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

The California Supreme Court in the case of Randall v. Costco Wholesale Corporation, 2009 DJD 16727 upheld the attorney-client privilege set forth in Evidence Code §954. The privilege attaches to any legal advice given in the course of an attorney-client relationship, regardless if the communication contains unprivileged material.

Costco Wholesale Corporation (“Costco”), retained counsel to provide legal advice regarding whether certain Costco warehouse managers in California were exempt from California’s wage and overtime laws. Counsel undertook this assignment and provided an opinion letter to Costco on the issue.

Several years later, Costco employees filed a class action against Costco, claiming that from 1999 through 2001, Costco had misclassified some of its managers as “exempt” employees and therefore had failed to pay them the overtime wages they were due as non-exempt employees. During the course of the litigation, plaintiffs sought to compel discovery of the opinion letter prepared by Costco’s counsel. Costco objected on the grounds that the letter was subject to the attorney-client privilege and attorney work product doctrine. Plaintiffs disagreed, arguing that the letter contained unprivileged matter and that Costco had placed the contents of the letter in issue, thereby waiving the privilege.

The Supreme Court held that the attorney-client privilege attached to the letter in its entirety, irrespective of the letter’s content. Further, Evidence Code §915 prohibits disclosure of the information claimed to be privileged as a confidential communication between attorney and client “in order to rule on the claim of privilege.” In addition, the Court found that a party seeking relief from a discovery order that wrongfully invades the attorney-client relationship need not also establish that its case will be harmed by disclosure of the evidence.

The holding bolsters a subrogating carrier's argument that correspondence from its counsel which includes facts and opinions about a loss, recovery potential, site inspections and conversations with witnesses are protected by the attorney-client privilege. 

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In Fireman’s Insurance Company v. Fire-Free Chimney Sweeps, Inc.,[1] the Court permitted a chimney sweep to pursue a contribution claim against the unit owner whose actions caused or contributed the fire. The chimney sweep, a defendant in the related subrogation action bought by the condominium association's insurer, filed a contribution claim against the unit owner where the fire started. The unit owner argued that he could not be directly liable to the condominium association or any of the individual unit owners pursuant to provisions in the condominium documents and his status as an additional insured under the condominium association’s policy. Therefore, he claimed that he could not be liable for contribution. However, the Court concluded that since the chimney sweep was a stranger to the contract documents, they were not a basis to restrict the chimney sweep’s right of contribution pursuant to the Uniform Contribution Among Tortfeasor’s Act. The Court noted that the proper question was not whether the chimney sweep and the unit owner were jointly and severally liable to the association and its insurer but, rather, whether they each performed some act that injured the association itself. 

The decision confirms that in proper circumstances a party protected by a waiver of subrogation may still be liable for damages caused by its negligent acts via a contribution cause of action.

[1] This opinion is yet unpublished. It is identified as Delaware Civil Action No. 07C-06-287-JOH

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Cozen O’Connor attorneys successfully argued in the Delaware Superior Court that the adoption of a National Fire Protection Association standard by an administrative agency defined the standard of care for work performed by a chimney sweep. The Court accepted the argument advanced on behalf of a subrogating insurance carrier for a condominium association that a chimney sweep hired by the association to “clean and inspect” chimney flues was required to perform a full Level 1 inspection of the entire chimney and fireplace systems pursuant to NFPA 211. 

In Fireman’s Insurance Company v. Fire-Free Chimney Sweeps, Inc.,[1] the Court denied a Motion for Summary Judgment filed by a chimney sweep company. It claimed that its contract with a condominium association to “clean and inspect” chimneys and flues for the individual fireplaces in the condominium complex did not create any duty on the part of the chimney sweep to inspect the fireplaces connected to the chimneys. The Court found that NFPA 211, the standard relied upon by the plaintiff, required the chimney sweep to perform a full “Level 1” inspection which involves an evaluation of the chimney, flue and all appliances, including the fireplaces, that were attached to the chimney. 

The chimney sweep was hired by the association to clean and inspect the chimneys that were utilized by the 294 unit owners in the condominium complex. NFPA 211 mandates cleaning of chimneys and flues, including the evaluation of the appliance which is attached to the chimney, in order to insure that the entire system is safe and operational. One of the unit owners had replaced the original fireplace doors with an after-market set of doors which effectively blocked the flow of air around the prefabricated fireplace. This prevented the fireplace from properly cooling while it was in operation and resulted in the ignition of combustible wood members surrounding the fireplace. The after-market doors had been installed by this unit owner prior to the time that the chimney sweep company performed its cleaning and inspection. 

