Discovery of Initial Claims Investigation Documents

A recent opinion out of the United States District Court for the Eastern District of Pennsylvania illustrates the ongoing and vexing problem of determining whether documents created during an insurer’s early claims investigation are protected from disclosure in subsequent litigation under an attorney-client or work-product privilege.

In Henriquez-Disla v. Allstate Prop. and Cas. Ins. Co., 2014 WL 2217808 (E.D.Pa. May 29, 2014), a homeowner filed an insurance claim following an alleged theft at the home. The insurer conducted a preliminary coverage and subrogation investigation and ultimately retained counsel within one month of the loss. Counsel later conducted an examination under oath of the insured. The claim was ultimately denied when the insurer determined that the claim was fraudulent.

In the ensuing “bad faith” lawsuit brought by the insured against the insurer, the insured sought production of claims log entries, emails and other documents that included communications with counsel before suit was filed as well as materials relating to the insurer’s subrogation investigation including a cause and origin report (interestingly, the court described the cause and origin report as having been commissioned as part of the subrogation investigation and not as part of the coverage review). The insurer resisted producing these materials and the homeowner brought a motion to compel discovery.

The court ordered production of the early communications with counsel that collected factual information only, and did not contain legal advice, finding that the “collection of information for the EUO’s, are part of the ordinary business function of claims investigation and therefore fall outside the attorney-client privilege.” With respect to the insurer’s materials relating to subrogation, including the cause and origin report, the court likewise ordered that these be produced, finding that such information was part of the “ordinary business functions in claims investigation” and was not protected by a work-product privilege.

This case demonstrates that while early retention of counsel is an important factor considered by the courts in determining the applicability of attorney-client and work-product privileges, it is not the only factor, and that if ordinary claims functions are assigned to counsel, the factual information collected by counsel may ultimately be discoverable. Similarly, subrogation materials collected in the ordinary course of claims investigation, and not in anticipation of litigation, are likewise at risk of being discoverable.

Effectively Connecting With A Jury In A Subrogation Trial

Consider this hypothetical:

It is 2 a.m. on a Monday morning. John and Jill Smith are fast asleep in the master bedroom while their kids are asleep down the hall. John awakes to the noisy smoke detector and the smell of smoke coming from their master bathroom. John goes to the bathroom to see what is happening. He opens the bathroom door and sees flames raging from the ceiling fan. John yells to his wife to gather the kids and run to safety while he helplessly tries extinguishing the fire with a fire extinguisher. The fire grows beyond John’s control. John gives up the fight then joins his family in the front yard. John and his family watch their home burn and watch as countless family heirlooms and memories are taken down by the flames.

Anne Amazing from Anyday Insurance arrives at the scene after the fire. Anne ensures the Smiths that they will have a warm place to stay while their home is rebuilt. While the sentimental value of the items cannot be replaced, Anne Amazing provides compensation to the Smiths so that they can begin rebuilding their life. While the wounds still exist, the Smiths can begin to live again.

Forensic investigation determines that the fire was started by a defective Fireprone Fan. Fireprone refuses to take responsibility for their actions and chooses to drag the Smiths and Anyday through contentious litigation. The cause of the loss is clear. The scope of the damages is clear. Regardless, Fireprone has taken Anyday to the eve of trial. Anyday Insurance contacts their subrogation counsel to discuss trial authority. The subrogation specialist Rachel Recovery is nervous. She informs counsel that her superiors are afraid of the jury bias against insurance companies. Even though Anyday has a very strong case, Rachel’s supervisor advised her to accept Fireprone Fans offer for 50% of the claim. Believing in her case but needing reassurance, Rachel asks the following question to subrogation counsel: Should I take the money or can you win this trial?

Many studies show that jurors tend to be biased against insurance companies. In fact, everyday experience confirms that this bias exists. However, juror bias should not prevent you from receiving a good result at trial. In fact, you can counteract juror bias if you conduct an effective voir dire. During voir dire, you must not only ask the right questions, but you must listen to every answer carefully. Even subtle answers that are unrelated to the topic of insurance can show that a juror would be biased against your client’s cause.

For example, an effective question that one can ask a juror to assess their potential bias is:

Q:  Do you think just because someone is wealthy that they do not deserve compensation if they have been wronged?

Depending on their answer, you may want to think about eliminating them from your jury.

Next, you must persuasively present your case. This is easier than you think. Many defense attorneys, will take complicated and emotional issues such as the insured’s lost belongings and reduce those items to mere numbers. This effectively takes the emotional factor out of the equation and strictly focuses on the logistics. Plaintiff’s counsel in a subrogation case cannot allow the case to be reduced to a matter of dollars and cents. Instead, I recommend focusing on what your insureds lost and the actions that your clients took to compensate them for their loss. I challenge you to remember your first fire inspection. Remember the devastation that family felt when they lost their home and all of their things. That is what your case is about.

Consider the hypothetical above. If that case went to trial, I would focus on: (1) how helpless John and Jill Smith felt watching their home burn; and (2) how much better they felt after Anyday compensated them for their loss and helped them begin to rebuild their future. When the Smith’s watched their home burn down and felt like they had nothing left, Anyday came in and provided them with just compensation.

Ask the jurors, where would the Smith’s be if it were not for Anyday? The Smith’s life was devastated by a defective fan that was supposed to cool and clear steam from their bathroom, not burn their house down. Destructive testing conducted after the Smith’s home burned down showed that the defective wiring in the fan turned it into a dangerous weapon. When Fireprone’s product burned down the Smith home, Anyday Insurance was there to rebuild while Fireprone was there to litigate. Without Anyday, the Smiths would have never had the opportunity to start again and rebuild their lives. The Smith’s would have been without a home and they would have never received compensation for their lost belongings.

Without Anyday, the Smiths would have been left to seek help from Fireprone. Without insurance companies, the public would be left to fend for themselves against these dangerous products and the companies who manufacture them.

When setting up your case for the jury, make it clear that you are trying to recover from the responsible party for the harm they or their product caused. In the hypothetical, Anyday compensated the Smith’s for their loss and now seeks to make Fireprone answers for their mistakes. This is why potential bias should not be enough to scare a subrogation carrier out of taking a case to trial. Subrogation carriers are fixers. They fix what has been broken and then make the breakers take responsibility for their actions. Subrogation investigations have discovered product defects that were harming the public. A product defect gone unnoticed is another building about to burn and another injury waiting to happen. Avoid the bias by telling the jury what your client really wants: To make those responsible take responsibility for their actions. Make sure that each juror is open to listening to your client’s story. Further, make sure that you tell the actual story. I reiterate, embrace the emotional! Do not let your client’s case be diminished to dollars and cents. You should never be afraid of taking your case to trial if you use these methods.

Dispute Resolution Clauses (UK)

The New Law Journal is likely to soon feature the following article by Rob Kay discussing the very recent English case of Emirates Trading Agency LLC v. Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm).  The decision held that a clause which required parties to have friendly discussions prior to resorting to arbitration - a clause which is fairly common in contracts between Asian parties - was an enforceable condition precedent to the right to invoke arbitration. The case shows the willingness of the Court to apply decisions in support of enforceability (as in recent Australian, Singaporean and ICSID decisions).

The Facts

The applicant, ETA, agreed to purchase iron ore from the respondent, PMEPL. However, ETA failed to lift all of the iron ore expected and PMEPL raised a debit note in respect of liquidated damages pursuant to the terms of their contract. During the next shipment year ETA failed to lift any iron ore and so PMEPL served notice of termination claiming US$ 45m. They stated that if the claim was not paid within 14 days they reserved the right to refer the claim to arbitration without further notice. The claim was not settled and, in June 2010, the claim was referred to arbitration.

The Contract provided:

“In case of any dispute or claim arising out of or in connection with [this contract] … the Parties shall first seek to resolve the dispute or claim by friendly discussion. Any party may notify the other Party of its desire to enter into consultation to resolve a dispute or claim. If no solution can be arrived at in between the Parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration.

All disputes arising out of or in connection with [the contract] shall be finally resolved by arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce ("ICC"). The place of arbitration shall be in London ("UK")….

Discussions Between the Parties

In December 2009 PMEPL terminated the contract. After an exchange of communications a meeting between the parties took place in Goa (although there had been previous meetings in Dubai and Goa these were before the termination). In the meeting they discussed possibilities to avoid arbitration, but no solution was found. Another (unsuccessful) meeting occurred in March whereupon PMEPL agreed to wait for a couple of months after which they would file for arbitration.

The Arguments

ETA argued that the disputes clause required a condition precedent to be satisfied before the arbitrators would have jurisdiction to hear and determine the claim and that such condition precedent was not satisfied with the result that the arbitral tribunal lacked jurisdiction. ETA asserted that the condition precedent was "a requirement to engage in time limited negotiations" and the requirement was not fulfilled because there had not been a continuous period of 4 weeks to resolve the claims.

PMEPL argued that the suggested condition precedent was unenforceable because it was a mere agreement to negotiate, but that if it were enforceable then it had been satisfied and therefore the arbitrators had jurisdiction.

The Decision

The Judge, despite being directed to several (first instance) decisions tending towards unenforceability, found them unpersuasive and declined to follow them.

The Judge took the view that:
(i) The use of the word "shall" in the dispute resolution clause indicated that the obligation was mandatory and that friendly discussions were a condition precedent to the right to refer a claim to arbitration
(ii) The use of the word "may", in distinction from the word "shall" in the first part of the clause, indicated that this was not a mandatory obligation
(iii) The meaning reasonably to be attributed to "for a continuous period of 4 (four) weeks" was not only for friendly discussions to resolve a dispute but also for a period of time to elapse before which arbitration may be invoked: the discussions may last for a period of 4 weeks but if no solution was achieved a party may commence arbitration; or the discussions might last for less than 4 weeks in which case a party must wait for a period of 4 continuous weeks to elapse before arbitration may be commenced.
(iv) There was obvious commercial sense for the dispute resolution clause: arbitration can be expensive and time consuming, so it was far better to try to avoid it by friendly discussions.

As a result the Judge found:

(a) The agreement was not incomplete - no term was missing; and

(b) the agreement was not uncertain - an obligation to seek to resolve a dispute by friendly discussions in good faith had an identifiable standard (fair, honest and genuine discussions aimed at resolving the dispute). The difficulty of proving a breach should not be confused with a suggestion that the clause lacked certainty; the parties had voluntarily accepted the restriction in the contract (and the court should be expected to enforce obligations which (a) have been freely undertaken; and (b) had the objective of avoiding a (likely) expensive and time consuming arbitration).

However he found that there had been "friendly discussions" at the meetings and they had lasted for more than 4 continuous weeks. As a result the arbitrators had jurisdiction to decide the dispute because the condition precedent to arbitration, although enforceable, had been satisfied.






Subrogation and Strata Corporations in British Columbia: What You Need to Know

In British Columbia, condominiums are referred to as “strata corporations”. When a loss occurs at a strata corporation, there could be potential for subrogation. However, even though the wrongdoer may be known to the strata corporation, there are limitations on commencing an action. It is important to be aware of these limitations as proceeding otherwise could result in negative costs consequences for the insurer.

In British Columbia, prior to commencing an action, sections 171 and 172 of the Strata Property Act, SBC 1998, c 43, require a strata corporation to obtain a special resolution passed by a ¾ vote at an annual or special general meeting authorizing litigation. As well, written consent of unit owners must be obtained. Obtaining the appropriate authorizations will take a good amount of time and should be done well in advance of British Columbia’s general two-year limitation period. Therefore, should a loss occur at a strata corporation, it is best to advise a lawyer of the loss as soon as possible.

In addition, generally an insurer cannot proceed with subrogation against those named on the strata corporation policy. It is important to note that section 155 of the Strata Property Act, SBC 1998, c 43, deems “persons who normally occupy the strata lots” as named insured’s on the policy. Therefore, a tenant renting a unit from a strata unit owner could reasonably be considered to be “a person who normally occupies the strata lot”. That being the case, an insurer may not be able to pursue subrogation against a rental tenant even if the tenant caused the loss.

Illinois Tightens Settlement Procedures

We have all experienced the frustration of having negotiated an acceptable settlement recovery after years of loss investigation and discovery, only to have the settling defendant drag its heels in terms of proffering a release and/or tendering the settlement proceeds. That frustration will be felt less frequently in Illinois due to new legislation.

Effective at the beginning of 2014, Illinois Code of Civil Procedure sec. 735 ILCS 5/2-2301 mandates that a settling defendant must tender to the plaintiff a release within 14 days of written confirmation of the settlement (735 ILCS 5/2-2301(a)). The settling defendant must pay all sums due to the plaintiff within 30 days of tender by the plaintiff of the executed release and all applicable documents contemplated by the statute that may be necessary (735 ILCS 5/2-2301(d)): a court order approving the settlement if court approval of the settlement is required (735 ILCS 5/2-2301(b)) and documents regarding the release or resolution of liens (735 ILCS 5/2-2301(c)).

If, following a hearing, the court finds that timely payment has not been made, 735 ILCS 5/2-2301(e) mandates that judgment shall be entered against the non-compliant defendant for the amount set forth in the executed release, plus costs incurred in obtaining the judgment, and interest at the rate specified under 735 ILCS 5/2-1303 (currently 9% per annum) from the date plaintiff tendered the executed release and all other applicable documents.

The new procedure applies to all personal injury, property damage, wrongful death and tort actions, except as otherwise agreed to by the parties (735 ILCS 5/2-2301(g)). It also does not apply to the State of Illinois; any State agency, board or commission; any State officer or employee sued in his or her official capacity; any person or entity that is being represented by the Attorney General and being provided indemnification by the State pursuant to the State Employee Indemnification Act; any municipality or unit of local government; or any class action lawsuits.

Dirty Business - The Effect on Subrogation of the Total Pollution Exclusion in a Liability Policy

Since the mid-1980’s, virtually all Commercial General Liability (CGL) policies have contained some form of a total (or absolute) pollution exclusion. The 1988 ISO total pollution exclusion endorsement provides that there is no liability coverage for “property damage…which would not have occurred in whole or in part but for the…discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.” “Pollutants” are generally defined as “any solid, liquid, gaseous or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste.”

Not surprisingly, there has been significant litigation about the meaning of the term “pollutant” and whether the total pollution exclusion applies to all damage caused by a “pollutant” or only damage created by “traditional environmental pollution.” See, e.g. Meridian Mutual Insurance Co. v. Kellman, 197 F.3d 1178 (6th Cir. 1999) (discussing the split of authority in the courts). In Meridian Mutual Insurance Co., for example, the issue was whether there was liability coverage where a school teacher allegedly became sickened from fumes from a primer/sealer being used by a contractor to seal a classroom floor in her school. Applying Michigan law, the court determined that the total pollution exclusion did not extend to injuries caused by “pollutants” that were confined to the “general area of their intended use.” However, the court surveyed the opinions of other courts finding, more broadly, that all damages caused by “pollutants” were excluded from coverage under the total pollution exclusion.

Most recently, the total pollution exclusion was examined in the context of a diesel fuel spill within the confines of a high-rise office building in San Juan, Puerto Rico. Zurich American Insurance Co., et al. v. Lord Electric, et al., Doc. No. 3:09-cv-01111 (D.P.R. December 9, 2013). In that case, the building’s emergency power generation system, fed by diesel fuel, and a diesel fuel spill alarm system, were alleged to have malfunctioned, causing and permitting a spill of diesel fuel that was confined to the building. Tenants and their subrogating carriers filed suit against several building contractors to recover for their property damaged by the diesel fuel spill and extra expense incurred in moving to alternate locations during the resultant clean-up by the building owner. One defendant’s liability carrier disclaimed coverage for the plaintiffs’ claims, asserting the total pollution exclusion.

After surveying the split in the law, the federal district court in Zurich American Ins. Co. relied upon Puerto Rico law to decide that the total pollution exclusion did not apply to all damages resulting from a “pollutant” (the court assumed for the purposes of its analysis, without deciding the issue, that diesel fuel was a “pollutant” within the meaning of the exclusion). Instead, the court determined that the exclusion did not apply to a diesel fuel spill confined to the interior of the building and resulting from a malfunction of the operation of normal building systems. This, the court held, did not constitute “environmental pollution… as this concept is commonly understood,” Id. at page 14, even though the incident was deemed an “environmental emergency” by Puerto Rican authorities. Id.

In summary, in the context of subrogation actions seeking recovery for damages sustained by “pollutants,” one may be met with disclaimers of liability coverage under the total pollution exclusion. The applicability of the total pollution exclusion to those claimed damages will turn on a fact-specific analysis that begins with the pleadings, and the application of state law. The courts have split on these issues, and there is no “one size fits all” answer to the question about whether the claimed subrogation damages will, or will not, be covered by a defendant’s liability policy.

What Role Does The Insured's Deductible Play In Subrogation?

Many states require that subrogation carriers demand the insured’s deductible as part of a pre-suit subrogation demand. For example, in California the Insurance Code requires that subrogating carriers include the insured’s deductible in any demand to a third party tortfeasor, and share subrogation recoveries on a proportionate basis with the insured, unless the insured already recovered the whole deductible amount.  California Code of Regulations, Title 10, Chapter 5, Subchapter 7.5Section 2695.7(q) states in part:

“Every insurer that makes a subrogation demand shall include in every demand the first party claimant's deductible. Every insurer shall share subrogation recoveries on a proportionate basis with the first party claimant, unless the first party claimant has otherwise recovered the whole deductible amount. No insurer shall deduct legal or other expenses from the recovery of the deductible unless the insurer has retained an outside attorney or collection agency to collect that recovery.”

However, case law holds that a subrogating insurer does not have standing to include the deductible as part of the insurer’s claimed damages in suit. Pacific Gas & Electric Co. v Superior Court (2006) 144 Cal.App.4th 19, 26-27. Therefore, an insurer must demand it pre-suit, but lacks standing to recover it post-suit.  If a carrier encounters this problem in litigation, a simple solution may be to intervene the insured into the lawsuit to obtain standing.  However, you must be mindful of whether the statute of limitations has passed.  In many states, an insurance company's intervention relates back to the date of the original filed complaint by the insured. In California, as long as the original action is timely filed, a complaint in intervention based on the right of subrogation is timely, even if filed after the expiration of the statute of limitations. County of San Diego v. Sanfax Corp. (1977) 19 Cal.3d 862, Harrison v. Englebrick (1967) 254 Cal.App.2d 871, 874-875.  However, an insured's intervention might not relate back to the date of the original filed complaint by the insurance carrier.  If the statute of limitations poses an issue, and the insured's deductible is significant, it may be wise to enter into a joint prosecution agreement with the insured at the commencement of litigation in order to ensure the deductible is recoverable in litigation. Again, each state has their own rules regarding the insured’s deductible, so be certain to consult with counsel to better understand the rules in the state where the loss occurred.


Science Fiction as Reality: The Internet of Things and its Impact on Subrogation

“Hello Dave.”

In 1968, director Stanley Kubrick introduced the world to an interactive, albeit maniacal, talking computer named Hal in “2001: A Space Odyssey.”

Fast forward to 2013, and not only do such computers generally exist, they are now prevalent in everyday items, including in the iPhone. With “Hello, Siri,” science fiction has become reality.

Looking through the wormhole, and taking the temperature of industry insiders, The Internet of Things is poised to become the next big universal technological advance.

Click here to read Howard Maycon's full article on the impact of the Internet of Things on subrogation, published at Property Casualty 360.

Properly Naming Doe Defendants Avoids Statute of Limitations Defenses

What are “Doe” amendments to a complaint? How can Doe amendments avoid statute of limitation defenses? What is the effect of serving one defendant out of many before the statute of limitations runs? Those questions and more are reviewed in Powers v. W.B. Mobile Servs., Inc. 311 P.2d 58, 2013 WL 5645561 (2013), Division Two of The Washington Court of Appeals.

For further details, we present this Cozen O'Connor Subrogation Alert: "John Doe Saves the Day in Washington: Avoiding a Statue of Limitations Defense by Properly Naming ‘Doe’ Defendants,” by Sean V. Walton. 

Click here for the full Alert

Determining Defendant's Armed Forces Status Prior to Default Judgment

When a defendant does not answer a complaint, the typical procedure is to move for a default judgment. You should be aware that pursuant to Federal law, the court must determine whether the defendant is a member of the armed forces before entering default judgment. Pursuant to The Servicemembers Civil Relief Act (SCRA), the court will require the party moving for the default judgment to submit an affidavit stating:

  • whether or not the defendant is in military service and showing necessary facts to support the affidavit; or
  • that the plaintiff is unable to determine whether or not the defendant is in military service.

In order to comply with this requirement, you should check the defendant’s status through an official request. If you know the defendant’s social security number or date of birth you can make an official request regarding military status online at There is no charge for this. Note, you will likely get a message from your browser stating that there is a problem with the website’s security certificate. This is simply because most web browsers do not come with Department of Defense security certificates installed. You can install the security certificate by following the instructions at this link

If you do not have the Defendant’s SSN or DOB, you may send written requests with the information you do have, to the following addresses:

Army World Wide Locator Service
Enlisted Records and Evaluation Center
8899 East 56th Street
Indianapolis, IN 46249-5031

Bureau of Naval Personnel
5720 Integrity Drive
Millington, TN 38055-3120

Air Force Personnel Center
550 C Street West, Suite 50
Randolph Air Force Base, TX 78150-4752

Commandant of The Marine Corps
Headquarters, U.S. Marine Corps (MMSB10)
2008 Elliott Road, Suite 201
Quantico, VA 22134-5030

The charge for each SCRA certificate is $5.20. Checks should be made payable to "Treasurer of the United States". Alternatively, you can pay a third party to handle the process for you. For example, is a commonly used resource.

Under the SCRA, if the Defendant is in the military, a court may not enter a default judgment without appointing an attorney for him or her. The SCRA applies to every United States territory and state and to all civil and administrative proceedings in federal, state or municipal venues. The SCRA does not apply to criminal proceedings. The complete text of the SCRA can be found at:

Ten Questions to Ask in Subrogation Cases Involving Leases, Rental Agreements and Other Contracts


For many years sage advice from legal counsel, consumer advocates, and friends has been to “get it in writing.” In subrogation cases, what is “in writing” can have a substantial effect on the viability of recovery. In many subrogation cases, the recovery specialist is confronted with one or more “writings,” including a lease, rental agreement, contract, or other type of agreement, containing various provisions which may affect the right of the insurer to pursue subrogation against the persons responsible for causing the loss. Discussed below are ten questions/issues the recovery specialist and subrogation attorney should be aware of in reviewing a new loss involving one or more agreements entered into by the insured.

1. Who are the Parties to the Agreement?
It is important to identify the parties and their involvement in any written agreement. For example, although an agreement between the insured and the third party may contain various provisions which might limit or prohibit recovery against the parties to the agreement, it may be that one or more of the parties responsible for causing the loss are not parties to the agreement. In particular, this issue could arise where a tenant has subleased the property or permitted a third party to temporarily or occupy or utilize a portion of the property. Issues can also occur in an agreement between an insured and a contractor, which might contain certain provisions limiting or waiving liability against the contractor. However, if subcontractors have been involved in performing the work which caused the loss, the subcontractors or other third parties’ responsibility for causing the loss may be unaffected by limiting provisions in the agreement between the insured and the contractor.

2. Is the Responsible Party Named as an Additional Insured?
In many instances, a lease or other agreement may require one of the parties to name other parties to the agreement as additional insureds under their insurance policy. If the agreement requires another party to name your insured as an additional insured, then there may be successful avenues of recovery/contribution from the third parties’ insurer. Alternatively, if your insured is required to name a potential defendant as an additional insured, the anti-subrogation rule may prevent recovery against that party.

3. Does the Agreement Contain a Waiver of Subrogation Clause?
In many agreements and leases, some type of “waiver of subrogation” clause is included. While, under many circumstances, the waiver of subrogation clause may prevent subrogation against the parties to the agreement, there may be circumstances where the waiver may not apply. For example, if the agreement or lease was terminated prior to the loss, then the waiver provisions may not be applicable. Additionally, if a violation of law, gross negligence, or intentional act was committed, the responsible party may not be afforded the protection of the waiver.
Also, the specific language of the waiver of subrogation clause should be examined carefully to determine whether the provisions apply to the circumstances of the loss, and whether there are any conditions that the parties were required to perform as a pre-requisite to the implementation of the waiver provisions.


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New York Court Holds Work of Insurer's Expert Prior to Fire Origin and Cause Determination Was Not Work-Product Protected

In New York Schools Insurance Reciprocal v. Milburn Sales Co., Inc., 963 N.Y.S. 2d 152, 105 A.D.3d 716 (2nd Dep't 2013), the New York Appellate Division, Second Department, narrowed the protection afforded by the work-product doctrine to investigations performed by independently retained experts. The Second Department reversed the trial court’s decision and held that work performed and documents prepared by an insurer's retained fire investigator prior to determination of the cause of a fire, was not immune from discovery as "work-product." The Court required production of the documents of the fire investigator to the adversary in litigation.

The facts of the loss are as follows: On February 18, 2010, a fire broke out at South Bay Elementary School in West Babylon, New York. The fire resulted in extensive damage to the school building. On the day of the fire, Milburn Sales Co. Inc. (“Milburn”) was performing work in the school gymnasium. Milburn's work included painting and sanding. Ultimately, following investigation, it was determined by the local fire authorities and documented in the Fire Marshal's report that the fire was the result of improper disposal of materials known to spontaneously combust. The improperly discarded materials were used by Milburn in the course of its work in the gymnasium on the day of the fire.

The school's insurer, New York Schools Insurance Reciprocal ("NYSIR"), retained the services of an independent fire investigation company, Russo Consultants (“Russo”), to investigate the cause of the fire. In the week following the fire, a series of three scene inspections were performed by both Russo and the local fire authorities. The on-scene investigations were performed the night of the fire, the day after the fire, and the fourth day following the fire. Russo had three investigators present during each inspection. Six days following the fire, NYSIR, through counsel, sent a notice letter to Milburn and its insurer. The letter stated that the "exact cause" of the fire was under investigation, but that "preliminary investigation" revealed the fire was caused by improper disposal of painting supplies by employees of Milburn.

During the litigation of this matter, Milburn’s counsel issued Subpoenas to Russo ordering production of documentation prepared by the Russo employees during the week following the fire and requesting the three Russo employees provide deposition testimony. NYSIR moved to quash the subpoenas pursuant to CPLR 2304 to prevent the production of documents prepared by Russo and to prevent the deposition of the Russo employees. In its motion to quash, NYSIR argued that the work performed by the Russo employees was "prepared in anticipation of litigation" and thus, immune from discovery pursuant to the work-product rule. Milburn cross-moved to compel Russo to comply with the Subpoenas seeking production of documents and deposition testimony. The trial court granted NYSIR’s motion to quash and denied Milburn’s cross-motion with leave to renew in the event that further discovery in the action demonstrated that Milburn is entitled to such relief. The court found the materials sought to be work-product, and thus, immune from disclosure.

CPLR 3101 (a) is the rule that there should be full disclosure of all matters material and necessary in the prosecution or defense of an action. However, under CPLR 3101 (d) (2), materials prepared in anticipation of litigation or for trial may be obtained only upon a showing that the party seeking discovery has substantial need for the material and is unable to obtain the information without “undue hardship.” The burden of proving that a statement is privileged as material prepared solely in anticipation of litigation or trial is on the party opposing discovery. More particularly, the party asserting the privilege that the material sought through discovery was prepared in anticipation of litigation bears the burden of demonstrating that the material is immune from discovery and should be withheld.

Milburn appealed the trial court decision. The Appellate Division, Second Department agreed with Milburn and reversed the trial court's decision as to the documents and ordered their production. In deciding that the materials sought by Milburn were discoverable, the Court relied on two rationales. First, the Court found the timing of the Russo employees' investigation to be particularly pertinent to the question of whether their work was done "solely in anticipation of litigation." The Court noted that Russo's employees investigated the premises immediately after the fire, and they were present on the fire scene before any determination was made as to the cause of the fire. The Court held that "subrogation litigation could not have been anticipated until the cause of the fire had been ascertained." Id. at 155 (emphasis added). The Court further held that because subrogation litigation could not have been anticipated at that time, NYSIR could not meet the burden of demonstrating that the Russo employees' work and documentation was "prepared exclusively in anticipation of litigation." Id. at 154. The Court noted that NYSIR's notice letter six days after the fire acknowledged that the cause of the fire had yet to be determined.

The Court's second rationale for compelling production of the documentation focused upon the standard a litigant must meet to demonstrate that materials are not subject to discovery due to the work-product immunity. The Court noted that an attorney's Affirmation containing conclusory statements that the materials sought were prepared in anticipation of litigation, without more, is insufficient to establish that the materials were prepared exclusively for litigation. A party must articulate an "actual basis" or "specific reasoning" for the position that the materials were prepared in anticipation of litigation.

In subrogation, early and immediate investigation is essential and therefore, protection of the work of independently retained experts is also a necessity in a subrogation matter. In light of the Court’s ruling, subrogation professionals must be familiar with the ways to protect the expert's documents and guide the investigation, so as to avoid unnecessary disclosure to an adversary. Early retention of counsel, even prior to the cause and origin investigation, may avoid such disclosure.


"Because I Said So": Expert Opinions Derailed by Ipse Dixit Rulings


A challenge to an expert opinion based on ipse dixit grounds differs from many Daubert motions in that is does not contest the expert’s qualifications but instead solely attacks the expert’s opinion as conclusory. Since the Supreme Court’s decision in Daubert v. Merrell Dow Pharmaceuticals, Inc., lower federal court rulings reveal you must do more than just spend a lot of money on a well-credentialed expert and then rely on nothing more than a one-dimensional opinion as the basis of your case. To survive summary judgment and prevail at trial, plaintiffs must produce experts that adequately explain how they reached an opinion and how the evidence available in the case scientifically establishes liability. Without a thorough analysis of the evidence, courts have repeatedly stated that they are unwilling to simply take your expert at his word.

Recently, the United States District Court for the Middle District of Florida in Florida Insurance Guaranty Association v. National Presto Industries Inc., 6:2012-cv-00160 (July 19, 2013) granted summary judgment in a products liability case where the expert was found to be qualified but his opinion amounted to nothing more that ipse dixit (Latin for “he himself said it”). The case involved a fire that originated near or within a Presto deep fryer. Although the plaintiff's expert performed a valid scientific test on an exemplar deep fryer and offered a scientific opinion that the fryer at issue in the case must have failed as a result of the same conditions which created a fire in the exemplar, the expert did not provide any opinions about (or testing on) the bimetallic element on the subject fryer. The court stated:

  • [Plaintiff’s expert] nevertheless concludes that [the fryer] must have failed, but when pressed in deposition, he was unable to articulate any basis for this conclusion.
  • As such, his testimony amounts to nothing more than inadmissible ipse dixit, as the only connection between the conclusion and the existing data is the expert's own assertions.

