with the plans.  Or, alternatively, if the building was constructed pursuant to the plans but the geotechnical review was inadequate, a claim may be viable against the geotechnical engineer.

Prior to undertaking a subrogation investigation of sinkholes, it is prudent to determine the age of the property.  As with all construction claims, it is important to determine whether the claim arises within the State’s statute of repose – Florida’s statute of repose is 10 years.  Florida Statute §95.11(3)(c).

In order to determine whether a viable subrogation claim exists, a licensed structural engineer should review the construction plans and specifications to determine if a geotechnical review was required.  If one was required, then a geotechnical engineer should be retained to determine whether the original review was proper.  Finally, the structural engineer needs to determine whether the damages caused were due to the original contractor’s failure to construct the property in accordance with the information supplied by the geotechnical review. 

Cozen O’Connor has been successfully handling construction claims for decades, including those arising from natural disasters.  We stand ready to address the ever increasing issues of sinkhole damage.  We are available for further consultation to discuss any recovery issues that you may be confronting.

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When Alon’s Big Spring, Texas oil refinery exploded on February 18, 2008, destroying Veolia’s waste treatment facility, Alon did not even bother to contest its liability for the damages to Veolia’s facility.  Nor did Alon dispute that the only proper measure of damages for the completely destroyed facility was its fair market value immediately prior to the explosion.  However, the problem faced by the Fifth Circuit in Factory Mutual Insurance Co. v. Alon USA L.P. is that there is a market for the facility’s used parts but no “market” for the facility system itself. 

After stipulating to liability, Alon contended that Veolia’s insurer, FM, was only entitled to the cost of the facility’s component parts.  The value of the component parts was $877,882.  FM claimed that Alon instead owed $6,106,880, the total replacement cost of new parts and labor adjusted downward for depreciation from the time the facility was built until the explosion that destroyed it.  The Northern District of Texas court ultimately awarded FM $3,790,391.96 plus interest.  The trial court first took the total cost of new equipment, including taxes and shipping, then incorporated additional money for contingency, installation, testing, and startup and finally multiplied the total by .65 to account for 35% depreciation.  Alon appealed.  Based on the reasoning below, the Fifth Circuit affirmed.  

Typically, a court called upon to determine fair market value would simply look to the price that willing buyers were offering for similar property being sold by unobligated sellers.  Thomas v. Oldham, 895 S.W.2d 352, 359 (Tex. 1995). The Northern District of Texas court faced with Alon’s case said that it could not do that because “the market price of such used subsystems does not reflect the market value of a running [facility]... No reasonable person would construct a working [facility] out of used components.” Factory Mutual Insurance Co. v. Alon USA L.P., Slip Op. No. 11-11080 (January 23, 2013, 5th Cir.)

The Fifth Circuit affirmed the lower court’s decision for two main reasons.  First, FM presented credible expert testimony on valuation, rather than merely relying on its payment to its insured, Veolia, to prove market value.  Second, Alon failed to address the fact that no market existed for the facility.  Alon instead repeatedly stated that its calculations for used equipment “sitting on the ground, not assembled” should be adopted because it could reliably price out those individual parts. 

Examining all of the expert testimony and complete trial record, the Fifth Circuit concluded that the Dallas-based district court was correct: “the market value of a fully operational [facility] is greater than the sum of its component parts.”  

In reviewing the recoverability of damages in a particular case, it is important to note that the law as to what is recoverable and what test to apply varies in each state.  While this case reflects upon the Fifth Circuit, it is important to consult with counsel regarding the laws of the state in which your loss occurred.

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So how can an insurance professional, risk manager, general adjuster, and asset manager make an informed decision regarding investigating a flood claim? Assuming that there is insurance coverage and that a claim will be paid, which of the thousands of flood claims carriers receive each year should be investigated for subrogation? There are several approaches, from investigating all flood claims to investigating only those with obvious potential such as dam breaks, pipe breaks or collapses. The best solution is somewhere is the middle; a disciplined staged approach.

