Responsibility of Electric Utilities to Trim Trees and Other Vegetation

It is hard to believe that summer is coming to an end and storm season will be upon us. It is never too early to be prepared for the property losses caused by high winds and winter storms. This blog explores the duty of electric utilities to trim trees and other vegetation around power lines.

Often utility lines are downed by tree limbs that fall on the power lines during ice storms and high wind events. In turn, the downed lines send electrical surges into residences and businesses, which may cause a fire. Many subrogation professionals fail to seek recovery in such cases believing that downed electrical lines are an act of God or that the local utility did not have a duty to actively inspect for and remove vegetation that may pose a threat to the electrical distribution system. Before closing such a case, one should be mindful that most states have adopted the National Electric Safety Code (“NESC”). The NESC is a national industry standard for the safety of utility lines. The NESC requires electric utilities to prune trees away from power lines and other electrical equipment. Rule 281 of the NESC, found in the NSB Handbook 81 provides:

Where trees exist near supply-line conductors, they shall be trimmed, if practicable, so that neither the movement of the trees nor the swinging or increased sagging of conductors in wind or ice storms or at high temperatures will bring about contact between the conductors and the trees.

National Electric Safety Code, NBS Handbook 81 (National Bureau of Standard, 6th Edition 1961).

Many states require utilities to proactively inspect for and remove vegetation that pose a risk to wires. For example, in New Jersey, utilities are required “to perform vegetation management on vegetation that pose a threat to its energized conductors at least once every four years.” New Jersey Administrative Code 14:5-9.4(b). The utility is also required to remove all vegetation that is close enough to the electrical line to “affect reliability or safety” once the utility becomes aware of the threat. N.J.A.C. 14:5-9.4(c).

In sum, when deciding if a utility should have or could have prevented a fire caused by a downed line, at the very least, the subrogation professional should check the NESC and the state code to determine if the utility complied with the mandatory vegetation control requirements. This is in addition to inverse condemnation arguments, where applicable, as this site has written about previously.

Discovery of Initial Claims Investigation Documents

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

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

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

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

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

Admissibility of Design Changes in Product Liability Cases

Most people have heard the old adage, “If it ain’t broke, don’t fix it.” But, is the opposite true? If something was fixed, does that suggest it was broken in the first place. In many cases, evidence that a product’s design was changed can be compelling evidence that the original product was defective. Many states have evidence rules which prohibit introduction of subsequent remedial measures. For example, in California the evidence code states: When, after the occurrence of an event, remedial or precautionary measures are taken, which, if taken previously, would have tended to make the event less likely to occur, evidence of such subsequent measures is inadmissible to prove negligence or culpable conduct in connection with the event.

The policy of encouraging safety measures is the primary reason for the rule. Many states have similar rules. However, there is an important exception recognized by California and 14 other states. The evidentiary rule in California is limited to negligence cases. In strict liability products cases, the subsequent remedial measures are admissible. California courts addressing this issue have held that excluding evidence of remedial measures in the strict liability context would be contrary to the public policy of encouraging distributors of mass-produced goods to market safer products. Schelbauer v. Butler Manufacturing Co. (1984) 35 Cal 3d 442.

Evidentiary rules on this issue vary from state to state. If you have a subrogation case that involves a product, it is worth checking into the evidentiary rule in your state on this issue. The following states allow admission of subsequent remedial measures in strict liability product defect cases: Alaska, California, Colorado, Connecticut, Georgia, Hawaii, Iowa, Massachusetts, Missouri, Nevada, Ohio, Rhode Island, South Carolina, Wisconsin and Wyoming.

Effectively Connecting With A Jury In A Subrogation Trial

Consider this hypothetical:

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

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

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

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

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

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

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

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

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

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

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

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

Principal Architect Liability

 The California Supreme Court, in Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP (2014) DJDAR 8787, recently held that an architect which serves as principal architect on a project owes a duty of care to future homeowners in the design of a residential building. Such architects owe that duty of care even when they do not actually build the project or exercise ultimate control over its construction.

The trial court had sustained a demurrer in favor of two architectural firms on the grounds that architects who made recommendations, but no final decisions on construction, owed no duty of care to future homeowners with whom they were not in privity of contract. The Court of Appeals reversed, concluding that an architect under those circumstances owes a duty of care under both common law and the Right to Repair Act.

In support of its holding, the Supreme Court, like the Court of Appeals, relied heavily on the factors set forth in Biakanja v Irving (1958) 49 Cal. 2d 647 and the Bily v. Arthur Young & Co. (1992) 3 Cal. 4th 370 decision. The Court summarized its opinion by outlining the following Biakanja factors: 1. Defendants’ work was intended to benefit the homeowners living in the residential units that defendants designed and helped construct; 2. It was foreseeable that these homeowners would be among the limited class of persons harmed by the negligently designed units; 3. Plaintiff’s members have suffered injury as the design defects have made their homes unsafe and uninhabitable during certain periods; 4. There is a close connection between defendants’ conduct and the injuries suffered; 5. Significant moral blame attaches to defendants’ conduct due to their unique and well-compensated role in the project as well as their awareness that future homeowners would rely on their expertise in designing safe and habitable homes; and 6. The policy of preventing future harm to homeowners reliant on the architects’ specialized skills support recognition of a duty of care.

The key to the Beacon decision is that the architects were the principal architects on the project - i.e. their design work was not subordinate to any other design professionals. It is yet additional proof that the concept of privity, if not dead, has been eroded to the point of irrelevance.

Dispute Resolution Clauses (UK)

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

The Facts

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

The Contract provided:

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

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

Discussions Between the Parties

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

The Arguments

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

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

The Decision

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

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

As a result the Judge found:

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

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

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

 

 

 

 

 

Does It Matter How Old My Product Is? - Statutes of Repose in Product Defect Cases

A frequent question that arises with claims involving alleged defective products is what effect, if any, the age of the product has on recovery. It’s a common misconception that simply because a product is “old,” any claim for damages caused by it are barred. However, the extent to which there could be recovery for damages resulting from a defective product depends upon whether the jurisdiction enacted any type of statute of repose for product liability cases and what that statute provides.