Plaintiff argued that had a full and complete Level 1 inspection been performed, the chimney sweep would have detected the fire hazard created by the after-market doors and should have provided warnings to the unit owner and condominium complex that the doors should be replaced in order to prevent fires.  The chimney sweep argued that its duty was limited to properly cleaning  and inspecting the flues. It asserted that since it had no access to the individual units it could not be responsible for the condition of the fireplaces in those units that it did not access. It did offer to inspect individual unit owner’s fireplaces for an additional charge of $40. Only a few of the unit owners availed themselves of this offer. 

The Court concluded that once a chimney sweep undertakes an inspection encompassed within the NFPA 211 standard, it has an absolute obligation to perform a full Level 1 inspection consistent with the standard and anything less would constitute negligence and negligence per se.  The court stressed code compliance as NFPA 211 is a standard intended to protect life and property from the risk of fires and explosions.  The Court essentially required a contractor like a chimney sweep to turn down a contract if it cannot carry out the steps in an adopted safety code, even if full compliance means mandating access to the private property of third parties.

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With a global economy more and more products are being shipped to the United States from foreign countries daily.  When these products fail, it is expensive and time consuming to seek recovery from the foreign manufacturer.  But before throwing out your products claim, look at your state's laws on pursuing those entities in the chain of distribution of the product.  For example, distributors usually coordinate the sale of the product from the manufacturer to the seller and many times never even touch the product.  Despite their limited role of organizing the transfer of the goods, their liability can be unlimited in some circumstances.

In Texas, if you establish that the manufacturer of the product is insolvent or not subject to the jurisdiction of the court then the distributor can be held fully liable for the damages caused by the product as though they were, in fact, the manufacturer.  See Civil Practice & Remedies Code § 82.003.  Many distributors try to insulate themselves from liability in Texas by pleading the manufacturer is a "responsible third party" under Section 33.004 of the Civil Practice & Remedies Code.  This type of plea allows the distributor to put the manufacturer's name on the jury charge when the manufacturer is not a party to the litigation so the jury can then decide the percentage of responsibility between the manufacturer and the distributor.  Logically, jurors are going to put the majority of responsibility on the manufacturer who made the product as opposed to the distributor who may never have even touched the product.  Don't be fooled by this bit of legal maneuvering by a distributor.  The "responsible third party" statute only applies when both parties are negligent.  Under Section 82.003, the distributor can be held liable for the damages associated with the defective product without any negligence on the part of the distributor.  Since the distributor's responsibility for the product arises from the statutorily imposed guidelines of Section 82.003 of the Civil Practice & Remedies Code and not from any negligent act it did or failed to do, the distributor cannot escape liability by trying to push a percentage of fault onto the manufacturer under Section 33.004. 

Each state has its own laws regarding the liability of distributors and those should be reviewed before closing a claim for a defective product manufactured overseas.

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A. What is A Standard Mortgage Clause?

First-party property insurance policies usually contain one of two types of mortgagee clauses: i) a loss-payable clause; or ii) a standard mortgage clause.

i)          The Loss-Payable Clause: This type of clause merely provides that insurance proceeds shall be paid to a mortgagee as "its interests may appear." Under a loss-payable clause, a mortgagee's right to recovery is dependent upon the insured mortgagor's compliance with policy obligations. That is to say, a mortgagee has no better position than the insured (mortgagor) to recover under the policy and is therefore subject to any act, neglect, omission or misrepresentation of the insured which might void or breach coverage under the policy. 

 ii)       The Standard Mortgage Clause: The Standard Mortgage Clause is the standard vehicle by which mortgagees insure their interest in encumbered property. The standard mortgage clause was incorporated into policies because the “loss payable” clause did not adequately protect the mortgagee’s interest in the insured property. Under the standard mortgage clause, a mortgagee is entitled to direct payment for a loss to the extent of its interest at the time of the loss, independent of whether the named insured mortgagor has complied with its policy obligations. Once the mortgagee has been paid for a loss to the extent of its full interest in the property, the insured mortgagor is entitled to payment for the remainder of the amount of loss, if any.

B. A Standard Mortgage Clause is an Independent Contract

A policy that contains a Standard Mortgage Clause contains, in essence, two contracts:

(1) a contract between the insurer and the insured mortgagor (such as a homeowner), and

(2) a contract between the insurer and the mortgagee (for example, a bank).

