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

A recent 9th Circuit Court of Appeals case included favorable holdings for subrogating carriers on the types of damages recoverable in maritime cases. The case, Oswalt v. Resolute Industries, Inc., 2:08-cv-01600-MJP (June 16, 2011), stemmed from a fire on a vessel that originated at a heater that was being repaired by Resolute Industries. The vessel owner and its subrogating carrier sued Resolute, who in turn filed a third party complaint against the heater manufacturer, Webasto Products. On appeal, the 9th Circuit upheld a jury verdict against Resolute for breach of the implied warranty of workmanlike performance, and likewise reversed summary judgment dismissal of Resolute’s product liability claim against Webasto.

Perhaps the most notable aspect of the Oswalt decision, however, was the Court’s treatment of the plaintiffs’ damages claims. First, the owner claimed that since he could not continue to use his vessel as a second home when he traveled to Oakland while working as a flight attendant, that he was entitled to loss of use damages (i.e. hotel costs). Although Resolute cited longstanding case law holding that loss of use damages were not recoverable for “pleasure crafts,” the Court rejected this argument, stating that the owner was not claiming lost “recreational” use, and that subject hotel costs were “both business-related and entirely nonspeculative.” Secondly, the subrogating carrier claimed that it was entitled to reimbursement of the cost of the marine surveyor it hired following the fire. The Court held that even though the insured did not participate in hiring the surveyor, and even though this cost was not on the subrogation receipt, that the subrogating carrier was still entitled to recover this aspect of its damages.

In summary, the 9th Circuit allowed the plaintiffs to recover their claims for loss of use and the surveyor’s fees stemming from the vessel fire. The damages holdings of the Oswalt case offer a reminder that subrogating carriers may be able to successfully recover diverse types of damages in the maritime context.
 

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In March, we discussed the importance of pleading common law duties separate and distinct from a builder’s contractual duties in order to preserve tort-based construction defect actions under Michigan law. In its opinion released June 6, 2011, the Michigan Supreme Court recently reinforced but fine-tuned this advice in Loweke v. Ann Arbor Ceiling & Partition Co., L.L.C., 2011 WL 2184294 (Mich. 2011).

The court recognized that under Fultz v. Union Commerce & Assocs., 470 Mich. 460 (2004), Michigan courts had mistakenly created a form of tort immunity against claims raised by noncontracting third parties. This immunity has grossly limited recoveries in both residential and commercial claims, because the policyholder typically contracts with only one entity, either the builder or general contractor, but the subcontracting tortfeasor has been previously ruled by trial courts to be immune due to lack of privity with the homeowner. The Supreme Court commented that Michigan courts had been allowing contract terms to obscure the inquiry as to whether a contracting defendant owed a noncontracting third party any legal duty. Rather, the court explained, any duty owed should be discerned “without regard to the obligations contained within the contract.” The focus of the inquiry is not whether a defendant’s conduct was separate and distinct from the defendant’s contractual obligations but whether a defendant owes any duty at all to a particular plaintiff.

While Loweke will be greeted with sighs of relief by those seeking to advance construction defect claims, the “separate and distinct” analysis is not dead letter. The failure to plead a duty independent of a contractor’s obligations will limit recovery to contractual avenues, to which third parties cannot generally avail themselves. Evaluation of what duties may exist relative the damage suffered, and careful crafting of the Complaint, is critical.

This facet of Michigan law has been dynamic and Cozen O’Connor will keep a watchful eye open for the latest changes.

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A fire sprinkler system is supposed to suppress fires. But, in August 2009, a fire sprinkler system in an apartment complex in Truckee, California did just the opposite. The fire began as a grease cooking fire. Then, a fire sprinkler system with a reported 71.2% concentration of glycerin antifreeze deployed during the fire. The resulting effect was an extended fire and explosion in which a serious injury and a fatality occurred.

Following the Truckee incident, the National Fire Protection Association (NFPA) initiated a research project in conjunction with the Fire Protection Research Foundation. The NFPA's investigation showed that there was a possibility of flash fires associated with various concentrations of antifreeze solution used in antifreeze fire sprinkler systems. Basically, if the antifreeze solution had too much of the antifreeze chemical, then the antifreeze solution could spread a fire, not suppress it. So, in July 2010 the NFPA issued a safety alert providing that residential anti-freeze systems should be drained and replaced with water. Then, in August 2010, NFPA Standards Council issued three Temporary Interim Amendments (TIAs) that, in effect, would ban of the use of anti-freeze systems in residential new construction. The Truckee incident, and the resulting research and NFPA responses, put the future viability of anti-freeze fire sprinkler systems in serious question.

Then, as part of its meeting on February 28-March 1, 2011, the NFPA Standards Council reviewed and issued (over an appeal by the Massachusetts Department of Fire Services) three new TIAs that would impact NFPA 13, Standard for the Installation of Sprinkler Systems, NFPA 13D, Standard for the Installation of Sprinkler System in One- and Two- Family Dwellings and Manufactured Homes, and NFPA 13R, Standard for the Installation of Sprinkler Systems in Residential Occupancies up to and Including Four Stories in Height. Under the new TIAs, antifreeze systems can be installed as long as the antifreeze solution is factory produced and meets certain maximum concentrations of antifreeze chemical. The new antifreeze sprinkler systems would also require special testing and verification that such requirements are met. In addition, to deal with existing antifreeze systems, a TIA was issued for NFPA 25, Standard for the Inspection, Testing and Maintenance of Water-Based Fire Protection Systems, that would require annual testing and certification that the proper type and concentration of antifreeze solution was in an existing system.