The court then rejected plaintiff's additional arguments and attempts to cite other evidence. In an effort to overcome summary judgment, plaintiff pointed to the fact “(1) that there is evidence the Fryer was low on oil when the fire started--and the manual lacked sufficient warnings of the attendant dangers of low-oil levels, (2) the power cord became hot during use, and (3) that the Fryer was plugged-in at the time of the fire.”

Similarly, the United States District Court for the Southern District of New York in 405 Condo Associate LLC v. Greenwich Insurance Co. 2012 WL 6700225 (S.D.N.Y. December 26, 2012) granted the defendant insurance company’s motion to bar expert testimony on the basis that it was nothing more than ipse dixit. The case involved an issue of whether the damage to the subject property was caused by wind (and therefore covered by the insurance policy) or by rain (therefore not covered by insurance).

In 405 Condo, the defendant did not challenge the plaintiff expert’s qualifications. Instead, the defendant prevailed on its motion by challenging the reliability of plaintiff’s expert testimony. Although the expert opined “within a reasonable degree of engineering certainty that the roof and flashing were first damaged by wind, and that the water penetration and damage were subsequent to the wind damage,” the court held that the expert’s opinion failed to meet the reliability requirement of Rule 702. The expert based his opinion on a weather report taken at JFK airport — thirteen miles away from subject property and found that the elevated wind speeds resulted in damage to the roof flashing, allowing rainwater to enter the building.

The court found that plaintiff’s expert opinion was inadmissible because the expert report:

does not mention the type of material used in the flashing or attempt to approximate the wind speeds necessary to cause the flashing to peel back. This renders [the expert’s] testimony speculative. Second, [the plaintiff’s expert report] contains no methodology for differentiating wind damage caused by Hurricane Irene from prior damage or rain damage alone. Third, that [plaintiff’s expert] did not examine the roof in person until May 31, 2012 — eight months after the damage allegedly occurred and after repairs had been completed — calls into doubt the reliability of his testimony given the absence of a clear methodology or relevant data.

The Southern District of New York concluded by stating that there is “simply too great an analytical gap between the data and the opinion proffered.”

Both of these recent federal opinions are examples of courts’ growing unwillingness to take an expert at his word, no matter how overwhelming the independent evidence may be or how well-credentialed the expert. Tests on exemplars and the use of other analytics may be useful in establishing liability and convincing a jury to rule in your favor, but they will likely not be enough to carry you past dispositive motions. Experts must examine the evidence in the case and draw conclusions based on that evidence.

Determining Whether a Relative is a Resident Under a Homeowner's Policy

Most subrogation professionals have encountered a strong subrogation claim against a negligent third party who does not have his or her own liability coverage, but whose relative – most likely a parent --has a homeowner’s policy which may cover the individual’s liability. The key factor in determining whether the homeowner’s liability policy will apply is whether the negligent individual is considered a resident of the insured’s household. Certainly the most obvious example is someone’s son at college who accidentally starts a fire at a dorm room. Will the parent’s homeowners policy kick in and cover the son’s liability for the property damage to the dorm?

The key question to consider is whether the individual is considered a “resident” of the home. Unfortunately, most homeowners policies do not define “resident,” so it is often left to the state to figure out whether someone is considered a “resident.”

In an August 15, 2013 opinion, the Michigan Court of Appeals has helped clarify and simplify the factors to consider in determining whether a person qualifies as a resident. In Freemont Ins. Co. v. Martin, No. 310906, the Court, after examining past case law and the issue at hand, identified eight factors to help determine whether an individual is a “resident.” These factors are to be weighed with the others, and no one factor is conclusive and determinative. The factors to be considered are:

  • the subjective or declared intent of the individual to remain in the place he or she contends is his “domicile” or “household”, either permanently or for an indefinite/undetermined amount of time;
  • the formality or informality of the relationship between the individual and the members of the household;
  • whether the place the individual lives is in the same house, within the same curtilage or upon the same premises;
  • the existence of another place of lodging by the individual alleging residence or domicile;
  • the individual’s mailing address;
  • whether the individual maintains possessions at the insured’s home;
  • whether the insured’s address appears on the individual’s driver’s license and/or other documents;
  • whether a bedroom is maintained for the individual at the insured’s home; and
  • whether the individual is dependent on the insured for financial support or assistance.

The Court also made clear that in cases where the facts are undisputed, whether an individual qualifies as a resident will always be a legal question for the court. In the case of Freemont Ins. Co., the court determined that the individual was not considered a resident at the time of the incident. The individual had since moved back in with his parents, but at the time of the indent, he lived in an apartment with his girlfriend, and the court examined the factors listed above and concluded that he was not a resident at the time of the incident, therefore concluding that the parents’ homeowners policy did not cover their son’s liability for the incident. A copy of the five-page opinion is available here.  Although the facts of the Freemont Ins. Co. case did not support a finding of residency, the case is still a reminder that if you have a loss involving a tortfeasor who does not have liability insurance, be certain to evaluate whether he/she is a resident of a home where there could be liability coverage under a homeowner’s policy.


UK Post - Aviation Incidents and Subrogation: Ensuring the Recovery Can Take-Off

While there have been only a few major aircraft losses in the first half of 2013, well below the five year average, Cozen O’Connor’s London office has seen increasing claims concerning ground based aviation incidents in foreign jurisdictions including Morocco, Israel and Russia. Given the varying nature of the governing law in overseas jurisdictions, it is of some comfort that there is commonality over the application of International Air Transport Association (IATA) rules. However, local nuances and attitudes to litigation (including freedom of information) remain as some of the obstacles that need to be understood and overcome.

Notwithstanding a claim occurring in a foreign jurisdiction, it is more than likely that the third party is insured through the London market (and thus often resulting in English lawyers undertaking or overseeing the work). Naturally this can make the legal process easier, however in many foreign jurisdictions local lawyers will also need to be instructed, often to help get the matter off the ground. The need to undertake due diligence on appointed local counsel is paramount and while most, if not all, jurisdictions have airports, there are real discrepancies between local lawyers who are sufficiently familiar with aviation litigation and those that state they are. Further, many foreign jurisdictions do not permit work on a contingency basis and/or do not have a “loser pays regime”. As such, a confident indication on local counsel’s fees, where possible on a staged basis, needs to be provided to insurers. The old adage remains: there is no point throwing good money after bad.

One of the first actions after a loss is to obtain the local airport or aviation authority’s report. This can provide confirmation as to how causation and/or liability are likely to be viewed within the jurisdiction. That said, it is important to be aware that the reports are not always impartial, occasionally seeking to obfuscate the real issues on cause/liability. For example, in a Moroccan matter the investigating airport authority had not cleaned the jet pan, resulting in the insured’s aircraft being sprayed with rock and debris when another aircraft started its engines. The investigating airport authority then refused to disclose its report. After local counsel successfully obtain a court disclosure order, the report’s comments that the incident was “very strange” and “unusual” ultimately became helpful toward a determination of liability.

Another important step in a foreign aviation loss is to work with a local adjuster who can attend on the ground and speak the local language. Many that we use also have the advantage of being familiar with the engineering aspects of the incident; thus they can help not only adjust the loss but also appreciate the underlying liability issues that might arise following their examination of the scene and damage.

Taking these steps early on in a foreign aviation matter will hopefully bring success in not only getting foreign subrogated aviation actions off the ground, but also bringing them home.

UK Post - Putting the "Gross" in Gross Negligence

Historically, and unlike other jurisdictions, English Courts have seen no difference between negligence and gross negligence as a legal concept. In 1843 it was “the same thing, with the addition of a vituperative epithet” (Wilson v. Brett) and in 1997 it was said that “the difference between negligence and gross negligence [is] merely one of degree.” (Armitage v. Nurse). However this does not necessarily mean that that the term “gross negligence” cannot have an effect in English law.   

More and more recently the English courts have needed to interpret “gross negligence” because it frequently appears in commercial contracts.  There is often an underlying commercial justification for limiting (or excluding) negligence: essentially making it knock-for-knock, but not gross negligence.  And in the commercial setting it is also arguable that if parties have chosen to use such words then they must be given some meaning. Thus, in The Hellespont Ardent (1997) the High Court held that the distinction between negligence and gross negligence was potentially material – the contractual term being clearly intended to represent something more than a failure to exercise the standard of care that would ordinarily constitute “mere” negligence.

More recently, in Camarata Property v Credit Suisse Securities (2011) the Court held that the concept of gross negligence had to be considered in view of the parties’ agreement as a whole as opposed to being a defined concept under English law. Thus a distinction might exist where gross negligence means more than simple negligence (although the difference, for English Courts, may not be easy to define or even describe).

In Camarata there was the presence of both “negligence” and “gross negligence” in the agreement: a factor that indicated some distinction must be intended. Ultimately, however, the difference was found to be one of degree and not kind.  In any event the point became moot as it was decided the bank could not have predicted Lehman’s collapse: so it was neither negligent nor grossly negligent.

Thus, for businesses or claims handlers in the UK (or where there is an English jurisdictional clause) the distinction may be that being grossly negligent suggests a greater lack of care than mere negligence (and a greater hurdle to be overcome in the event of a claim). Similarly it is a distinction worth looking out for if businesses want to ensure they have a remedy for mere (trivial) negligence on the part of those providing services and where they want to ensure they receive the highest standards of care.

Connecticut Supreme Court Holds Make Whole Doctrine Does Not Apply to Deductibles

In a recent decision, the Connecticut Supreme Court provided valuable clarification regarding the application of the make whole doctrine in Connecticut. Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., --- A.3d --- , 309 Conn. 449 (Conn. July 30, 2013).

The case arose out of an insurance coverage dispute. In 2005, Haynes Construction Company (“Haynes”) filed a claim against TD Banknorth Insurance Agency Inc. (“TD Banknorth”), alleging negligent procurement of insurance in connection with a housing development project. TD Banknorth in turn filed a claim with its insurer, Fireman’s Fund, under an Errors & Omissions policy issued to TD Banknorth by Fireman’s Fund. In 2006, Fireman’s Fund and TD Banknorth settled with Haynes. TD Banknorth contributed its $150,000 deductible to the settlement and Fireman’s Fund contributed the remainder. Fireman’s Fund then brought a subrogation action and recovered $208,000 from the responsible parties, which was deposited into an escrow account.

In 2008, Fireman’s Fund brought suit against TD Banknorth in the United States District Court for the District of Connecticut, seeking a declaratory judgment that it was entitled to all of the escrowed funds. TD Banknorth counterclaimed for a declaratory judgment that, under Connecticut’s make whole doctrine, it was entitled to recover its $150,000 deductible from the escrow funds. The District Court found that the subrogation clause in the E & O contract abrogated Connecticut’s make whole doctrine, and granted summary judgment in favor of Fireman’s Fund. Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., No. 3:08–cv–364, 2010 WL 420041 (D. Conn. Feb. 1, 2010).

On appeal, the United States Court of Appeals for the Second Circuit held that the contract at issue did not abrogate Connecticut’s make whole doctrine. The Second Circuit further concluded, however, that Connecticut law was silent on the more basic issue of whether Connecticut’s make whole doctrine applies to insurance policy deductibles. Accordingly, the Second Circuit certified the following question to the Connecticut Supreme Court: “Are insurance policy deductibles subject to Connecticut’s make whole doctrine?” Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 644 F.3d 166 (2d Cir. 2011).

Because there was no Connecticut case in which the make whole doctrine had been expressly adopted, the Connecticut Supreme Court deemed it appropriate to reformulate the question as follows: (1) Is the make whole doctrine recognized as the default rule under Connecticut law; and, if so, (2) does the make whole doctrine apply to insurance policy deductibles under Connecticut law?

The Court first concluded that the make whole doctrine is the default rule under Connecticut law. In reaching its decision, the Court noted that the make whole doctrine is designed to prevent inequitable results when the amount recoverable from the responsible third-party is insufficient to satisfy both the loss sustained by the insured and the amount the insurer paid on the claim. In order to prevent such results, the make whole doctrine restricts the enforcement of the insurer’s subrogation rights until after the insured has been fully compensated for his or her injuries.

Next, the Court held that the make whole doctrine does not apply to insurance policy deductibles. The Court concluded “that the equitable considerations supporting the make whole doctrine are inapplicable to deductibles . . . If we were to decide otherwise, as TD Banknorth urges, we would effectively disturb the contractual agreement into which TD Banknorth and Fireman’s Fund entered, thereby creating a windfall for TD Banknorth for a loss that it did not see fit to insure against in the first instance when it contracted for lower premium payments in exchange for a deductible.”

As one of the first courts to address whether the make whole doctrine applies to insurance policy deductibles, this decision will provide valuable precedent to subrogation professionals in cases in which a defendant argues that the insured has not been made whole due to the insured’s payment of a deductible.


Protect Yourself Before Voluntarily Filing A Dismissal


In the throes of the dog days of Summer, a recent California decision has placed a chilling effect on voluntary dismissals. In Loong v Superior Court, 2013 DJAR 9593, the Court of Appeals, Second Appellate District, held that a voluntary dismissal of an action constitutes conclusion of an action. Such a dismissal, therefore, provides a legal basis for a trial court to award expert witness fees under Code of Civil Procedure Section 998. That statute permits a court discretion to award expert witness fees if the plaintiff fails to accept a statutory offer to compromise its claim under Section 998 and then does not obtain a more favorable “judgment or award.”

The threshold question was whether a voluntary dismissal, with or without prejudice, triggers the court’s discretionary award of expert witness fees under Section 998. Plaintiff argued that defendant was required to obtain a judgment on the merits, as opposed to a voluntary dismissal, in order to be entitled to the benefits of Section 998. The Court of Appeals rejected that argument, holding that by voluntarily dismissing the case plaintiff failed to obtain “a more favorable judgment or award” under Section 998’s Offers to Compromise. The court noted that ordinary costs are recoverable by a defendant after a dismissal and that Section 998 merely expands those recoverable costs to potentially include expert witness fees.

The moral of the story is that, prior to voluntarily dismissing a case, plaintiff’s counsel must request that the defense waive all costs. Those costs now clearly include expert witness fees under Section 998. Plaintiff in the Loong case learned that lesson the hard (and expensive) way-as their $7,336 cost bill included $3,600 in expert witness fees incurred in preparing for trial.

Confusion Surrounding Pierringer Agreements In Canada Are Settled

Until recently, in Canada, there was a lack of consensus across the provinces regarding whether the settlement figure in Pierringer agreements was required to be disclosed. A Pierringer agreement is a type of settlement agreement whereby the plaintiff settles a claim with one or more co-defendants in an action while reserving the right to proceed against other non-settling co-defendants for the loss they actually caused. In the recent decision of Sable Offshore Energy Inc. v. Ameron Internationl Corp., 2013 SCC 37, Canada was provided with clarity: settlement figures in Pierringer agreements do not need to be disclosed.

In Sable, Sable Offshore Energy Inc. sued a number of defendants who had supplied it with and applied paint intended to prevent corrosion. After initiating an action against all of the defendants alleging that the paint did not preventing corrosion, Sable entered into Pierringer agreements with some of the defendants, allowing those defendants to withdraw from the litigation while permitting Sable's claims against the non-settling defendants to continue. All of the relevant evidence in the possession of the settling defendants, would, in accordance with the agreements, be given to the plaintiffs and be discoverable by the non-settling defendants. And, all of the terms of the Pierringer Agreements were disclosed to the two non-settling defendants, except for the amounts agreed to. The non-settling defendants brought an application for disclosure of the settlement amounts paid under the Pierringer Agreements. At trial, the Court dismissed the defendants' application for disclosure of the settlement amounts. This was overturned at the Court of Appeal, and subsequently appealed.

At the Supreme Court of Canada, Justice Abella wrote the decision. Speaking for the Court, she began by noting there is an overriding public interest in favor of settlement, in that it promotes the interests of the litigants by saving them the expense of the trial, and it reduces the strain upon an overburdened judicial system. And, settlement privilege promotes settlement.

Accordingly, the Court proceeded with a structured analysis of settlement privilege. Settlement negotiations have long been protected by the common law rule that "without prejudice" communications made in the course of such negotiations are inadmissible. The settlement privilege created by the "without prejudice" rule was based on the understanding that parties will be more likely to settle if they have confidence from the outset that their negotiations will not be disclosed. Citing the English case of Rush & Tompkins Ltd. v. Greater London Council, (1988) 3 All E.R. 737 and the British Columbia case of Middelkamp v. Fraser Valley Real Estate Board (1992), 71 B.C.L.R. (2d) 276 (C.A.), the Court held that although most cases considering the "without prejudice" rule have dealt with the admissibility of communications once negotiations have failed, the rationale of promoting settlement is no less applicable if a settlement is actually reached. As such, the Court concluded that settlement privilege applies to not only failed negotiations, but also to the content of successful negotiations, a key component of which is the settlement amount.


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"1984" All Over Again: Big Brother IS Actually Watching Where You Drive

In light of the recent news headlines involving NSA’s PRISM surveillance program, it probably should not surprise us, but big brother is watching You. For some time now, police in an increasing number of states across the country have been using “license plate readers.” These devices collect various amounts of data, including photographs, and time and place where the license plate information was taken. That license plate readers collect data is not as big as a surprise as to the sheer volume of license plates these devices can capture. For instance, photographs and information on over 700 vehicles in just one hour is not uncommon. Accumulating data on millions of license plates in one year is the norm.

Police have found the license plate reader useful in identifying stolen vehicles. However, in one recent instance that turned headlines, a man asked the City of San Leandro, California, for the data from the scanning of his license plate. To his surprise, not only was his vehicle scanned over 100 times in the last three years, but within the records provided to him was a photo taken by such a scanner of him and his children exiting his vehicle at their home. While the potential privacy issues involved in this technology pose a great concern for many, it is worth noting that such records can be useful in pursuing a litigation matter. By using the power of a subpoena, these records can be obtained. With this data now available, it is important to consider whether it would be an asset in your investigation. Does your client want some sub rosa investigation into one of the parties in a lawsuit? Perhaps you are having difficulty personally serving an individual? Or need to know the location of someone at particular dates in the past? The information available from these license plate readers are a potential source of information regarding an individual’s whereabouts and favorite hangouts. It is yet another arm in the arsenal of attorneys and investigators alike to obtain information on an individual when litigating against them.

Recovering an Insured's Deductible - Texas

In a recent case out of the Seventh Court of Appeals of Texas, the court considered whether a waiver of subrogation provision waived an insurer’s claim for its insured’s uninsured losses or deductible.  Am. Zurich Ins. Co. v. Barker Roofing, L.P., 387 S.W.3d 54, 66 (Tex. App.—Amarillo 2012, no pet.).  In deciding this issue, the court focused on the specific language of the insurer’s policy and relied on basic principles of subrogation law.  The court’s decision raises an important question as to whether an insurer has a right to include its insured’s deductible in a subrogation claim.

A few states have statutes or regulations that control the right of an insurer to seek recovery of automobile or property deductibles.  In Texas, Section 542.204 of the Texas Insurance Code provides that, unless an automobile insurer notifies its insured that subrogation will not be pursued in accordance with the provisions of the statute, the insurer must either take action to recover its insured’s deductible against a responsible third party within one year after the insured’s claim is paid or pay its insured the amount of the deductible.  There is no Texas statute or regulation that applies to the recovery of property deductibles.

Generally, Texas law provides that payment of a loss creates a subrogation right, and no formal assignment is necessary. Campbell v. Jefferson, 453 S.W.2d 336, 338-39 (Tex. Civ. App.—Tyler 1970, writ dism’d) (citingWichita City Lines, Inc. v. Puckett, 156 Tex. 456, 295 S.W.2d 894, 899 (1956); Magnolia Pipe Line Co. v. Security Union Ins. Co., supra; International Insurance Company v. Medical-Professional Building of Corpus Christi, 405 S.W.2d 867 (Tex. Civ. App., Corpus Christi, 1966, writ ref., n.r.e.)).  However, as noted by the court in Am. Zurich Ins. Co. v. Barker Roofing, L.P., subrogation generally gives indemnity and no more, meaning an insurer is subrogated only to the extent of its payment and is limited to recovery of the amount paid.

The takeaway is that you should always review the specific language of the policy at issue to determine if the policy grants the insurer a right to recover its insured’s deductible.  If the policy does not expressly give the insurer the right to recover its insured’s deductible, the best practice may be to include the insured’s deductible in a subrogation claim only at the request of the insured and with the insured as a party to any ensuing litigation or with an assignment from the insured.  While this blog post discusses Texas law, it is imperative that you review the specific laws of your state with regard to the insured's deductible. 

Impact of Late Notice of Claim to Liability Carrier (New York)

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.


Implied Co-Insured In Indiana Revisited

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. 






The Filed Rate Doctrine

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.

The Dangers of Sinkholes


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.



Investigating Flood Losses - A Staged Approach

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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New Jersey Court Reinforces Public Adjuster's Fee as Non-Recoverable Element of Insured's Damage

               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. 



Minnesota Supreme Court: No More Bright Line Anti-Subrogation Approach in Tenant Subrogation

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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Proving Diminution of Value in a Commerical Property Case

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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USC Notches Important Courtroom Victory

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.”      


Second Circuit holds that New York Building Code imposes non-delegable duty on property owner

This summer, in reviewing a filed lawsuit, the Second Circuit Court of Appeals made a determination as a matter of law on a matter of first impression, specifically holding that property owners in New York City have a non-delegable duty to maintain the structural integrity of adjoining walls, including party walls.

According to the papers in the action, in 2008, a foreign government’s Permanent Mission to the United Nations began renovating a townhouse it owned in Manhattan. Its subcontractor negligently poured concrete alongside an existing party wall separating the foreign government’s property from that of the adjacent townhouse owned by an insurer’s subrogor. The party wall collapsed, causing substantial damage to the subrogor’s property.

Amongst other causes, the insurance company brought suit alleging that the foreign sovereign violated Section 3309.8 of the City Building Code for “failing to shore up the common wall.” The foreign government moved to dismiss the complaint alleging that it was immune from suit under the FSIA. The insurer argued that three statutory exceptions to the FSIA applied to the case, one for tortious activity, a second for commercial activity, and a third for claims involving “immovable property.” The Southern District of New York’s Court denied defendant's motion to dismiss counts of the complaint and found that the tortious activity exception applied. The Court further held that the construction activity concerning the consular mission was not a discretionary act of the foreign government, and therefore did not invoke the “exception to the exception” under the FSIA which would re-grant immunity from federal court jurisdiction.

The foreign government appealed the decision to the Second Circuit Court of Appeals, where oral argument was heard. On appeal, the foreign government also argued, under the tortious activity exception, that it owed no duty to its next-door neighbor under the independent contractor doctrine in that it was not responsible for the actions of its contractors.

The Second Circuit Court's opinion affirmed the lower court’s opinion. The Court held that the foreign government can be sued in tort for failure to comply with the New York City Building Code. While New York courts have not “specifically determined” whether §3309.8 imposes a delegable or non-delegable duty, the Second Circuit Court determined that, “The New York Court of Appeals has repeatedly held that statutes and regulations that address specific types of safety hazards create non-delegable duties of care,” especially where the regulation contains a “specific positive command.” The Court found that here, the New York Building Code, N.Y. City Admin. Code tit. 28, ch.1, §3309.8 contains such a command, requiring that the “person causing construction or demolition”, i.e. the property owner, maintain the structural integrity of adjoining walls, including party walls.

The Potential for Stigma Damages in Subrogation Actions

The Supreme Court of Georgia recently held that stigma damages are potentially covered under a property insurance policy, leading to the possibility that the property insurer could pursue such damages in a subrogation action. Royal Capital Development LLC v. Maryland Casualty Company, 291 Ga. 262, 728 S.E.2d 234 (Ga. 2012).

In Royal Capital, the insured owned an eight-story commercial building in Atlanta. In 2003, the insured purchased an insurance policy from Maryland Casualty to insure the building. Construction damage on an adjacent property caused physical damage to the insured’s building. The insured submitted a claim to Maryland Casualty, seeking both (1) the cost to repair the damage and (2) the diminution in the market value of the property resulting from the stigma of the building’s past physical damage, even after all repairs had been made. Maryland Casualty agreed to pay the insured $1,132,072.96 as compensation for the estimated costs to repair the property, but refused to acknowledge responsibility for the alleged diminution in the value of the property.

In reaching its decision that an insurer could be responsible for both diminution in value and cost of repairs, the Court recognized that “cost of repair and diminution in value can be alternative, although often interchangeable, measures of damages with respect to real property.” In some circumstances, it may be appropriate to award a combination of both damages in order to make the insured whole. “In such cases, notwithstanding remedial measures undertaken by the injured party, there remains a diminution in value of the property, and an award of only the costs of remedying the defects will not fully compensate the injured party.” (quoting Thurmond & Associates v. Kennedy, 668 S.E.2d 666 (Ga. 2008)).

The Court did not answer the ultimate question of whether the policy at issue covered stigma damages. Rather, the Court stated: “whether damages for diminution of value are recoverable under [the insured’s] contract depends on the specific language of the contract itself and can be resolved through application of the general rules of contract construction.” The case is currently on remand to the District Court for the Northern District of Georgia.

Despite the Court’s decision in Royal Capital, the ability of a property owner (and an insurer as subrogee of the property owner) to recover stigma damages is far from clearly established. In general, stigma damage refers to some loss in a property’s market value caused by a public perception of a risk associated with the property. Stigma damage occurs when potential buyers of property fear that a disclosed problem may recur even after the problem has been repaired, and consequently demand a lower price for the property. In such circumstances, the property owner seeks to recover the difference between the market value of the property before the damage and the market value of the property after the damage has been repaired.

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Pennsylvania Supreme Court: One Cannot Exculpate For Recklessness

The Supreme Court of Pennsylvania recently held that exculpatory clauses that relieve a party of liability for “recklessness” are invalid as against public policy. Tayar v. Camelback Ski Corp. Inc., 2012 WL 2913750,* 10 ___ A.3d ___ (July 18, 2012). After a detailed analysis and discussion of the law applicable to exculpatory clauses, the Supreme Court concluded that it was against public policy to allow a party to exculpate itself in advance for reckless behavior. The Supreme Court reasoned that to find otherwise “would remove any incentive for parties to act with even a minimal standard of care.” Tayar, 2012 WL 2913750 at * 7 & 10. In so finding, the Supreme Court not only noted that the overwhelming majority of states find that exculpatory clauses releasing reckless conduct are against public policy, but also noted that the federal courts in Pennsylvania had previously barred the enforcement of releases for reckless conduct. Id. at * 9 & n.13.

The Court’s decision in Tayar left “for another day the question of whether a release for gross negligence can withstand a public policy challenge.” 2012 WL 2913750, at * n. 7. The Court cited federal court decisions from United States District Courts for the Eastern District of Pennsylvania and the District of New Jersey in its analysis of recklessness, and noted those courts found that exculpatory clauses in Pennsylvania cannot limit liability for gross negligence. Id. at * n.13. In doing so, the Court commented on the decision in Valeo v. Pocono Int’l Raceway, Inc., 500 A.2d 492 (Pa. Super. 1985) by saying that it “did not address the public policy of permitting such a release.” Id. at * n.7. . Valeo is sometimes cited as authority for the argument that one cannot circumvent the language in an exculpatory clause based on gross negligence. While the Court’s decision in Tayar now stands for the proposition that one cannot avoid liability for recklessness by relying on an exculpatory clause, the decision also opens up the possibility that, under the same logic, defendants can no longer escape liability for acts of gross negligence. 

Texas Supreme Court Reiterates Cost to Repair Property Must Be "Reasonable and Necessary"

In a subrogation case, what type of evidence is required to prove real property damages at trial? Many times, the only evidence of damages that is readily available is the property adjuster’s Xactimate estimate and testimony. As of late, this type of evidence is no longer sufficient. In McGinty v. Hennen, Texas Supreme Court held that the plaintiff must provide specific evidence that the cost to repair the damaged property was reasonable and necessary.

In Texas, the plaintiff can recover the reasonable and necessary costs to repair damaged real property, as long as there is not economic waste (i.e., the cost to rebuild the property does not exceed the value of the property). The plaintiff in McGinty alleged his house had developed mold due to water leaks from several construction defects. The plaintiff sued the builder for breach of the construction contract alleging that his damages were in excess of $600,000 for mold remediation and the repair work. The plaintiff presented two damages experts: a mold remediation expert and a local general contractor who had 30 years of experience. The Xactimate estimates from both experts were admitted as evidence. The defendant did not present any expert testimony challenging the amount of the plaintiff’s damages. During trial, the plaintiff’s experts testified regarding their estimated costs to rebuild and that the Xactimate prices were within 1%-2% of the costs in Corpus Christi. However, neither expert gave an opinion that the repairs were necessary or that the costs were reasonable. In fact, the experts never said the words “reasonable and necessary.” Defendant appealed on grounds that there was no evidence that the cost to repair was reasonable and necessary.

The 14th Court of Appeals in Houston held that although the plaintiff’s experts did not opine that the costs were reasonable and necessary, there was sufficient evidence (the estimates and testimony) to support the jury’s finding that the costs were reasonable and necessary. The Texas Supreme Court disagreed. The Court stated that the legal standard for damages is reasonable and necessary. The plaintiff’s experts merely explained their process for arriving at the cost to repair the house by using the Xactimate program, researching local material and relying on information from previous jobs. They did not provide evidence that these costs were reasonable and necessary. Without some other evidence that the costs were reasonable and necessary (the Court referenced using competitive bids), there simply was no evidence to support the plaintiff’s damages.

Therefore, how does one prove property damages in Texas? The Court did not list what types of evidence is sufficient to prove that the damages were “reasonable and necessary,” but the opinion referenced those terms on numerous occasions. Reading between the lines, a damages expert should be prepared to testify that each element of damage is “reasonable and necessary.” Further, it is necessary to meet with your damages expert early on—be it an adjuster or building consultant—to specifically identify all the information that the expert relied upon to arrive at his/her estimate. If it is only an Xactimate estimate, that may not be sufficient evidence.

Are Smart Meters Causing Fires?

Smart Meters are high tech devices being installed by utility companies to provide two-way wireless transmittal of information to and from a utility to track energy use more accurately and to enable utility companies to monitor power distribution load and usage and to remotely shut off electricity. While there have been some concerns regarding privacy and the fear of what utility companies will do with the information, the reports of fires in several states have raised a whole new level of concern.

The Pennsylvania Public Utility Commission is investigating reports of fires caused by the new meters. The Maryland Public Service Commission held a hearing on Tuesday, August 28 based upon reports of the fires in Pennsylvania. There have also been reports of fires in California.