Statutes of repose differ from statutes of limitations and these distinctions often provide a source of confusion. The main distinction between statutes of repose and statutes of limitations is the triggering event from which the applicable period of time begins to run. A statute of limitation begins to run from the injury or the act giving rise to the injury (i.e. the date of the fire or flood in the typical subrogation case). A statute of repose begins to run from an event other than the event of an injury giving rise to the cause of action. In some cases, a statute of repose may bar an action before a cause of action even arises.

Most states have enacted statutes of repose related to construction activities (such as construction of real property). Some states have also enacted statutes of repose applicable to product liability claims which generally begin to run when the specific product is first delivered or sold to a consumer. Beyond that, every state that has a statute of repose has different and unique provisions and exceptions to how the statute applies.

A very small number of states have statutes with an absolute bar to asserting a product liability claim after a specific number of years. These statutes provide no exceptions to the rule that after a certain number of years after the product is first sold (the number of years vary), any claim is barred. More commonly are statutes which provide a number of exceptions to the absolute bar on recovery. Examples of exceptions include claims for fraud or misrepresentation. Other states have “rebuttable presumptions” whereby the court will presume that a product over ten years old is not defective until the claimant presents evidence to rebut that presumption. Finally, a few states have no statutes of repose, either because the courts have declared them unconstitutional or because they were never enacted. In those states, no matter how old the product is, the claim is not barred by any statute of repose.

Each state treats claims based on product defects very differently and that treatment is constantly subject to change by the courts. One should not assume that because a claim involves a product older than 10 years, for example, there is a legal bar to that claim. Those states that do have statutes of repose applicable to product defect cases also may have a number of exceptions that may render it inapplicable or trigger beneficial presumptions. If you have a claim involving an older product it is imperative that you review the laws of the specific jurisdiction you are in, including whether an applicable statute of repose applies.

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

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

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

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

A Case Example of the Negative Impact of Improperly Adjusting a Claim (U.K.)

Brit Inns Ltd v. BDW Trading Ltd is an illustrative example of where litigation (and in this case, a subrogated claim) can go wrong. Indeed, the judge said “[t]his litigation has gone wrong for everybody.” It does, though, have important aspects that can improve Claimants and Defendants approaches to subrogation claims.

Facts
A contractor caused flooding to a basement of a bar and restaurant during the course of their development work. The repairs to the basement and the subsequent losses that arose due to the closure of the business were handled by the insurers for the bar and restaurant. The claimants brought a subrogated claim for losses arising out of the defendant’s defective work. This comprised of the insurers’ claim of £660,000 and an uninsured claim, mainly loss of rent and profit, for £522,000. At an early stage liability was admitted. So far so good….

However, the claimant became unstuck when it became apparent that the loss adjusters had failed to correctly adjust the claim. The subrogated claim came under intense scrutiny and quantum could not be settled between the parties leading to a (costly) 6 day trial.

Damages - The Result
In relation to the material damage claim, the court said that where works had been completed by the time of the trial, the actual costs would almost always be the starting point of any assessment of the reasonable costs of reinstatement. In addition, where the scope of the works and their costs had been the subject of scrutiny by a third party, such as a loss adjuster, with a clear incentive to ensure that the sums paid had been kept to a minimum, the court would likely attach significant weight to the reasonableness of the sums paid out. In the instant case, however, the claim for the costs of the reinstatement works had been wholly exaggerated. It was found that invoices presented in support of the costs were unreliable, inadequate and impossible to analyze retrospectively and there was a lack of evidence of payment and checks by insurers that the work had been carried out. Indeed, at trial the adjuster conceded that there were items and invoices he had accepted but which should not have been paid! The inadequacies were such that the judge said they were “too numerous to identify comprehensively”. The Court also rejected the basis for the insurer’s assessment of the loss of profits claim, which was based on a competitor’s business, even though actual profit and loss figures were available upon which a reasonable adjustment could have been made.

The insurer, under the insured’s name, claimed about £660,000. The Court awarded just £157,467 (or 26%).
The insured claimed £522,000 as uninsured losses. The Court awarded a meager £16,403 (or 3%).

Costs – The Result
During the litigation the parties made several settlement offers. The judge endorsed the Court of Appeal’s statement in Fox v Foundation Piling Ltd that a defendant cannot expect to secure costs protection unless it makes a sufficient Part 36 offer (see author’s blog of 19 July 2011 for understanding of Part 36). As such, although the defendant had made a Part 36 offer it was not high enough to provide costs protection. For this reason, the judge awarded the Claimants their costs up until 30 May 2012, but deprived them of 40 percent of those costs because of their conduct in the claim: excluding all costs incurred in connection with the Claimants’ experts whose evidence was fundamentally flawed from the outset. As for the costs from 30 May 2012, essentially all the costs of the trial, the judge ordered the Claimants to pay the Defendant’s costs in full for the period of the trial. Furthermore, the Claimants had a smaller claim for the uninsured losses which amounted to about 10% of the total claimed. In relation to this claim the judge ordered that the Claimants pay 90% of the Defendant’s costs. In short, the Court found that it was the Claimants’ unreasonable conduct and unrealistic expectations that caused the matter to proceed to trial.

Comment
The case therefore serves as a warning that winning is not everything. In this case the Claimants spent substantially more in costs that the Defendant even had to pay them in damages. Winning on liability does not always guarantee an award of costs, even in a “loser pays” regime: the Courts will carefully consider the conduct of the parties when awarding costs.

Had the Claimant properly adjusted the loss, made a claim for a realistic figure, made a sensible offer early on and engaged with the Defendant properly, it is likely they would have recovered the majority of their costs. This case therefore serves as a reminder of the need to take early reputable advice on the merits of your claims, on both liability and damages.

 

Texas Uniform Condominium Act: What to Know, Where to Go, and How to Find it

 

As the State of Texas continues to enjoy strong population growth, condominiums will continue to proliferate particularly in Texas’ largest cities. For subrogation professionals who occasionally see claims associated with condominium associations, it is helpful to have an understanding of the Texas Uniform Condominium Act (“UCA”) and how it may affect potential subrogation rights.