Based on the 2011 TIAs, NFPA issued an updated NFPA Alert regarding antifreeze in new and existing fire sprinkler systems. In the updated Alert, NFPA summarizes the new TIAs and the impact on new and existing fire sprinkler systems. The NFPA also recommended in the April 2011 Alert several other options for the design of fire sprinklers to avoid the effects of freezing conditions, including the placement of sprinklers in heated areas and using dry or preaction systems instead of antifreeze systems. NFPA will be having online presentations about the new TIAs on June 28, July 7 and July 19, 2011.

How the Truckee incident, the new TIAs, and the additional testing will impact the fate of antifreeze fire sprinkler systems still remains to be seen. However, for the subrogation professional going forward, the existence of an antifreeze sprinkler system should now prompt additional questions about the special testing and certification required for these type of fire sprinkler systems and the potential liabilities created by such testing, or lack thereof.
 

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The Washington Court of Appeals recently ruled that a seller may be the sole party held strictly liable for a manufacturing defect if the product is sold under the seller’s brand or trade name. In 2007, Monika Johnson was riding in downtown Seattle when the carbon fiber fork of her bicycle (which attaches the frame to the wheel) sheared, causing the fork and wheel to become disconnected from the bicycle (and an accident that seriously injured Ms. Johnson). The bicycle was purchased at REI and sold under REI’s brand name, Novara. However, the actual carbon fiber fork that failed was manufactured by another entity, Aprebic Industry Company (the fork did have the Novara brand name on it as well). Ms. Johnson filed a lawsuit that named only REI as a defendant.

REI attempted to shift blame to Aprebic by arguing in a summary judgment motion that jurors should be able to apportion fault between the two companies. The trial court disagreed, and ruled that while REI could still pursue Aprebic (through a third-party complaint) in a severed trial, the jury would not be allowed to attribute fault to anyone other than REI. In Johnson v. Recreational Equipment, Inc. (REI), the Washington Court of Appeals upheld the trial court’s ruling. If jurors were allowed to allocate fault, the Court reasoned, the manufacturer would “necessarily be 100 percent responsible for the defectively manufactured product” and “the product seller would avoid all such liability.” Since Washington’s Product Liability Act (WPLA) explicitly allows for a product seller to be held liable as a manufacturer for defects in the seller’s branded products, the Court concluded it would undermine the WPLA to allow apportionment of fault.

The Johnson case reaffirms that subrogating carriers may have multiple options when pursuing a product defect claim in Washington. In the case of a defect involving a seller’s branded product, the carrier may consider pursuing the manufacturer, the seller, or both.

 

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On May 26, 2011, the Supreme Court of Arkansas delivered an opinion on spoliation in a case that may be of interest to subrogation professionals. The Court clarified the law of spoliation in Arkansas and held that a finding of bad faith is not required for a spoliator to receive an adverse jury instruction.

The case involved a fire that occurred in the office space of the subrogating carrier’s insured. A painting contractor left a halogen light on in an area where lacquer had recently been applied to wall paneling. The fire investigators retained by the subrogating carrier determined that the fire was caused by the ignition of either vapors from the lacquer or the wood paneling by the heat from the halogen lamp. The halogen lamp and a receptacle were initially retained by the experts for future examination. Seven months after the loss, however, the evidence was discarded, which had been authorized by the carrier.

The contractor’s motion to dismiss the case on the basis of the carrier’s destruction of the evidence was denied, but the trial court granted the request for an adverse jury instruction on spoliation. Arkansas Model Instruction 106 was read to the jury at the conclusion of the evidence:

"If you find that a party intentionally destroyed the halogen light and electrical receptacles with knowledge that they might be material to a potential claim, you may draw the inference that an examination of them would have been unfavorable to plaintiff’s claim. When I use the term material, I mean evidence that would be a substantial factor in evaluating the merit of a claim or defense in this case."

The jury returned a verdict in favor of the painting contractor.

On appeal, the subrogating carrier argued that the spoliation instruction was improper because there was no finding of bad faith. The carrier relied on a federal appellate court (applying Arkansas law) that previously held that a finding of “an intent to destroy the evidence for the purpose of obstructing or suppressing the truth is required.” Stevenson v. Union Pacific R.R. Co., 354 F.3d 739, 747 (8th Cir. 2004). In declining to adopt the Eighth Circuit’s standard, the Arkansas Supreme Court held that “a circuit court is not required to make a specific finding of bad faith on the part of the spoliator prior to instructing the jury with AMI 106.”

This decision underscores the importance of having safeguards in place to ensure that evidence is not prematurely discarded. Until all potential avenues for a recovery are explored and foreclosed, a carrier should err on the side of keeping evidence that supports the claims and defenses of a case. If evidence is discarded, regardless of the motive, an adverse jury instruction can strike a damaging blow to a subrogation case. As the carrier learned here, what had been a promising $300,000 negligence claim against the painting contractor ended up being tossed in the dumpster along with the evidence.
 

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