According to a paper published in July 2010 by Cindy Sage of Sage Associates and James J. Biergiel, EMF Electrical Consultant, the new meters may be contributing to electrical fires where there is a weak spot such as older wiring, undersized neutrals for the electric load, poor grounding, or use of aluminum conductors. The use of Smart Meters according to the authors places an entirely new and significantly increased burden on existing electrical wiring because of the very short, very high intensity wireless emissions (radio frequency bursts) that the meters produce to signal the utility about energy uses. According to the authors, the typical gauge electrical wiring that provides electricity to buildings (60 Hz power) is not constructed or intended to carry high frequency harmonics that are increasingly present on normal electrical wiring. The exponential increase in use of appliances, variable speed motors, office and computer equipment and wireless technologies has greatly increased these harmonics in community electrical grids and the buildings they serve with electricity. Harmonics are high frequencies than 60 Hz that carry more energy, and ride along on the electrical wiring in bursts. Radio frequency (RF) is an unattended by product of this electrical wiring according to the paper.

The manufacturer of the meters, Sensus Metering Systems, Inc., has denied that there is any problem with the approximate 10,000,000 meters it has installed nationwide. The company maintains that it has investigated reported failures of its meters and “in all cases, it was determined that the meters were not the cause of the problem.”

All of us involved in Subrogation should closely follow what is happening with the investigation of the potential for Smart Meters to cause electrical fires and make sure that our investigators are up to date on what is happening around the country with Smart Meters.

Filing Suit in the Name of the Carrier Versus the Insured

Most attorneys in voir dire in a subrogation jury trial will ask some variation of the following question: "Ladies and gentlemen of the jury, please raise your hand if any of you do not believe you can be fair and impartial to my client XYZ Insurance Company because they are an insurance company and not an individual plaintiff." 

We ask this question to jurors because it is common knowledge that some people hold prejudices against a party when they know insurance coverage is involved. See e.g. Staples v. Hoefke (1987) 189 Cal.App.3d 1397 (recognizing that prejudice is inherent in the admission of evidence of insurance coverage). That is one of the very reasons the Evidence Code does not allow evidence of a defendant’s liability insurance into evidence. See F.R.E. 411. Since it is common knowledge that a party could be prejudiced by the jurors knowing it has insurance, should a subrogating carrier consider reaching an agreement with the insured to file suit in the name of the insured rather than in the name of the carrier to avoid any juror prejudice? If the state where you are filing suit allows for flexibility in who is properly named, following should be considered in this analysis:

Who is Being Sued? - It is important to keep in mind that a subrogating insurance carrier plaintiff is not necessarily going to be viewed negatively by the jurors. Most jurors have had positive experiences with their own insurance carrier or otherwise feel no reason to view the subrogating carrier negatively. One important factor to consider, however, is who is being sued. If the case is against a large corporation, then often jurors will see the parties on equal footings. However, if the case is against an individual or a very small local company, then some jurors may view the case as the large insurance carrier picking on the small individual/business (even though unbeknownst to the jurors the defendant has its own insurance carrier funding the litigation/judgment). In these types of litigations it may be worthwhile to consider filing suit in the name of the insured to avoid any "large company" prejudices from the jury. 

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Arizona Adopts Federal Daubert Standard for Admissibility of Expert Testimony

Over the last few years, the Arizona legislature and Arizona courts have been dealing with the implementation of Federal “Daubert” standards for the admissibility of expert testimony in Arizona state courts. After initial legislative action was held unconstitutional, the Arizona Supreme Court ultimately amended Arizona Rule 702, effective January 1, 2012, to conform to the Federal rule. The amended Rule 702 states:

“A witness who is qualified as an expert by knowledge, skill, expertise, training, or education may testify in the form of an opinion or otherwise if:

(a) The expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) The testimony is based on sufficient facts or data;

(c) The testimony is the product of reliable principles and methods; and

(d) The expert has reliably applied the principles and methods to the facts of the case.”

By amending Arizona Rule 702 to conform to the Federal Rule, the Arizona Supreme Court has, in effect, implemented what is known as the “Daubert” standard applicable in all Federal cases. Although the amendment lacks any specific language as to its retroactivity, procedural rules generally apply even to lawsuits filed before the rule’s enactment, and applies both in civil and criminal cases. 

Amended Rule 702 now places “gatekeeper” responsibilities upon the trial judge as to the introduction of expert testimony. While there is little reported Arizona case law on the Daubert issue, there are thousands of Federal cases ruling on various aspects of the Daubert/Rule 702 standards, which will be considered as persuasive authority by the Arizona courts.  In essence, under the Daubert standard, an expert must explain his methodology of reaching an opinion, and demonstrate in an objective, verifiable way, that the expert has chosen a reliable method, and followed it. Factors as to whether an expert has followed a reliable method include testing to replicate a failure, peer review supporting the theory, and general acceptance by the relevant expert community as to the methodology and conclusions reached. Expert areas involving engineering and science will likely be most affected by the amendment, although most qualified experts are familiar with the Daubert review standards and are prepared to provide opinions that will withstand Daubert review. 

Work Product or Not? California Supreme Court Provides Insight on Recorded Statements in Coito v. Superior Court

Recorded Statements and Work Product Protection

On June 25, 2012, the California Supreme Court rendered its decision on a critical issue for attorneys and investigators alike: Is a recorded statement taken by an attorney, or her/his agent, afforded attorney work product protection?

For years, most attorneys in Southern California would respond “of course it’s protected!” This is in part due to the California appellate decision of Nacht & Lewis Architects, Inc. v. Superior Court (1996) 47 Cal. App. 4th 214, which held that recorded witness statements are entitled to absolute work product protection and are never discoverable. Most California practitioners followed this general rule of thumb until the case of Coito v. Superior Court, (2010) 182 Cal. App. 4th 758.

In Coito, the Appellate Court reviewed the decision of a trial court where production of recorded statements of eyewitnesses obtained by defense counsel were held to be absolute work product, therefore not discoverable. Upon review, the Appellate Court rejected the reasoning of Nacht & Lewis Architects, and held that a recorded statement receives no attorney-work product protection because the statement did not contain an attorney’s impressions, conclusions, or opinions. Therefore, defendant was required to disclose recorded statements it took of the eyewitnesses. Defendant petitioned the California Supreme Court, and review was granted.

California Supreme Court Review

In the California Supreme Court’s review of Coito v. Superior Court,  the Court reversed the Appellate Court and held that recorded statements taken by an attorney or his/her agent are afforded work product protection. However, the Court took a step back from Nacht & Lewis Architects, holding that recorded statements are afforded a minimum of qualified work product. In making this decision, the Court reasoned that witness statements may be entitled to absolute work product protection if the party claiming the privilege can show disclosure would reveal the “attorney’s impressions, conclusions, opinions, or legal research and theories.” If not, then the items may be subject to discovery if the requesting party can show that denial of discovery will unfairly prejudice the requesting party in preparing its claim/defense, or will result in an injustice. In sum, parties may now be able to obtain a recorded statement that was previously undiscoverable if that recorded statement is of a witness that is not reasonably available (e.g. passed away, or is not in the country).

The California Supreme Court also addressed one other issue: Whether a party responding to California Judicial Council Form Interrogatory 12.3 can avoid disclosing the identity of witnesses. Specifically, the interrogatory requests: “Have you or anyone acting on your behalf obtained a written or recorded statement from any individual concerning the incident?” Under Nacht & Lewis Architects, such information was provided qualified work product protection. The Supreme Court, however, has added a twist: A party can claim qualified work product protection as long as it can show that disclosing such information would reveal the attorney’s tactics, impressions, or case evaluation. While not much guidance was provided, perhaps the best example the Court gave was that if an attorney took a recorded statement from every eyewitness, then responding to this interrogatory would not be a violation of work-product protection since such individuals had to be disclosed anyway in other interrogatories. However, if an attorney chose a select few individuals to obtain statements from, then such information could invoke qualified work product protection.


The California Supreme Court’s recent decision provides California practitioners with a sense of relief, as the Appellate Court decision was a complete disregard for the attorney work-product doctrine. However, with the rough guidelines provided as to what is “absolute” or “qualified” work product, expect California courtrooms to have more motions filed on these issues in the near future.

Illinois Adopts Rule Allowing Jurors to Question Witnesses

Imagine you are in the middle of a complicated fire subrogation case. Each side has multiple lay and expert witnesses. After your expert finishes testifying about the fire’s cause, one confused looking juror raises his hand with a clarification question for your expert. The judge informs the juror that this is not permitted, and you cringe wondering what the juror did or did not understand and how it would affect your case. Prior to this year, the juror would not have been allowed to find out the answer to his question. However, in Illinois, this is all about to change.

On April 3, 2012, the Illinois Supreme Court adopted new Rule 243, which will allow jurors to submit questions of witnesses during civil trials. Presently, half of the state court systems and all of the federal circuits allow jurors to submit questions to witnesses.

In a civil trial, the judge will have discretion on whether the rule will be implemented and which witnesses may be questioned. If allowed, the jury members may submit written questions to the judge initially. There is no limit to the number of questions allowed any one juror, and the jury members will not be required to submit questions. All questions will be marked as exhibits and made a part of the record. Outside the presence of the jury, the judge will review the questions with counsel and rule on all objections. The judge will then decide on which questions will be admitted or excluded. Questions may also be modified by the judge. After the appropriate questions have been decided upon, the judge will read them to the witness with an opportunity for follow-up questions from the attorneys limited to the scope of the new testimony.

The goal of Rule 243 is that jurors will better comprehend the testimony being offered, allowing for verdicts that are based on a correct understanding of the facts and testimony.  Rule 243 becomes effective on July 1, 2012 for all civil trials in Illinois.

Personal Jurisdiction in Oregon--Contacts May Not Be Enough

 A recent Oregon case offers a reminder that subrogating carriers need to carefully examine personal jurisdiction before pursuing an out-of-state defendant. In Robinson v. Harley Davidson Motor Company (Oregon Ct. App. 2012), Oregon resident Robinson was riding her Harley Davidson motorcycle in Idaho when she noticed a problem with the front wheel. Although she had purchased the motorcycle in Oregon, she took it to an Idaho dealer for warranty work. The next day, the wheel malfunctioned and Robinson was thrown from the motorcycle and injured.

Robinson sued the Idaho Harley dealer, among others, in Oregon state court. Although the Idaho dealer did not have a business located in Oregon, it maintained contacts there, including advertising in Oregon and selling parts, accessories and apparel to Oregon residents. Nevertheless, the Idaho dealer brought a motion to dismiss Robinson’s case, arguing that Oregon courts did not have personal jurisdiction over it.

The trial court agreed, and dismissed the Idaho dealer from Robinson’s case. In an opinion affirming the dismissal, the Oregon Court of Appeals held that “plaintiff’s claims do not arise out of or relate to defendant’s Oregon activities.” Since the Idaho dealer’s work on Robinson’s motorcycle did not take place in Oregon, the court found it was irrelevant that the dealer advertised or sold parts there.

In light of recent U.S. Supreme Court cases (such as J. McIntyre Machinery, Ltd. v. Nicastro) holding foreign manufacturers are not subject to personal jurisdiction simply by placing products in the stream of commerce, Robinson v. Harley offers another example where “contacts” with a state may not be enough to create personal jurisdiction there.

Good, Bad or Ambivalence: The Litigation Detour of Judicial Reference under California Law

Property subrogation cases that proceed against developers and seller-builders of homes are suddenly apt to being diverted from judicially engaged litigation into the province of Judicial Reference pursuant to California Code of Civil Procedure Section 638. In essence, this Code section exercises to remove judicial litigation and substitute independent arbitration pursuant to a written agreement between the insured and the developer/builder that was entered into at the time of the purchase of the home. The result is that a negligence or products liability action against a seller-builder or developer is evaluated by a single or multiple arbitrators [three maximum] whose decision stands “as the decision of the Court” and judgment may be entered in the same manner as if the action had been tried by the Court.

In order to activate the provisions of California Code of Civil Procedure Section 638, or other similar codified Judicial Reference laws in other states, there must be a written agreement between the insured and the builder/developer. Normally, these agreements are part of the purchase transaction in which the buyer and seller agree that any disputes between the parties will be regulated and decided by a neutral arbitrator.

The insurer in a subrogation matter “stands in the shoes” of the insured, and thus is bound by the agreement between their insured/buyer and the potential tortfeasor/developer/seller.

The benefits of Judicial Reference are speed, access to a decision-maker and potential cost savings. That is, the matter is immediately “stayed” if filed in a California Court and referred to an mutually agreed independent arbitrator. Written discovery, depositions and expert disclosures are thereafter controlled by agreement of the parties in conjunction with the arbitrator and Court dates and other judicially monitored actions are eliminated.

All parties to the potential dispute must either be signatories to the agreement to Judicial Referral or must accede to the process. Judicial Referral is “discretionary” to the Court if sought after litigation ensues.

Where multiple parties are involved, for instance in a fire case involving the construction of a home where the seller/manufacturer may be among many potential defendants [appliance manufacturers and sub-contractors may be others], the Court may deny Judicial Reference as being potentially prejudicial to other parties or leading to potentially conflicting findings of fact between an arbitrator and a Court proceeding.

While cost-saving and potentially expedient, the detriment to Judicial Reference is elimination of jury trials and Court supervised discovery. Placing decision making into the control of an independent arbitrator would require evaluation and vetting of that arbitrator with extreme scrutiny to eliminate any potential prejudice or preconceptions.

Hence, the Judicial Referral option has both advantages and disadvantages that must be evaluated on an individual case basis.

Insurer's Right to Contractual Subrogation Trumps Equitable Made-Whole Doctrine Yet Again in Texas

In Fortis Benefits v. Cantu, 234 S.W.3d 642 (Tex.2007), the Texas Supreme Court held that the “made whole” doctrine does not apply where the parties’ agreed contract provides a clear and specific right of subrogation. Despite this ruling, the Austin Court of Appeals was recently confronted with a situation where a trial court attempted to allocate the entirety of an $800,000.00 settlement in a negligence suit to the family of an individual who was injured in an oilfield explosion and spent 52 days in the hospital before eventually succumbing to his extensive injuries. Although the insurer had intervened in the underlying lawsuit and asserted a contract-based lien of over $330,000.00 on any recovery obtained by the family, the Austin Court of Appeals ultimately agreed with the trial court that equitable principles applied to the subrogation claim, and that where “a subrogation claim works an injustice, it shall not be allowed.” Citing the insurer’s solid financial position and the financial hardship that the family would suffer should the insurer’s subrogation rights be enforced, the entire settlement was ultimately allocated to the family under the “made whole” doctrine.

In reversing the Austin Court of Appeals, the Texas Supreme Court held in Texas Health Ins. Risk Pool v. Sigmundik, 315 S.W.3d 12, 14 (Tex.2010) that the “made whole” doctrine was inapplicable, and that it was improper to cut the insurer out of a settlement to which it had a valid claim. Moreover, the Court noted that the trial court could not cut the insurer out of the settlement simply because it was an insurance company, or because the trial court believed the surviving family needed the money more than the insurer.

The Court further addressed arguments by the family that the insurer failed to carry its burden of establishing that settlement funds should be allocated to its lien. In rejecting this argument, the Court held that such evidence was in fact provided. Specifically, the insurer requested the full amount of the total medical expenses incurred beginning with its first petition in intervention, and also provided extensive medical records and testimony to support both the expenses it requested and the damages suffered by the deceased. The Court ultimately remanded the case to the trial court to determine what portion of the settlement funds should be allocated to the insurer.

The Sigmundik case provides even more persuasive authority for insurers to rely on when asserting contractual based rights of subrogation. Based on Fortis Benefits and Sigmundik, it is clear that the Texas Supreme Court will defer to clear policy language when addressing allocation issues between an insured and its insurer. Accordingly, it is imperative that these provisions be reviewed and analyzed at the outset of a claim so that the insurer is not forced to unfairly compromise its rights of subrogation. In addition, Sigmundik also provides a framework for what an insurer needs to do to adequately protect its contractual subrogation interest (namely, intervene and ensure that its damages are properly pled and supported). Adherence to these suggestions will allow an insurer to negotiate from a position of strength should recovery allocation issues arise.

Turning an Implied Insured into a Co-insured

Thinking about subrogating against a tenant in Washington? Think again because the Washington Court of Appeals has re-affirmed existing law and increased the risks of such a challenge. 

Since Cascade Trailer v. Beeson was decided 1988, Washington courts have held that tenants are implied co-insureds under a landlord’s property policy. This holding leaves the landlord’s insurer without a remedy when a tenant negligently causes damage. The holding is based on the notion that part of the rent paid by the tenant pays for the landlords property insurance. Because the tenant is a considered an insured, the landlord insurer cannot subrogate.

In an unrelated insurance decision, the Olympic Steamship court determined that an insured who successfully sues an insurer to obtain coverage may recover the reasonable attorney’s fees incurred in the litigation. Olympic Steamship Co. v. Centennial Insurance Co., 117 Wn.2d 37, 811 P.2d 673 (1991). The decision to award attorney’s fees in a coverage dispute is based on equity and flows from the special fiduciary relationship that exists between an insurer and its insured. McGreevy v. Oregon Mutual Insurance Co., 904 P.2d 731 (1995). 

A recent decision that has yet to be published has intermixed these two unrelated holdings. In Community Association Underwriters of America v. Kalles, et. al., the Washington Court of Appeals affirmed that a tenant is an implied co-insured and further held that, as an insured, the tenant was entitled to an award of attorney fees. In Kalles, the plaintiff insured a condominium complex. One of the units was owned by Elkins who ran a business out of the condominium unit. Elkins sold the business to the Kalles but maintained ownership of the condominium unit, renting the space to the Kalles. The Kalles negligently caused a fire which damaged the condominium building. CAU paid for the damage on behalf of the condominium association and pursued a subrogation claim against the Kalles for negligence.

The lawsuit challenged existing law because this particular scenario was not addressed in Cascade Trailer. In particular, the Kalles was not tenants of the condominium association, rather they were tenants of a unit owner. The Kalles court, however, applied Cascade Trailer and found the Kalles were implied co-insureds under the condominium association’s policy. In a broad expansion of insurance law, the court also awarded the Kalles their attorney’s fees in defending the case against their “insurer,” under Olympic Steamship

The award of Olympic Steamship fees in the situation presented in Kalles is a significant expansion of the attorney’s fees penalty. It certainly raises the stakes when deciding whether to put a case into suit when it is questionable whether the lease language circumvents the implied co-insured rule. 

Utilizing Federal Rule 27--Depositions to Perpetuate Testimony

The sooner evidence can be evaluated and preserved, the better the prospects for a successful outcome. The Federal Rules of Civil Procedure afford to potential plaintiffs and defendants a uniform standard when pre‐action “discovery” can be obtained. Strictly speaking, the relief sought is not discovery, as the rule is utilized to preserve evidence. Federal Rule 27, titled “Depositions to Perpetuate Testimony” permits the preservation of testimony, physical evidence, and documents that are not likely to be available at a later time.

Case law interpreting the rule permits the petitioner to demand production of documents and gain access to physical property for purposes of inspection by a party’s experts. A dying witness or a product or part which is leaving the United States, deteriorating, or changing for any reason, are examples where Rule 27 relief may be invoked. The rule is especially useful where witnesses, such as crew members, are temporarily in the United States, but reside in locations beyond the court’s jurisdiction. In Deiulemar Compagnia di Navigazione SpA v M/V Allegra, the court allowed depositions, as well as access to documentary and physical evidence in such a circumstance. 

In order to qualify for Rule 27 relief, a lawsuit must be able to be filed in a U.S. court. If the matter cannot be heard in a U.S. court, Rule 27 is not available. Where the matter is to be heard in a foreign tribunal, including overseas arbitrations, and witnesses and/or evidence is within the United States, 28 U.S. § 1782 can be invoked in support of an application to allow for depositions that are to be utilized before foreign or international tribunals. Intel Corp. v Advanced Micro Devices

So before filing a lawsuit to obtain discovery, consider Rule 27 if evidence needs to be preserved and suit can be brought in the United States. Also consider 28 U.S.C.§ 1782 if the proceeding needs to be brought in a foreign tribunal.

Expert Opinions in Wisconsin--What Has Changed?

The Wisconsin legislature enacted a comprehensive tort reform package in early 2011. Part of the legislation changed Wisconsin’s evidence rules governing the admissibility of witness testimony on scientific, technical or specialized subjects. Wisconsin law now aligns with federal standards, which means that Wisconsin practitioners will have to identify any expert opinions they may need in a particular case and ensure that a suitable witness has been selected to render that opinion.

Under the old rules, a witness could offer an expert opinion as long as the judge determined that the witness was an expert in a particular field based on the person’s knowledge, skills, experience, training, or education. The old rule allowed lay witnesses with extensive practical work experience to testify about scientific, technical or specialized subjects. This meant that such a witness did not need degrees or certifications to qualify as an expert witness, and the testimony need only be relevant to be presented to a jury.

The new rules subject the bases for expert opinions to greater scrutiny. In addition to determining whether a witness is qualified to give an opinion on technical matters, a judge must now determine whether the expert’s testimony is based on sound data and methods. This evaluation also entails an assessment of whether the witness’s opinion is based on adequate facts and that the facts were properly used in forming the opinion. Under the new rule, it is important that a witness have the ability to articulate the principles underlying her opinion and the process she went through in forming her opinion.

These new requirements may lead some recovery practitioners to more closely scrutinize a potential witness’s educational background. Most importantly, when an expert opinion is needed, one must now be certain that the expert can state and explain the principles, facts and methods behind the opinion.

Subrogating Against The Long Island Power Authority--Guidelines and Pitfalls

In situations where the Long Island electrical distribution system is involved in causing the loss, it is critically important to make sure that you adhere to certain particular Notice of Claim requirements, heed the shortened statute of limitations period, and also identify any additional maintenance vendors as potential targets for recovery.


The Long Island Power Authority (“LIPA”) was created by statute under N.Y. Pub. Auth. Law §§1020 et seq. which states, in part, as follows: “There is hereby created a corporate municipal instrumentality of the state to be known as the ‘Long Island Power Authority,’ which shall be a body corporate and politic and a political subdivision of the state, exercising essential governmental and public powers.”

LIPA owns the retail electric system on Long Island and provides electric service to over 1.1 million customers in Nassau and Suffolk counties, and the Rockaway Peninsula in Queens. LIPA does not own any electric generation assets on Long Island, and it does not provide natural gas service. According to its own press releases, LIPA is the second largest municipal electric utility in the nation in terms of electric revenues, third largest in terms of customers served and the seventh largest in terms of electricity delivered.

Notice of Claim

Any notice of claim must be served upon LIPA within the time limited by and in compliance with all the requirements of section 50-e of the general municipal law. Service of a notice of claim within 90 days after accrual of the claim is a condition precedent to the commencement of any tort action against LIPA. See McShane v Town of Hempstead, 66 AD3d 652 (2d Dept 2009) (citing General Municipal Law § 50-e [1] [a]; § 50-i [1]; Public Authorities Law § 1020-y [3].)

Statute of Limitations

When an action, other than one for wrongful death, founded upon tort is brought against LIPA, the action must be commenced within one year and ninety days after the cause of action accrues. N.Y. Pub. Auth. Law § 1020-y.

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New Rule for Hearings in Arbitration Forums

Recovery professionals handling claims in Arbitration Forums, Inc.’s Property Arbitration Forum should be aware that, as of March 1, 2012, Arbitration Forums will be implementing new rules for hearings. Rule 3-7 now states that the written Contentions and supporting evidence submitted are all that is to be considered by an arbitrator, and that a party attending the hearing is not allowed to verbally present its case or offer any argument that is not included within the written Contentions. Rule 3-7(a) also provides that a representative who attends a hearing may only clarify, at the arbitrator’s request, his or her party’s Contentions and/or submitted evidence. Consequently, under the new rules, a recovery professional presenting a claim can only answer the questions of the arbitrators and can no longer present arguments.

Rule 3-7 has been also been amended to state that additional evidence can no longer be submitted at the time of the hearing, rather it must be uploaded or submitted to Arbitration Forums by the Materials Due Date.

These new changes to Rule 3-7 go along with the trend in Arbitration Forums of holding “staff hearings,” which are hearings held via a conference call in which the parties are only allowed to answer the questions of the arbitration panel. When preparing your arbitration package, try to anticipate all of the potential written evidence and file materials that you may need to rely upon in presenting your claim. Given these changes, recovery professionals should err on the side of being over inclusive when submitting evidence and supporting documentation.

Remember the Basics--Make Sure the Insured Knows Whether Subrogation Counsel is Representing Their Interests


It is not uncommon for subrogation counsel to file suit in the name of the insured for a variety of reasons. The most obvious is when counsel represents the insured for their uninsured losses or their deductible. However, there are times that for tactical reasons, counsel files suit in the name of the insured to try and avoid the bias that often accompanies an action filed in the name of the carrier. Although the deductible may be accounted for in a suit filed in the name of the insured, if the insured suffered any uninsured losses, they may not be included unless counsel has entered into a retention agreement with the insured. Unless a proper agreement is in place, the carrier and subrogation counsel run the risk of being sued by a disgruntled insured whose uninsured losses were not included in the carrier’s suit. There is a simple solution to avoid such a problem – make it clear to the insured whether or not their claims are included in the lawsuit, especially when suit is filed in the name of the insured. 


A perfect example of what can happen when the insured is not advised whether their uninsured losses are included in the carrier’s action occurred in Sandman v. Quincy Mut. Fire Ins. Co., et al. (Mass. App. No. 10 – P-2080 January 25, 2012). The case stemmed from Quincy Mutual’s subrogation action against a heating oil delivery company that spilled 100 gallons of fuel oil in Elaine Sandman’s property during a delivery. Quincy Mutual covered the remediation costs to clean up the oil spill, which was over $200,000, but denied coverage for damage to Sandman’s personal property due to a policy exclusion. Quincy Mutual then retained subrogation counsel to recover its remediation costs from the oil delivery company. 


Approximately two weeks after the spill, as Sandman was looking for an attorney to represent her uninsured losses, Quincy Mutual’s subrogation counsel contacted her and introduced himself as the attorney hired by Quincy Mutual to pursue her claims against the oil delivery company. For the next five years, counsel consistently led Sandman to believe he represented her interests as well as those of Quincy Mutual. Most of those representations were oral, but in one letter counsel sent to Sandman, he referred to her as a client and stated that, “[o]nce we receive the final figure suit will be entered in the Superior Court against parties responsible for damages to your property.” Counsel never informed Sandman that he had not filed suit on her behalf and was only seeking to recover the damages Quincy Mutual paid out on her claim. Sandman assisted counsel in answering interrogatories, and he represented her at her deposition. When the case settled in the spring of 2009, counsel informed Sandman, for the first time, that he was only representing Quincy Mutual. Counsel then told Sandman he could not assist her in pursuing her claims against the oil delivery company because he had a conflict of interest as Quincy Mutual’s attorney. By that time, Sandman’s claims were barred by the statute of limitations. 

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The Independent Contractor Doctrine is Not Always Applicable in Delivery and Installation Cases

Defendants often claim that the negligent work they are being sued for was done by “an independent contractor”—thus attempting to alleviate their responsibility. This defense is often raised in cases where construction is being performed. However, it can also be raised when one party contracts with another for a specific type of installation or delivery work. In these cases, the independent contractor defense may not be applicable if you can establish that there was no prior disclosure to the owner that independent contractors would be used.

For a variety of reasons, the recovery professional may wish to craft an argument that will allow continued pursuit the primary target for the work done by the independent contractor. While not every jurisdiction has addressed this issue in the context of installations or deliveries, some have adopted Restatement (Second) of Torts §429. Under this section of the Restatement, you may be able to diffuse the defense that an independent contractor did the work if you are able to show the general contractor failed to disclose the use of independent contractors or subcontractors.

Massachusetts has adopted Section 429 of the Restatement (Second) of Torts. In Harkins v. Colonial Floors, 8 Mass. L. Rptr. 127, 1998 WL 22075, * 8, No. CIV A 96 910 (Mass. Super. Ct. 1998), the court set forth a roadmap for how to defeat the defense of the independent contractor doctrine in a repair, installation or delivery setting.

When faced with the independent contractor doctrine in a setting that involves installation or delivery, recovery professionals should examine Section 429 of the Restatement to see whether it may apply in your state.

Pennsylvania Rejects Independent Action for Negligent Spoliation

The Pennsylvania Supreme Court recently joined “the overwhelming majority” of states that have declined to recognize a separate cause of action in tort for negligent spoliation of evidence. In Pyeritz v. Commonwealth of Pennsylvania, __ Pa. __, 32 A.2d 687 (2011), the Court held that “Pennsylvania law does not recognize a cause of action for negligent spoliation of evidence.” The case involved a suit against the Commonwealth for the actions of the Pennsylvania State police. Daniel Pyeritz was found dead at the base of a tree while hunting. He was alone and there were no witnesses. The remains of a black nylon belt were found 15 feet up in a tree stand. The Trooper in charge of the investigation into the death took the two pieces of belt as evidence and logged them into evidence.

The estate retained a lawyer to investigate a civil suit. Counsel wrote to the Trooper and asked if the evidence could be retained for the indefinite future, even after the coroner’s inquest, if able to do so. After the inquest finding an avoidable accidental death, counsel requested that the state police retain the evidence and the Trooper agreed. About 7 months later, the evidence was relocated when the state police barracks was moved. The Trooper in charge had been re-assigned to another post before the evidence was moved. The new Troopers, unaware of the communications between counsel and the original Trooper, authorized the destruction of the evidence. All that remained were some photographs and two envelopes with names of two tree stand belt manufacturers written on them.

The estate filed and then settled for $200,000 an action against the two tree stand belt manufacturers. The estate also filed an action against the Commonwealth in negligence for failure to preserve the evidence. The trial court granted summary judgment for the Commonwealth and the intermediate appellate court affirmed. The Pennsylvania Supreme Court recognized that the duty element in negligence required the Court to make a policy judgment whether it is in the public interest to impose damages for failure to conform conduct to a particular standard. The Court held “that as a matter of public policy, this is not a harm against which [a party] should be responsible to protect.” The primary reason relied upon by the Court was that such a cause of action would potentially allow liability where, due to the absence of evidence, it is impossible to determine whether the underlying litigation would have been successful. The Court noted that there were protections already in place to encourage the preservation of evidence and imposing tort liability would involve financial burdens that outweighed the benefit to encourage preservation. The overall public interest favored rejection of a tort based on speculation, the possibility of litigation proliferation, and one whose benefit was already sufficiently protected under existing law.

New Discovery Rules in Utah may Streamline Your Subrogation Case

The Utah Supreme Court recently approved a number of amendments to the Utah Rules of Civil Procedure which limit discovery in civil actions. The amendments became effective for all cases filed after November 1, 2011.