As recent experience shows, flood subro claims can be litigated and won or settled.  In order to make money on these cases informed decisions must be made early.  Most people think of floods as Acts of God so liability carriers are understandably reluctant to discuss settlement.  Only when we can demonstrate that human intervention caused or contributed to the loss will meaningful settlement discussions occur.  The key is understanding that the Act of God defense requires that the event be solely caused by unpredictable, uncontrollable, natural events without any human intervention. Only the most extreme events qualify as Acts of God.  Most events result from the combination of naturally occurring events and human intervention; for example a large rainstorm combined with the failure of a property owner or municipality to maintain a bridge or culvert.

For asset allocation, the extremes are simple;  very small flood claims rarely qualify for scarce investigation funds and investigating very large flood is easier to justify.  The great majority are the cases in between - the $150,000 to $500,000 range of cases. What are some things that the adjuster can consider when deciding to invest in these cases and is there an acceptable protocol to follow to maximize the investigation budget and to justify further investigation expense?  A disciplined, phased or staged investigation approach is best. This allows for the increased allocation of resources as more is learned about a case and the prospect for a recovery increases.   

First and most obvious is utilization of “free” resources.  If you pay an engineer hourly but pay your subrogation counsel a contingent fee then the first step is getting all you can from counsel. Most counsel who handle substantial flood cases are well acquainted with flood science. Counsel can gather preliminary details regarding the storm and flood such as how much rain fell and in what period of time, how deep the flood water was, if a flood study was completed by FEMA for the community where the flood occurred.  If this initial evaluation reveals some questions or areas of interest then an engineer can be retained for the limited purpose of surveying background information about the flood and the history of the community and source of the flooding.  The goal here is to try and exclude the case based upon this background information.  To make an early determination that the flood was caused by too much rain falling too quickly suggesting an Act of God rather than a viable subrogation case.  Most of this information can be gathered by the engineer for little cost from the internet. There are informational web sites which historically track rainfall data, stream flow data, and stream gage data (the USGS has deployed a system of rain and stream gages nationwide that provide substantial information about rainfall and water flow).  Setting a “not to exceed” budget for the expert to work toward on this initial phase is beneficial.  Flood studies and flood insurance rate maps are prepared by the government for thousands of communities and even the smallest of creeks and streams. This information can be gathered with a modest budget.  The analysis by the engineer is more costly but can easily be budgeted beforehand (again, a “not to exceed” approach is useful).  Now an informed decision based upon the background information can be made regarding a more expensive engineering site inspection. Usually this pre-site visit stage can be reached for $2,000 to $3,000 which is a modest investment for a substantial flood case.

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               The United States District Court for the District of New Jersey recently reinforced that a public adjuster’s fee is not a recoverable element of an insured’s damages.  In doing so, the court distinguished the cost incurred in retaining a public adjuster from the cost incurred in retaining other third-party contractors following a loss.

                The decision, Travelers Property Casualty Company of America v. Hallam Engineering & Construction Corporation, arose from a fire at a food processing plant operated by Goya Foods.  No. 08-444 (D.N.J. 2013).  Following the fire, Goya Foods retained a public adjuster to manage the adjustment of Goya’s claim with its insurer, Travelers Property Casualty of America.  Travelers, on behalf of Goya, retained a construction-consulting firm to assist Goya in estimating the cost to repair its plant.  The consulting firm also managed the repairs of Goya’s facility.  When Travelers subsequently brought an action against the third parties responsible for the fire, Travelers sought to recover the fees charged by the construction consulting firm and the public adjuster as part of its damages.

                The District Court determined the fee paid to the construction-consulting firm was a recoverable element of Travelers’ damage.  The court explained the firm’s fee was a “reasonable cost” incurred by Travelers in an attempt to mitigate the damage caused by the defendants’ negligence.  The fee flowed directly from, and was a consequence of, the defendants’ negligence.  As such, that fee was recoverable by Travelers.  The public adjuster’s fee, on the other hand, was not recoverable by Travelers.  The court distinguished the public adjuster from the consulting firm on the basis the public adjuster acted solely as the insured’s agent for purposes of adjusting the insured’s claim with Travelers, and did not work to mitigate the insured’s damages.  As such, the public adjuster’s fee was not a cost resulting directly from the defendants’ negligence, but, instead, an expense voluntarily assumed by the insured to facilitate adjustment of its claim.  Accordingly, the public adjuster’s fee was not recoverable.

