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

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:

 

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.

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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!
 

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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. 4^th 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. 4^th 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 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 www.artnet.com and www.askart.com. 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.
 

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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.

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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

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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.

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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.

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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.

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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.
 

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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.
 

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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.

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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.
 

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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).
 

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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.

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

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

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

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

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

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

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

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

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

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

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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.
 

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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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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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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.

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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.
 

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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.
 

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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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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.
 

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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.
 

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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."
 

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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.
 

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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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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.

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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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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.
 

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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. 

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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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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.
 

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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.

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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 http://saferproducts.gov/ 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.
 

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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.
 

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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.
 

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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. 

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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.
 

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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.
 

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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. 

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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.

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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.

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 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. 

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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. 

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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.

Application

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.

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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.

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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. 

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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.

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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 occupancies.  As 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.

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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.

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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.

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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.

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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.

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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.  

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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.   

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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.

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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.  

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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. 

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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 11^th 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 11^th 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.

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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.

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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? 

Once 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.

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The recent California Appellate Court decision of Interstate Fire & Casualty Insurance Company v. Cleveland Wrecking Company (2010) 182 Cal.App.4^th 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.

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The 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.

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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.

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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. 

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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.

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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. 

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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.

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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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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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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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