The purpose of the amendments are to allow discovery in proportion to: needs of the case; amount in controversy; complexity of the case; the parties’ resources; the importance of the issues; the importance of the discovery in resolving the issues – U.R.C.P. 26(b)(2)(A); the likely benefits of the proposed discovery outweigh the burden or expense - R.26(b)(2)(B); the discovery is consistent with the overall case management and will further the just, speedy and inexpensive determination of the case – R.26(b)(2)(C); the discovery is not unreasonably cumulative or duplicative – R.26(b)(2)(D); the information cannot be obtained from another source that is more convenient, less burdensome or less expensive – R.26(b)(2)(E); and the party seeking discovery has not had sufficient opportunity to obtain the information by discovery or otherwise, taking into account the party’s relative access to the information – R.26(b)(2)(F).

The new rules establish 3 tiers of cases based on the damages pled and set limits for standard discovery for each tier:



Amount of Damages

Total Fact Deposition Hours

Rule 33 Interrogatories including all discrete subparts

Rule 34 Requests for Production

Rule 36 Requests for Admission

Days to Complete Standard Fact Discovery


$50,000 or less







More than $50,000 and less than $300,000 or non-monetary relief







$300,000 or more






To obtain discovery beyond these standard limits, the parties may stipulate or a party may file a motion explaining why the extraordinary discovery is necessary. However, the stipulation or motion must be filed before the close of standard discovery and after reaching the limits of standard discovery. R.26(c).

Finally, the standard discovery and new rules on initial disclosures eliminate the need for case management orders, discovery plans and attorney planning conferences and those requirements have been removed from the rules. R.26(f).

Plaintiff’s Initial Disclosures are required to be served within 14 days after the service of the first answer to the complaint. The Defendant must serve its Initial Disclosures within 28 days after Plaintiff’s first disclosures or after Defendant’s appearance in the case, whichever is later.

With respect to experts, within 7 days after the close of fact discovery, Plaintiff must disclose: (i) the expert’s curriculum vitae identifying the expert’s qualifications, publications, and prior testimony; (ii) compensation information; (iii) a brief summary of the opinions the expert will offer; and (iv) a complete copy of the expert’s file for the case.

Within 7 days after this disclosure, the party opposing the retained expert may elect either a deposition or a written report from the expert. A deposition is limited to four hours. The report or deposition must be completed within 28 days after the election is made. Designation of Defendant’s experts follows a similar schedule.

This is a brief summary of the changes to the discovery rules in Utah. From a subrogation perspective, the new rules should streamline discovery and move subrogation cases more quickly toward resolution or trial.

**Many thanks to Leslie Hulburt for her assistance in preparing this blog post.

Subrogation vs Contribution--Does it Matter?

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!

Discovery of Confidential Settlement Information

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. 4th 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. 4th 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: Details, Details, Details

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 and 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.

When is an Expert Report a Draft and When is it a Report? That is the Question.

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.

Prescribed Burns: The Importance of Determining Your State's Approach to Liability

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

Certificate of Merit Requirement in Federal Diversity Cases

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.

Crane Collapse Investigation - Recovering From the Tipping Point

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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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.

Illinois Court Expands Reach of Implied Coinsured Doctrine

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.

Recovering the Cost of Code Upgrades

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.

What happened to my fire scene?

A call comes in regarding a new large fire loss. Based on the preliminary information from the insured, it sounds like there may be subrogation potential. The adjuster promptly retains a cause and origin investigator to go to the scene. However, the cause and origin investigator shows up only to find that an overzealous restoration or cleaning company has already gutted the scene and ruined any opportunity to determine the cause of the fire.

This is a scenario that many property adjusters may be all too familiar with. I often get calls from clients inquiring whether there is any potential claim against the restoration company under this scenario. Unfortunately, in most instances, there is no recourse against the restoration company. In recent years, a number of jurisdictions have considered the issue of whether there is an independent cause of action against a third party for evidence spoliation. The vast majority of jurisdictions to consider the issue have refused to recognize such a cause of action. Those jurisdictions have taken the position that the only remedy against a spoliating party are the sanctions available against that party in litigation for the underlying claim. This remedy is obviously of no help when the spoliating party is a restoration company who has no potential liability for causing the fire.

Even if the loss occurs in one of the handful of jurisdictions that have recognized an independent cause of action for spoliation, it is still very difficult to maintain such a cause of action. First, you have to establish that the spoliating party was a aware of potential litigation and had a duty to preserve evidence. Most jurisdictions recognizing this cause of action require that the destruction of evidence be intentional and be done for the express purpose of depriving another party of its use and it is not sufficient to show the party negligently disposed of the evidence. In most circumstances, it would be difficult to establish this against a restoration company that cleans up a fire scene.

Even if you can establish that the party has intentionally spoliated evidence, you still need to prove the damage aspect. To prove damages, you need to establish that the spoliation prevented you for proving the underlying claim and that but for the spoliation you would have been able to prevail on the underlying claim. However, if the restoration company cleans up the entire fire scene before you can even investigate, in almost all instances, it would be impossible to prove that but for the clean up, you could have prevailed on a subrogation claim against some other party. As a result, in most cases you will not have any legal recourse against a restoration company who cleans up a fire scene before you can investigate. The situation may be different if there is an express contractual agreement with the restoration company to preserve evidence and they fail to do so.

Given that there is likely no legal recourse against restoration companies for cleaning up a fire scene too soon, carriers need to educate everyone involved in the claims process to try to make sure it does not occur. Carriers should make sure that restoration companies they use frequently are aware that they should not do any cleanup until specifically authorized to do so. More importantly, carriers need to let insureds, agents and public adjusters know as soon as a claim is reported that the scene needs to be preserved for investigation and they are not permitted to let emergency services contactors clean up the scene until the carrier authorizes it.

Nomination for Top 50 Insurance Blogs of 2011

We are pleased to announce that this “Subrogation & Recovery Law Blog” has been nominated as a candidate for the LexisNexis Top 50 Insurance Blogs of 2011. Each year, LexisNexis honors a select group of blogs that it believes sets the standard for a particular industry. If you have enjoyed this blog, and would like to support this nomination, please feel free to take a moment to comment on the announcement post on the Lexis/Nexis Insurance Law Community Board.

Each comment is counted as a vote toward the nominated blog. To submit a comment, you need to log on to your free Lexis/Nexis Communities account, and, if you have not previously registered for an account, you can do so for free on the Insurance Law Community Board. The comment box is at the bottom of the blog nomination page, and the comment period for nominations ends on September 30, 2011. At that point, Lexis/Nexis will post the Top 50 Insurance Law Blogs of 2011, and the community will vote for the “Top Blog” from that select group. We are extremely appreciative of even a nomination for such recognition.


Holding Electric Utilities Responsible for Negligent Underground Installation Work

After indignantly waving their tariff in your face, electric utilities are quick to claim "lack of notice" when confronted with claims alleging that an electrical malfunction in the utility's wiring and equipment caused a fire at your insured's property. Many times, this defense deters further recovery efforts. But a thorough investigation of the utility's pre-loss knowledge, likely only possible through litigation, may provide you with a viable subrogation claim.

For example, your electrical expert tells you that the fire at your insured's property was caused by an electrical surge into the electric meter located on the exterior of your insured's house. The surge, in turn, resulted from shorting and electrical activity in the underground distribution bus buried beneath a box outside the property. Your expert also determines that the arcing and electrical activity at the bus probably resulted from settlement, which may have been caused by improperly compacted soil.

The utility claims it had no notice of any problems with the electrical service, settlement, or the compaction of the soil and consequently, no reason or duty to inspect its underground equipment before the fire. Moreover, the utility claims, it sub contracted the electrical service installation work and the developer was responsible for compacting the soil.

You can ask the utility for its internal records concerning service calls for any property serviced by the underground equipment, for records regarding the installation work, and for records regarding the utility's knowledge of problems with settlement at this development, and possibly studies in the utility's possession regarding the effects of settlement and their equipment's ability to withstand anticipated ground settlement. Of course, the utility is not going to voluntarily provide you with any information. So the reality is, if you have a good expert and the case is sufficiently large, it may be in your best interest to file suit to obtain the information and the utility's internal documents you need to support your claims, or to confirm that there is no basis for a claim against the utility.

So, just how much do you earn, anyway?

Lawyers deposing experts often delve into matters pertaining to the witnesses' compensation. Indeed, FRCP 26(a)(2)(B)(vi) contemplates that an expert's report must contain "a statement of the compensation to be paid for the study and testimony in the case". However, at what point will questions probing the amount of income that an expert earns be considered intrusive and not relevant? While the federal courts often allow litigants liberal discovery of expert credentials, most courts now limit the scope of the inquiry when litigants overreach to learn details about the extent of an experts' earnings outside the matter where he/she is testifying. In Young v. Pleasant Valley School, No. 3:07-CV-854 (M.D.Pa. Aug. 18, 2011), Chief Judge Yvette Kane ruled that absent a showing of relevance or necessity, the request of annual income information from an expert is "overkill" and not discoverable. Id. at 4. Plaintiffs filed this civil rights action based on claims that the minor plaintiff's high school teacher promoted a hostile classroom environment by showing explicit photos and directing student to read sexually graphic books. The defense retained Dr. Edward Dragan from the Educational Management Consulting firm to opine that the school district acted appropriately in reviewing the allegations, disciplining the teacher and monitoring the class to make certain potentially offensive materials were removed. Dr. Dragan was presented for a videotape deposition and during a voir dire of his credentials was asked: " How much income did you achieve in the last year on . . .providing expert testimony, what's your income?" Id. at 1. Dr. Dragan refused to answer, and claimed the information was personal. Id. at 2. On the eve of trial, the plaintiff's sought to exclude his testimony as a sanction contending that the plaintiffs have a right to all information showing the expert's bias and interest.

The court disagreed noting that this broad question was needlessly intrusive and lacked relevance. Chief Judge Kane noted that pertinent compensation information was previously disclosed, including the amount of Dr. Dragan's compensation for testifying in the matter, the cases in which Dr. Dragan testified over a seven year period, and the allocation of matters for which he testified on behalf of a plaintiff or defendant. The court referenced a line of cases from district courts in Maryland, Tennessee, California and Indiana holding that income an expert earns is not discoverable absent a showing that other information furnished is insufficient or that the financial information is otherwise probative.

As a practice tip, there may be instances where the amount of income of an expert may be discoverable. One such instance may be where an expert testifies exclusively on behalf of a plaintiff or defendant. In Young, Chief Judge Kane commented that Dr. Dragan testified equally on behalf of plaintiffs and defendants, so there was no showing that he had an economic incentive to show a bias toward either party in any particular case. If a party can show that an expert depends upon one party to earn his income, there may be grounds to seek discovery of an expert's income. Similarly, discovery may be permitted if there a showing that an expert has become a "professional witness" , demonstrated by a "significant pattern of compensation that would support a reasonable inference that the witness might color, shade, or slant his testimony in light of the substantial financial incentives" Cooper v. Schoffstall, 588 PA 505, 905 A.2d. 482, 495 9PA 2006). However, even with a proper showing, the court may still require a showing of why less intrusive financial information would not suffice to demonstrate the bias of a witness. Behler v. Hanlon, 199 FRD 533, 561-62 (D.Md. 2001).

Failure To Warn: Read The Fine Print

When someone is injured or property is destroyed because a manufacturer did not warn about known dangers you may think your case is a slam dunk. But before you start your victory dance, make sure you can prove that the warning would have been read. Recently, the California Court of Appeal for the Fifth District overturned a jury verdict in excess of $12 million because the plaintiffs did not prove that the failure to warn caused their injuries.   Huitt v. Southern California Gas Company (2010) 188 Cal.App.4th 1586.   In Huitt, two plumbers were injured in a gas explosion due to a phenomenon called "odor fade" whereby the odorant added to natural gas was absorbed into new piping. Without the odorant the plumbers were unaware of the presence of natural gas. The plaintiffs argued that the gas company had a duty to warn that new pipes absorb the odorant. 

The appellate court found that even if the gas company had issued a warning, there was no evidence that the plumbers would have become aware of the warning. The court distinguished this case from those dealing with products such as cigarettes, where a warning can be placed directly on the product. In contrast, natural gas cannot be seen and has no packaging. The court found that the plaintiffs did not prove how the gas company could have delivered an effective warning. Examples offered at trial were a notice included in the customers' bill or a posting on the company website. However, in these hypotheticals there is no evidence that the plumbers would have received the warnings.   The court reasoned that even if there had been a warning there is no evidence that the accident would have been avoided. Therefore, it does not make sense that a lack of warning caused the plaintiffs' injuries. The court ultimately held that recovery was precluded because the plaintiffs failed to establish that a timely warning issued by the gas company would have prevented the accident. 

In conclusion, it is not enough to prove that the manufacturer knew of a dangerous condition and did not warn of it. A plaintiff must also prove that the lack of warning actually caused the harm.

Ninth Circuit Holds Loss of Use Damages and Surveyor's Fees Recoverable in Maritime Subrogation Case

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.

Finding of Bad Faith Not Required in Arkansas for a Jury Instruction on Spoliation

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.

North Carolina Revisiting Contributory Negligence

In the United States, there are only 6 jurisdictions that continue to bar recovery for a plaintiff if their own negligence contributed in any way to the cause of their injuries- Virginia, Maryland, South Dakota, Alabama, the District of Columbia and North Carolina. (South Dakota does allow recovery where the plaintiff’s negligence is slight in comparison to the negligence of the tortfeasor.) While it is clear that the theory of contributory negligence is a dinosaur among legal doctrines, those jurisdictions that continue to follow it have shown little signs of giving it up- until now.

North Carolina House Bill 732, known as the Tort Reform Act of 2011, is currently under consideration in the North Carolina legislature. If it is passed, House Bill 732 could impact recoveries both in and out of North Carolina in a number of ways.

First, House Bill 732 would abolish contributory negligence in favor of a modified comparative negligence scheme. A “pure” comparative negligence scheme allows a plaintiff to recover that amount of damages that are attributable to the torfeasor regardless of any proportion of the plaintiff’s own negligence in causing their injuries.  Under the modified scheme currently proposed in the bill, a plaintiff would be able to recover damages for injuries as long as the plaintiff’s own negligence was not equal to or greater than the combined responsibility of all other parties and released persons determined to have caused the injury. For subrogation purposes, this means that as long as your insured’s actions constitute less than half of the negligence leading to the injuries, you can recover the proportion of total damages caused by the tortfeasor(s).

Second, House Bill 732 would abolish sovereign immunity for governmental entities. Sovereign immunity currently bars most actions against state agencies and their employees from suit as long as the agency was performing a governmental function (police, fire, etc.). The Bill would limit the damages that are recoverable and would also make the Industrial Commission the forum of first impression for cases of negligence against the State, but this portion of the bill could potentially open up formerly unavailable avenues of recovery against governmental agencies.

Finally, as noted, these few hold-out jurisdictions have shown little inclination in the recent past to change their stance on contributory negligence. If North Carolina breaks ranks, it is possible that other jurisdictions will be spurred to follow suit. If so, large metropolitan areas like Baltimore, Richmond and Washington D.C. may soon be more fertile than ever for future recovery.

Fourth Circuit Clarifies Removal Process

The Fourth Circuit Court of Appeals has recently clarified its interpretation of the procedure for removing a case to federal court in Barbour v. International Union, No. 08-1740, 2011 WL 242131 (4th Cir. Jan. 27, 2011). Courts strictly construe the removal statutes, 28 U.S.C. §§ 1441 and 1446, to limit the jurisdiction of federal courts. Doubts about the propriety of removal are resolved in favor of remanding the case to state court. Dixon v. Coburg Dairy, Inc., 369 F.3d 811, 816 (4th Cir. 2004) (en banc). Therefore, a defendant’s failure to comply with the statutes’ requirements—and the relevant jurisdiction’s interpretation of those statutes—can defeat removal on technical grounds and keep the case in state court.

Section 1446 requires a defendant to remove a case within 30 days of being served with the complaint. When there is only one defendant this procedure is straightforward: when there is more than one, the situation is more complicated. Courts have universally applied the “rule of unanimity,” which requires all defendants in an action to formally “join in or consent to the notice of removal, otherwise the removal is defective.” See Getty Oil, Div. of Texaco, Inc. v. Ins. Co. of North Am., 841 F.2d 1254, 1262 (5th Cir. 1998). Some courts have recognized exceptions to this rule where (1) the non-joining defendant has not been served; (2) the non-joining defendant is merely a nominal or formal party; or (3) the removed claim is independent. Parker v. Johnny Tart Enterprises, Inc., 104 F. Supp. 2d 581, 584 (M.D. N.C. 1999).

The Fourth Circuit recently confirmed its long-standing position, which differs from every other Circuit that has addressed the issue, that the consent or joinder in the removal be simultaneous. In 1992, the Fourth Circuit articulated the “McKinney Intermediate Rule” in a footnote, which provided that “where B is served more than 30 days after A is served, . . . if A petitions for removal within 30 days, the case may be removed, and B can either join in the petition or move for remand, [but] . . . if A does not petition for removal within 30 days, the case may not be removed.” McKinney v. Board of Trustees of Maryland Comm. College, 955 F.2d 924, 926 n.3 (4th Cir. 1992).

The McKinney rule varies markedly from the rules applied in other Circuits. The Fifth Circuit maintains the “First-Served Defendant Rule,” whereby the removal notice must be filed within 30 days of the first defendant receiving service, and all then-served defendants must join in that filing in order for it to be effective, even if they were served with the complaint the day before the 30-day window expired. The Sixth, Eighth, Ninth (as of this January) and Eleventh Circuits follow the “Last-Served Defendant Rule,” which allows any defendant to file a notice of removal within 30 days of being served. Under this interpretation, even if the earlier-served defendants chose not to seek removal within 30 days of service, a later-served defendant can try to persuade them to join its removal petition.

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California Fire Fighting Immunity Remains Strong but Not Without Exception

How far does California's grant of immunity for the tortious acts of firefighters extend, and specifically, when can a fire department be liable for the negligent operation of its fire engine? The California Court of Appeal in Varshock v. Cal. Dept. of Forestry and Fire Protection (2011) D057709 attempted to answer these questions in a case arising out of the 2007 San Diego County wildfires. Thomas Varshock lived with his wife, Dianne, and their son, Richard, within an area consumed by one of the 2007 wildfires. As the fire approached and burned the Varshock's property, the family evacuated and found a group of firefighters in the nearby area to whom they pled with to save their home. The firefighters agreed, drove to the Varshock's property with Thomas and Richard aboard, and attempted without success to put out the blaze, which at this point consumed the Varshock's residence. Realizing that the fire was uncontrollable, the fire captain told his crew, along with Thomas and Richard, to retreat into the fire engine. Tragically, when attempting to drive the fire engine away from the blaze, winds blew flames across the fire engine causing its engine to die and subjecting the vehicle to intense heat and smoke. Thomas died as a result, and Richard along with the other firefighters suffered severe burns.

The Varshock family sued the California Department of Forestry and Fire Protection ("CAL-FIRE") based primarily upon the alleged negligence of the fire captain in his decisions to (1) drive the fire engine to the Varshock's property with Thomas and Richard aboard without first verifying if there was an adequate escape route; (2) drive the fire engine into a location that had poor access and inadequate space to turn around; and (3) park the fire engine too close to the fire itself. CAL-FIRE moved for summary judgment on the ground that it was entitled to immunity under Government Code section 850.4, which the Varshocks argued did not apply to the case due to a particular exception established under Vehicle Code section 17001.

Government Code § 850.4 provides the following grant of immunity: "Neither a public entity, nor a public employee acting in the scope of his employment, is liable for any injury resulting from the condition of fire protection or firefighting equipment or facilities or, except as provided in Article I (commencing with Section 17000) of Chapter 1 of Division 9 of the Vehicle Code, for any injury caused in fighting fires." Among the statutory exceptions referred to in section 850.4 is Vehicle Code section 17001: "A public entity is liable for death or injury to person or property proximately caused by a negligent or wrongful act or omission in the operation of any motor vehicle by an employee of the public entity acting within the scope of his employment."

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Subrogation in Louisiana: Differences and Opportunities

Louisiana. Home of the Big Easy, Mardi Gras and drive-thru daiquiri bars. Louisiana is also home to a unique legal system called the civil code system, which the Pelican State inherited from French and Spanish settlers. Basically, a civil code legal system means that most of Louisiana law originates from codes and statutes, rather than from judge-made law (common law). For this reason, handling subrogation matters in Louisiana can present unique challenges, but it can also provide opportunities not found in common law states.

In general, I found that Louisiana law is more supportive of subrogation actions than common law jurisdictions. For example, a subrogated carrier may assert claims against a defendant for causes of loss that are not covered under the policy. See Independent Fire Insurance Co. v. Kline, 454 So.2d 418, 419 (La. App. 3rd Cir. 1984). In Kline, the insured’s carport collapsed during high winds. Damages caused by high winds were covered under the insured’s policy. The subrogated insurer (that paid under the policy) sued the contractor that built the carport for construction defects. Defects in construction were not covered under the homeowner’s policy. The contractor-defendant asserted that the subrogated insurer did not have subrogation rights because the claims asserted in the petition were not covered losses under the homeowner’s policy. On appeal, the 3rd Circuit Court noted that the subrogation agreement assigned “all claims” to the insurer. The Court reasoned that the term “all claims” included all the claims that could have been asserted by insured against any potential defendant, including those claims not covered under the insurance policy. The Court returned the case to the trial court for a trial on the issue of causation (high winds or construction defects).

Another important difference in Louisiana is the general acceptance of subrogation rights arising from settling third-party liability claims. In general, Louisiana permits a liability insurance carrier to subrogate against a third-party tortfeasor after settling the plaintiff’s claims. Many times, this situation presents itself in environmental contamination or personal injury cases. In general, the settling plaintiff assigns his/her subrogation rights to the liability carrier through the settlement agreement and release, thereby granting the settling carrier conventional (contractual) subrogation rights.

While the vast majority of Louisiana law is conceptually the same as common law jurisdictions, a major difference is in the terminology. For example, a statute of limitations is referred to as “prescription,” and a statute of repose is referred to “peremption.” As I joked with my colleagues after obtaining my Louisiana bar license last year, the Louisiana bar should provide a Louisiana-to-common-law dictionary for those of us who started our practice at the common law.  Once the differences and opportunities in Louisiana are understood, as they say in Cajun country: Laissez les bon temps rouler—Let the good times roll.

Missing a few links in the chain of causation? Don't give up, you may not need them.

A fire occurs in a garbage can causing damage to a home. Joe and John Smith, construction workers installing hardwood flooring in the home on and prior to the date of the fire, admit that they smoke each day near the job site. They further admit that they typically extinguish and then discard their cigarettes in the same garbage can where the fire began, including doing so on the date it occurred. The garbage can itself is almost completely destroyed in the fire, and no trace of any cigarettes are found. No witnesses saw the fire begin, and nobody saw the Smiths discard a smoldering cigarette in the garbage can. Finally, no evidence can be shown to exclude the possibility that a third-party, as opposed to the Smiths, left a smoldering cigarette in this garbage can. Think these facts are insufficient to prove that Joe and John caused the fire in a civil case? You may be surprised.

The hypo given above describes the essential facts in the California Court of Appeals case of Garbell v. Conejo Hardwoods, Inc. (LC076832). The Second Appellate District in Garbell reaffirmed the established tenet of California law that Plaintiffs in civil cases do not need to prove causation with absolute certainty, but rather only need to show that their theory is probable given the evidence at hand. In reaffirming this principle, the Garbell court rejected the Defendant's contention that expert testimony was required to establish every link in the chain of causation, and instead held the expert investigator's process of elimination based analysis to be sufficient.

The fire investigator in Garbell concluded that the fire began in the garbage can and eliminated all causes of the fire except for a smoldering discarded cigarette or spontaneous combustion. The court directed a verdict in favor of the defense on the spontaneous combustion theory, leaving the jury only the discarded cigarette theory of causation to consider. Since the investigator could not testify if it was more likely than not that the smoldering cigarette belonged to one of the Defendant's workers rather than some other third-party, the defense argued that there was insufficient evidence that the Defendant was responsible. The jury disagreed by ruling for the Plaintiff, and the court upheld the jury's finding permitting the jury to draw reasonable inferences from the evidence that the Defendant was to blame.

The end result of this case provides two valuable lessons. First, the next time you can't affirmatively prove causation, don’t be dismayed, a process of elimination based analysis may be sufficient to prove your theory. Second and equally important, expert testimony, such as the fire investigator's above, is substantially more likely to be admissible in courts (such as in California state court) following the Kelly/Frye "general acceptance test" governing the admissibility of expert opinions, as opposed to Daubert (followed in federal court and in some states) whereby the test for admissibility of expert opinions is much more stringent. It is unlikely that the investigator's process of elimination based analysis in Garbell was tested or peer-reviewed, which are both significant factors that would be considered in determining the admissibility of this testimony under Daubert, unlike under the applicable Kelly/Frye standard where the theory must only be shown to be generally accepted in the particular field. Therefore, it's always important to analyze the expert opinions needed to establish your case in weighing whether to file in a court following Daubert as opposed to Kelly/Frye, as a court applying Daubert just might require your expert to prove those additional missing links in the chain.

Inverse Condemnation Alive and Well in Oregon

In February 2011, the Oregon Court of Appeals reaffirmed that the doctrine of "inverse condemnation" is alive and well in Oregon. Inverse condemnation claims do not require a showing of negligence, and instead arise by showing that a government actor (e.g. a city) “substantially interfered” with an owner’s right to use his or her property, and that therefore the owner is owed “just compensation” under the Constitution (in this case, Article I, Section 18 of the Oregon Constitution—the “Takings Clause”). The case, Dunn v. City of Milwaukie (CV07040247), stemmed from property damage caused when a municipal sewer system backed-up into a home. The City, at the time, had been “hydrocleaning” a nearby sewer (blasting high-pressure water from a tanker), allegedly causing the backup. While this cleaning was taking place, sewer water shot from bathroom fixtures into the home and caused substantial property damage throughout.

The Court of Appeals affirmed the trial court's $55,000 award based on the homeowner's inverse condemnation claim. In its decision, the Dunn Court rejected arguments from the City that it did not "intend" to harm the plaintiff, and that since the damage was repairable, that there was no "substantial interference" with the homeowner’s property rights. The Dunn case is a recent reminder of the subrogation opportunities that may arise in property damage cases stemming from government work or municipal systems. Even where a case does not involve negligent work performed by a municipality (or other government actor), a subrogating carrier may still pursue a recovery case if it can demonstrate that the government impeded its insured’s property rights.

The Georgia Statute of Repose for Products: When Does Time Begin to Run?

Georgia has a statute of repose for claims involving defective products. O.C.G.A. §51-11-11(b)(2) states that “no action shall be commenced pursuant to this subsection with respect to an injury after ten years from the date of the first sale for use or consumption of the personal property causing or otherwise bringing about the injury.” [Emphasis Added]  Prior to 2006, based upon this statute, products claims were brought against product manufacturers within ten (10) years after the product was purchased by the first consumer or user. However, in 2006 the ruling in Johnson v. Ford Motor Company changed the game. In Johnson, the Georgia Court of Appeals held that a claim involving damage caused by a product’s component part must be filed within 10 years after the part was incorporated into the final design of the product by the manufacturer.

In Johnson, the plaintiff suffered property damage when her Lincoln Town Car erupted into flames inside of her neighbor’s garage. The fire spread from the neighbor’s home to the plaintiff’s home. The plaintiff alleged that the vehicle’s speed control deactivation switch failed and caused the fire. The plaintiff sued the vehicle and the switch manufacturers to recover the damage to her property. The Court upheld the lower court’s grant of summary judgment in favor of the manufacturers and held that the 10 year statute of repose began to run “when Ford installed the switch in the car and the car became operable.” The Court reasoned that “when the car was driven off the assembly line, the starter had been actively placed in use, was in fact being used, and did not require purchase from the end user or consumer to be used for its “intended purpose.”

On February 7, 2011, the Georgia Supreme Court issued a ruling resolving the controversial issue raised in the Johnson case. See Campbell v. Altec Industries Inc., 288 Ga. 535 (2011). In Campbell, the Eleventh Circuit certified the following question to the Georgia Supreme Court: “In a strict liability or negligence action, does the statute of repose in O.C.G.A § 51-1-11 begin running when (1) a component part causing an injury is assembled or tested, (2) a finished product, which includes an injuring component part, is assembled, or (3) a finished product, which includes an injuring component part, is delivered to its initial purchaser?”

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Texas Tort Reform 2011: Back So Soon?

Don't look now, but the Texas Legislature may be back up to its old tricks. That's right, "tort reform" has once again become a hot topic in Texas. On March 14, 2011, two separate bills were introduced in the state Senate and the state house of Representatives that could fundamentally alter civil litigation in Texas (yet again). The bills (referred to as S.B. 13 and H.B. 274, respectively) effectively creates a "loser pays" system to address what the legislature believes to a continuing "lawsuit crisis" in Texas. Governor Rick Perry has expressed his support of a loser pays tort reform initiative, and has publicly commented that he is fully committed to ensuring that the bills make their way through the legislative process.

Essentially, the bills would make the losing party - and in one of the bills, the losing lawyer - responsible for paying the prevailing party's attorneys' fees and litigation costs. However, the bills approach this issue in different ways. Specifically, S.B. 13 allows a "prevailing party" to recovery attorneys' fees in lawsuits for services, labor and materials; lost or damaged freight; killed or injured stock; contract claims and defamation actions. The bill further provides that a winning plaintiff shall pay litigation costs if the plaintiff refuses a settlement offer, a judgment is ultimately signed by the court and the amount of monetary relief in the judgment is more favorable to the defendant who made the settlement offer than the actual settlement offer itself. S.B. 13 also commissions a study to be conducted by the Texas Supreme Court to determine the most effective manner to implement a "loser pays" system. Under S.B. 13, the Texas Supreme Court would be required to report its findings to the legislature by 2012.

H.B. 274 contains similar language to S.B. 13, but also allows for attorney liability for litigation costs. Specifically, the bill would permit the trier of fact to determine whether the civil action prosecuted by a claimant was "an abusive civil action," or "a civil action that a reasonable person would conclude is an abuse of the civil justice process." If the trier of fact answered in the affirmative, the attorney would be individually responsible for his opponent's litigation costs which would include "reasonable and necessary attorney's fees, reasonable and necessary travel expenses, reasonable fees for not more than two testifying expert witnesses and court costs." The bills also contain provisions for early dismissal of frivolous lawsuits, ensuring that new causes of action are not created unless expressly established by the legislature and speedier trials with reduced discovery for claims under $100,000.00.