The UCA is codified in Chapter 82 of the Texas Property Code and applies to all condominiums in Texas for which the condominium declaration is recorded on or after January 1, 1994. However, if the declaration was recorded before January 1, 1994, the UCA may control if the unit owners vote to amend the pre-exiting declaration to have the UCA apply and that amendment is filed for record in the county where the condominium is located. Alternatively, the unit owners could record a declaration or amendment before January 1, 1994 stating that the UCA will apply in its entirety as of January 1, 1994.

Certain key provisions in the UCA will retroactively apply to all condominiums even if the declaration was recorded before January 1, 1994. These provisions include requirements that the condominium association purchase and maintain property and commercial general liability insurance where each unit owner is an insured person under the policy and the insurer waives its right of subrogation against each unit owner.

A cursory review of the UCA would lead one to the conclusion that pursuit of a unit owner by a subrogated condominium association insurer is pointless. However, this is not always the case. While the UCA provides that provisions related to insurance, additional insured status and waiver of subrogation apply even if the declaration was recorded before January 1, 1994, it also provides that such provisions cannot “invalidate existing provisions of the declarations, bylaws, or plats of a condominium for which the declaration was recorded before January 1, 1994.” What does this mean then for subrogation professionals?

Essentially, this latter provision confirms that while requirements for insurance, additional insured status and waiver of subrogation will retroactively apply to condominiums formed before January 1, 1994, those provisions cannot contradict or invalidate what unit owners previously agreed to with respect to those issues. For example, if the unit owners agreed in a declaration filed before January 1, 1994 that a negligent unit owner and/or his or her tenant would be responsible for damage to all common elements of the condominium complex, this language would arguably control over the insurance provisions in the UCA since the UCA cannot “invalidate existing provisions of the declaration…recorded before January 1, 1994.”

In sum, if you are reviewing a potential subrogation claim against a unit owner where the condominium association is your insured, do not automatically assume that your subrogation rights are extinguished by the UCA. Instead, determine when the declaration was recorded and whether it was ever amended. If it was recorded before January 1, 1994 and never amended, pay particular attention to any provisions which address a unit owner’s potential liability/responsibility for property damage. If the declaration provides that unit owners are responsible for reimbursement of certain damages that were covered by the association’s property insurer, you may have a very good argument that the UCA does not necessarily invalidate your subrogation claim since the UCA cannot invalidate a property damage allocation scheme previously agreed upon by the unit owners.

 

Beware of Defendants Who Attempt to Push the Boundaries of the Economic Loss Rule (Texas)

In most jurisdictions today, to recover under a strict products liability theory, the Plaintiff must prove that a defect in the subject product was a producing cause of the Plaintiff’s damages. More importantly, in order to recover under a strict products liability theory, the Plaintiff must show that the defective product caused physical harm to person(s) and/or property other than the defective product itself. In East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 866, 106 S. Ct. 2295, 90 L. Ed. 2d 865 (1985), a unanimous U.S. Supreme Court ruled that when a defective product injures only itself and causes only economic harm, tort claims (i.e., negligence, strict products liability) do not apply. Justice Harry A. Blackmun, writing for the Court, stated "a manufacturer in a commercial relationship has no duty under either a negligence or strict products-liability theory to prevent a product from injuring itself." Therefore, in East River, suit could only be brought under a warranty theory. Suit under a warranty theory could no longer be filed because of a time limit in the contract, so the Plaintiff was left with no remedy. That, in a nutshell, is the Economic Loss Rule.
 

Quoting from Vincent R. Johnson, The Boundary – Line Function of the Economic Loss Rule, 66 Wash. & Lee L.Rev. 523, 534–35 (2009), the Texas Supreme Court emphasized that using the term “the economic loss rule” is “something of a misnomer” because “there is not one economic loss rule that is broadly applicable throughout the field of torts, but rather several more limited rules that govern recovery of economic losses in selected areas of the law.” Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 415 (Tex. 2011). In products liability cases, when a loss arises from failure of a defective product and the damage or loss is limited to the product itself, “recovery is generally limited to remedies grounded in contract (or contract-based statutory remedies), rather than tort.” Id. at 415. However, the economic loss rule “does not preclude tort recovery if a defective product causes physical harm to the ultimate user or consumer or other property of the user or consumer in addition to causing damage to the product itself.” Equistar Chems., L.P. v. Dresser-Rand Co., 240 S.W.3d 864, 867 (Tex. 2007) (citing Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77, 79-80 (Tex. 1977)); Signal Oil & Gas Co. v. Universal Oil Prods., 572 S.W.2d 320, 325 (Tex. 1978); Mid Continent Aircraft Corp. v. Curry County Spraying Serv., 572 S.W.2d 308, 313 (Tex.1978)).
 

In recent years, some courts have held that when a defective product is “integrated” into another product or system, the whole integrated product is “the product itself” for purposes of the economic loss rule. For example, in Pugh v. Gen. Terrazzo Supplies, Inc., 243 S.W.3d 84 (Tex. App.—Houston [1st Dist.] 2007, pet. denied), the First District Court of Appeals of Texas concluded that strict products liability and negligence claims brought by the purchasers of a home against the supplier of EIFS were barred by the economic loss rule. Pugh, 243 S.W.3d at 93. The homeowners in Pugh alleged that the EIFS, which had been applied on their home, allowed moisture to penetrate into their home and caused damage to their home consisting of “decayed wood framing, water damage, and mold” and “warping in their hardwood flooring.” Id. at 86-87. The Pugh court noted that all of the alleged damages were property damages to the home and found that, “under the controlling case law, there was no personal injury or damage to other property that would have permitted the [homeowners] to assert a tort claim that would be excepted from the economic loss doctrine.” Id. at 94.


Pugh and cases in other jurisdictions like it raise interesting questions regarding the breadth of the economic loss rule. Should the integrated products approach apply only when a component part is integrated into another product? Should the rule apply to products installed in homes, which are not products per se, but improvements to real property? Should the rule apply to replacement products that were added to the original product, or just to the original product and its component parts? What is required to show a product is “integrated” into another product? If the rule applies to residential or commercial structures, what products are truly integrated? Prefabricated fireplaces? EIFS? Kitchen appliances? Extension cords? Light bulbs? Toilet ball cock valves? Toilet tank connectors? What if the product was added by the property owner years after the property was built?