The separate contract between the insurer and the mortgagee remains in force even when the policy itself has been voided by an act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property. Thus, when the insured mortgagor voids the policy, for example, by doing something that materially changes the policy risk, the Standard Mortgage Clause protects the mortgagee by maintaining the insurance of the mortgagee’s interest in force. The insurer must pay the mortgagee’s loss to the extent of the policy limits even when the mortgagor has voided the policy.

C. Example of a Standard Mortgage Clause

The Standard Mortgage Clause, as approved by the Insurance Bureau of Canada, has two parts:

IT IS HEREBY PROVIDED AND AGREED THAT:

1. BREACH OF CONDITIONS BY MORTGAGOR, OWNER OR OCCUPANT

This insurance and every documented renewal thereof – AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN – is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured, including transfer of interest, any vacancy or non-occupancy, or the occupation of the property for purposes more hazardous than specified in the description of the risk;

PROVIDED ALWAYS that the mortgagee shall notify forthwith the Insurer (if known) of any vacancy or non-occupancy extending beyond thirty (30) consecutive days, or of any transfer of interest or increased hazard (not permitted by the policy) shall be paid for by the Mortgagee – on reasonable demand – from the date such hazard existed, according to the established scale of rates for the acceptance of such increased hazard, during the continuance of this insurance.

2. RIGHT OF SUBROGATION

Whenever the Insurer pays the Mortgagee any loss award under this policy and claims that – as to the Mortgagor or Owner – no liability therefore existed, it shall be legally subrogated to all rights of the Mortgagee against the Insured; but any subrogation shall be limited to the amount of such loss payment and shall be subordinate and subject to the basic right of the Mortgagee to recover the full amount of its mortgage equity and in priority to the Insurer; or the Insurer may at its option pay the Mortgagee all amounts due or to become due under the mortgage or on the security thereof, and shall thereupon receive a full assignment and transfer of the mortgage together with all securities held as collateral to the mortgage debt.

…

SUBJECT TO THE TERMS OF THIS MORTGAGE CLAUSE (and these shall supersede any policy provision in conflict therewith BUT ONLY AS TO THE INTEREST OF THE MORTGAGEE), loss under this policy is made payable to the Mortgagee.

As you can see above, the first part of the Clause contains the language that provides that the policy remains in force as to the interest of the mortgagee despite any act, omission or misrepresentation of the mortgagor or any change in use that increases the risk.

The second part of the Clause provides that when its requirements are met, the insurer becomes legally subrogated to all the rights of the mortgagee against the insured to the extent of the payment it has made to the mortgagee.

D.  Can an insurer exercise its right of subrogation against an insured mortgagor under a standard mortgage clause without establishing that a policy is void?  

On a literal reading, the subrogation portion of the standard mortgage clause appears to suggest that an insurance company can simply allege that coverage has been vitiated by the insured mortgagor in order to exercise these subrogation rights. Thus, the question arises; can an insurer exercise its right of subrogation against an insured mortgagor under a standard mortgage clause without having to prove that the policy coverage has been vitiated?

Surprisingly, this question had received little judicial consideration in Canada until the recent Ontario Court of Appeal decision of Farmers’ Mutual Insurance Company (Lindsay) v. Pinder, 2009 ONCA 831 (CanLII).

A fire occurred at the home of Joyce and Cindy Pinder. Their insurance company denied coverage, alleging that there had been a material change in risk with respect to the installation of a new heating system, and that the Pinders had made willfully false statements regarding their contents claim. The Pinders sued their insurance company seeking a declaration that they were entitled to coverage.

The house was subject to a mortgage with the Bank of Montreal for which the insurance company paid $97,143.97 under a Standard Mortgage Clause.  Upon making the payment, the insurance company then commenced a subrogated action against the Pinders seeking summary judgment for the $97,143 that it paid the bank on the mortgage. The Pinders argued that since the issue of whether their policy was void had yet to be resolved, the Bank had not yet acquired the right of subrogation under the Standard Mortgage Clause.

The Court of Appeal clarified that:

1. First, the insurer must actually make a payment to the mortgagee for its loss. This condition was satisfied when the insurance company paid the bank $97,143.97.

2.  Second, the insurer must establish a claim that it has no liability to the insured mortgagor. In other words, before the insurance company could exercise the right of subrogation under the standard mortgage clause, it had to prove that the Pinders had vitiated coverage under the policy.  This was an issue that would require a trial and so could not be addressed on the insurance company’s summary judgment motion.

Accordingly, the Court held that the issue of whether the insurance company had a right of subrogation under the Standard Mortgage Clause would have to wait until a resolution of the Pinder’s coverage action. The Court ordered that the two actions be tried together.

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