Obviously many of the provisions could adversely affect subrogation claims and counsel who handle such claims. Fortunately, plaintiffs and subrogated carriers have an unlikely ally for this round of potential tort reform: civil defense lawyers. A recent article in "Texas Lawyer" noted comments from several prominent defense attorneys who are concerned with "the integrity of the civil justice system." These lawyers publicly noted that extreme measures in tort reform fundamentally affect overall fairness in the legal system and could ultimately cause the system to "collapse on itself." Moreover, Texas already has similar laws which allow defendants to recover attorney's fees making the new bills somewhat redundant.

As with any major legislative initiative that affects the rights of subrogated carriers, the Texas offices of Cozen O'Connor will continue to monitor and provide periodic updates regarding the progress of both bills.

California Court of Appeal Puts the Brakes on Contractually Exculpating Liability for Gross Negligence

Riding motocross has been part of my life for nearly twenty years. Every weekend as a kid, I would wake my parents up early, load my motorcycle in the back of a truck, and we would drive to the local motocross track. The line of trucks waiting to enter couldn’t move fast enough. I remember thinking – “Just sign in and let’s go!” Virtually all motocross tracks in the country have riders and spectators print and sign their name to a “sign-in sheet” at the entry gate. That sheet invariably contains language attempting to release the owner of the premises from liability. Today, I still anxiously wait in my truck to sign in and ride at motocross tracks throughout Southern California. But releases like these may not slow down your subrogation case.

In Rosecrans v. Dover Images, Ltd., plaintiff and motocross rider, Jerid Rosecrans, loaded his bike in the back of his truck and drove to Starwest Motocross Track in Perris, California. Before entering, an attendant at the entrance booth gave Jerid a clipboard with a document titled, “Release and Waiver of Liability Assumption of Risk and Indemnity Agreement.” Several paragraphs set forth the waiver and release of liability language. He signed the document and then started riding on the track after putting on his gear (helmet, goggles, chest protector, etc.).

Unfortunately, Jerid crashed on the downside of a blind jump. Luckily, he was not hurt as a result of the initial crash. But his luck ran out as he stood up to get back on his bike. Another rider who was going over the blind jump collided into and injured him. The track did not have a caution flagger stationed at the jump to alert the other rider. Jerid filed a lawsuit against the track alleging that Starwest “negligently owned, operated, maintained and/or controlled” the track because there was not a caution flagger stationed at the take off of the jump to signal that Jerid had crashed.

Starwest moved for summary judgment asserting the waiver as a complete defense to the asserted claims. The trial court agreed with Starwest and concluded that the Release completely barred Jerid’s claims. The California Court of Appeal upheld the Release to the extent that it barred claims for simple negligence. But the Court disagreed with the trial court and held that the Release did not bar claims for gross negligence. The plaintiff’s safety expert opined that not having a caution flagger stationed at a blind jump was “inexcusable, a blatant disregard for riders’ safety, and criminal.” Accordingly, the Court concluded that a reasonable jury could find the track’s conduct to constitute an extreme departure from the standard of care. Ultimately, the Court refused to allow defendants to use a release of liability to shield them from extreme negligent conduct.

Elimination of the "Process of Elimination"? Fuh-get About It

Earlier this year, a fire investigator advised me that the 2011 edition of NFPA 921, Guide for Fire and Explosion Investigations, would be coming out in February. He alerted me that the new edition was “doing away with the process of elimination method for determining the cause of a fire.” Not much later a client called me with similar news and to ask what that meant to the viability of our case which hinged on eliminating all possible causes for the fire, but one.

Indeed, in the 2011 edition of NFPA 921, the entirety of Chapter 18 dealing with Fire Cause Determination has been rewritten. Contrary to the concerns of the excited fire investigator and the worried client, the process of elimination remains alive and well.

I suspect that the trigger for their concern was the heading to section 18.6.5 ("Improper Process of Elimination"). Reading the title of the section without the content might lead one to conclude that the NFPA was advocating that the process of elimination may no longer be used to determine the cause of a fire. That is not the case. Section 18.6.5 relates to "negative corpus" or the process of determining the ignition source for a fire by eliminating all ignition sources found, known, or believed to have been present in the area of origin, and then claiming such methodology is proof of an ignition source for which there is no evidence of its existence.

In contrast, we sometimes can eliminate all ignition sources, but one, thereby revealing the cause of a fire. That is exactly the process advocated by the NFPA. Section 18.5 in NFPA 921 (2011 ed.) states that "Systematic evaluation (hypothesis testing) is … conducted with the elimination of those hypotheses that are not supportable (or refuted) by the facts discovered through further examination." Section 18.5.2 instructs that the investigator should also carefully consider potential ignition sources which do not correspond to a physical device that can be recovered. Section 18.6 reads: "Each of the alternate hypotheses that were developed must then be tested using the Scientific Method. If one remaining hypothesis is tested using the 'scientific method' and is determined to be probable, then the cause of the fire is identified."

As Dr. Vytenis Babrauskas (renowned author of The Ignition Handbook) commented in committee: "The Process of Elimination is, in fact, the cornerstone of the Scientific Method."

Lasko Recalls 4.8 Million Box Fans

Today the Consumer Product Safety Commission announced a voluntary recall of 4.8 million Lasko box fans. The recall notice reports “an electrical failure in the fan’s motor poses a fire hazard to consumers.” The CPSC cites a “barn fire resulting in extensive property damage” as a basis for the recall. This barn fire turned into a large and successful subrogation case handled by Cozen O’Connor.

The case involved a massive barn fire at a breeding farm in Hondo, New Mexico. Six world class race horse breeding stallions were killed in the fire and the barn itself was totaled. Cozen O’Connor represented over sixty sophisticated horsemen clients who had ownership interests in the stallions, and their insurers. The insurers for the horses and the barn went to great lengths to preserve the fire scene, and as a direct result of their diligence the experts were able to examine each electrical device in the barn and identify the fatal flaw in the Lasko fan motor. The matter was aggressively litigated in Federal Court in New Mexico, and was favorably resolved prior to trial.

Stumbling Over Michigan's Distinction Between Contractual and Common Law Duties

Tort claims arising from construction defects often falter in the looming presence of a contract. The existence of a contract is particularly challenging for the plaintiff who is not in contractual privity with the defendant. Under Michigan law, the distinction between duties owed by a contractor arising from a contract and those arising in the common law plays a critical role in properly pleading a tort claim. The distinction is acutely unclear with respect to claims arising from defective construction.

The “plaintiff not in privity” situation was addressed by the Michigan Supreme Court in Fultz v. Union Commerce & Associates, 470 Mich. 460 (2004). In Fultz, the Court declared that the plaintiff must show the defendant owed a duty to the plaintiff that was “separate and distinct from the defendant’s contractual obligations” in order to recover in negligence. The Fultz court further explained that a separate and distinct duty could be breached through a defendant’s creation of a “new hazard.” Since Fultz, the concepts of “separate and distinct duties” and “new hazard” under Michigan case law have remained unclear, thus an element of uncertainty exists with respect to pleading those elements.

On September 7, 2010, the Michigan Court of Appeals further explained the contract-common law duty dichotomy and the “new hazard” theory of breach. See Boylan v. Fifty-Eight Ltd. Liab. Co., 2010 WL 3488995 (Mich. Ct. App. 2010). In Boylan, the defendant was hired to install a water line that traversed an easement on the plaintiff’s land. The defendant contractor did not restore the terrain to its preexisting condition, thus predisposing the land to flooding and eventually causing the plaintiff’s septic system to fail. The court determined that the defendant had a duty that was grounded in “common-law duties to avoid permanently damaging” the landowner’s real property which was separate and distinct from its contractual duties. The court held that the defendant breached its duty when it created a “new hazard” that interfered with the plaintiff’s drainage system and caused the home’s septic system to back up.

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Houses Can Still Make Cents: Illinois' Implied Warranty of Habitability

Residential construction defects are common occurrences in Illinois where numerous homes and condominiums quickly went up before the housing bubble burst.  Illinois' expansion of the economic loss doctrine has made alleging tort theories against builders and vendors (those that sell) of houses very difficult.  Nonetheless, there may be express or contractual warranties from the builder providing an avenue of recovery.  In the event those express warranties have expired, Illinois implied warranty of habitability can play a pivotal role in pursuing recovery from builders and vendors of homes. 

The implied warranty of habitability is a consumer protection warranty of public policy.  The rationale behind the warranty is that home buyers do not have the ability to detect latent defects in the homes they are purchasing.  They rely on builders and vendors to properly construct the home and, for that reason, builders and vendors should be liable for the repair costs for a defective home.  The warranty continues to expand and is actionable against a builder or a vendor of a home or a landlord in a rental situation.  The warranty can be used as a remedy for tenants, home buyers and successive purchasers. 

Another benefit of the implied warranty of habitability is that it is very difficult to disclaim.  The builder or vendor has the burden to prove that the warranty was disclaimed specifically by name, that the disclaimer was conspicuous and fully discloses the consequences of its inclusion, and that an agreement regarding the disclaimer was actually reached with the buyer.  Because of the strict disclaimer rules, many Illinois courts invalidate purported disclaimers.

Even with the expansion of economic loss in Illinois, an implied warranty of habitability cause of action allows subrogated insurers to avoid the economic loss pitfalls.  It has increasingly become one of the prime means in Illinois to pursue builders and/or vendors for latent defects.

Be Careful Not to Split the Cause of Action

Many states, including Pennsylvania, recognize that once a property insurer has paid its insured for a property damage loss, that insurer owns a separate and independent cause of action against the tortfeasor responsible for causing the damage. See State Farm v. Ware's Van Storage, 953 A.2d 568 (Pa. Super 2008). In Ware's Van Storage, State Farm's insured filed a lawsuit seeking compensation for his personal injuries arising out of a truck accident; he did not make a claim for his property damage deductible or any uninsured property damage. State Farm commenced a subrogation action seeking recovery of the amount it paid its insured for property damage arising out of the accident. State Farm did not include the insured's deductible interest of other uninsured claims in its complaint. The defendants in the State Farm case filed preliminary objections in the nature of a demurrer asserting that State Farm had waived its subrogation claim because its insured had already filed a complaint seeking damages arising out of the same transaction or occurrence. The Court concluded that under Pennsylvania law, the subrogated insurer and its insured are not compelled to assert their related claims in a single action. "State Farm's insured, once reimbursed for its property damage under the terms of the insurance policy, has no further interest in pursuing that claim… Once payment is made, the unity of the insurer's interest with that of its insured is eliminated, rendering the parties' interest in litigation qualitatively dissimilar." State Farm and its insured were not subject to the compulsory joinder of their cases and were permitted to maintain separate causes of action for their separate claims. However, the Court noted that if State Farm had included the insured's deductible or any uninsured property damage claim, or if the insured had included a claim to recover its deductible or other property damage in his complaint, the causes of action would have to be consolidated and could not proceed as separate cases.

Other courts have held that all damages resulting from an "indivisible" cause of action must be addressed in one proceeding. See, e.g., Simpson v. Robert's Express Inc., 182 A.2d 449 (NH 1962); Federal Ins. Co. v. Cheoy Lee Shipyards, Ltd., 210 W.L. 255 7484 (S.D. FL 2010). In Simpson, the plaintiff was injured in an automobile accident that also caused damage to his insured vehicle. The Court determined that since the personal injury and property damage arose out of the same accident, it constituted a single cause of action that could not be split between the insured and his insurer. The Court concluded that the insurer knew about the insured's personal injury lawsuit and should have intervened in that case to recover its property damages. Instead, after the injured plaintiff obtained a verdict, the vehicle insurer filed a claim for property damage arising out of the same accident. The Court held that the subrogation claim was barred by the insurer's failure to intervene in the insured's personal injury case. The Court noted, however, "[i]f a subrogation claim becomes barred by a judgment because of the insurer's failure to intervene owing to non-culpable ignorance of the pendency of suit, the insurer may be entitled to have judgment vacated."

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Last In First Out: Priority of Recovery for Insurers in Missouri

Although issues between primary and excess carriers regarding who is entitled to what in a subrogation recovery do not arise often, when they do they can involve substantial sums and interesting issues. Last fall the United States Court of Appeals for the Eighth Circuit addressed such issues under Missouri law. The underlying case involved an explosion in 1999 that caused $452 million in total losses. The incident raised issues relating to coverage, damages, allocation between insured and uninsured losses, and priority of recovery between primary and excess carriers. Travelers Property Casualty Ins. Co. v. National Union Ins. Co., 621 F.3d 697 (8th Cir. 2010).

The insured had $200,000,000 in primary coverage and $100,000,000 in excess coverage. It submitted a claim of $285,000,000 to its insurers and claimed significant uninsured losses not covered by its policies. After the explosion, the insured invited the insurers to discuss potential litigation against third parties and the allocation of litigation expenses and recoveries, including its independent claims for uninsured losses. The excess insurer declined to participate as it was not clear that the loss would exceed the primary layer. The insured and the primary carrier entered into an allocation agreement for recoveries and expenses between them at 45% - 55% respectively. The insured invited the excess carrier to join the agreement after it was signed. The excess carrier declined.

Two suits were pursued: one by the insured against the primary carrier on the amount of damage covered by the primary policy and a subrogation action pursuant to the allocation agreement. One defendant in the subrogation action settled for $126,000,000 and the proceeds were split according to the agreement. The case went to trial against the remaining defendant and the jury returned a verdict of $452,000,000 in total damages. After appeal, the defendant was responsible for $97,000,000. After rulings by the trial court in the coverage litigation, the primary carrier paid its $200,000,000 limit, and the excess insurer agreed to pay $10,000,000 to the insured to resolve the coverage suit. In a settlement agreement the parties reserved issues regarding the excess insurer's subrogation rights due to the pendency of the appeal of the subrogation verdict. After the appeal of that action was decided, the excess carrier sough recovery of its $10,000,000 in federal district court. After rulings on motions for summary judgment were appealed, the Eighth Circuit issued its opinion.

The Court ruled that the excess carrier was entitled to a priority interest in the subrogation proceeds representing insured losses. The excess carrier waived any right to contest the insured's designation of its own recovery as uninsured losses for failing to participate and allowing the insured and primary carrier to incur expenses in pursuit of recoveries. The excess carrier therefore had no priority against the insured to recover uninsured losses under state law or the insurance policy. The excess policy, however, clearly provided it priority in the subrogation provision. The subrogation provision in the primary policy was, at best, silent on the issue. The Court specifically acknowledged that the result under the policies was consistent with the recognized industry practice of "last in first out" for pure excess insures. That practice recognizes the realities of the risks bargained for and premiums received.

This opinion is a good place to start when dealing with issues relating to primary and excess disputes on subrogation recoveries.


Many states have enacted laws requiring homeowners, with claims of construction defects, to follow certain procedures prior to filing a lawsuit against a builder. The procedures generally require that before a homeowner initiates construction defect litigation, it must notify the builder of the claims, allow the builder an opportunity to remedy the defects, pay the homeowner for the cost of repairs, and/or participate in some form of dispute resolution. If the builder fails to respond to the notice, or the process does not resolve the claims, then the homeowner may proceed with the lawsuit.

If the notification laws are not complied with by the homeowner, a lawsuit filed by the homeowner against the builder may be stayed, or possibly dismissed, with the possibility of the expiration of the applicable statute of limitations or statute of repose. 

In a recent California Court of Appeal decision, Nancy Anders, et al. v. Superior Court/Meritage Homes of California, homeowners filed a construction defect complaint against the builder without first following the California notification laws set out in California Civil Code Sections 895-945.5 (entitled “Requirements for Actions for Construction Defects” hereinafter “RACD”). After the homeowners filed the lawsuit, the builder filed a motion to compel the homeowners to comply with the notification and remediation procedures contained in the sales contracts it entered into with the homeowners, which required binding arbitration, and requested that the court stay the litigation until the procedures in the sales agreement were followed. The trial court ruled the contract provisions were unconscionable and unenforceable, and instead required the homeowners to comply with the provisions of the RACD. The homeowners appealed, claiming that because the builder had elected to set out its own procedures, which were found to be unenforceable, the homeowners were under no obligation to comply with the RACD. 

The Court of Appeal ruled that under the specific language of the RACD, a builder may, as an alternative to the RACD, elect to set out its own notice and resolution procedures. However, the court held that if those alternative procedures are found to be unenforceable, the homeowner is not required to comply with the RACD provisions. In other words, the builder does not get two bites at the apple. If it elects to set out its own procedures, it does so at its own risk, and cannot thereafter claim that the RACD provisions apply if the builders’ alternative provisions are unsuccessful or unenforceable. 

Timely Tips for Weather Related Property Damage Claims

Punxsutawney Phil may have predicted an early spring in 2011, but by no means have we seen the end of claims involving pipe freeze-ups and storm-related roofing collapses for the season. Despite the fact that Old Man Winter is not a viable subrogation target, there may be more subrogation potential in these claims than you think. In these situations, it is imperative to involve subrogation counsel from the outset of the investigation.

Too often, media outlets will assign adjectives to winter weather that lead us to believe it was of an intensity observed only once in a decade, century or lifetime. Rather, it is more often the case that these are average storms for the season and the region. The winds, temperatures and precipitation levels usually are not outliers but instead are within the standard deviation of a winter storm for that region. It is more likely than not, for example, that the amount of snow on the roof which caused it to collapse was actually within the “factor of safety” in the roof’s design specification or local building codes.

Because you will likely face many more of these claims throughout the rest of this winter season, here are a few helpful tips and reminders as you conduct your investigations through the remainder of the season:

1. Preserve the Loss Site.  It is all too easy for your target to defend against a subrogation claim based upon the fact that the loss site was spoliated before they had a chance to inspect it. When a loss like a pipe freeze up or structural collapse occurs, it is often catastrophic. Time is therefore of the essence to begin repairs and/or return the structure to a safe condition. For that reason, tip #1 should be undertaken in conjunction with tip #2, 3 and 4.

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Nebraska Supreme Court Closes the Door on Economic Loss Doctrine Exception

On February 4, 2011, the Nebraska Supreme Court, in the case of Dobrovolny v. Ford Motor Company, 281 Neb. Reports 86, addressed the issue of “whether the economic loss doctrine applies when a product self-destructs without causing damage to persons or other property.” The Court addressed the previous decisions by both the Nebraska Supreme Court and the Nebraska Court of Appeals which addressed the “exception” to the economic loss doctrine when there was evidence of a “sudden, violent event.”

The Supreme Court in Dobrovolny, in reversing the Court of Appeals, found that the term “sudden, violent event” was unnecessarily confusing. The Court adopted the rule that disallowed recovery in tort when the damages are to the product alone, following both the Restatement (Third) of Torts § 21 and the United States Supreme Court in East River S.S. Corp. v. Transamerica Delaval, 476 US 858, 106 S. Ct. 2295, 9 L.Ed. 2d 865 (1986) which held:

Even when the harm to the product itself occurs through an abrupt, accident-like event, the resulting loss due to repair costs, decreased value and lost profits is essentially the failure of the purchaser to receive the benefit of its bargain—traditionally the core concern of contract law . . . The maintenance of product value and quality is precisely the purpose of express and implied warranties . . . Contract law, and the law of warranty in particular, is well suited to commercial controversies of the sort involved in this case because the parties may set the term so their own agreements.

476 U.S. at 870-873.

Accordingly, the Nebraska Supreme Court abandoned the “sudden, violent event” analysis and held that the economic loss doctrine prevented recovery under a products liability theory where the damage was solely to the product.

Under-Odorized Propane Gas Recalled

On January 20, 2011 the U.S. Consumer Product Safety Commission (“CPSC”) announced a voluntary recall of Propane (LP) Gas, manufactured by Aux Sable Liquid Products of Morris, Illinois.  The affected propane was sold in portable cylinders and delivered to storage tanks.  The problem with this estimated 700 rail car units of propane gas is that some of the propane did not have sufficient levels of the odorant that should be added to propane to help alert consumers to a gas leak. Without the proper levels of odorant, a clear hazard is created in that failing to detect leaking gas can present fire, explosion and thermal burn dangers to consumers.

According to the CPSC, the recalled propane was sold to propane retailers in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, Vermont and Virginia from February 25, 2010 through September 30, 2010.  The CPSC has encouraged consumers in the affected states who purchased propane gas during the aforementioned timeframe to contact Aux Sable to arrange for a free inspection and exchange.

New Consumer Complaint Database May Aid Subrogation Efforts

On March 11, 2011, the Consumer Product Safety Commission (“CPSC”) will officially launch a new website which offers a forum for consumers to register complaints about product-related safety issues. The database, located at will register complaints of injury or of potential harm filed by consumers, safety groups, health care professionals and other interested parties; non-safety product quality and performance complaints will not be included. Other information traditionally promulgated by CPSC, such as recall notices, will also be published in the database. It is further indicated that the database will provide automated email alerts to subscribers regarding new complaints and recalls.

Previously, product safety issues were publicly reported by the CPSC only after the body of safety complaints regarding a particular product reached the critical mass necessary for a recall. With the introduction of this database, subrogated insurers will be able to discover reported product deficiencies before they result in a recall or even if no recall ever issues.

Because participation in the complaint registration process is not limited to consumers, insurers affected by product failure should also be able to file complaints. If insurers are active in adding loss-causing product defects to the database, the depth and breadth of aggregated product hazard knowledge will grow exponentially, making the new database a more and more valuable resource over time.

Confidentiality Agreements: The Trappings of Concession to Agree

It is as commonplace and disconcerting as ordering specialty food at a fast food restaurant and receiving what they commonly serve. You don't get what you want.

In litigation, product manufacturers, builders and providers of products and ideas are seldom producing background information on those items and ideas without first requiring that the requesting party execute a "confidentiality agreement" which cloaks not only the attorneys and parties, but their experts and consultants as well. These agreements are required as a pre-requisite to the production of any materials which the party required to produce claims is either trademark, proprietary, confidential or trade secret information.

Further, manufacturers and companies are withholding vital information until the requesting party either executes a confidentiality agreement or seeks an order from the Court compelling the production of this information.

In a recent unpublished* California Appeals Court Decision, the Court in Seahaus La Jolla Owners Association vs. Superior Court of San Diego County [San Diego County Superior Court 37-2009-00095253-CU-CD-CTL] [*unpublished decisions can neither be relied upon or cited, but serve as illustration of examining of legal issues] addressed the circumstance of a builder not providing testing data concerning construction materials to a Homeowner's Association which had sued for construction defect of a condominium project. The Appellate Court in examining the facts of the matter, deduced that the trial court owed a duty to formulate an appropriate protective order based upon the interests of the parties and that ordering a party to execute a confidentiality agreement was an abuse of the trial court's discretionary powers.

Hence, ultimately, the Court placed the burden on the party demanding the confidentiality order to establish the need and basis for that claim. Reviewing this decision, it would appear that this vision by the Court at the very least requires that the party seeking the claim of confidentiality must take the initiative by seeking a protective order or by providing evidence at a motion to compel, that the confidentiality claims are valid and supported by potential adverse consequences to the party seeking to protect the information.

While the opinion is unpublished and cannot serve as precedent in this area, it nonetheless demonstrates that product manufacturers, builders and providers of products cannot, without substantive proof, immediately assert and require that litigants execute confidentiality agreements as a precursor to obtaining discovery data. The ubiquitous nature of these agreements, which extend to cloak lawyers, agents, experts and consultants, have far-ranging and perpetual ramifications that affect all items produced in discovery and may ultimately prove to be unwarranted if challenged by Court review.

Contractual Privity Not Required Between Subrogating Insurer and Defendant

The U.S. Court of Appeals for the Ninth Circuit has recently issued an opinion holding that a subrogating insurer can sue a defendant for negligence for damage to property even though the subrogating insurer and the defendant were not in privity of contract.  This opinion provides guidance on privity of contract as well as economic loss issues.

In Affiliated FM Ins. Co. v. LTK Consulting Servs, Inc., Affiliated FM Insurance Company (AFM) was subrogated to the rights of its insured, Seattle Monorail Services Joint Ventures (SMS), for a fire that damaged the Seattle monorail. SMS sued LTK asserting that LTK had provided negligent design advice to SMS, which ultimately caused the fire. LTK challenged AFM’s interest in the Monorail System because SMS only had a contractual right to operate on the property owned by the City of Seattle. LTK argued it was not in privity of contract with SMS, and therefore AFM could not sue LTK. The Ninth Circuit Court of Appeals certified the issue to the Washington State Supreme Court, who concluded that SMS had legally protected interests in the monorail and that LTK, having undertaken its engineering services, had assumed a duty of reasonable care. The Court concluded that LTK’s duty encompassed SMS’s legally protected interests in the monorail, and therefore AFM was free to subrogate and sue LTK for negligence.

California Superior Courts Now Offer Expedited Jury Trial Options

The Expedited Jury Trials Act (ETA) Assembly Bill 2284 became effective in California state trial courts.  Additional rules implementing the program are being prepared by the California Judicial Council.  AB 2284 provides for expedited jury trials in civil cases where both parties agree.   The trials scheduled pursuant to the ETA will be heard on a date certain.  Only eight jurors are required.  Both parties will only have three peremptory challenges each against those jurors.  Each party will have three hours to present their testimony and arguments.  The goal of the program is to conclude a civil trial as close to one day as possible.

The rationale behind the bill is to address the ever increasing delays in getting a civil case to trial.  Limiting the length of trial testimony and argument should make the trial less costly.  Further, shortening the trial to roughly one day will be less burdensome on jurors time away from work.  However, the bill provides that the parties waive all rights to appeal  except as provided for in the ETA.

In the right situation, where the parties cannot agree to resolve a disputed matter, certain simplified cases should be considered for ETA.  Of course the other party must agree to participate to trigger the ETA program. 

Spoliation Sanctions and The Gang That Couldn't Spoliate Straight

Seasoned subrogation professionals do not need to be told how important it is to attempt to afford potential adversaries the opportunity to inspect a loss site before the site, and evidence on the site, has been significantly altered or disturbed. Making such entreaties to an experienced practitioner essentially amounts to “preaching to the choir”.

However, even the seemingly well-developed body of case law regarding spoliation occasionally finds new frontiers to cross. Until recently, the worst-case scenario in spoliation litigation seemed to be the ominously-named “terminating sanction”, which would result in dismissal of a claim. However, in September 2010, a U.S. Magistrate Judge in Maryland (aptly surnamed “Grimm”) attempted to up the ante and impose sanctions upon a spoliator which could potentially have included up to two years’ imprisonment. Victor Stanley, Inc. v. Creative Pipe, Inc., (D.Md. C.A. No. MJG-06-2662, September 9, 2010).

It is important to note that the conduct at issue in the Victor Stanley case involved a defendant’s willful and methodical destruction of electronic records during the course of litigation, in violation of several specific court orders. The defendant and his cronies were so inept in their attempts to destroy information and then cover up their tracks that Magistrate Judge Grimm dubbed them “The gang that couldn’t spoliate straight”. Such conduct is clearly not even remotely akin to an insurer’s asserted failure to preserve a loss site, or artifacts from the site, to the satisfaction of an eventual defendant in a subrogation claim.

It is equally important to note that, upon appeal from Magistrate Judge Grimm’s Order, the U.S. District Judge’s brief opinion held that imprisonment was not an appropriate sanction under the circumstances (the Court upheld the imposition of a default judgment and assessment of $337,000 in attorney’s fees and costs and left open the possibility of civil contempt penalties - - including imprisonment - - if the monetary penalties were not promptly paid). Nevertheless, Magistrate Judge Grimm’s 89-page Memorandum, Order and Recommendation includes a thorough dissertation on the evolution of spoliation law in the federal courts and a facially plausible discussion regarding selection of sanctions that are proportionate both to the degree of misconduct at issue and to the prejudice to the adversary. This discussion ultimately leads to the Magistrate’s Judge’s endorsement of jail time as an appropriate sanction for discovery misconduct.

Although not pertinent to the facts of the Victor Stanley case, Magistrate Judge Grimm’s analysis leaves open the possibility that a negligent spoliator whose conduct causes great prejudice could be subjected to harsher sanctions than an intentional spoliator whose actions cause little or no prejudice. It is therefore not beyond the pale that an even harsher sanction than the so-called “terminating sanction” could still be in the offing in an appropriate future case.

Rethinking Economic Loss: Washington Supreme Court Introduces the "Independent Duty Doctrine"

In a November 2010 decision, the Washington Supreme Court replaced the longstanding “economic loss rule” with a what it has termed the “independent duty doctrine.” The case, Affiliated FM Ins. Co. v. LTK Consulting Services, Inc. , stemmed from a fire in Seattle’s Monorail System. Prior to the fire, the City of Seattle had contracted with SMS to run the monorail, and had also contracted with LTK to perform engineering services on the system. After the fire, SMS’ subrogating carrier, Affiliated FM, sued LTK in tort (alleging its negligence caused the fire). However, LTK argued, and the trial court agreed, that Affiliated FM’s tort claim was properly dismissed under Washington’s economic loss rule because the alleged damages (repair costs and business interruption) were solely economic and therefore only compensable under a contract claim. Since SMS (Affiliated FM’s insured) did not contract with LTK, the trial court effectively ruled that Affiliated FM had no cause of action against LTK even if its engineering work did indeed cause the fire.

The Washington Supreme Court ruled otherwise, holding that Affiliated FM could proceed with a tort claim against LTK. After discussing the confusion and misapplication surrounding the economic loss rule, the Court stated that a “court’s task is not to superficially classify the plaintiff’s injury as economic or noneconomic.” Instead, the Court continued, “an injury is remediable in tort if it traces back to the breach of a tort duty arising independently of the terms of the contract.” In the case of LTK, the Court found that “engineers who undertake engineering services in this state are under a duty of reasonable care.” Since this independent duty existed, it was irrelevant to the Court that SMS did not contract with LTK, that SMS’ damages were “economic” in nature, or that SMS did not actually own the property that was damaged (it was owned by the City, but SMS was contractually obligated to pay for repairs).

We believe that this decision marks an important clarification in what has otherwise been a vague and often improperly applied doctrine, and will give subrogating carriers an opportunity to proceed with a variety claims that may have previously been barred.

Insured's Settlement Submarines Subrogation

In a decision consistent with other jurisdictions, the Washington State Court of Appeals held that if an insurer denies coverage and its insured settles with the tortfeasor, the insurer's subrogation rights can be terminated by that settlement. Further, the settlement does not breach the policy's impairment of recovery rights provision. Vision One LLC v. RSUI, --- P.3d --- (October 19, 2010, Division II)

In Vision One, shoring equipment supporting a poured concrete slab collapsed during the construction of a condominium complex. Vision's insurer denied the insurance claim and Vision sued the carrier for breach of contract, bad faith, and violations of the Consumer Protection Act. Vision also sued the contractor for supplying the shoring equipment. Vision settled with the contractor and the settlement released the contractor from liability. The insurer moved to dismiss the breach of contract claims by arguing that Vision breached the insurance contract by impairing the insurer's subrogation rights against the tortfeasor. The trial court denied the motion and the Court of Appeals affirmed.