In addition to products liability claims, some courts have applied the economic loss rule to construction claims. The doctrine has been applied to preclude tort claims brought to recover economic losses when those losses are the subject matter of a contract. See Jim Walter Homes, Inc. v. Reed, 77 S.W.2d 617, 618 (Tex. 1988). In Jim Walter Homes, the Court held that when the injury suffered is limited to economic loss to the subject of the contract itself, the action sounds in contract alone. Id. In Schambacher v. R.E.I. Elec., Inc., 2010 WL 3075703 (Tex.App. – Fort Worth 2010, no pet.), the Fort Worth Court of Appeals held the economic loss rule barred tort claims against two subcontractors who performed electrical and insulation work during the construction of a house that was damaged by fire. Jim Walter Homes and Schambacher also raise questions regarding the scope of the economic loss rule. Does the rule apply in the absence of privity of contract between the plaintiff and the defendant? If the defendant’s work was limited to the installation of the electrical systems, which cause a fire that ultimately destroys a home, does the economic loss rule bar recovery in tort for the entire home or just the subject of the subcontract?
 

The above cases relating to the economic loss rule have come from Texas, but every jurisdiction has their own interpretation as to the scope of the economic loss rule.  As a result, it is important that you review these cases with counsel as your state may allow tort causes of action under the specific facts of your case. 

Indiana: New Home Warranties Must Be Insured

When faced with a subrogation loss involving a new or fairly new house, and a potential construction defect that caused the loss, one of the first things to look for is how warranties can help or hurt your case. Did the builder give an express warranty? For how long? Were any warranties disclaimed? Do implied warranties exist? What if your homeowner isn’t the original buyer- do the warranties extend to subsequent purchasers?


Indiana has a unique approach to new home construction warranties. The Indiana New Home Construction Warranty Act (the “Act”) (see Indiana Code §32-27-2-1 et. seq.) allows a builder to provide specific warranties and disclaim all implied warranties if the text of the statute is followed. The express warranties are very specific in terms of what must be warranted, and for how long. For instance, if a builder utilizes the Act, it must provide a four year warranty covering defects in the home’s roof. In addition, in order to comply with the Act, the warranties must all be backed by an insurance policy at least equal to the purchase price of the new home, as well as completed operations products liability insurance covering the builder’s liability for reasonably foreseeable consequential damages arising from a defect covered by the warranties that the builder provides. The Act also provides that the express warranties, as long as they have not expired, will extend to subsequent purchasers.


The statute allows for recovery damages arising from the breach as well as reasonably foreseeable consequential damages arising from the defect and attorney’s fees, if provided for in the written contract.


Why would a builder choose to give a buyer express warranties via the Act? The likely answer is that it allows the builder to have control over its liability if a construction defect occurs. In Indiana, the implied warranty of fitness and habitability and the implied warranty of workmanship are warranties determined by case law and are not based in statute. If a builder provides express warranties in compliance with the Act, it is able to disclaim these implied warranties and the uncertainty of limitless liability. If a builder provides express warranties via the Act, it is assured that any warranty liability will be covered by insurance. This also works to the benefit of a plaintiff in a subrogation case, as there will be guaranteed insurance for the construction defect if the builder complies with the Act.
 

Based on the foregoing, when presented with a construction defect claim or case in Indiana, it is important to look at the contract to see if the builder has provided an express warranty pursuant to the Act.
 

Illinois Tightens Settlement Procedures

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

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

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

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

Recent Notable Recalls

By now most subrogation professionals understand the importance of keeping current with the frequent Consumer Product Safety Commission recall notices.  For this blog post we note the following recent notable recalls for the subrogation professional: 

Bosch Security Systems Recalls Fire Control Panels Due to Fire Alarm Failure
A recall was issued by the United States Consumer Product Safety Commission for the Bosch GV4 Fire Alarm Control Panel. The recall relates to the hazard of the notification appliance circuit module which can cause the panels to fail to activate an audible or visual alarm in the event of a fire. More specifically, the recall involves the G-series Fire Alarm Control Panels that are professionally installed and have model numbers that end in GV4 and use D192G Notification Appliance Circuit (NAC) modules. The NAC module monitors the circuit connections and signals when alarms are not operational. The Bosch name, logo and model number D9412GV4, D7412GV4 or D7212GV4 are on the board of recalled GV4 fire alarm control panels. The control panels and modules are used in residences and commercial facilities and can be mounted inside a variety of enclosures with a minimum size of 16 inches x 16 inches x 3.5 inches, which may or may not be labeled with the Bosch name or logo.


Most of the subject models were sold nationwide from January 2012 to December 2012. Consumers who have a recalled GV4 control panel with a D192G NAC module should contact Bosch or their certified professional installer for a free repair. Bosch Security Systems Inc. may be contacted at (800) 289-0096, from 9 a.m. to 8 p.m. ET Monday through Friday or online at www.boschsecurity.us and click on Customer Care for more information. To date, there have been no reports of any injuries. Bosch has contacted their distributors and installers and sent installers a service bulletin telling them how to correct the problem.


GE Brand Dehumidifiers are Recalled Due to Serious Fire and Burn Hazards

This recall involves 30, 40, 50, 65-pint dehumidifiers with the GE brand name. The brand name, model number, pint capacity and manufacture date are printed on the nameplate sticker on the back of the dehumidifier. The chart below indicates those that are recalled. The dehumidifiers are light gray plastic and measure between 19 and 23 inches tall, 13 and 15 inches wide, and 9 and 11 inches deep.


There have been 16 reports of incidents with the recalled GE-brand dehumidifiers, including 11 reports of overheating with no property damage beyond the units, and 5 reports of fires beyond the units which were associated with about $430,000 reported in property damage. No injuries have been reported. These items were sold at Sam’s Club, Walmart and other stores nationwide and in Canada, and online at Amazon.com and Ebay.com, from April 2008 through December 2011 for between $180 and $270. The manufacturer is Gree Electric Appliances, of China and may be contacted at Gree toll-free at (866) 853-2802 from 8 a.m. to 8 p.m. ET Monday through Friday, and on Saturday from 9 a.m. to 3 p.m. ET, or online at www.greeusa.com and click on Recall for more information.