                The court’s decision serves as a gentle reminder to a subrogating carrier that a public adjuster’s fee is not a recoverable element of damages.  The decision also serves as a useful tool, in insured made-whole states, for a subrogating carrier confronted with an insured who seeks to recover the fee paid to its public adjuster as an element of its damages.  In that situation, the carrier should gently remind the insured a public adjuster’s fee is not a recoverable element of the insured’s damages. 

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Exhaust fans commonly found in the ceilings of bathrooms and laundry rooms cause many residential fires and fires in commercial and industrial buildings. Exhaust fan fires have caused more than $50 million in property damages.[1]

Exhaust fan fires are frequently ignited by electrical arcing in the fan motor or by heating caused by the fan motor bearings “locking up.” The heat generated by the electrical activity or friction is sufficient to ignite plastic components of the fans such as the blades or grill. The burning plastic can and will fall down out of the fan to ignite combustible material in the room below. Burn patterns moving up and out from laundry baskets, plastic trash cans, and other similar items ignited by burning plastic dropping down from exhaust fans are frequently relied upon by investigators for fan and fan motor manufacturers to support an argument that the fan was damaged by a fire originating in the room below and being drawn to, and burning to, the fan operating in the ceiling of the room.

Investigators have identified one common cause of exhaust fan fires referred to as a crimp connection failure. Certain fan motors are manufactured with a crimp connection between a copper lead and an aluminum conductor. Copper and aluminum are dissimilar metals. Copper and aluminum expand and contract at different rates when heated and cooled. The differential rate of expansion and contraction will weaken the connection. The contact between the dissimilar metals also causes corrosion which results in oxidation. Aluminum oxides do not conduct electricity well and further weaken the connection. Weakening and failure of the connection results in resistance heating and electrical arcing sufficient to ignite fires. 

There are three crimp connections in many exhaust fan motors. The first crimp connection connects the copper lead from the motor plug cord to the copper lead into the fan motor TCO. A crimp connection is merely a hollow connector that is used to connect one conductor to another. The first crimp connection is actually located within the plastic bobbin of the motor. The second crimp connection runs out from the fan motor TCO and connects to the aluminum windings. The second crimp connection actually rests on the aluminum windings. The third crimp connection connects the other end of the aluminum windings to the copper lead for the neutral that returns back to the plug cord. The third crimp connection is usually also located within the plastic bobbin for the motor.

The second crimp connection is a connection of a copper lead to an aluminum conductor. Heat generated by the connection failure can cause off-gassing of the varnish on the aluminum windings upon which the second crimp connection rests. Electrical arcing can occur as the second crimp connection fails and the aluminum windings are exposed by the off-gassing of the varnish. The electrical arcing will ignite the off-gassing varnish and combustible lint, dust, and plastic in the fan. 

The melting of the copper lead at the second crimp connection is strong evidence that a failure at this connection ignited a fire. Copper melts at 1,980° Fahrenheit. ((c) NFPA 921, 2011 Edition, Table 6.2.8.2) Electrical arcing caused by the failure of the connection is typically the only possible source of heat sufficient to melt the copper. Fire attacking a fan motor from the exterior will typically not produce localized temperatures near 1,980° Fahrenheit, especially when combustible material such as plastic in the fan or wood framing near the fan with much lower ignition temperatures suffer little or no fire damage. A fire attacking an exhaust fan from the exterior will typically cause electrical arcing in another location on the fan electrical system and terminate current to the fan motor before the fire reaches the fan motor and causes arcing at the second crimp connection.

An exhaust fan must be on or energized for a crimp connection failure to occur and ignite a fire. Electrical arcing cannot occur unless electrical current is flowing to the crimp connection. However, a crimp connection can fail and cause a fan to stop operating or to operate intermittently when the fan switch is on and the fan is energized. Therefore, a fan may be on and energized even though it is not operating and the homeowner does not believe the fan is on. This situation often occurs when exhaust fans rendered non-operational by a crimp connection failure are controlled by two separate on/off switches in a laundry room or bathroom. 