The Vision insurance policy provided: "If by any act or agreement after a 'loss' you impair our right to recover from others liable for the 'loss', we will not pay you for that 'loss.'" There were no Washington cases on point. Looking to other jurisdictions, the Court found many agree that when an insurer denies liability and the insured settles, the insurer is estopped from claiming that the insured breached the policy by impairing the insurer's recovery rights. The explanation in Stephens v. State Farm Mutual Auto Insurance Co. was persuasive: "…admittedly the subrogation rights of the insurer could be compromised by a settlement. However the denial is a breach of contract on the part of the insurer and its breach should, by rights, relieve the insured of the punitive effects of his failure to comply with the consent provisions of the insurance policy."

The Court felt it important to note that in Vision One the insured settled with the tortfeasor only after the carrier denied the claim. This was not a case where (1) the tortfeasor knows of the insurer's payment and right of subrogation, (2) the insurer does not consent, and (3) the settlement does not exhaust the tortfeasor's assets. (Leader National subrogation rights not extinguished) or where the insured breached the contract first by settling and extinguishing the insurer's recovery rights before submitting an insurance claim (Kalamazoo subrogation rights not extinguished). The Court concluded in Vision One that if the insurer properly denied the claim, the insurer is not harmed by the settlement. However, if the insurer improperly denied the claim, then the carrier breached the contract first.

The import of the case is that an insured in Washington may waive its carrier's subrogation rights.  Accordingly, subrogating carriers should act quickly in pursuing subrogation and making third parties aware of their claim. Otherwise, what initially could have been a viable subrogation case may turn into a recommendation to close. 

Natural Gas Risers -Often Overlooked as a Potential Fire Cause

Most commercial and residential properties using natural gas have gas riser pipes which connect the primary distribution service line to the natural gas meter. Although the gas riser connects the utility’s distribution line to the utility’s meter, these risers are typically installed by a sub-contracting plumber during original construction. For this reason, the riser often belongs to the property owner, not the utility.

Most gas risers consist of a polyethylene tubing inside of a rigid conduit with metal or plastic connectors on both ends. Gas risers are only used in natural gas systems. Liquid propane gas systems utilize copper or black iron pipe to connect the local supply tank directly to the meter.

A natural gas leak originating at a gas riser typically manifests itself in one of two ways: 1) the leaking gas travels through the soil, accumulates in the sump pit or crawlspace, and finds an ignition source which causes an explosion; or 2) the leaking gas migrates up to the surface of the soil and finds an ignition source, resulting in a fire at ground level. Because the gas leak begins underground, oftentimes it is simply overlooked as a potential ignition source.  

Gas leaks can originate at gas risers due to both manufacturing defects and installation errors. A common failure method is the over-tightening of the plastic connectors during installation. The over-tightening results in a damaged connector which eventually leaks. Manufacturing defects can occur in a variety of ways ranging from improper materials to anomalies in the riser construction. It is important to quickly identify the cause of the leak in order to avoid any potential claims being barred by the applicable statutes of repose. Asking your expert the difficult questions early on will help to streamline recovery efforts down the road.

Not Quite a Recall--Lennox Issues a "Product Hold" Due to Fire Hazard

On September 17, 2010 Lennox International, Inc. sent a letter to all of its constituent regional organizations as well as its licensed dealers, installers and repair technicians placing a “Product Hold” on a series of residential air conditioning units. According to the letter, Lennox air conditioning units manufactured between July 1, 2010 and September 16, 2010 starting with serial numbers 1910G, 1910J, 5810G, and 5810J represent a serious fire hazard during installation. As part of the standard installation, the suction lines on the units must be brazed. Due to the configuration of the suction lines, one of the refrigerant valves can overheat and crack from the heat generated by the brazing. As a result, refrigerant escapes and the oil in the refrigerant can ignite. There are several reported cases of the fire spreading to the home causing significant property damage. It is believed that Lennox has not issued a full recall of these units because it is trying to develop a fix for the problem so that units that have been released into the supply chain can still be utilized at a later date. 

Clearly any fire involving an HVAC unit reported between July 1 and September 16 should be scrutinized to determine if a Lennox unit was involved and, if so, whether a “held” unit was the culprit. If it is determined that a “held” unit was the culprit, Lennox should be considered as a potential defendant. Second, there is at least one known case of this type of fire occurring after the “hold” was issued. Any installer that fails to heed Lennox’s warning not to install the product could open itself to liability, depending on the laws of the state where the fire occurs.

NFPA Issues Safety Alert Regarding Antifreeze in Residential Sprinklers

 On July 6, 2010, the National Fire Protection Association (NFPA) issued a safety alert recommending that residential fire sprinkler systems containing antifreeze be drained and the antifreeze be replaced with water. While NFPA emphasized that residential sprinklers remain reliable and effective, a recent fire incident involving a sprinkler system containing a high concentration of antifreeze solution raised concerns surrounding the combustibility of antifreeze solutions in residential sprinkler systems. The subject incident involved a grease fire in a kitchen where a sprinkler system with a reported 71.2% concentration of antifreeze deployed. The fire resulted in a single fatality and serious injury to another individual.

Following this incident, NFPA initiated a research project in conjunction with the Fire Protection Research Foundation. The initial test results showed that antifreeze solutions consisting of 70/30% glycerin and 60/40% propylene glycol may provide an unacceptable risk of harm to occupants in certain types of fire scenarios, in particular kitchen grease fires. There were successful tests where kitchen grease fires were extinguished or contained with a 50/50% glycerin solution, but NFPA felt there should be additional testing to more fully understand if there is a risk associated with a 50/50% glycerin solution. Further testing on antifreeze is planned in the future.

Potential fire spread issues, such as the aforementioned, should always be considered when evaluating a case for subrogation potential. 

CSB Calls For A Ban On Pipe Cleaning Using Pressurized Natural Gas


The U.S. Chemical Safety Board (CSB) called for a ban on cleaning out debris from gas piping using pressurized natural gas. “Gas blow” is an industry-wide practice and is now described as an “inherently unsafe activity.”

CSB called for the ban after investigating a tragic explosion at Kleen Energy in Middleton, Connecticut, that killed six workers. After that investigation, CSB called upon the Occupational Safety & Health Administration (OSHA) to issue Federal regulations prohibiting the release of flammable gas to clean fuel pipes. Furthermore, the CSB sought changes to major voluntary standards from the National Fire Protection Association and the American Society of Mechanical Engineers to amend their codes and standards to require safer methods of cleaning fuel gas piping.

Connecticut Governor M. Jodi Rell issued an executive order banning the use of natural gas blows during power plant construction in that state. The Governor’s spokesperson indicated making that change will save lives.

CSB also issued letters to 49 states, warning of the hazards associated with gas blows and urging state officials to enact necessary changes in their state regulations and codes to prohibit gas blows at power plants and similar facilities.  Keep proper gas line maintenance procedures in mind when evaluating gas line failure subrogation matters. 

Careless Smoking by Defendant's Employee: Beware the "Course and Scope" Defense

Subrogating the discarded cigarette case can burn out quickly or really catch fire.  If your insured caused it, subrogation may be a problem.  But when a defendant causes it, potential subrogation, right?  Perhaps.  Take, for example, the case of a store clerk who throws a discarded cigarette on the pine needles that serve as a landscaping bed outside the building while on a smoking break.  The clerk works for a business that runs a store.  You insure the neighboring building.  Clear winner against the clerk’s employer?

Not so fast.  You still need to prove the employee’s smoking was done “in the course and scope of employment” for an employer to be held vicariously liable for the acts of the employee.  


The “Furtherance of Employer’s Interests” Test

Is smoking a cigarette in furtherance of an employer’s interests?  That is the standard applied by most courts when determining if the act was in the course and scope of employment.  See, e.g., Lange v. National Biscuit Co., 297 Minn. 399, 211 N.W. 2d 783 (1973); Minamayor Corp. v. Paper Mill Suppliers, Inc., 297 F. Supp. 524, 526 (E. D. Pa. 1969); Edgewater Motels, Inc. v. A. J. Gatzke, 277 N.W.2d 11; 1979 Minn. LEXIS 1381 (Minn. 1979).


Case By Case Basis: Factors to Consider

Courts have found smoking to be considered in furtherance of the employer’s interests depending on the circumstances.  Factors relevant to the analysis include:


- Whether the smoking occurs substantially within authorized time and space restrictions.

- Whether the smoking is a minor deviation from the employee's work-related activities .

- Whether the employer's assent was given or may be fairly assumed.

- Whether the smoking was known to occur or reasonably expected.



Knowing to address these issues early will help you analyze more thoroughly the potential vicarious liability of the defendant.  It may also help develop potential spread theories, even if it turns out the smoking was outside the course and scope or was done by a customer or passerby or even your own insured.  For example, if the store owner knows customers or passersby regularly discard cigarettes in the area, the store owner might be liable for failure to provide cigarette towers or failure to select landscaping less combustible than the pine needles used in our fact pattern.  Questions to pose of the store clerk and employer might include:


- Did you smoke in a designated area at the designated time?

- Who created the area and time designations?

- Did you have available a designated trash container for the cigarettes?

- Did you use such containers and, if not, why not?

- Are customers or passersby known to smoke outside the store?

- Was your employer aware of such customer smoking?

- Where does such customer or passerby smoking occur?

- What steps were taken to mitigate potential hazards from such smoking?

- Who selected the pine needles as landscaping and why?


When investigating the claim, these questions should be asked early, when witnesses are still available and their memories still fresh.  It may mean the difference between your case smoking out or burning bright.

Be Careful What You Send Your Testifying Experts

In a case of first impression, the Pennsylvania Superior Court adopted the "bright line" rule, followed by a majority of jurisdictions, that all information considered by a testifying expert, including information typically protected under the attorney work-product privilege, is discoverable.In Barrick v Holy Spirit Hospital, No. 1856 MDA 2009 (Pa. Super. Sept.16, 2010), the court embraced the notion that once information is considered by an expert, it is fair grounds for full discovery and cannot be shielded.

In Barrick, a plaintiff sought discovery of letters and emails between the defendant's testifying expert and counsel that included trial strategies and tactics. Plaintiff Barrick was injured when a chair collapsed in the defendant's cafeteria. The plaintiff was treated by Dr. Green who was designated to testify as the defendant's expert. The plaintiff subpoenaed Dr. Green's records, but were furnished the treatment records only. The defendant refused to produce emails and letters exchanged between counsel and Dr. Green that included counsel's views concerning the expert's onions. The trial court ordered the production of all records, including communications between counsel and Dr. Green.

On appeal, the defendant argued that discovery permitted under the Pennsylvania rules does not include disclosure of mental impressions of a party's attorney or his or her conclusions, opinions, memoranda, notes or summaries, legal research or legal theories. Judge Olson, writing for the Superior Court majority, noted that the work product privilege protects certain disclosures, but that the privilege is not sacrosanct and may yield if the information sought becomes relevant to an issue in a lawsuit [page 12]. Judge Olson also noted that the permissible scope of expert discovery is broad and may conflict with other discovery rules. In reconciling the conflict, the court ruled "that if an expert witness is being called to advance a party's case-in-chief, the expert's opinion and testimony may be impacted by correspondence and communications with the party's counsel; therefore, the attorney's work-product doctrine must yield to discovery of those communications". [page 10] Judge Olson reasoned that a party is entitled to discover the extent of a lawyer's influence over an expert's opinions, to test the weight and veracity of the expert's conclusions, and to determine "whether counsel directed [the expert] to reach certain conclusions or to disregard certain facts or take other facts into consideration" [page 13]

While this ruling is consistent with extant federal case law [See e.g., Galvin v. Pepe, No. 09-cv-104, 2010 WL 3092640 (D.N.H. Aug. 5, 2010)], proposed amendments to FRCP Rule 26 would require production only of “facts or data” considered by a testifying expert. But the amendments would continue to allow discovery of communications between a lawyer and a testifying expert about: (1) the compensation for the expert’s study or testimony, (2) the facts or data provided by the lawyer that the expert considered in forming opinions, and (3) the assumptions provided by the lawyer that the expert relied upon to form an opinion. These amendments are scheduled to go into effect December 1, 2010.

This decision underscores the importance of managing information sent to any testifying expert. Many courts will continue to apply the "bright line" test, even if privileged documents are inadvertently disclosed to the expert [see e.g., MVB Mortgage Corp. v. Federal Deposit Insurance Corp., No. 08-771, 2010 WL 582641 (S.D. Ohio Feb. 11, 2010), where the court concluded that “once an expert sees information, even if it is the product of an inadvertent disclosure of something otherwise privileged, that information becomes part of the expert’s mental database, and the opposing party is entitled to test how, if at all, knowing that information may have influenced the expert’s opinion."] Subrogation practitioners should also consider that many states do not have rules that follow the amended federal rules, so the "bright line" test will likely remain in force and apply to all information sent to the expert.

Lowe's Dryer Installation Practices Foiled in Class Action Suit

On September 17, 2010 Lowe’s Home Centers, Inc. settled a class action lawsuit brought in the United States District Court for the Western District of North Carolina by consumers who contracted with Lowe’s for the installation of clothes dryers in their homes and businesses. The lawsuit alleged that the “skilled, trained, experienced [and] equipped” installation technicians employed by Lowe’s used metal foil ducts to vent the dryers, in clear contravention of the dryer manufacturers’ instructions. The operative complaint cited a warning specifically instructing consumers and installers “[d]o not use a metal foil vent” and further cautioning “[f]ailure to follow these instructions can result in death or fire.” This warning was included with the clothes dryers installed by Lowe’s—either on the dryer itself or in the product instruction manual—and was uniformly ignored by the Lowe’s installers. 

The warnings accompanying the dryers are not the only indication of the danger associated with the use of a metal foil duct. The United States Consumer Product Safety Commission, in a June, 2003 publication entitled Overheated Clothes Dryers can Cause Fires, warned that “foil type duct can more easily trap lint and is more susceptible to kinks or crushing, which can greatly reduce the airflow.” Lint build-up in, and reduced airflow through, dryer ducts are among the leading causes of dryer-related fires. Thus, even in the absence of manufacturer instructions warning against the use of a metal foil duct, the Lowe’s installation practice constituted a clear deviation from the standard of care applicable to professional appliance installers.

It is currently unknown how many fires have been caused by the use of metal foil ducting, and the class action suit did not seek damages for such fires. Rather, the injury alleged in the lawsuit was the improper installation itself, and its creation of a dangerous condition which could lead to fire, injury or death. Thus, the settlement of the class action will not adversely impact a subrogating insurer’s ability to recover against Lowe’s where the defective mode of installation causes a fire.

The practice of using metal foil duct to vent clothes dryers is likely not limited to dryer installations performed by Lowe’s.  As such, a subrogating insurer investigating a fire originating in the area of a clothes dryer should be alert to this installation issue, even where the dryer was installed by a party other than Lowe’s. Additionally, where the cause of action relating to a foil duct installation is time-barred by statute, product liability causes of action against the foil duct manufacturer or seller may provide additional, unbarred avenues for subrogation recovery. 

Cozen O'Connor’s subrogation attorneys are committed to working with experts and adjusters to identify and recover on losses caused by metal foil dryer ducts. If an insurer believes that a fire loss involved metal foil ducting, it should contact Cozen O’Connor immediately for our assistance in taking advantage of the favorable recovery picture highlighted by the Lowe’s class action. 



If you live in the southwest, then you have probably looked into different ways to keep your house or business cooler without raising you air conditioning bills.  One solution which has increased in popularity over the past couple of years is the installation of a reflective radiant barrier. Radiant barriers can be used in residential, commercial, and industrial buildings. Radiant barriers reduce summer heat gain and winter heat loss, which helps lower heating and cooling costs.  The potential benefit of attic radiant barriers is primarily in reducing air-conditioning cooling loads in warm or hot climates.

The two most common types of radiant barriers on the market today are radiant barrier coatings and radiant barrier foil coverings. Radiant barrier coatings (latex paint mixed with aluminum) are typically sprayed on the underside of the roof decking. Radiant barrier foil coverings usually consist of a thin sheet or coating of a highly reflective material, usually aluminum, applied to one or both sides of the substrate. Common substrates include kraft paper, plastic films (scrim), cardboard, plywood sheathing, and oriented strand board. Reflective radiant barrier foil products can be installed between the roof sheathing and attic floor insulation, in wall cavities, and around door openings, water heaters, and pipes.

While the potential benefits of radiant barrier foil coverings are well known and advertised, the potential risks are much less well know. It should come as no surprise that the aluminum laminate used in the reflective radiant barrier covering is an excellent conductor of electricity. When grounded, through incidental contact with the homes grounded electrical lines, plumbing lines, junction boxes or recessed light fixtures, it can effectively conduct electricity throughout the entire attic space. Because reflective radiant barriers are installed either on the attic floor or between the roof sheathing, the potential exists for them to become energized through contact with exposed or damaged residential wiring, as well as through a direct lightning strikes on the chimney cap, metallic roof penetrations, attic vents, and flashings. When a radiant barrier becomes energized and current begins to flow through it, intense heating can occur at the connection points. The intense heating at those connection points has the potential and often does ignite the various combustible substrate materials upon which the aluminum is mounted or laminated. The greater the amount of current flowing through the system (i.e. typical 120v residential wiring vs. lightning), the greater the risk of fire.

Over the past year, we have identified a number of radiant barrier fires with good recovery potential.  It should be noted that radiant barrier losses are not always easy to identify  because they can occur virtually anywhere along the energized radiant barrier foil, not just at the point where it becomes energized.  That being said, we continue to work closely with our experts to identify, understand and evaluate these losses.  If you believe that you have a loss potentially involving a radiant barrier, Cozen O'Connor stands ready to assist in evaluating all aspects of the loss for third-party opportunities.

NFPA Bans Use of Antifreeze in Sprinkler Systems

Following up on our report of July 9, 2010, Cozen O'Connor has learned that the National Fire Protection Association (NFPA) has issued tentative interim amendments to three of its standards, banning the use of antifreeze in sprinkler systems in new construction of residences and in the dwelling unit portions of other occupanciesAs previously reported by our blog, the NFPA, in conjunction with the Fire Protection Research Foundation, tested antifreeze solutions in sprinkler systems with varying percentages of glycerin and propylene glycol.  Those tests were followed by additional testing and research which concluded that antifreeze solutions with concentrations of propylene glycol exceeding 40% and concentrations of glycerin exceeding 50% have the potential to ignite when discharged through automatic sprinklers.  Based on these results, NFPA has determined that antifreeze solutions of propylene glycol exceeding 40% and glycerin exceeding 50% are not appropriate for use in residential fire sprinkler systems.  NFPA's Standards Council, the body that oversees the NFPA standards development process, has issued amendments to NFPA 13, Standard for the Instillation of Sprinkler Systems; NFPA 13D, Standard for Installation of Sprinkler Systems in One- and Two-Family Dwellings and Manufactured Homes; and NFPA 13R, Standard for Installation of Sprinkler Systems in Residential Occupancies Up To and Including Four Stories in Height.  For now, and until any further action by NFPA consensus standards committees, NFPA sprinkler standards prohibit the use of antifreeze in new residential fire sprinkler systems.

Wind Farms: A Growth Area for Subrogation Opportunities

In response to the growth of the wind turbine industry, insurance carriers have introduced a number of insurance products tailored to this industry. Principal coverages include protection of those individuals responsible for the design, construction, erection, commissioning and testing of wind turbines. Coverage can also be provided for all risks of loss, destruction or damage to the wind turbines or the property where the wind turbines are erected. Policies also exists for business interruption or loss of profits should the wind turbines stop operating, as well as for protection of the wind turbines while in transit. Finally, it is not uncommon to see policies related to environmental "clean up" costs, or protection for all equipment, tools and personal effects of those contractors responsible for erecting wind turbines.

Obviously, the wide variety of coverages available are a direct reflection of the key risks that a wind energy program can present. From installation problems to start-up delays, there are several potential problems which can lead to first-party insurance claims. The most common property damage for wind farm underwriters involves lightning damage. Lightning strikes can cause significant fires if the wind turbine's lightning protection system is not installed or maintained properly. Besides lightning strikes, failure in the electrical installation of wind turbines can also lead to fires. Other common problems that may present fire hazards in wind turbines include the failure to protect hot surfaces inside the wind turbine (e.g., the generator and gearbox mountings), work related to the repair, assembling and maintaining of wind turbines (e.g., welding, cutting or soldering work) and the build-up of internal combustible materials such as foam sound insulation or oil in the gearbox or hydraulic system.

When presented with a claim involving damage to a wind turbine, there are a number of third-party issues that must be evaluated. First, was the loss caused by a lightning strike or some other technical defect in the electrical or mechanical systems? If the damage was caused by lightning, it is crucial that the adequacy of the lightning protection system be examined. The appropriateness of the protection system, including design, installation and maintenance must be evaluated, especially since third-parties were most likely responsible for those tasks. If there was some type of problem with the electrical or mechanical systems, it is important to evaluate whether the electrical system complied with applicable code and provided an approved method of controlled shutdown of the operating system, as well as whether the electrical system was routinely inspected by qualified professionals on a recurring basis. To the extent the electrical and mechanical systems performed as intended, it still may be necessary to evaluate internal materials in the turbine to determine whether the materials used were combustible when either non-combustible or low-flammability materials were available (thus contributing to the rapid spread of what was originally a modest internal fire).

As wind farms continue to proliferate, coverages available for constructors, manufacturers, owners and land owners will continue to increase. In reviewing wind turbine losses, a basic understanding of how wind turbines work is important, as is an understanding of the most common type of wind turbine failures and the contributing factors. Should you be involved in underwriting wind farm programs and experience a major loss, Cozen O'Connor stands ready to assist in evaluating all aspects of the loss for third-party opportunities.

Substance Over Form-The Amendment to FRCP 26 May Improve Your Subrogation Case

On December 1, 2010, Federal Rule of Civil Procedure 26 will be amended to exempt draft expert reports and certain categories of attorney/expert communication from discovery. In practice, this amendment will liberalize the communications your attorney can have with your testifying expert and reduce expenses that are incurred to comply with the Rule as it is currently written.

Current Rule
Under the current version of Rule 26, along with a written expert report a party must disclose “the data or other information considered by the witness in forming [his opinions]”. That “other information” would essentially be everything the expert read, looked at, or wrote down. Practically speaking, parties go to great lengths to conduct phone conferences with their testifying experts so nothing will be put in writing. In many cases a party will hire separate “consulting only” experts to assist in development of case theories. As written, the Rule has become a situation of form over substance.

Amended Rule
The amendment to Rule 26 requires that only the “facts and data considered by the witness” is discoverable. The Rules Committee has specifically stated that a primary purpose of the amendment is to extend the work-product privilege to draft expert reports. It will also allow for more natural communication between attorney and expert.[1] Under the amended rule, an attorney and expert will be able to speak and email much more freely about the development of the case and craft a report that truly captures the substance of the expert’s opinions.

In Subrogation Practice
In a subrogation case, experts are widely used. Expert reports are often prepared early on so the handling adjuster has something in writing for the file. Under the current Rule, the problem with the pre-litigation expert report is that as new or additional facts are developed through discovery, the report becomes obsolete or even incorrect. It is always challenging to receive a case with good subrogation potential but a poor expert report. You are forced to either hire a new expert (who likely will not have the benefit of firsthand information gathered when the loss was fresh) or produce the damaging report. Discovery of the early draft provides an opportunity for opposing counsel to impugn the credibility of your expert in deposition or trial. The Rule as amended can add value to an otherwise strong subrogation case, as well as save expenses by not having to jump through hoops to comply with the Rule as it is currently written.

[1] Certain areas of attorney expert communication are still open to discovery: 1) expert compensation; 2) facts or data provided by the lawyer that the expert considered in forming opinions; and 3) assumptions provided to the expert by the lawyer that the expert relied upon in forming the opinion.


Missouri: Subrogation Against Condominium Unit Owners and Members of the Household

The subrogating carrier of a unit owner or condominium association to pursue subrogation against another condominium unit owner, renter and/or member of the household of the unit varies by jurisdiction. 

Unlike most jurisdictions, the state of Missouri utilizes a statute which requires policies covering condominium properties to waive subrogation against unit owners and members of their household.  The reasoning behind the statute is that the property insurance premium on the building and common areas paid by and through the association, which is funded by the assessment monies of the unit owners, all of whom have an ownership interest in the common elements.  Therefore, the association members all benefit from the insurance protection on the common elements versus the individual protection afforded on personal condominium property or contents and on the use of the property by and through a separate condominium policy issued to a unit owner.  From this statute, policies issued to condominium associations in Missouri now commonly contain a “Condominium Association Coverage Endorsement,” which essentially precludes carriers from recoveries against a unit owner and/or its liability policy.  In fact, the endorsement trumps the terms of the condominium by-laws, regulations and building rules, which were traditionally documents that dictated subrogation opportunities under these circumstances. 

Despite the statute, subrogation may still be viable in Missouri when presented with similar facts.  In a different coverage scenario, where a property insurance carrier has provided separate condominium coverage to a unit owner, successful recovery efforts have been achieved in Missouri as to the unit owner’s loss of personal property and as to the loss of the use of the property.  In these cases, successful arguments have been made that the statute does not apply because (1) there is no joint interest in the insured property of a separate owner against another owner and (2) there is no sharing of the risk.  This model remains a viable avenue to pursue in Missouri by subrogated carriers when the insured is a unit owner, and many policies of insurance include arbitration clauses or provisions that facilitate the adjudication of these claims under this particular setting.

Waiver of Subrogation, a Canadian Perspective

You have a fire loss at a commercial premise, and the insured's tenant is clearly at fault for the same. Is there subrogation?  Not so fast, preparing that demand or settlement brief may be premature as there may be language in the lease precluding subrogation against the tenant. In a trilogy of cases, the Supreme Court of Canada set forth the legal principles which may act to bar a subrogated claim in the context of a commercial tenancy. In Cummer-Yonge Investments Ltd. v. Agnew Surpass Shoe Stores Ltd., [1976] 2 S.C.R. 221 and Smith v. T. Eaton Co., [1978] 2 S.C.R. 749, the subject leases contained a covenant from the landlord to insure the property against loss from fire. The Supreme Court of Canada held that the covenant established that the landlord had intended to eliminate any right of action against the tenant. Since the insurer is in no better position than the insured as against the third party, the subrogated claim was dismissed. In Ross Southwood Tire Ltd. v. Pyrotech Products Ltd., [1976] 2 S.C.R. 35, the lease required the tenant to pay part of the cost of the property insurance secured by the landlord. The Supreme Court of Canada held that since the tenant contributed to the cost of the policy, the landlord and tenant were essentially joint insureds and the subrogated claim could not proceed.

The above cases demonstrate that it is critical to review the underlying lease prior to advancing the claim. Although the presence of a covenant to insure or contribute to insurance may result to bar the claim, the existence of the same only creates an inference of a waiver of subrogation which may be rebutted based on the wording contained in the other parts of the lease.  For instance, the following factors may assist in a finding against a waiver:

- a mere agreement to insure versus an actual covenant to insure

- the loss may not have been a peril sought to be covered under the subject policy

- deductibles or self insured retentions may not be barred

- the requirement of a cross liability clause in the tenant's liability policy

- an express versus an implied covenant

- the existence of an "entire agreement clause" in the lease


The above list is not exhaustive but illustrates that there are several factors which the Canadian courts may consider in determining whether a bar to subrogation exists. An early review of the lease ensures that time and costs are not needlessly expended on a clearly barred claim.

PTAC Fires Becoming Subrogation Opportunities

PTAC fires are causing a recent stir in apartment complexes and hotels. What is a PTAC, you ask? PTAC's are Packaged Terminal Air Conditioners/Heat Pumps. They are self contained machines installed through the wall with a sub unit for each room, which can be controlled independently. The units normally have the ability to heat as well as cool.

In December 2009, the U.S. Consumer Product Safety Commission recalled about 30,000 Amana-brand, Comfort-Aire, and Century-brand PTAC units manufactured by Goodman Manufacturing. The recall covers units manufactured from February 2007 to April 2008.

According to the recall, the problem with the units appears to be overheating where the power cord connects to the power supply, causing a burn or fire hazard.  However, due to the relative newness of these fires, the specific problem is still unclear and a case-by-case evaluation should be employed. The power cords are manufactured by Tower Manufacturing, a U.S. Corporation. The circuit boards are manufactured by Everex Communications, also U.S. based. 

Goodman has also implemented a voluntary corrective action program (“CAP”) in which they provide new replacement power cords for the recalled units. However, it has been reported that these replacement cords have also been subject to failures/fires. With 30,000 units subject to the recall, and the potential of the corrective action program being unsuccessful, there will likely be more subrogation opportunities with fires involving PTACs.  

Don't Get Nailed-Clearly Identify Your Insured and Payment!

On July 29, 2010, the California Court of Appeals, Fifth District, held that an insurer waived its right to equitable subrogation when it entered into a settlement without identifying its insured or apportioning payment.  The case arose from a complicated personal injury action, causing the trial court to comment that "this is one of the most screwed up cases I've ever seen."  The court of appeals responded that  "we heartily agree."

Essex Insurance Company had defended a personal injury action on behalf of the individual who had hired the plaintiff.  That plaintiff was injured when he stepped on a nail while moving a refrigeration unit in a restaurant.  After making payment to the plaintiff, Essex sought recovery from a doctor whose alleged malpractice had resulted in plaintiff suffering two amputations.  The court of appeal denied Essex equitable subrogation, explaining that it only had the right to assert claims for monies paid out on behalf of its insured.  Since Essex failed to spell out the amounts paid on behalf of its insured, as opposed to payments on related claims, the court found that neither equitable subrogation nor indemnification were available.

The lesson of the Essex case is simple.  In order to preserve equitable subrogation and/or indemnity rights, the insurer must carefully craft all settlement documents and releases.  The court will not attempt to glean what amounts are made on behalf of the insured, as opposed to bad faith or fraud claims.  The Essex case reiterates the most basic tenet of subrogation-you can only stand in the shoes of your insured for payments made on its behalf.   


The old saying “the devil is in the details” has particular application when trying to prove a contents claim to opposing counsel or at trial. Insurance policies provide for actual cash value and replacement cost value and, with limited exceptions, the law provides for cost to repair or replace unless it exceeds fair market value. A typical claim will usually involve hundreds of individuals items purchased over a number of years that all have to be accounted for and properly priced.

Normally the homeowner, alone or with the help of a public adjuster, compiles a list and hopefully provides the relevant information relating to the item, purchase date, price, condition before the loss, and condition after the loss. The company or independent adjuster will have checked that list or prepared his or her own list. In some cases, however, all of the information may not have been obtained originally or the other side disputes one or more of the above.