System Sensor Recalls Reflected Beam Smoke Detectors Due To Failure to Alert Consumers in a Fire
Sensor reflected beam smoke detectors were recalled due to hazard when used with certain power supplies. Apparently, when used in this manner, the reflected beam smoke detectors can fail to send a signal to the fire alarm control panel that sounds the alarm and fail to alert occupants of a fire. The recall involves about 610 units with model number BEAM1224S and date codes 2111 through 3053. The YMMW format date codes stand for (2111) 2012-November-1st week of Nov. through (3053) 2013-May-3rd week of May. The detectors are ivory and black and measure 10 inches high by 7½ inches wide. The model number and date code are printed on a label on the back of the detector’s cover and on the product’s packaging. The reflected beam smoke detectors were used primarily in commercial buildings as part of the fire alarm system. Detectors used with acceptable power supplies, as listed on the company website, do not need to be replaced.
If you own such item you may report it to System Sensor at (800) 736-7672 from 7:30 a.m. through 5 p.m. CT Monday through Friday, or online at www.systemsensor.com and click on Resources, then Product Info Library/Technical Field Bulletins, then Safety Bulletins for more information and a list of acceptable power supplies. No Incidents/Injuries have been reported. Owners with the affected smoke detectors powered by a power supply that is not on the company’s acceptable list available online, should contact System Sensor to receive free replacement smoke detectors.
It is important to note these recalls especially when handling product defect matters. In those types of matters, it is beneficial to search the products company website, as well as, the United States Consumer Product Safety Commission website to see if your product is the subject of a recall.

 

 

 

 

 

Additional California Rulings on Right to Repair Act Defense

In August 2013, we reported that Christmas had come early for the California subrogation community due to a recent decision from the Court of Appeals which found that the “Right to Repair Act” (SB 800) did not apply to cases in which a property owner had suffered actual damages. Prior to the Liberty Mutual Insurance Company v. Brookfield Crystal Cove decision, subrogation professionals in California would encounter arguments that their subrogation claim was barred because proper notice and opportunity to repair was not given to the home builder as required under the Right to Repair Act. However, in the Liberty Mutual decision, the Court concluded that the “Right to Repair Act” was only intended to provide remedies where construction defects have negatively affected the value of a home, not where actual property damages occurred (i.e. the Act did not apply to subrogation cases).

Fast forward a few months and the California Court of Appeals have made two additional decisions on the topic. On February 19, 2014, the California Court of Appeals, 2nd Appellate District in Cynthia Burch v. Premier Homes, LLC, found that the Right to Repair Act did not provide an exclusive remedy for a homeowner seeking damages for construction defects. Rather, it found that common law causes of action for negligence and breach of warranty were permissible for construction defects that actually caused property damage. The Court cited to the prior Liberty Mutual decision, noting that the Court had examined the Act and its legislative history, and agreed with the Liberty Mutual decision - the Right to Repair Act did not provide an exclusive remedy and did not limit or preclude common law claims for damages for construction defects that have caused property damage.

On February 21, 2014, the 2nd Appellate District in Allstate Insurance Company v. KB Homes of Greater Los Angeles, Inc., ruled that the failure to give KB Homes timely notice and opportunity to inspect and offer to repair the construction defect excused KB Homes’ liability for damages under the Right to Repair Act. The case was unusual in that a series of demurrers left plaintiff Allstate Insurance Company only one cause of action – a violation of the Right to Repair Act – and no common law causes of action. The Court found that the sole issue before it was whether the Right to Repair Act required that notice be given to a builder before repairs are made. They distinguished the Liberty Mutual case (which notably involved common law causes of action), stating that the builder was allowed to repair the damage to the home. Here, in contrast, the builder was not given notice or any opportunity to inspect and to repair the defect before the damage was repaired.

The Allstate case can be distinguished on the ground that the Court’s decision was based on a single cause of action which alleged violation of the Right to Repair Act, and did not involve common law causes of action.  Arguably, if the common law claims allowed in Liberty Mutual and Cynthia Burch were present, the Court would have followed the Liberty Mutual decision. As a result, it is critical to plead common law tort causes of action when filing an action that arguably would come under the umbrella of the Right to Repair Act.
 

The Recovery of Loss of Use for Damage to Pleasure Craft

The recoverability of loss of use damages for recreational water craft has been vexing Federal courts in Admiralty cases for over 100 years. In 1897, the Supreme Court of The United States held that loss of use damages for a vessel “designed for pleasure only and which had never been put to any other use” was not a legally recognized element of damages. The Conqueror, 166 U.S. 110 (1897). The Supreme Court’s decision in The Conqueror proves the axiom that bad facts make bad law. The US Customs office had wrongfully detained one of Frederick Vanderbilt’s three yachts. Mr. Vanderbilt claimed loss of use damages of $15,000.00, a large sum of money in the 1890’s. Mr. Vanderbilt, one of the richest men in the World, produced dubious evidence concerning the loss of use of one of his many recreational diversions.

Since The Conqueror was decided in 1897, several Federal courts have questioned the reasoning behind the Supreme Court’s decision with one court going as far as calling the blanket prohibition against recovering loss of use damages “draconian”. Nordisilla v. Norfolk Shipbuilding, 192 AMC 99 (E.D.Va. 1981). Many judges have written that they would permit the recovery of loss of use damages for pleasure craft under Admiralty law but are forced not to until the Supreme Court reverses itself. Nordisilla v. Norfolk Shipbuilding, 192 AMC 99 (E.D.Va. 1981); Northern Assurance Company v. Town of Winthrop, 755 F.Supp2d 295 (D.Mass. 2010).

The lower Federal courts have not been willing lift the blanket prohibition against loss of use damages for pleasure craft in Admiralty law. However, these courts have given guidance to practitioners who decide to challenge the Supreme Court’s decision in The Conqueror. As a threshold matter, to prove loss of use, a claimant should provide reasonable proof concerning the market value of a replacement vessel during the loss period. This proof should be in the form of testimony, estimates or invoices for a bare bones charter of a replacement vessel of the same like, kind and quality. The claimant should also introduce evidence concerning the number of hours, days and weeks the vessel would actually have been used but for the accident that disabled the vessel.

