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

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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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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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 prevailing laws in the Middle East are generally based on, and utilize elements of, Shari’ah, The Koran and the Hadith together with what is termed as Latin law, influenced by Egyptian Napoleonic Code style law. The concept of insurance is not contradictory to Islam, the payment of blood money by an individual to a deceased’s family has been common through the ages. Further, the concept of risk mitigation, by using what can be termed as the law of large numbers, is common practice in Islam. One of the explanations often cited for the low uptake for conventional insurance (or what is termed as Islamic insurance or Takaful) in the Middle East is that insurance is viewed by many to be considered impermissible. It inherently contains elements of gharar (uncertainty) or, to put it into context, trading in risk, which is addressed in Shari'ah law.

Insurance law in the UAE was codified following the enactment of Federal Law No.6 of 2007 (the "2007 Law”), which created the UAE Insurance Authority ("IA"). The precise application of the 2007 Law is ongoing, and is adopted from Jordanian insurance law.  Currently, the 2007 Law is very grey in its application and far from an all-encompassing regulatory system for conducting insurance activities in the UAE.

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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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As Lord Mansfield ruled in one of the oldest English authorities on subrogation, payment of the loss by an insurer to its insured does not affect the liability of the wrongdoer. He set forth the basic principle as follows:

“Every day the insurer is put in the place of the insured … The insurer uses the name of the insured … I am satisfied that it is to be considered as if the insurers had not paid a farthing”.

So what was a sophisticated Court in South Africa thinking when, earlier this year, it came to the conclusion in Nkosi v. Mbatha (AR 20/10) [2010] that a third party is able to raise the insurer’s indemnification as a defence to the related proceedings brought in the name of the insured?

In Nkosi, the plaintiff, having been involved in a car accident, was indemnified by her insurers in the sum of SA Rand 16,000 (approximately £1,500). A subrogation action was started but only during cross-examination did the plaintiff declare to the Court that she was proceeding on behalf of her insurers. When asked to give particulars, she refused (no doubt with her Lord Mansfield “Book of Quotes” in hand) on grounds that such information was irrelevant.

It seems that both the first instance Magistrate’s Court and then the Court of Appeal in Pietermaritzburg – both of which would be familiar with English common law as South African law is partly based on its principles – were annoyed by the plaintiff’s conduct finding – incorrectly in our submission - that subrogation was a fact that had to be specifically pleaded and proved to the court.

Fortunately, a very recent decision of a South African court suggests that there has been an appropriate judicial reaction to the Nkosi case. In Smith v Banjo (AR290/10) (12th November 2010) the KwaZulu-Natal Provincial Appeal Court ruled that the involvement of the insurer in a lawsuit is irrelevant and it is, therefore, not necessary to plead such involvement. It found Nkosi to be “clearly wrong” and “not binding on future courts”. Whilst it is pleasing that the South African Courts have remedied a poor decision the fact that the decision in Nkosi was ever made (and supported on appeal) goes to show how there is always a litigation risk. Thankfully now, the South African courts are again “satisfied that it is to be considered as if the insurers had not paid a [Rand]”.
 

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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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As in the United States, experts in England and Wales often play a fundamental role in litigation. Their opinions influence whether a case is brought, case strategy and settlement decisions. Experts currently have limited immunity for claims of professional negligence. This immunity extends to evidence given by the expert in court and to work which is preliminary to giving such evidence. This immunity has applied even where an expert has been dishonest with the parties or the court. The rationale is that an expert witnesses should be free to give evidence in court without fear of being sued by a party whose case is lost.

This issue recently came under scrutiny in Jones v Kaney [2010] EWHC 61. The extent of immunity will be considered by the Supreme Court in January 2011, after permission was granted for a “leap-frog appeal”.

In Jones, Dr. Kaney was hired by the claimant, Mr. Jones, to prepare an expert medical report regarding personal injuries he suffered following a traffic accident. Dr. Kaney initially opined that Mr. Jones suffered from post traumatic stress disorder (PTSD). The defendant’s expert disagreed, believing that Jones had exaggerated his physical symptoms. The experts later discussed the case and prepared a joint statement, signed by both experts, saying the claimant was deceitful. Although Dr. Kaney later tried to retract the statement, the court refused and the claim settled for a considerably smaller sum than originally sought. Jones then brought proceedings for negligence against Dr. Kaney, who sought to have the case struck out on grounds of her immunity from suit, applying the Court of Appeals’ decision in Stanton v Callaghan [1999] 2 WLR 745.

Mr. Jones argued that Stanton is no longer good law for two reasons: (1) the immunity can no longer survive in light of the House of Lords’ decision in Arthur Hall v Simons [2000] 3 WLR 543 (where a barrister’s immunity from suit was abolished); and (2) the expert witness immunity is inconsistent with Article 6 of the European Convention on Human Rights, the right to a fair trial.

The Judge found in Dr Kaney’s favour, considering himself bound by Stanton, but said:

“although I conclude that Stanton v Callaghan remains good law, I have doubts as to whether it will continue to remain so for the reasons canvassed by the Claimant…. I conclude that there is a substantial likelihood that on re-examination by a superior court, with the power to do so, it will emerge that public policy justification for the rule cannot support it”.

With permission for the appeal having been granted, there is a possibility that experts’ immunity will be severely curtailed, if not altogether abolished.
 

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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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