While outside help may not be possible for several of the items above because that knowledge belongs exclusively to the insured, there are certain resources to consider which may assist in supporting a contents claim: (1) online data bases of historical products; (2) information from national retailers, internet participants, and distributors; (3) a highly specialized evaluation team; and (4) the ability to have multiple specialists simultaneously on a claim.  The list is not exhaustive, but may assist in ascertaining values for hard to find items and, ultimately, proving that the claim being submitted is reasonable.


On July 13, 2010, the Appellate Court of Connecticut affirmed a $664,373.02 verdict issued by a trial court sitting non-jury in 2007. Utica Mutual Ins. Co. v. Precision Mechanical Services, Inc. The case arose from a fire at the Commons Condominium Complex in Branford, Connecticut. An employee of the defendant was installing a shower diverter in one of the units. He was a licensed plumber soldering pipes when he ignited insulation in the wall. In November of 2007, the trial court, sitting non-jury, awarded Utica Mutual $664,373.02 after three days of trial.

On appeal, defendant argued that plaintiff failed to offer expert testimony regarding the standard of care, improperly excluded defense experts, and plaintiff did not sustain its burden of proof on damages. The three judge appellate panel rejected each contention. With respect to the first issue, the court determined that the question of whether a reasonable person should operate a torch within the vicinity of combustible materials did not go beyond the field of the ordinary knowledge and experience of the fact-finder and therefore held that expert testimony was not required to determine if the defendant’s performance complied with the requisite standard of care. The trial court allowed one defense expert to testify, but then refused to consider the testimony when deciding the case. The defense expert testified that the damages had been greatly enhanced by the lack of fire stops in the condominiums. The appellate court held that the trial court reasonably concluded that it should not consider his testimony or any evidence that the fire spread due to an alleged lack of fire stops, given the defendant’s failure to apprise the plaintiff of its claim through an affirmative pleading. The defendant had not raised contributory negligence as a defense in its answer or any other pleading.

With respect to damages, the appellate court found that Utica Mutual had presented the testimony of its insurance adjuster, who had more than fourteen years of experience in the profession, and was sent a written form by the public adjusters representing the Commons that detailed line by line the areas that had to be repaired. Utica’s adjuster had also retained a contractor to determine the scope of the damages. The contractor prepared a final report that concluded that the repair costs were $676,842.67. Utica paid the Commons $664,373.02 because of the insured fire loss and received a subrogation receipt from the Commons stating that amount had been paid. The Connecticut Appellate Court determined that such evidence afforded a sufficient basis for determining with reasonable certainty that the plaintiff’s damages were $664,373.02. The court also awarded 6% interest from July 9, 1997, when Utica Mutual received the subrogation receipt. The decision represents a complete and total victory for the subrogating carrier. 

New York Court Rejects Defendant's Fire Modeling

Subrogation professionals should be aware of a recent opinion in New York where computer fire modeling utilized by the defendant's expert was held to be inadmissible.   In Santos v. State Farm Fire & Casualty Co., No. 000790/07 (N.Y.Sup. Ct. Jun. 28, 2010), a trial court held that the defendant had not presented sufficient evidence that computer fire modeling was generally accepted as reliable in the fire investigation community. 

In larger fire losses, computer fire modeling can be a useful tool that fire experts use to assist in evaluating hypotheses related to fire origin and fire spread.  Fire modeling is also used for illustrative purposes, such as presenting an origin and cause investigator's opinions to a jury.  Although they can be helpful, fire models have their limitations.  NFPA 921, the recognized guide for fire investigations, cautions: "[t]o conduct valid modeling and testing it is important that the investigator gather data that is as accurate and complete as possible."  Fire models are generally only as good as the accuracy of the data that is used in the model. 

The Santos decision is surprising in light of the fact that several federal courts have held that fire modeling is reliable.  For an expert opinion to be admissible in federal court, the opinion must pass the rigors of the Daubert standard.  In federal court, expert testimony must be both relevant and reliable, which entails a preliminary assessment of whether the reasoning or methodology underlying the testimony is scientifically valid and can be applied to the facts at issue. 

In state courts in New York, expert opinions must pass the Frye test, which is viewed as a more liberal standard than Daubert.  Under the Frye test, expert testimony based on scientific principles or procedures is admissible only if a principle or procedure has gained general acceptance in its specified field.  Here, the court found that the defendant only presented evidence that computer fire modeling was generally accepted in the regulatory and design community, but failed to meet the burden of demonstrating that modeling is generally accepted in the fire investigation community. 

The Relation Back Doctrine Is Clarified By The U.S. Supreme Court

On June 7, 2010, in a unanimous decision, the United State Supreme Court reversed the Eleventh Circuit in Krupski v. Costa Crociere S.p.A., holding that relation back under Fed. R. Civ. P. 15(c)(1)(C) depends on what the party to be added knew or should have known, not on the amending party's knowledge or timeliness in seeking to amend the pleading.

In Krupski v. Costa Crociere S.p.A, Petitioner Krupski sought compensation for injuries she suffered while on a cruise.  Her passenger ticket, which was issued by Coast Cruise Lines and listed respondent Costa Crociere S.p.A. as the carrier. In addition, it required written notice of the claim to the carrier or its agent, required any lawsuit to be filed within one year of the injury and designated a specific federal district court as the exclusive forum for such suit. The front of the ticket listed Costa Cruise’s Florida address and made references to “Costa Cruises.”

After Krupski’s counsel notified Costa Cruise of her claims but did not reach a settlement, Krupski filed a diversity negligence action against Costa Cruise.   During the next few months the limitations period expired and after this limitations period had ended, Costa Cruise brought Costa Crociere's existence to Krupski's attention three times, including in its responsive pleading and a motion for summary judgment. 

Krupski responded and moved to amend her complaint to add Costa Crociere as a defendant. The district court allowed Krupski to amend her complaint and dismissed Costa Cruises.  Later the court dismissed Costa Crociere (who had the same attorney as Costa Cruises to represent its interests) on the basis that the amended complaint did not satisfy the requirements of Federal Rule of Civil Procedure 15(c), which governs when an amended pleading "relates back" to the date of a timely filed original pleading and is thus timely even though it was filed outside an applicable limitations period.

The Rule requires that within the Rule 4(m) 120-day period for service after a complaint is filed, the newly named defendant “knew or should have known that the action would have been brought against it, but for a mistake concerning the proper party’s identity.” Rule 15(c)(1)(C)(ii). The District Court found this condition pivotal to Krupski’s attempt to relate back. The District Court held that she had not made a mistake about the proper party’s identity because, although Costa Cruise had disclosed Costa Crociere’s role in several court filings, she nonetheless delayed for months filing an amended complaint. The Eleventh Circuit agreed, finding that Krupski either knew or should have known of Costa Crociere’s identity as a potential party because she furnished the ticket identifying it to her counsel well before the limitations period ended. It was therefore appropriate to treat her as
having chosen to sue one potential party over another. Moreover, the 11th Circuit Court held that the relation back was not appropriate because of Krupski’s undue delay in seeking to amend the complaint.

The Supreme Court reversed the 11th Circuit Court’s holding in a decision authored by Justice Sotomayor.  The Supreme Court found that Krupski made a mistake in failing to name Costa Crociere, despite being aware of its existence, and that her undue delay in amending the complaint has no bearing on whether the amended complaint relates back under Rule 15(c).  The language in Rule 15(c) results in a remarkable distinction with discretion offered under Rule 15(a), which does allow a court to consider delay in deciding whether to grant a motion to amend a pleading to add a party or a claim.  The question under 15(c) is what the prospective defendant reasonably should have understood about the plaintiff's intent in filing the original complaint against the first defendant.  The plaintiff's post-filing conduct is otherwise irrelevant to whether an amended complaint relates back.  Thus, The Supreme Court’s holding illustrates that the relation back under Rule 15(c)(1)(C) depends on what the party to be added knew or should have known, not on the amending party’s knowledge or timeliness in seeking to amend the pleading.

Evidence Disposal: Your Trash May Be Someone's Treasure

A California court recently held that an insurer had a duty to preserve an allegedly defective tire for use as evidence in the insured's product liability case.  Cooper v. State Farm Mutual Auto. Ins. Co., 177 Cal.App.4th 876 (2009,  4th Dist., Div. 2).  Plaintiff Bryan Cooper, an insured of State Farm, was involved in a single car accident allegedly caused by tread separation of a tire.  State Farm acquired possession of the vehicle and tire after the claim was paid to Plaintiff.  State Farm's expert concluded that the tire was defectively manufactured.  State Farm notified plaintiff of its expert opinion and promised Plaintiff it would retain the tire.  Plaintiff sued the tire manufacturer.  Before Plaintiff's litigation against the manufacturer was resolved, State Farm disposed of the car and tire.

The appellate court held that Plaintiff could legally bring an action against State Farm for the destruction of the tire.  The court concluded that Plaintiff set forth a case because he relied on State Farm's promise to preserve the tire, the expert opinion created an inference that the tire was defective, and Plaintiff's damages could be reasonably ascertained.

California does not recognize an independent tort for intentional spoliation of evidence. Cedars-Sinai Medical Center v. Superior Court (1998) 18 Cal.4th 1, 74 Cal Rptr.2d 248 and Temple Community Hospital v. Superior Court (1999)20 Cal.4th 464, 84 Cal.Rptr.2d 852.  The Cooper court shows that an insurer may still be liable for destruction of evidence on theories of promissory estoppel or voluntary assumption of a duty.  In other words, the Court is not saying an insurer, in general, must preserve evidence.  But, it is saying that once the insurer promises to preserve evidence it may be liable for breaking that promise.

Burning Issues In Fireplace Failures

The fire loss involves your insured’s fireplace. The fire originally starts in the fireplace, but spreads to nearby combustibles, catching the structure on fire. Is there a subrogation case? 

Fireplace with burning logsOnce a fireplace loss comes in, thorough analysis of the fireplace system needs to take place. Generally, fireplaces are masonry built of bricks, blocks, or stone and mortar. The other fireplace type is a light-weight metal chimney and metal firebox. Hybrids exist, so careful examination of the fireplace is necessary. Masonry fireplaces are massive structures. Due to their weight, settling or movement are common problems to be evaluated. Settling often occurs where the firebox meets the facing. Specifically, where the fire brick meets the facing. That weak spot can permit fire to travel to adjacent combustibles. Fireplace fires burn up to temperatures of 2,000 degrees, easily igniting inappropriately exposed combustibles. The firebox itself needs to be checked. The joints in the firebox expand and contract. Those need to be checked to insure that they did not fail, permitting the fire to escape.

Factory-built fireplaces are commonplace today. They have become readily available in the last 25 years.  Most are made of metal and are sold as complete systems with a specific chimney.  Installation manuals need to be obtained to make sure the original installation of these factory-built fireplaces was correct. Applicable codes insist that factory-built fireplaces be installed in accordance with the manufacturer’s specifications/listing. Clearances (usually two-inch air space) is required from nearby combustible framing. If the clearance is not correct, nearby wood will dry out over time and lower the ignition temperature of the adjacent combustible framing. Called pyrolysis, if this process continues unabated, a fire will likely result.

As to all fireplaces, what material was burned is important to determine. What was the quantity used? Was over-firing a contributing factor? Areas to be examined include but are not limited to the foundation, ash dump, hearth, firebox, lintel, damper, smoke shelf, smoke chamber, flashing, flue, crown, spark arrestor, and cap. Additionally, review sweep records on the fireplace. Was the fireplace maintained? When was the last sweep work done? What repairs have been made to the fireplace? Was the fireplace fireblocking done correctly? All these factors and others need to be properly evaluated to determine if a fireplace loss has subrogation potential.

Subrogation for a Personal Injury Claim Under a Liability Policy? Yes!

The recent California Appellate Court decision of Interstate Fire & Casualty Insurance Company v. Cleveland Wrecking Company (2010) 182 Cal.App.4th 23, illustrates that under the right circumstances, a liability insurer can subrogate against a third party to recover amounts paid to resolve a first party personal injury claim. The case involved a construction site personal injury claim by an employee of Subcontractor A. The employee filed a personal injury claim against General Contractor and Subcontractor B. Both Subcontractor A and Subcontractor B had contracts with General Contractor, requiring each subcontractor to defend and indemnify General Contractor for any claims arising out of the subcontractor’s operations, and required each subcontractor to name General Contractor as an additional insured under their general liability insurance policy. Subcontractor A procured the liability insurance and named General Contractor as an additional insured. Subcontractor B did not. General Contractor tendered its defense to both subcontractors. Subcontractor A and its insurer, Interstate, accepted the tender. Subcontractor B rejected the tender. Ultimately, General Contractor, through Interstate, as well as Subcontractor B, resolved their claims with the injured employee and filed good faith settlement motions approving the settlements which, under California law, barred any claims for equitable contribution. Thereafter, Interstate filed a subrogation action against Subcontractor B, claiming Subcontractor B breached its contract with Interstate’s additional insured, (General Contractor), by failing to defend and indemnify General Contractor for the claims brought by Subcontractor A’s employee. The trial court dismissed Interstate’s complaint determining Interstate had no rights of subrogation against Subcontractor B, as Subcontractor B’s alleged breach of the contract did not cause any damage to the General Contractor, and the good faith settlement barred any claims of negligence against Subcontractor B for causing the loss. 

The California Court of Appeal reversed the trial court’s ruling, holding that Interstate had a right of subrogation against Subcontractor B, based on Subcontractor B’s alleged breach of the indemnity provisions in the contract with General Contractor. The court acknowledged that the good faith settlement determination did, under California law, bar any equitable contribution claim based on the comparative negligence of Subcontractor B in causing the injury. However, the court held the contractual claim for indemnity survived the good faith settlement determination, and that Interstate, as the insurer, could step in the shoes of its insured, General Contractor, to pursue the claim. The court extensively reviewed and discussed many of California’s subrogation cases spanning the past 40 years and concluded that the equities of the insurer were superior to that of Subcontractor B, and that there was no basis to prevent the insurer from pursuing its claim for breach of the indemnity provisions within the contract. 

The lesson learned from the case is where a defendant or cross-defendant is not willing to contribute its fair share or acknowledge responsibility under a contractual indemnity agreement, a subsequent subrogation action against the non participating defendant may be a viable option. As the Interstate case illustrates, even if one of the defendants participates in the settlement, but fails to live up to all of its contractual responsibilities, a viable subrogation claim may exist, pending the provisions in the parties’ contracts, and the specific facts of the case.

Florida Provides Further Clarity on its Implied Waiver Doctrine in Landlord-Tenant Cases

Lease CartoonThe Third District Court of Appeal of Florida recently brought us closer to clarity on Florida's approach to when a landlord's insurer can sue a tenant.  State Farm of Florida Ins. Co. v. Loo, 2010 WL 445945 (Fla. 3d DCA Feb. 10, 2010).  For the most part, jurisdictions adopt one of three approaches in this context:

                (1) The Sutton Approach ("Anti-Subrogation Rule"): Under this approach, a jurisdiction adopts a bright-line rule barring a landlord's insurer from bringing a subrogation case on the ground that the tenant is deemed an "implied co-insured." Thus, an insurer may not subrogate against its own insured.  The policy behind this approach is that "when fire insurance is provided for a dwelling it protects the insurable interests of all joint owners including the possessory interests of a tenant absent an agreement by the latter to the contrary." Sutton v. Johndahl, 532 P.2d 478 (Ct. App. Ok. 1975). This is the majority rule.


                (2) The Anti-Sutton Approach: The converse of the Sutton Approach is the order of the day in these jurisdictions.  Essentially, absent an express or implied agreement to the contrary, these jurisdictions presume subrogation is permissible. This is the minority rule.


                (3) The Case-by-Case Approach: This is an approach that places great emphasis on the lease provisions in order to determine the intent of the parties as to which party should bear the risk of loss.  This is often referred to as a "middle of the road" approach.


Until recently, it was unclear which of these approaches Florida was applying.  Even today, the Florida Supreme Court has not formally adopted or rejected any.  Instead, the approach in Florida has evolved from a number of different decisions from various Appellate Courts.  The first attempt made to articulate this doctrine came in 1980 when the Third District Court of Appeal held that "a limitation of liability for one's negligent acts cannot be inferred unless such intention is expressed in unequivocal terms."  Tout v. Hartford Accident & Indem. Co., 390 So. 2d 155 (Fla. 3d DCA 1980).  Two subsequent cases revealed an evolution in Florida toward Sutton without a specific adoption of the approach.  See, gen., U.S. Fire Ins. Co. v. Norlin Indus., Inc., 428 So.2d 325 (Fla. 1st DCA 1983); Continental Ins. Co. v. Kennerson, 861 So.2d 325 (Fla. 1st DCA 1995). 


However, the evolution toward Sutton was halted in Loo, supra.  Without overturning Tout or its progeny, the Court in Loo formally adopted the case-by-case approach pointing out that the Tout line of cases looked to the lease provisions to determine the intent of the parties as to who should bear the risk of loss.  In sum, for subrogation against a tenant to proceed, the lease must not contain "unequivocal terms" that the tenant is a co-insured.  Unequivocal terms are those that either (1) exculpate the tenant from liability for its own negligence, (2) require the landlord to maintain insurance for the benefit of the tenant, or (3) shift any risk of loss incurred as the result of the tenant's negligence to the landlord.


Perhaps one day the Supreme Court of Florida will weigh in on this issue with a formal adoption or rejection of one of the three approaches.  Until that day, subrogation against a tenant will be guided by the lease document's unequivocal (or lack thereof) articulation of the intent of the parties as to risk of loss.

Mediation: What You Need To Know About Your Mediator

Mutual consent and court ordered mediation is becoming more prevalent as a means to resolve matters in conflict as litigation costs escalate and court calendars suffer from over-crowding, greater demand and budgetary constraints. While mediation is a valuable forum to access for all parties, there are specific areas which are often overlooked in preparing a matter for presentation and discussion in this type of forum.

Selection of Your Mediator

What has escaped many litigators and companies in the artful practice of mediation is a full and comprehensive examination of the mediator involved in the process. Some of the most prominent aspects that should be examined with regard to choosing a mediator are as follows:

Background of the Mediator

1.         Does the mediator have sufficient or significant exposure or knowledge of the area or matter of the litigation?

2.         Does the mediator have an employment, education or cultural bias which prejudices or taints his or her viewpoint to either of the parties?

Character Aspects of the Mediator

1.         Is the Mediator passive or aggressive in his or her approach to mediation;

2.         Does the Mediator participate in the respective factual patterns of the parties or in the process of mediation?

Key Element for Choosing a Mediator

Litigation history has shown lawyers and their clients that the best mediators involve themselves in the process of bringing resolution of the parties through the parties. A key mistake often made by mediators is advancement of their personal knowledge to educate the parties during mutual or separate sessions. For example, for a mediator to advance their personal experience or knowledge of "adjustment of damages" in a subrogation case can often tip either party to ideas or legal concepts which were not previously part of their reasoning towards resolution. Hence, a mediator who introduces ideas, knowledge or ideas to either party can otherwise distort the process of mediation which ultimately is designed for the parties to facilitate through their own devices, a solution to their conflict.

In looking towards mediation as an integral part of the litigation process, it is vital for the participants to fully examine the "third party neutral" to insure that the process is fully respected for its aims and ideals.

The Malfunction Theory

Have you ever experienced the following all-too-common frustrating subrogation scenario:  Your cause and origin expert determines that a fire started from a particular product but, after destructive examination of the product, your engineer is unable to identify the defect which caused the product to fail.  Even though you cannot identify the specific defect, you are not necessarily out of luck. 

Courts in a number of states have long recognized that fires destroy direct physical evidence of a defect and therefore allow the product defect case to be presented with circumstantial evidence via a Malfunction Theory.  Under the Malfunction Theory, if one can prove the following elements then a  product liability claim still may exist:

1) The product is only a few years old;

2) The fire started inside the product;

3) Alternative ignition sources have been eliminated as a potential cause of the fire;

4) Your expert can explain how the product "could" have caused the fire even though the exact cause is unknown; and

5) The product was not misused. Often you can prove that the product was not misused if the fire started in an area where the insured did not have access to misuse it, i.e., the motor area of a microwave, the compressor area of a refrigerator, etc.  However, even if the insured had access to the area of the product where the fire occurred, you can still circumvent the misuse element by showing that the insured actually did not access this area or the insured's access of the area of origin was unrelated to the fire. 

The next time a product causes a fire, but the specific defect cannot be identified, do not rush to close the file.  Instead, check to see if your jurisdiction recognizes the Malfunction Theory.  If so, it could turn your dead-end products claim into a functional theory of liability. 

Subrogating Under International Sales Contracts: Which Law Applies


The United States Court of Appeals for the Ninth Circuit recently explained the limited applicability of California’s “made-whole” rule which may preclude an insurer from recovering any third party funds unless and until the insured has been made whole for the loss. 

In Chandler v. State Farm Mutual, the court opined that “an insurer is permitted to recoup a payout from a third-party tortfeasor’s insurance company before the insured has sued the third-party tortfeasor, and without first making the insured whole.” A two-party automobile accident provided the factual background for the court’s decision. The subrogating carrier's insured’s car sustained damages after another driver rear-ended the vehicle. As a result of the accident, the insured incurred $317.45 in rental car expenses while his car underwent repairs. The subrogating carrier paid 80% of these rental car expenses as required by the insurance policy, leaving its insured with $63.49 in out-of-pocket expenses.

After its payment, the carrier exercised its subrogation rights and settled with the third-party tortfeasor’s insurer. Subsequently, the insured requested reimbursement from the tortfeasor’s insurer for his $63.49 in out-of-pocket expenses, which that insurer rejected. Then, the insured sought to recover his out-of-pocket expenses from his own insurance (subrogating) carrier, which was also denied because the carrier had paid the full amount due under the policy.  After additional benefits were denied, the insured initiated an action against his insurance carrier claiming violations of California’s Unfair Competition Law, conversion, unjust enrichment, and declaratory relief. As the court noted, all of the claims essentially hinged on the applicability of the "made-whole" rule.

The court rejected each of the insured’s arguments and dismissed all claims against the insurance carrier because the "made-whole" rule did not apply. The court’s reasoning supported the policy considerations for both subrogation and the made-whole rule. First, where the insured has not yet sought to recover from the third-party tortfeasor, nothing indicates that the insured will not be made whole if he decides to initiate a suit. Moreover, allowing the insurer to subrogate furthers the fundamental purpose of subrogation: to hold third-party tortfeasors accountable for the injuries they inflict. If a carrier could not immediately subrogate, as the court explained, this purpose would be frustrated and the risk of loss would be placed on the insurer whenever the insured does not attempt to recover from the third-party tortfeasor. Finally, if an insurer was required to make its insured whole before subrogating against potentially responsible third-parties, it would remove the insured's incentive to pursue its claims and would obligate the insurer to pay for more than the express terms of the insurance policy require.

Based on the court’s conclusion and reasoning, an insured’s failure to bring its own action does not prevent the insurer from subrogating to the insured’s claim before the insured has been made whole. The court’s holding bolsters a subrogating carrier’s argument that subrogation rights may be exercised immediately upon payment and cannot be prejudiced by an insured’s inaction.

Oral Trials In Mexico

Legal reform is slowly but surely sweeping Mexico’s legal system. Mexico’s centuries-old legal system is being transformed into a system where oral trials will be publicly presented to the assigned judge. This new system will require judges to hear evidence orally, instead of through written briefs and memorandum.  The oral system will allow more transparency and accountability to the judges who have traditionally rendered their decisions without much public scrutiny.

Subrogation cases will greatly benefit from the new oral system, where the complexity of fire burn patterns, spread issues, and other scientifically technical evidence will be better explained through expert witnesses testifying before the judge in order to present their opinions. This will truly provide a refreshing dimension to litigating subrogation cases throughout Mexico.  

This new system is expected to be fully implemented throughout Mexico’s 31 states by 2016. So far, Chihuahua, Nuevo Leon, Oaxaca, Zacatecas, State of Mexico, and Baja California, have already began to have oral trials. Slowly but surely, the rest of the country will implement this new system that is expected to bring renewed confidence to Mexico’s legal system. 

Maximize Subrogation Potential With Early An Response

Subrogation cases are often won, and lost, within the first few days of the incident.  Consider employing the following steps to maximize your recovery potential:

1. Get an attorney and experts involved immediately.  If possible, have your attorney involved from the start.  This gives the attorney an opportunity to inspect the scene, secure evidence and interview witnesses. Your attorney should also know what experts are needed based on the facts of the loss. Further, your attorney should know how these experts perform at deposition and in trial. 

2. Keep the accident scene intact - as long as possible.  Do not order the bulldozer in right away, or start debris cleanup, until your expert and attorney have had a chance to assess the scene and determine what possible target defendants may exist.

3. Balance cleanup efforts with the investigation.  It is important to make sure that the damaged property gets back on its feet right away. However, when feasible, try and provide a reasonable time period for experts and potentially responsible parties to inspect the accident scene.

4. Put the target defendants on notice right away. When possible, give target defendants an opportunity to inspect the scene in its original condition.  This may assist in avoiding spoliation arguments down the road.

5. Preserve the evidence.  Do not throw anything away.  Allow your experts and/or your attorney to inspect the scene and determine what to preserve.  If in doubt as to whether to store a piece of evidence or dispose of it, err on the side of caution and store it.

By following these simple steps you will be ahead of the curve and well on your way to maximizing recovery for your subrogation claim.

Colorado's Subrogation "Made Whole Rule" Under Discussion

Colorado's legislature is considering passing a bill that would limit subrogation in personal injury casesHouse Bill 10-1186 is aimed at situations where the insured would not be made whole if the insurer was allowed to recover its payments through subrogation.  In other words, if there is a limited pool of money to go around, the insured needs to be fully compensated before the insurer can recover its payments.  See full size imageIf the bill is passed into law, an insurer would be prohibited from bringing a direct subrogation action against a third party if the insured was not fully compensated for his or her damages by the policy.  

As drafted, the proposed bill seems only to apply to personal injury and health care cases and does not include property damage cases.  Specifically, the bill defines an injured party in pertinent part as "a person who has sustained bodily injury as the result of the act or omission of a third party."  If passed, the bill would prohibit an insurer from recovering payments, either directly or from the insured, if the insured has not been fully compensated for his personal injuries. 

The bill was introduced in January 2010 and is currently with the Judiciary Committee.  Cozen O'Connor attorneys, along with lobbyists for other interested parties, recently met with the sponsors of the bill seeking modifications to the proposed language specifying that the bill only deals with health care matters.  The bill's future can be monitored at this blog or the Colorado legislature's website.


The Oregon Court of Appeals once again affirmed the viability of negligent construction claims while delivering another blow to the Economic Loss Doctrine.  In Cowan v. Nordyke, 232 Or.App. 384 (2009), plaintiff purchased a home from a Professional Home Designer (PHD).*  Of course, the home was not without problems, including water intrusion.  Plaintiff filed suit against the PHD claiming negligent design of the home and that the PHD's conduct fell below the standard of care for a reasonably prudent professional home designer.  The PHD’s motion for summary judgment was granted as Oregon does not recognize a tort for "professional negligence" by a PHD.  After attempts to amend the complaint to allege general negligence proved unsuccessful, plaintiff filed an appeal. 
While the Oregon Court of Appeals affirmed that Oregon does not recognize "professional negligence" by a PHD, it reversed on the issue of allowing a claim against a PHD for general negligence. In reaching its decision, the Court explained that Oregon deviates from traditional negligence concepts of "duty, breach and causation."  In Oregon, liability rests on whether the defendant's conduct unreasonably created a foreseeable risk of harm to the plaintiff.  Foreseeability applies unless the parties invoke a "status, relationship, or particular standard of conduct that limits the defendant's duty."  Here, the PHD argued that the foreseeability standard did not apply because its duty to plaintiff was defined and limited by its status as an unlicensed contractor and an "owner builder," rather than a "builder-vendor."  The PHD further contended that there were adequate contractual protections for plaintiff and that it need only disclose that it built the house and to disclose known defects.  The court was not swayed and correctly held that that being an unlicensed contractor did not provide a shield to limit liability.  The Court reasoned that a jury can determine whether damages sustained by a plaintiff are reasonably foreseeable.  With regard to contractual protections and the disclosure of defects, the Court agreed that the required disclosure might provide sufficient protection for known defects.  However, the Court recognized that not all latent defects "come to light" while the builder occupies the home.  Therefore contractual disclosure is not an adequate substitute for holding a builder liable under the general negligence standard.

Oregon continues to recognize negligent construction claims grounded in general negligence.  As Oregon continues to recognize negligence in this context, it further erodes the Economic Loss Doctrine.  See also Bunnell v. Dalton Construction, Inc. (2006 (water damage to interior not economic loss) and Harris v. Suniga (2006) (damage to physical structures is not economic loss).
* A Professional Building Designer specializes in designing light-frame buildings such as single family homes and agricultural buildings.  Unlike architects, Professional Building Designers are not legally required to pass exams or receive special licenses. 


California's Attorney-Client Privilege Upheld

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.See full size image

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. 

Anti-Subrogation - Not So Fast Says The Delaware Superior Court

The Delaware Superior Court recently ruled that despite the existence of an express waiver of subrogation in a condominium association’s CC&R’s, a chimney sweep could pursue a contribution claim against the unit owner where a fire started under the Delaware Uniform Contribution Among Joint Tortfeasor’s Act. 

Old-Time SweepIn 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

What Must A Chimney Sweep Do? - The Delaware Superior Court Requires Full Compliance with NFPA 211

ChimneyCozen 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. 

Chimney Sweep SignThe 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.

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


Subrogation Rights Under A Standard Mortgage Clause In Canada

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:



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.


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.

Life Without Plastics Is Incomprehensible" - The story of Acetal....

While plastics have forever changed the way we live, the story isn't always as rosy as the American Chemistry Council infers in the quoted slogan.

Introduced in 1956, acetal (also known as polyacetal, polyformadehyde or polyoxymethlene) was developed for high stiffness, low friction and stability. This material was successfully used in the manufacture of automotive parts such as cams, bearings, gears, etc. But in the 1970's acetal was introduced into plumbing systems, with disastrous results. Over the last 30 years, acetal plumbing parts have shown a high failure rate, resulting in billions of dollars in property losses.

Toilet System SchematicPublicized failures of acetal plumbing parts were seen in the 1980s. Acetal was used to fabricate fittings incorporated into residential water supply piping made of Polybutylene ("PB"). Homes across the country were suffering PB water system failures, causing water losses. Class action litigation ensued, with one of the largest in US history (Cox v. Shell Oil Co., et. al) settling for $950 million. A cause of the PB piping failures was degradation of the acetal fittings, which led to fracture and water release.