While loss of use damages for pleasure craft is not recoverable under Admiralty law, loss of use for please craft is recoverable under state tort law. Martin v. Houston Hare, 337 S.E.2d 632 (N.C. App. 1985). Thus, when determining if loss of use damages are recoverable, an attorney or claims handler should determine if Federal admiralty law or state tort law applies. For the purposes of this discussion, if the accident giving rise to the claim occurred on the water admiralty law applies, but if it occurred on land, state tort law applies. For example, if a company has been hired to move a pleasure craft over dry land and drops the boat off of the trailer, state tort law applies. The claimant can recover loss of use damages the same as a claimant can recover for loss of use damages for other items, such as for loss of use of an automobile. Conversely, if the same company that was hired to haul the boat drops it into the water while unloading it, admiralty law would apply and the claimant cannot make a recovery for loss of use.

 

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

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


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


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


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


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

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

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

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

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

 

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

“Hello Dave.”

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

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

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

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

The Expert Dance - Should Your Expert Lead or Follow?

The timing and sequence for disclosing expert opinions may have a significant impact on recovery. Most subrogation professionals are aware that expert testimony is critical in proving a strict products liability case. But, in addition to the substance of expert testimony, the timing and sequence of disclosing your expert’s testimony may also be critical. Expert disclosures can be one of the pivotal deadlines in litigation. Depending on the state or court where the case is pending, the sequence in which the parties will disclose their expert and the expert’s opinions may leave some room for disagreement where an established procedure is not mandated by the court or a clear rule. This article will outline two different procedures for designating an expert followed by a discussion of some pros and cons for each.


Simultaneous Disclosure: Under this approach, all parties simultaneously disclose an expert on a given date. For example, each party to a particular case will be required to disclose their expert, identify the expert’s opinions, and all the bases for the opinions on a specified date—June 1st for illustrative purposes. After the initial disclosure, the experts will typically have an opportunity to respond to the other experts through rebuttal—July 1st for illustrative purposes.


Staggered Disclosure: Where expert disclosures are staggered, the plaintiff will usually disclose its expert first, followed by the defendant’s disclosure, and then plaintiff will be provided with an opportunity for rebuttal. For example, plaintiff’s expert will disclose its expert on June 1st, defendant will disclose on June 15th, and the plaintiff will be provided with a rebuttal deadline of July 1st.
 

Depending on the facts of a particular case, the timing and sequence of disclosing your expert’s opinion may have a dramatic impact on the opinions offered. Under the simultaneous disclosure approach, a defense expert will be required to offer an opinion before evaluating the plaintiff’s theory. Conversely, under the staggered approach, a defense expert can offer an opinion after evaluating the plaintiff’s theory and supporting evidence, which allows the defense expert to build an opinion in response to the plaintiff’s theory. One benefit of the staggered approach is that the plaintiff’s expert will have the last word and be given an opportunity to rebut any opinion offered by the defense expert.


Other practical considerations in choosing between the simultaneous or staggered approaches are the benefits and drawbacks of having three disclosures versus two. Also, consider whether the additional disclosure deadline will pose any scheduling difficulties with the experts. Furthermore, it is important to know your expert in deciding which approach to follow. For experts who draft detailed and comprehensive reports, the staggered approach may have certain benefits whereas the simultaneous disclosure certain drawbacks. Experts who draft shorter outline reports may prefer the simultaneous disclosure so that additional information can be supplemented in a second report.


At the end of the day, each expert’ s opinion must stand on its own. But the timing and sequence for disclosing the opinion is an important consideration that may have significant substantive and practical effects on recovery.

 

Properly Naming Doe Defendants Avoids Statute of Limitations Defenses

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

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

Click here for the full Alert

Determining Defendant's Armed Forces Status Prior to Default Judgment

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

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

In order to comply with this requirement, you should check the defendant’s status through an official request. If you know the defendant’s social security number or date of birth you can make an official request regarding military status online at https://www.dmdc.osd.mil/appj/scra/single_record.xhtml. There is no charge for this. Note, you will likely get a message from your browser stating that there is a problem with the website’s security certificate. This is simply because most web browsers do not come with Department of Defense security certificates installed. You can install the security certificate by following the instructions at this link https://www.dmdc.osd.mil/appj/scra/faq.xhtml#Q1.

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

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

NAVY:
Bureau of Naval Personnel
PERS-312E
5720 Integrity Drive
Millington, TN 38055-3120

AIR FORCE:
Air Force Personnel Center
AFPC/DPDXIDL
550 C Street West, Suite 50
Randolph Air Force Base, TX 78150-4752

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

The charge for each SCRA certificate is $5.20. Checks should be made payable to "Treasurer of the United States". Alternatively, you can pay a third party to handle the process for you. For example, http://www.servicememberscivilreliefact.com/?gclid=CNXF0YTx2rkCFevm7Aodv2cAGQ is a commonly used resource.
 

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

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

 

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


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


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


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

 


4. Does the Agreement Contain a Waiver of Liability Clause?
Many agreements and leases contain general waiver of liability provisions wherein one party releases the other from liability, which may prevent recovery by the insurer against the party relieved from liability in the agreement. However, this will not always be the case.
For example, in some jurisdictions, if the actions of the responsible party are found to constitute active or affirmative negligence, and the limiting language is not explicit, the waiver may be found unenforceable. Likewise, if the provisions are found to affect the “public interest”, then the release may also be found not to be enforceable. Also, if the conduct of the responsible party is intentional or in violation of law, the waiver will likely not be enforced. Finally, the specific provisions of the waiver must be closely examined to determine whether the specific circumstances of the loss fall within the parameters of the waiver.


5. Does the Agreement Contain an Indemnity Clause?
A properly drafted indemnity provision may provide an express agreement upon which the insurer can pursue recovery or may prevent an insurer for pursuing recovery against certain parties protected by the provisions. As with other discussed provisions, the indemnity provisions must be examined carefully to determine the precise obligations that are created. For example, the indemnity obligations may only relate to one of the party’s conduct. Thus, the subrogating insurer may be able to utilize the indemnity provisions to pursue recovery against the obligated party. Other indemnity provisions may obligate a party to not only defend and indemnify the other party for the indemnifying party’s negligence, but also for the indemnified party’s negligence.