The connection of dissimilar metals in an electrical circuit is a recognized fire danger. Section 110.14 of the 2008 National Electric Code prohibits intermixing or splicing where physical contact occurs between dissimilar conductors (specifically identifying copper and aluminum as dissimilar conductors) unless a device is used that is approved for connecting the dissimilar metals. However, this code provision applies to building wiring and not to wiring within a product such as an exhaust fan.

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The Supreme Court of Minnesota recently adopted a case-by-case approach to analyze whether a landlord or landlord’s insurer may sue its tenant. Ram Mutual Insurance Company v. Rusty Rohde d/b/a Studio 71 Salon, ____N.W.2d ____, 2012 WL 3822155 (2012). The decision effectively overrules the court’s decision in United Fire & Casualty Co. v. Bruggeman, 505 N.W.2d 87 (Minn. App. 1993), which followed a no-subrogation rule, barring insurers from pursuing subrogation claims for structural losses against negligent tenants in the absence of an express agreement otherwise. The current landlord-tenant bright line rule laid out by Bruggeman and its progeny was that a landlord’s insurance carrier could not subrogate against a tenant for the tenant’s negligence unless there was an express agreement placing liability on the tenant to procure insurance for that type of loss. That rule in Minnesota did not extend to nonstructural losses or uninsured losses, which could still be recovered from a negligent tenant.

In Ram Mutual, Studio 71 rented commercial space from JD Property Management, Ram Mutual’s insured. Studio 71 installed water lines that serviced pedicure chairs in violation of a term of the lease between it and JD Property Management, LLC. The water lines burst, causing damage to the property. JD Property Management made a claim to Ram Mutual, who paid the claim and then pursued Studio 71 for its negligence.

The lease between the parties contained no requirement that Studio 71 maintain insurance for water damage to the property. Studio 71 moved for summary judgment based on the bar against subrogation found in Bruggeman. Studio 71 argued that Bruggeman and its progeny required the court to dismiss Ram Mutual’s claim against it because as a tenant, it was a co-insured under the Ram policy. The district and appellate court agreed with Studio 71, stating that because the lease placed no express obligation on JD Property of Studio 71 to procure property insurance for the water damage at issue, Studio 71 was a co-insured and Ram could not maintain a subrogation action against Studio 71. Ram Mutual appealed the case to the Minnesota Supreme Court. There, the court reversed and remanded the case back to the lower court by adopting a case-by-case approach, with a focus on the intent of the parties.

In evaluating whether an insurer should be allowed to subrogate against a tenant, the court instructed lower courts to ascertain the parties’ intent and expectations as to which party bears responsibility for the loss. The court reasoned that a careful analysis of the lease agreement, as well as extrinsic evidence, should be considered in determining whether it was reasonably anticipated by the landlord and tenant that the tenant would be liable for its negligence.

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The recent Georgia decision of Royal Capital Development LLC v. Maryland Casualty Company, 291 Ga. 262, 728 S.E.2d 234 (Ga. 2012) opened a new world of claims for property insurers, in that the Court concluded that economic loss ensuing from property damage (in this particular case so-called “stigma damage” was at issue) was covered under a commercial property policy.

While this decision changed the first-party claim landscape for insurers of property in Georgia, it also creates both additional challenges and opportunities for subrogation recovery as well. To the extent that diminution of value beyond repair cost is compensable under an insurance policy as “damage,” that diminution of value should be recoverable in a subrogation action, but only upon presentation of adequate proof to take the claim of diminished value beyond speculation to a level that is quantifiable and susceptible to consideration by a jury without guesswork.

To establish diminution of value in a commercial property loss, the first step will be to involve competent and licensed property appraisers, preferably at the outset, to assist in evaluation of the question of diminution of value. Since recent economic history has demonstrated that property values can fluctuate quickly and significantly because of external influences from the general economy, getting this work done as soon as practicable after the loss is important. Subrogation cases may progress for a period of years before getting to trial, with investigation taking considerable time even before any filing of litigation can occur and the ability of an appraiser to obtain useful and reliable data will diminish over time.