Acetal plumbing fittings resurfaced in the 1990s. This time, acetal was formed in fittings incorporated into flexible water supply lines manufactured by various companies, including Robert Manufacturing, Watts Industries and Fluid Master). Failures began to surface in late 1990 and 2000. The failures had a similar appearance, with the plastic coupling fittings suffering cracking or full fracture.

More recently acetal failures have arose in toilet valve assemblies, including those manufactured by Coast Foundry and Fluid Master. Acetal was used in certain models to fabricate the toilet valve shaft, float arm and trigger.

Parts Breaks

SAupply Line PartsThere are two primary causes of these failures. Acetal has been recognized within the plastics industry since as early as the 1950's to be sensitive to acid hydrolysis (a chemical reaction during which one or more water molecules are split into hydrogen and hydroxide ions) and oxidation (the addition of oxygen to a compound with a loss of electrons) by agents such a chlorine. And since chlorine is a required additive for virtually all domestic water systems, degradation of acetal plumbing products is an all to frequent occurrence. Low levels of chlorine in potable water supplies can be sufficient enough to cause stress corrosion cracking (sudden failure of normally ductile metals or tough thermoplastics ) to develop, a problem which has been experienced in both the USA and Europe. Acetal is also notch sensitive, meaning the materials susceptibility to fracture. Acetals have the highest crystallinity (degree of structural order in a solid) of any thermoplastics making it strong and fatigue resistant. This toughness (or lack of ductility) makes it susceptible to fracture where there is a notch, a sudden change in the surface section, a crack, or scratch. Because acetals are notch sensitive, sharp corners must be avoided in part design. This has been an issue in various acetal product designs, including the thread geometry of the water supply coupling nuts and toilet valve triggers, resulting in premature failures.

Many of the plastic components dealt with in subrogation have a tale to tale. Uncovering the material's "story" may be the key to recovery.

CLAIMANT BEWARE: Construction Defects to Real Property: Georgia's Statute of Repose v. Statute of Limitations

Construction SiteIn Georgia, it is well known that actions for injury to real and personal property caused by any person furnishing the design or construction of an improvement to the property must be filed within eight (8) years after the substantial completion of the improvement. O.C.G.A. §9-3-51(a).  Further, an improvement to real property has been defined as a fixed alteration to the real property. Mullis v. Southern Co. Services, Inc., 250 Ga. App. 90, 296 S.E.2d 579 (1982). The Courts have held that if a component is an essential and integral part of the improvement to which it belongs, then it is itself an improvement to real property.  Therefore, in the event a claimant files an action against a contractor, architect, or subcontractor to recover damages to its real property, for example, one would surmise that he or she has eight (8) years from the date the work was substantially completed to file the claim. That is not the case insomuch as in 1994, the Georgia Court of Appeals, in effect, shortened the time period to file a claim against a contractor to recover damages to real property to four (4) years.

In Hanna, et al. v. McWilliams, et al., 213 Ga. App. 648, 446 S.E.2d 741 (1994), a homeowner brought an action against a general contractor and subcontractor to recover damages to real and personal property caused by the negligent installation of a fireplace. The Hanna Court held that the fireplace constituted an integral part of the home and an improvement. As a result, the statute of repose applied. The Hanna Court also examined whether the homeowner had eight (8) years after the substantial completion of the fireplace to bring an action against the contractors, as outlined in the statute of repose, or whether the four (4) year statute of limitations barred the claim.  The Court held, as it pertains to damages to real property, that the Plaintiff’s claims were subject to the four (4) year statute of limitations set forth in O.C.G.A. §9-3-30 and the action accrued at the time of the substantial completion of the project.  

The holdings in Hannah provide that in cases involving damages to real property, the statute of repose and statute of limitations will run concurrently after the date of substantial completion. When the four (4) year limitation for tort actions has been reached, the claimant is barred from pursuing a claim to recover damages to its real property as a result of the defect in an improvement to its land. Keep in mind that the application of Hannah is different for damages to personal property as the discovery exception to the statute of limitations applies. 

Claimant beware! Make sure you examine the dates when the repair and/or improvement was made to determine if you have a viable claim.


As was previously reported, New York Governor Paterson has signed a bill which purports to eliminate the alleged windfall of double recoveries to plaintiffs which were alleged to have resulted from the common-law Collateral Source Rule, which enabled collateral source payors, including subrogating insurers, to recover their losses as part of the damages claimed by injured insureds.  This bill does not impact property damage subrogation claims, which was made clear beyond peradventure by a memorandum prepared by one of the previous sponsoring committees.  The language of the prior sponsor's memo is as follows:

Collateral Source and Subrogation Changes: The various collateral source provisions of the CPLR were enacted to eliminate the common law collateral source rule, which prohibited tortfeasors from reducing their obligations to a plaintiff by the amount of benefits the plaintiff receives from other sources, such as insurance. The statute's purpose is to eliminate the windfall of double recoveries to plaintiffs which often resulted from the common law collateral source rule, while still ensuring that uncompensated losses are fully compensated. Notwithstanding the trend to eliminate the windfalls that result from the common law rule, and to safeguard public monies, presently all defendants except public employers may offset against awards for future costs or expenses any amounts that would with reasonable certainty be replaced or indemnified. This bill would ensure that public employers are treated the same as private employers in tort actions. New York City estimates that it would save $14.5 million annually from this reform.

At present, there is no statutory authority that addresses or limits the extent to which a benefit provider may claim contractual reimbursement or subrogation with respect to medical expenses it has paid pursuant to an insurance contract or other agreement. Likewise, there is no statutory authority that specifies whether or under what circumstances such a benefit provider may intervene as a party in a personal injury or wrongful death action. For example, in a medical malpractice action, a health insurer which has provided coverage to the plaintiff may demand reimbursement for its expenses, often unnecessarily prolonging cases, thwarting settlement talks and making cases more expensive to litigate. Thus, it has become important that a statutory framework be established to facilitate settlement of cases and reduce expenses for litigants. This bill would preclude a benefit provider to seek reimbursement or subrogation against a settling defendant for those benefits paid to or on behalf of plaintiff, unless specifically set forth by statute.  In doing so, this bill would make the savings to defendants more tangible, and allow cases to settle more quickly and without unnecessary expense. This provision of the bill would be applicable to actions for personal injury, medical, dental, or podiatric malpractice, or wrongful death and would be inapplicable to the subrogation of property damage claims. (Emphasis added).

Pennsylvania Supreme Court Civil Procedural Rules Committee Recommendations Regarding Subrogation

The Pennsylvania Supreme Court Civil Procedural Rules Committee developed Recommendation 240 which would have amended Pa.R.C.P. 1020 to require that all claims arising from the same property loss be bought in a single action, even where there are different claimants with distinct damages.  This proposal would have overturned settled Pennsylvania appellate precedent.  Subrogation attorneys from Cozen O'Connor appeared before a committee of the Philadelphia Bar Association to voice opposition to this proposed rule change. It is of interest to note that the opposition we proffered on behalf of the subrogation community was echoed and expanded upon Detail Pennsylvania State Flagby representatives of the plaintiffs' personal injury bar, who also questioned the need for the proposed amendment.  All affected constituencies were united in their opposition to this unnecessary rule change, noting that there already are existing procedural mechanisms to allow parties to move for consolidation of related claims, or not, depending upon the circumstances of each case.

At this time, all reports we have received indicate that the Committee's proposal is being withdrawn.

We will continue to monitor carefully all aspects of this proposed amendment, and will report further as information becomes available.

California's "Made Whole Rule"

People in queueWhere the subrogating insurer and insured both have recovery claims and are competing for a limited amount of available money from a defendant, issues arise as to who is entitled to recovery, and/or how the recovery should be divided. These issues fall within the realm of the “made whole rule”, which generally provides, that under certain circumstances (i.e. limited assets of a wrongdoing defendant, non participation of the subrogating insurer in recovery lawsuit), the insured is entitled to be “made whole” for uninsured damages from the wrongdoing defendant, before the subrogating carrier can recover from the insured (via a lien or policy provisions) or from the defendant who caused the injury.

In a recent California Supreme Court decision involving med pay reimbursement, 21st Century Insurance Company v. Superior Court (2009) 47 Cal. 4th 511, 213 P. 3d 972, an insured attempted to expand the scope of the made whole rule by including the insured’s attorney’s fees as part of her uninsured loss, thereby eliminating the recovery of the subrogating carrier.   

21st Century’s insured was injured in an automobile accident. 21st Century paid the insured $1,000 under the med pay provisions of its automobile policy. The insured hired an attorney and pursed a personal injury claim against the third party who caused the accident. The case settled for $6,000, which comprised her total damages. The insured’s attorney received a fee approximating $2,000, leaving a net recovery of $4,000. 21st Century requested reimbursement of $1,000.  The insured argued that because her damages, including attorney’s fees, were $8,000, and her recovery was only $6,000, no reimbursement to 21st Century was required. Thus, the question before the court was whether “made whole” included the attorney’s fees incurred by the insured.

After reviewing cases in other states and noting states are divided on the issue, the Court ruled in favor of 21st Century, concluding that attorney’s fees should not be included as part of the insured’s damages for purposes of determining whether the insured has been made whole in med pay reimbursement cases.  Instead, the “common fund doctrine” allows the insured to reduce the amount of reimbursement to the insurer by a pro rata share of the insured’s costs and attorney’s fees. In that manner, both the insured and insurer share in the cost of recovery in proportion to their respective recoveries. The end result of the court’s decision allowed reimbursement to the insurer of $600, representing the insurer’s $1,000 payment, less its 1/6th pro rata share of attorney’s fees and costs.

Analysis of Katrina Opinion re: MRGO Claims

A Louisiana federal court issued a decision this week that may affect thousands of claims in the ongoing Hurricane Katrina litigation. After a 19 day bench trial for five flood victims that filed suit against the United States Army Corps of Engineers (ACOE), U.S. District Judge Stanwood R. Duvall awarded $719,000 in the In Re Katrina Canal Breaches Consolidated Litigation.

The ruling concerns only two areas of New Orleans: St. Bernard Parish and the Lower 9th Ward neighborhood, and is further restricted to claims arising from flooding caused by the Mississippi River Gulf Outlet (MRGO). The claimants alleged the government failed to properly design, construct, operate and maintain the MRGO, a 76-mile man-made ship navigation channel that connects the Gulf of Mexico to the Port of New Orleans Inner Harbor Navigation Canal. The claimants further alleged that the design of the MRGO (with the surface width being wider than the bottom width), along with the inevitable widening that would occur from waves in the channel, allowed the MRGO to act as a "funnel" for the Hurricane Katrina storm surge. Additionally, the salt water that was allowed to enter the MRGO from the Gulf allegedly killed off the storm-slowing plants and vegetation, further contributing to the "funnel" effect for the storm surge. The issues surrounding the MRGO have led many to refer to it as "The Hurricane Highway."

New Orleans flooded during KatrinaClaimants in the In Re Katrina Canal Breaches Consolidated Litigation advanced essentially two claims. The first claim concerned the levee breaches. In January 2008, the Court ruled that the ACOE was immune from suits based on the levee breaches because of the immunity provided by the Flood Control Act of 1928, 33 U.S.C. § 702(c), which provides that "no liability of any kind shall attach to or rest upon the United States for any damage from or by any floods or flood waters at any place." After the January 2008 decision, only the MRGO claims remained.

In its decision in favor of the plaintiffs this week on the MRGO claims, the Court rejected the government’s claims of immunity based on the Flood Control Act, because unlike the levee, the Court found that the MRGO was not designed for flood control, but rather was designed as a shipping channel.

The Court rejected the government’s claims of immunity for the failures of the MRGO under the Due Care Exception to the Federal Tort Claims Act (FTCA). In its November 18, 2009 Order, the Court held:  "Due care was clearly absent in the Corps’ actions as to the maintenance and operation of the MRGO. This exception is unavailable to the Corps."

The Court also rejected the government’s claim of immunity under the Discretionary Function Exception to the FTCA. This exception "insulates the Government from liability if the action challenged in the case involves the permissible exercise of policy judgment." Berkovitz v. United States, 486 U.S.531, 537 (1988). The government had claimed that all of its actions with respect to the maintenance of the MRGO were shielded by the Discretionary Function Exception. In its November 18, 2009 Order, the Court held, "In the event the gross negligence of the Corps in maintaining the MRGO would be regarded as policy, then the discretionary function exception would swallow the Federal Tort Claims Act leaving it an emasculated statute applying to automobile accidents where government employees are involved or medical malpractice where a government physician is involved. This was clearly not the intent of Congress."

The lead plaintiffs attorney, Pierce O’Donnell, told multiple media outlets that after this initial trial, there are "roughly 100,000" Hurricane Katrina claimants with the same claims as those that were ruled on this week that could be eligible for the same type of financial award from the government. However, a government appeal in the case is likely. In interviews, O’Donnell has said he is asking the government to work out a "universal settlement" with all of the claimants he represents.

In order to have preserved a claim against the ACOE related to Hurricane Katrina, claimants must have filed a Form 95 with the ACOE by August 29, 2007.  Claimants then have 6 months after denial within which to file suit.

New York Legislature Passes Anti-Subrogation Law

New York Governor Paterson signed into law New York State Bill A40002, which amends CPLR 4545, New York's Collateral Source Rule.  The bill has many aspects, some of which relate to municipal health benefit plans which are not directly germane to subrogation concerns.  From a subrogation perspective, the bill both maintains existing restrictive language concerning subrogation rights, and further tightens the grounds upon which reimbursement may be obtained.

See full size imageThe pertinent section of the bill references "Any Action Brought To Recover Damages For Personal Injury, Injury To Property Or Wrongful Death…."   It then provides for "limitation of non-statutory reimbursement and subrogation claims in personal injury and wrongful death actions."  This section states that it shall be conclusively presumed that any settlement in a personal injury or wrongful death action does not include any compensation for the cost of healthcare services, loss of earnings or other economic loss to the extent they have been or will be reimbursed by a collateral source payer.  The only exception is when there is a right of reimbursement or subrogation that is statutorily established.

The Act does not purport to restrict rights of subrogation for property damage claims, notwithstanding the somewhat misleading reference to actions for "Injury To Property" in one of the headings.  Indeed, two separate memorandum prepared by bill sponsors explicitly stated that the bill is not applicable to property damage subrogation claims.  The bill was passed as a "program bill," with a truncated memorandum which did not contain this language, but the pertinent memoranda still comprise part of the relevant legislative history for this bill, to the extent any unfounded arguments are made regarding the intended application and scope of this bill.  We shortly will be posting one or both of the sponsor memos with this clear language.

Stay tuned for further developments regarding potential anti-subrogation legislation in other jurisdictions.

Economic Loss Doctrine Broadened in Tennessee

The Economic Loss Doctrine may bar tort claims when a defective product causes injury only to the product itself and not to other property or persons. In many jurisdictions there are exceptions to the doctrine, including when the damage is caused by a “sudden calamitous event.”Recently, the Supreme Court of Tennessee considered the application of this exception.

Vintage BusIn Lincoln General Ins. Co. v. Detroit Diesel Corp., a bus caught fire due to an allegedly defective engine. The fire did not cause personal injuries or property damage to anything other than the bus. The subrogating insurer argued that the economic loss doctrine should not bar a products liability claim because the harm was caused by a “sudden calamitous event.” The court rejected the exception, instead following a “bright line rule” completely barring tort claims when a product causes damage only to itself.  The court reasoned that certain products “expose a product owner to an unreasonable risk of injury during an abrupt and disastrous occurrence" while others "merely disappoint a product owner’s expectations.”  The court explained that it would be difficult for parties and courts to apply a rule that focuses on the degree of risk and the manner in which the product was damaged, as opposed to a rule that hinges on the harm a plaintiff actually sustains.

Despite Tennessee's reluctance to carve out an exception, many states have successfully modified the application of the Economic Loss Rule by:

  1. Creating component part exceptions. (California)
  2. Confining the doctrine to products liability or very similar situations. (Florida);
  3. Statutorily providing for new home warranty laws against construction defects.(Connecticut, Indiana, Louisiana, Maryland, Minnesota, Mississippi, New Jersey, New York, and Virginia);
  4. Statutorily providing for notice and right to repair and associated actions (California, Nevada);
  5. Finding that builders have a duty in tort to act without negligence in the construction of residences (Colorado, South Carolina), or
  6. Recognizing exceptions, such as an independent duties (Utah, Colorado), special relationships or foreseeability of plaintiff (Alaska, Delaware, West Virginia).

The Economic Loss Doctrine varies in its application from state to state.  If you have a large loss involving a product, it is prudent to review your jurisdiction’s interpretation of the doctrine, and exceptions to the same, prior to embarking on recovery efforts.

Inverse Condemnation: The People's Champion

Article I, Section 19 of The California Constitution provides that just compensation be paid when private property is taken or damaged for public use.  *STOP*  Take a deep breath.  It is not as tough as it sounds.  In fact, after reading this blog you'll likely find yourself asking "Why haven't I used inverse condemnation as a cause of action in fire cases before?".

Knight on a horseInsurance carriers have incurred more than a billion dollars in damages arising from the California wildfires over the past few years.  The causes of these fires include arson, discarded cigarettes and failed utility equipment owned or operated by government entities or privately owned public utility companies.  When the latter are to blame, rest assured that inverse condemnation is the preferred cause of action to champion your fire subrogation case.  It's both a shield and a sword against government entities and public utilities.

The Shield:      In California, government entities require an injured party to file a claim within six (6) months of an incident to preserve a cause of action for Dangerous Condition of Public Property.  Inverse condemnation does not require the filing of any claim form and has a three (3) years statute of limitations.  Even assuming you win the race to file a timely notice, you will still need to prove the public entity or utility had notice of the dangerous condition in order to prevail under a Dangerous Condition of Public Property cause of action.  Inverse Condemnation has no requirement to prove notice of the dangerous condition.

Helmet, sword and shield leaning against a treeThe Sword:  A plaintiff need only prove the necessary elements of the cause of action to prevail  - (1) a public entity or privately owned utility company (2) took/damaged (3) private property for (4) public use (5) without just compensation.  [Note: Flood/levee cases have some different requirements.].  A plaintiff does not need to prove (1) negligent conduct; (2) fault on the part of the government entity or public utility; (3) that the loss was foreseeable; or (4) how or why the loss even occurred.   Moreover, liability and causation are issues to be determined by a judge, not a jury, which eliminates potential bias against insurance companies.  As if this is not enough incentive, a plaintiff that prevails under an inverse condemnation cause of action is also entitled to recover attorneys'  fees and costs.

Inverse condemnation is a recognized cause of action in many jurisdictions, though its application varies from state to state.  Still, the next time you receive a fire loss in which a government entity or privately owned public utility company is a potential defendant, look to see if the elements of inverse condemnation are met.  If so, don't be afraid to wield the sword and reap the benefits.

Canadian law still requires that subrogated actions be brought in the name of the insured rather than insurer

Automobile Accident In Canada, the right of subrogation is a product of the common law, although it may be modified by statute or contract. Unlike in the United States, Canadian common law provides that an insurer may sue only in the name of the insured in relation to a subrogated claim .That rationale has its roots in the need to provide a process by which the insurer would be able to exercise its subrogated rights. Historically, insureds were required to take all steps within their power to reduce a loss for which they had received indemnity, including exercising legal remedies against third parties. Since those remedies were personal to the insured, however, they could only be exercised in the name of the insured as a matter of procedural law. The common law did not provide a method whereby a person could be compelled to commence an action against another; therefore insurers had to apply to the Chancery Court to compel an insured to allow his or her name to be used for legal proceedings against third persons in order to reduce the loss.

The tenet still holds true today, and is illustrated by an exception to the rule discussed in the Ontario Court of Appeal case of Freudmann-Cohen v. Tran, 2004 CanLII 34765 (Ont. C.A.) . In Freudmann-Cohen, the plaintiff was injured in a motor vehicle accident when her car was struck by another vehicle. Since the driver of the offending vehicle was underinsured, the plaintiff asserted a claim under her own automobile insurer for underinsured motorist coverage. Her insurer, Zurich, subsequently learned that the defendant had been delivering pizza for Pizza Nova franchise at the time of the accident and that the franchisee had insurance coverage. It then issued a third party claim in its own name against the defendant pursuant to Rule 29.01 of Ontario's Rules of Civil Procedure, which states that: "A defendant may commence a third party claim against any person who is not a party to the action and who...should be bound by the determination of an issue arising between the plaintiff and the defendant." Zurich argued that Rule 29.01 constitutes a procedural scheme, with the force of regulation, which overrides the normal subrogation principle requiring an insurer claiming a subrogated right to sue in the name of the insured in circumstances such as these.

The Ontario Court of Appeal agreed, and held that the subrogation principle obliging the insurer to sue in the name of the insured is a procedural requirement itself, as opposed to a substantive obligation. While subrogation is a matter of substance rather than form, this aspect of subrogation is a matter of the procedure to be followed in the exercise of the substantive right of subrogation. The court noted however that:

"[t]he fact that Zurich has resorted to the third party procedure to put its subrogated claim on behalf of the plaintiffs in play in the action does not mean that Zurich is asserting the plaintiffs’ claim against Pizza Nova in Zurich’s own name. As I have earlier pointed out, rule 29.01 merely provides a mechanism whereby the defendant Zurich may ensure that an issue regarding which the third party should be bound is determined in the action; it is not necessary that that issue arise out of a claim whereby the defendant says the third party is or may be liable to the defendant. In my view, Zurich is entitled to resort to the third party rule in its own name in these circumstances."

As this case demonstrates, the right of an insurer to bring a subrogated action is derivative; that is, it merely a right to make such claim for damages as the insured himself could have made. For this reason, the general rule still holds in Canada that a subrogated action must be brought in the insured's name, rather than that of the insurer.

Recent Michigan Rulings Allow Subrogation Claims Against Tenants

Pan on fire on stoveMichigan appeared to join those states barring a landlord's subrogee from suing a tenant in the case of New Hampshire Insurance Group v. Labombard, 155 Mich. App 369, 375 (1986). There, the court held that a tenant is an implied co-insured in every lease, unless “expressly and unequivocal’ stated otherwise. But recent decisions give a new lease on life to recovery opportunities for insurers of landlords. In Laurel Woods Apartments v. Roumayah, 274 Mich. App. 631 (2007), the owner sued a tenant for a kitchen fire. The court held that the trial court erred when it granted defendant’s motion for summary disposition based on the Labombard decision, because defendant was contractually liable for the damages. The lease was found to shift the burden to the tenant for property damage caused to the premises. The court also rejected the argument that the lease’s failure to require the tenant to insure the premises precluded the landlord’s recovery. The Court of Appeals distinguished between negligence and contract claims, stating the following:

Labombard does not apply to this case.  Labombard was a negligence action, whereas this is a breach of contract action. The holding in Labombard makes plain that the Court was limiting negligence claims against tenants for fire damage to circumstances in which there is an express agreement allowing such liability. Thus, although the Labombard Court considered the parties' lease agreement, the holding in Labombard has no applicability here.

The court found the lease agreement to be “clear and unambiguous,” as follows:

[The lease states,] “Tenant shall also be liable for any damage to the Premises ... that is caused by the acts or omissions of Tenant or Tenant's guests.” Accordingly, defendants, who are defined as “Tenant,” are liable for “any damage” caused by their act or omission. Fire damage is clearly encompassed by the broad term “any damage.” And defendants' liability is not limited to damage caused by their negligence, but rather, it extends to any damage that they cause, negligently or otherwise.

Apartment fireOn October 28, 2008, the Michigan Court of Appeals extended this decision to subrogation.   In an unpublished decision, American States Insurance Company v. Hampton,2008 W.L. 4724279 (Mich. Ct. App. 10/28/08) (unpublished), the subrogee’s contract claims were deemed to be unaffected by Labombard. Citing to Laurel Woods, the court found the lease had similar language, establishing a contractual right of recovery.   The Laurel Woods decision was reaffirmed in May 28, 2009 in American State Insurance v. Ratcliff, May 28, 2009, Wayne Circuit Court, LC No. 05-522975-NZ (unpublished). There, the commercial lease agreement required the tenant pay the landlord for the fire insurance premium. After a fire damaged the premises, the insurer paid the landlord for fire damage and brought a subrogation action against the tenant for negligence. The landlord subsequently joined the suit seeking damages for its uninsured loss. The seminal question was whether the landlord or tenant bore the risk for any damage in excess of the policy limit. The Court of Appeals ruled that the lease contained an express agreement requiring the tenant to bear responsibility for negligence. And that the lease terms were consistent with Laurel Woods. While this decision didn’t address the subrogation action, the trend continues of allowing recovery against tenants where the contract establishes the risk of loss against the tenant.


These unpublished decisions limiting the Labombard and finding a contractual basis to extend subrogation rights against tenants, provide an excellent basis to argue pre-suit and in suit that subrogation claims against tenants are not dead in Michigan.


North Carolina Extends Statute of Repose for Defective Products to 12 Years

BooksEffective October 1, 2009, North Carolina's statute of repose for claims for defective products will be increased from six to twelve years for actions that accrue on or after October 1, 2009.  N .C .G .S. 1-46.1(a)(1) .  For actions that accrued prior to October 1, 2009, the former statue of six years after the date of initial purchase or consumption will apply. 

This will substantially and positively impact subrogation potential for defective product claims in North Carolina. Interestingly, the statute of repose for improvements to real property will remain six years from the later of the specific last act/omission giving rise to the cause of action or the date of substantial completion .   N.C.G.S.  1-50(a)(5)

It is key that in any claim you have that you are calculating both the statute of limitation and statute of repose periods.  Remember a statute of limitation begins to run from the date of the event or loss.  This is the length of time within which a legal cause of action or suit must be brought.  Whereas, as statute of repose may have begun to run months or even years before the event/loss.  A classic example would be a defective car which catches fire within the garage of a home.  In North Carolina, the statute of limitation for property damages based in tort is generally three years from the event.  However, the statute of repose for the product, in this case the car, will be calculated from the date of sale to the first purchaser.

Suit must be brought before the running of both the limitation and repose periods.

 It is entirely possible that the repose period may have run before the loss or will run shortly after the date of loss.  This was frequently the problem with product claims in North Carolina because of the short repose period of six years.  Now, for events that take place after October 1, 2009, a twelve year repose period will apply and more product claims can be brought as now products between 7-12 years in age will not automatically be excluded which would bar suit against the manufacturer.   In the example above, a claim that occurred prior to October 1, 2009, for a defective 11-year old vehicle is barred because the six year statute of repose still applies to claims before October 1, 2009.  If the fire had occurred today, October 1, 2009, the claim would not be barred because of the longer repose period of twelve years applies.  Note, you would still have to bring suit within one year of the loss (before the end of the 12th year), well before the running of the three year statute of limitation.  While the increase to 12 years for the product repose period is good news for those in the recovery business.

State Flag of North CarolinaKeep in mind that North Carolina still has a fairly short six year statute of repose for improvements to real property.  So, if your house fire was due to defective original wiring in the garage and not the defective vehicle, you would have only a six year repose period that applies to your claim.  Like the example with the car, you might need to bring suit before the running of the limitation period if the six year repose period for the structure will run before the three year limitation period to bring suit expires."

How to Deal with a Would-Be Spoliator

Burned Out Car HulkAs subrogation professionals, we see spoliation of evidence typically used as a defense by defendants who claim they did not get a chance to examine certain evidence. But sometimes we face the problem of a third party, sometimes the insured or its public adjuster or sometimes another insurance carrier, that is blocking access to evidence vital to the subrogation investigation. How do we deal with it? Aside from considering the particular problems unique to each individual case, the first step is communication with the would-be spoliator. That person should be made clearly aware of your need to examine the evidence and the consequences for blocking access. At the same time, it is important not to be overly aggressive and risk angering that person to the point of sabotage.

To assure your right of later legal action, if necessary, the common elements to convey are these:

1. you have a potential cause of action involving an item or items of evidence;
2. the would-be spoliator has voluntarily undertaken control over such item(s);
3. you are making a specific request for access to and continued retention of that item(s) of evidence; and
4. denial of that request could result in legal consequences.

The following is a template of a letter that might serve as starting point for those facing this problem:

To Whom it May Concern:

We are the insurance company for Insured Architects, which own the building that caught fire on September 22, 2009. We understand that you are the public adjuster for the tenant that occupied the space where the fire originated. The fire investigator we retained has determined that a certain printer on the premises was in the area of origin. We understand that you have voluntarily undertaken to take custody and control of the printer. As we discussed, the printer may be critical evidence in a potential subrogation claim against the manufacturer of the printer and/or others who may have been aware of problems with the printer or its surrounding parts, depending on what the completed investigation reveals.

We would like to take over the custody and control of the printer for purposes of completing our subrogation investigation. If you are not willing to transfer custody and control to us, we request that you provide our experts access to the printer for further examination at a laboratory facility so that we may complete our subrogation investigation. While we continue to work together to arrange such an inspection, you should continue to take all necessary steps to avoid damaging, modifying, or releasing the printer without providing us at least thirty (30) days written notice with an opportunity to take over custody and control of the printer. It is our hope to avoid legal action for failure to provide access to the printer for this purpose.

Please be sure to contact me regarding this matter as soon as possible.


Your Name

Technology Can Maximize Subrogation Recoveries

In recent years, technology and the internet have fostered a new trend in social media with websites such as Youtube, Facebook, and Twitter.  This undeniably stems from the desire for instant information.  How can technology and the internet assist in maximizing subrogation cases?  Consider these examples:

Youtube/Online Video:  Recently I received a new fire loss days after the fire occurred.  I began searching online for information and came across multiple Youtube videos of the fire still burning.  Some of the videos were taken from a helicopter by a major news organization and others were local/online reporters and bystanders documenting the fire spread.  One video even included an interview with the local fire department chief discussing the status of the fire.  These videos can be used to assist fire cause and origin investigators in their evaluation of where the fire started, how it spread and even identifying witnesses. 

E-Mailing Notice Letters:  The process of placing a potential defendant on notice of a new loss, and receiving a response, can often take weeks.  However, most companies have websites with e-mail contact information.  By utilizing their e-mail addresses, you can ensure (1) reasonable notice and (2) faster notification to liability carriers.  Further, you can activate the "Return Receipt" feature on your email to verify that the notice was actually received.  

Video-Conferencing:  Whether you are conducting a roundtable conference with subrogation counsel, interviewing an insured or even listening to a deposition, a simple telephone call may not always provide all of the details.  If a picture is worth a thousand words then video-conferencing is the equivalent of a dictionary.  Video-conferencing allows you to assess facial expressions and body language.  In essence, it puts you in the room.  Video-conferencing is readily available in most law firms and there are many inexpensive alternatives available, such as Skype which allows video calls over the internet to other Skype users. 

These are just a few examples of how technology and the internet can assist in maximizing subrogation recoveries. These tools should be utilized for effective and efficient handling of subrogation losses.