6. Does the Agreement Require any Parties to Carry Insurance?
All agreements should be carefully examined to ascertain whether any responsibility has been placed on a particular party to carry a liability, and/or casualty coverage. Depending on the circumstances, the responsibilities for carrying insurance may create an opportunity for recovery.
For example, if the agreement requires someone other than the insured to carry insurance covering the loss in question, and the insurance is procured, then the insurance obtained under the agreement may be considered to be the primary policy, and provide primary coverage for the loss. Also, if the agreement places responsibility upon a party to carry liability insurance for damages caused by their negligence, such provisions will be helpful in asserting that the parties did not intend to waive recovery rights against each other, given that the party was required to carry the liability insurance for its actions.


7. Does the Agreement Place Responsibility for Repair on a Particular Party?
Many rental/lease agreements contain provisions requiring one of the parties to make repairs to the property. Depending on the language of the clause and the factual situation giving rise to the loss, the language could be helpful to a recovery claim. For example, if there are provisions within the agreement that provide a tenant will be responsible to pay for damages caused by its negligence, such provision may be persuasive in overcoming an “implied co-insured” defense sometimes raised in a landlord tenant situation.


8. Does the Agreement Contain an Attorney’s Fees Clause?
The existence of an attorney’s fees clause may permit the prevailing party in a legal action to recover its incurred attorney’s fees from the unsuccessful party to the lawsuit. In many jurisdictions, the attorney’s fees clause has been applied to a subrogated insurer, which could either entitle, or require, the insurer to recover, and/or pay attorney’s fees, depending on the outcome of the action.
In evaluating the feasibility of pursuing a recovery action involving an agreement with attorney’s fees clause, the insurer should consider and appreciate the existence of the clause, the potential of recovering its incurred attorney’s fees in a successful action, and being required to reimburse the other party for its attorney’s fees should the insurer be unsuccessful.
 

9. How Were the Damages Caused?
The circumstances as to how a loss occurred may affect the enforcement of the various provisions contained within the agreement. Whether they were intentional acts, violations of law, or acts that constitute gross negligence may provide means for avoiding otherwise enforceable limiting provision in the agreement. Likewise, under certain scenarios involving indemnity provisions, the type of negligence of the party, i.e. active as opposed to passive, may provide an opportunity to pursue recovery and/or avoid responsibility.


10. Who are the Parties Involved in the Loss?
Finally the circumstances of the loss must be examined to determine whether parties other than those named in the agreement were responsible in whole or in part for the damages, as those parties may not be entitled to rely on the provisions of the agreement and under appropriate circumstances, may be pursued for recovery.
 

Convention on the Contract for the International Carriage of Goods by Road: A Primer

Claims handlers for insurers of goods being transported by road in Europe would be well served to familiarize themselves with what is commonly referred to as the “CMR Convention” (“CMR”). The CMR (which became operative in July of 1961) is actually entitled the “Convention on the Contract for the International Carriage of Goods by Road” and applies to every contract for the carriage of goods for pay where the origin and final destination are two different countries of which at least one is a contracting party to the CMR. A majority of countries in Europe are contracting parties to the CMR.

Essentially, the CMR provides a framework for dealing with claims for those companies who act as a carrier, exporter or forwarder for the international movement of goods by road in Europe. With respect to actual carriers, they will typically be liable for the total or partial loss of the shipment occurring between the time it takes over the goods and the time of delivery including damages for any delay in delivery. The carrier is also responsible for the acts and omissions of its agents and servants and of any other persons of whose services it utilizes for the performance of the carriage.

The carrier, however, can be relieved of liability if the loss or delay was caused by the wrongful act or neglect of the claimant, by instructions of the claimant given otherwise than as a result of the carrier’s own wrongful act or neglect, the inherent vice of the goods or circumstances which the carrier could not avoid and the consequences of which it was unable to prevent. The burden of proving that loss, damage or delay was due to one of these exceptions is the responsibility of the carrier. If the carrier can in fact prove that the loss or damage can be attributed to one or more of the exceptions from liability, the claimant still has an opportunity to prove that the loss or damage was not attributable wholly or partly to one of these risks.

An accident where the carrier is entirely without fault may fall within the exceptions for liability. However, the CMR specifically provides that the carrier will not be relieved of liability by reason of the defective condition of the vehicle that it utilized. Accordingly, in those situations where the transporting vehicle malfunctions, the carrier will likely not be protected from liability under the CMR. It is important to also remember that these liability obligations also apply to companies that act as freight forwarders even though the freight forwarder does not carry out the actual transport itself.

With respect to timing, the limitations period for an action arising out of carriage under the CMR is typically one year. However, a written claim to the carrier will suspend the period of limitation until the date the carrier rejects the claim by notification in writing and returns all claim documents submitted in support of the claim.

The CMR can be an effective tool for subrogated insurers that are pursuing carriers and/or freight forwarders for damage to goods being transported by road in Europe. When a claims handler receives such a loss, it is important to determine where the shipment originated, the final destination and whether one of those countries is a contracting party to the CMR. Once the claims handler confirms that the CMR applies, a written claim should be promptly submitted within one year of the loss to suspend the limitations period. Unless the carrier or freight forwarder can establish one the specific exceptions to liability, the subrogated insurer should have a very good opportunity to obtain a recovery for claims involving damage to goods.
 

Equine Law Basics - Evaluating the Strength of Releases of Liability

 

Injuries to horse and rider often occur on a third party’s property. It is becoming more commonplace for horse trainers and stables to have the rider and/or horse owner sign a release of liability before any riding or boarding can take place. There are many factors to consider in determining whether a release of liability will be enforceable when an accident does occur. While it is wise to consult an attorney when an accident happens, a few of the things to consider are discussed below.


Equine Activity Statute


The vast majority of states have adopted equine activity statutes. Apart from any written waiver or release of liability, these statutes also serve to protect the party providing equine activity providers. Oftentimes the language of the statute is mirrored in the release of liability document, which is a recommended practice. Equine activity statutes vary from state to state, so it should be independently consulted in connection with reviewing the enforceability of a waiver document.


Is the Release Language Clear?