In Georgia, as in most jurisdictions and in the Federal courts, a property appraisal intended to establish recoverable diminution of value will have to employ a reliable and acceptable methodology that will withstand scrutiny in litigation under Daubert and its progeny. Appraisal opinion evidence is the type of expert opinion evidence that will be evaluated in Georgia civil matters and in the Georgia Federal District Courts under the standard for admission of any type of expert opinion evidence and, in both state and Federal courts, the Daubert standard of reliability is applicable.

Use of “comparables” (i.e., comparing a subject property with recent sales or appraisals of property of similar size, cost of replacement, siting, etc.) to establish value of property is a typical and generally accepted methodology used by appraisers. For most types of property, it is generally not too difficult for the appraiser to find appropriate “comparables” to establish the value of a subject property. However, use of “comparables” to establish proof of diminution of value after a casualty and subsequent repair is more problematic. There is no established index or track record of sales or appraisals for reference to determine the extent to which a casualty, fully repaired, nonetheless diminishes the value of a building by stigma or otherwise. Use of appraisers with MAI status (Member of the Appraisal Institute) or other recognized advanced professional certifications will be advisable for any large diminution of value claim.

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In a large number of American homes, hot and cold water are supplied to kitchen and bathroom faucets by braided stainless steel water line connectors. In a significant number those homes, the under-sink space that encloses the braided steel water lines also serves as a storage space, frequently for cleaning products. The subrogation community is gradually becoming aware that this storage practice may be to blame for previously inexplicable water intrusion losses.

Consider the following loss scenario: the insured purchases a new home from a builder-developer, and lives happily and loss-free in that home for two years following the purchase. At the beginning of year three, the insured’s third-floor bathroom floods, causing water intrusion damage throughout the risk and a sizable additional living expense claim. The engineer identifies the source of water intrusion as a braided stainless steel water line that burst at the middle. The water line was installed as a part of new construction only two years earlier, so it has not surpassed its expected useful life, but the engineer notes that there seem to be signs of corrosion around the area of the burst.

Contrary to its name, stainless steel is not entirely stainless; that is, it is not impervious to corrosion. Stainless steel relies on an ultrathin barrier layer of protective corrosion to maintain its resistance to further oxidization. Studies have shown that certain types of stainless steel are especially prone to corrosive pitting when exposed to chlorides. Chlorides are compounds containing the element chlorine which, when it gains an electron and thus a negative charge, forms the chloride ion. Two such compounds, alkyl dimethyl benzyl ammonium chloride and alkyl dimethyl ethylbenzyl ammonium chloride are commonly found in household cleaning products, like toilet bowl cleaner, bathroom cleaning liquids, and disinfecting sprays. It is also understood that when the stainless steel subject to such corrosion is also under tensile or mechanical stress (such as that produced by water-hammer movements), the corrosive effect is accelerated.

Subrogation professionals have seen several water losses caused by bursts at seemingly random locations on braided stainless steel water line, like that pictured above. Forensic experts have learned that many of these failed water lines show corrosion that is consistent with exposure to household chemicals.  Subrogation claims arising from this loss scenario may include product defect claims against the manufacturer of the braided steel water line for a design defect and for its failure to warn the consumer of the dangers of chloride exposure. 

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Just days after ending a disappointing football season, USC scored a major legal victory in the California Supreme Court.  In Sargon Enterprises v. University of Southern California, 2012 DJAR 15846, a Court of Appeals ruling permitting expert testimony on potential lost profits was reversed.  This case is significant as it brings California law on the admissibility of expert testimony more in line with the federal standard. 

The case involved a small dental implant company suing USC for breaching a contract to clinically test a newly patented product.  The Supreme Court held that the trial judge had a duty as a “gatekeeper” to exclude speculative expert testimony that the dental implant company suffered more than $1 billion in lost profits had USC properly completed the clinical testing.  The Court’s rationale for excluding such speculative expert testimony was explained by distinguishing what would have happened, as opposed to what might have happened.  In the spirit of the holiday season, the decision may be summarized as follows-“if ands or buts were candy and nuts, every day would be Christmas.”      

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