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

Colorado's legislature is considering passing a bill that would limit subrogation in personal injury cases.  House 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.  If 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.

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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).
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* 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. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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A. What is A Standard Mortgage Clause?

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

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

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

B. A Standard Mortgage Clause is an Independent Contract

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

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

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

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

C. Example of a Standard Mortgage Clause

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

IT IS HEREBY PROVIDED AND AGREED THAT:

1. BREACH OF CONDITIONS BY MORTGAGOR, OWNER OR OCCUPANT

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

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

2. RIGHT OF SUBROGATION

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

…

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

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

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

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

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

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

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

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

The Court of Appeal clarified that:

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

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

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

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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.

Publicized 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.

There 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.

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In 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.

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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).

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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 by 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.

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Where 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, 21^st Century Insurance Company v. Superior Court (2009) 47 Cal. 4^th 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.   

21^st Century’s insured was injured in an automobile accident. 21^st 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. 21^st 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 21^st 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 21^st 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 1/6^th pro rata share of attorney’s fees and costs.

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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.

The 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.

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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.

In 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.

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“Dangerous and generally a fruitless occupation.”- Justice Akenhead

No, Justice Akenhead was not talking about being a lawyer, but stating that it is inappropriate to rank possible causes of a fire in terms of probability in order to select the most probable. 

In Fosse Motor Engineers Ltd v Conde Nast (2008), Fosse, the owner of a warehouse, asserted negligence against its tenant and an employment agency that supplied workers in the building for that tenant. A fire occurred at the warehouse when only the workers and a security guard were present. Expert evidence could not identify which of several possible causes led to the fire. The possible causes were: a cigarette discarded by either Fosse’s employees or the agency workers; an electrical fault; or arson by an intruder. Fosse claimed the fire was caused by one of the agency workers carelessly discarding a cigarette or, if it was an intruder, because a door had been left open by the agency workers allowing the intruder access.

The Judge held that although the Court might eliminate all but one of the causes of the fire, it still had to decide that the remaining cause was the most probable. The judge accepted the evidence of the agency workers that the fire was not caused by their actions and discounted the electrical cause as being improbable. That left either someone working earlier or an intruder (entering before the agency workers). The Judge found that as it was not possible, on the balance of probabilities, to determine which of the two remaining feasible scenarios was the cause, Fosse had failed to prove its case.

What’s all the Fosse about?

Fosse provides a reminder that in England & Wales the burden rests upon the claimant to overcome the evidential burden. In some respects the fact that the Judge did not choose to decide between (what he regarded as) the remaining feasible causes was academic since, in either scenario, Fosse would not have been successful. However, the fact that the Judge chose not to decide may be useful in defending claims where the exact circumstances that gave rise to the allegation are unclear: It is therefore always worthwhile looking into causation issues with a critical eye. 

In Drake v Harbour (2008), the lack of proof of an exact cause did not prevent recovery. The claimant engaged the defendant electrician to rewire her home. She was away from the property during the work when a fire started in the loft where Harbour had been working. The Court of Appeal held that the fact that the claimant was unable to demonstrate the precise mechanism that led to the fire was not a bar to recovery; if a claimant proved that a defendant was negligent and a loss was caused that was of a kind likely to have resulted from such negligence, that would ordinarily be enough to infer that it was probably so caused. Further, as Harbour was suggesting that it was not his negligence that caused the fire, then it was his burden to suggest what the probable cause was, and to properly plead it.

Harbouring doubts?

Drake suggests that where negligence can be established you do not necessarily have to show the precise mechanism as an English Court might infer that it was the defendant's negligence that caused the loss; the onus then shifting to the defendant to prove that alternative causes are at least “as likely”.

Causation considerations
These two cases highlight the importance of considering the cogency of the factual (and expert) evidence in proceedings. Drake suggests that even if you don't know the precise mechanism, if you can show that the likely causes all would have emanated from the negligence of a specified person, that suffices. If an English Court can be satisfied that a party was negligent it may not always be necessary to show the most likely cause. In Fosse, though, because the causes may have had different culprits, and because negligence could not necessarily be shown, the causation hurdle could not be overcome.

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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?".

Insurance 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.

The 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.

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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.

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Michigan 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.
 

On 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.

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Effective 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.

Keep 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."

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As 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.

Sincerely,

Your Name

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Unlike in the United States, one of the most frustrating problems for subrogators in England is that they are not able to obtain a third party’s insurance policy in order to ascertain how deep their opponents pockets are before pursuing a recovery action. 

This tactical advantage was effectively nailed closed (for now) following the court’s decision in the West London Pipeline and Storage Limited v. Total UK Limited (2008).  In that case, Total was seeking contribution from a third party (TAV) following the largest peace time explosion in Europe at the Buncefield oil depot in 2006.  Relying on the court’s controversial decision in Harcourt –v- Griffin (2007), Total made an application to the court under CPR Part 18 for information and the disclosure of TAV’s insurance information.  Total argued that the information was relevant to the issues in dispute and necessary for the efficient management of the case. 

Unfortunately for subrogators, TAV successfully argued that the court did not have jurisdiction to order disclosure of its insurance information, as it was not relevant to any issue in the case.  Agreeing with TAV, the court took the view that although they understood the claimant’s desire to know whether a Defendant is worth suing, the court was also keen to avoid the promotion of “deep pocket” or “speculative” litigation before English courts.   

Although the Total decision has been adopted by most courts in England, the argument that an insurance policy is a private matter between the insured and insurers has not extended to After-The-Event (“ATE”) insurance policies.  These are specific policies which some claimants take out to combat the loser pays rule, which is embedded in English litigation.  Claimants use ATE policies to cover their liability to pay a Defendant’s legal fees and disbursements, if their case is unsuccessful.   In the recent decision of Barr & Oths –v- Biff Waste Services Ltd [2009], the court took the view that such insurance policies are disclosable.  Among other things, the court held that there was a difference between liability insurance, which may have been in place for many years before the event giving rise to the litigation, and an ATE insurance policy that was probably taken out for the sole purpose of allowing a claimant to pursue litigation, which would otherwise not be possible.  As an ATE policy is a vital component to the litigation itself, its disclosure can be distinguished from the court’s decision in the Total case.

While the theory surrounding both decisions may seem sound, one cannot help but feel that just as a Defendant in England does not want to defend a claim for fear of being unable to recover its costs, a claimant does not want to obtain an empty judgement.  Surely as the “cards on the table” approach is the overriding objective of the Civil Procedure Rules, wouldn’t it be in all parties interest to save time and costs by knowing where they stand from the outset of any case?

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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.

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