It should be determined if the language of release is clear and unambiguous. Is it broad enough to release everyone involved in the accident? Does the waiver or release clearly describe the potential harm that the signatory is releasing? Or is it confusing and hard to understand? These are important factors to consider when evaluating the strength of a release. For example, if a rider releases a farm from liability for personal injury to the rider, but later the rider’s horse steps in a hole and ultimately must be euthanized, the release will likely not apply to protect the farm from a property damage claim. Further, if that same rider is injured due to the negligent acts of her trainer, but she has only released the farm from liability, she may still have a claim against the trainer.


Gross Negligence or Intentional Acts


Most jurisdictions hold that in instances of gross negligence or intentional acts, a release of liability will not apply. Gross negligence is a conscious and voluntary disregard of the need to use reasonable care, which is likely to cause foreseeable grave injury or harm to persons, property, or both. It is considered to be extreme when compared with ordinary negligence. Intentional acts likewise cannot be released. The intent is referring to an intent to do harm. Additionally, oftentimes liability or care, custody and control (CCC) insurance will not cover a policyholder’s intentional acts that cause harm.


Conclusion


Reviewing your jurisdiction’s Equine Activity Statute is a starting point for evaluating potential liability in the face of an accident. The release itself should then be carefully reviewed while considering the specific facts of the accident, and a determination can be made regarding whether the document will release the potential target of a liability claim.
 

VIKING RECALL FOR BUILT-IN SIDE-BY-SIDE REFRIGERATOR FREEZERS

Last month, Viking Range, LLC recalled approximately 750 42-inch and 48-inch built-in side-by-side refrigerator freezers with in-door water and ice dispensers that were manufactured between October 2012 and May 2013. Electrical connectors in the refrigerator freezer wiring harness can overheat which poses a fire hazard. According to the Consumer Product Safety Commission recall, Viking has received 27 reports of electrical shorts and 4 reports of fires.


The recall advises owners to immediately turn off and unplug the recalled refrigerator freezers and contact Viking to schedule a free, in-home repair. Click here for a list of all model numbers included in the recall. The model number can be found on the ceiling of the interior of the refrigerator.
 

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

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


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


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


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


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


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


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


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

 

Illinois: Several Factors Determine Construction Manager Liability for the Acts of a Trade Contractor

A recent Illinois appellate court opinion illustrates how a construction manager may be found to have entrusted work to a trade contractor and, ultimately, how the construction manager can be held liable for the acts of the trade contractor.


Construction managers generally do not enter into contracts directly with the contractors who perform work on a project. Rather, construction managers typically solicit and receive bids, prepare bid analyses and make recommendations to project owners for the award of contracts, while the owners typically enter the agreement with project contractors. Ordinarily, construction managers also coordinate site activities and administer the construction project. Because construction managers typically do not hire or contract with trade contractors, construction managers have successfully argued that they are not liable for injuries resulting from a trade contractor’s work.


Generally under Illinois law, one who hires an independent contractor is not liable for the acts or omissions of the independent contractor. Under an exception to this rule, a construction project owner, construction manager or general contractor may be held liable for a trade contractor’s actions where the owner, manager or general contractor (1) entrusted the work to the trade contractor and (2) retained control over some aspect of the trade contractor’s work.


The Illinois appellate court recently adopted a totality of circumstances approach to determine whether a person has entrusted work to another. Under this new approach, it can be established that a construction manager entrusted work to an independent contractor even where the manager did not enter the contract with the contractor. Calloway v. Bovis Lend Lease, Inc., 2013 IL App (1st) 112746, at *61 (Aug. 16, 2013). Instead of only considering whether or not a construction manager actually contracted with a trade contractor to determine the element of entrustment, a court may now consider the overall contract structure of the project as well as the actions of the construction manager in making the determination. This includes contracts between the owner and the construction manager and contracts between the owner and trade contractors.


In Calloway, the appellate court upheld a finding that that the defendant construction manager entrusted work to a subcontractor. Under its contract with the project owner, the construction manager had the authority to identify the lowest responsive and responsible bidders and was required to recommend to the owner those bidders who should be given contracts. The contract between the manager and owner reduced the owner’s role in contractor selection. The court concluded that through the manager’s actions as the owner’s agent in selecting contractors, the manager entrusted the work to the subcontractor. Ultimately, the court went on to find that the construction manager retained a sufficient level of control over the subcontractor’s work that led to the plaintiff’s injuries and upheld a jury verdict in favor of the plaintiffs.


Of concern in Calloway was the ability of project owners, construction managers and general contractors to easily avoid liability under the exception to the general rule of no liability for the acts of independent contractors based purely on the various agreements between the parties. The Calloway opinion illustrates that a construction manager’s activities must be considered in addition to the relevant contracts in evaluating subrogation recovery against a construction manager for losses arising from construction defects.
 

Heavy Equipment Fires - What The Subrogating Carrier Should Know

Heavy equipment fires occur frequently and can lead to substantial losses. The loss of the equipment itself is often compounded by the insured’s loss of use of the equipment.  For businesses that rely extensively on heavy equipment (e.g., agricultural and construction businesses), the loss of use/business interruption claim arising from such a fire can be staggering.


Heavy equipment is often used in undeveloped areas not readily accessible to fire departments. As a result, the equipment is often badly damaged by the fire, creating challenges to identifying the point of origin. Subrogation recovery for such fire will hinge on proper investigation immediately after the loss occurs. The following are some tips to guide a subrogating carrier’s investigation in heavy equipment fires.


In analyzing a heavy equipment fire case, it is important to gather data and evaluate the maintenance history of the equipment. Lack of maintenance of hoses carrying hydraulic fluid can be problematic, as these rubber hoses become brittle and prone to cracking over time, creating the potential for the failed hose to discharge pressurized, flammable hydraulic fluid onto hot parts of the equipment’s motor or exhaust system, resulting in a fire. Thus, one of the first steps in evaluating the recovery potential of a heavy equipment fire claim is to determine whether the equipment was properly maintained. A diligent insured will keep log books recording each instance of maintenance to the equipment. The carrier should request such maintenance records from the insured at the outset of such a claim, as those records can substantially inform the subsequent investigation.


Additionally, some heavy equipment fires may occur at job sites where there is already a fire in progress. In a land clearing project, for instance, there is usually a pile of cleared wood and vegetation being burned. This creates a significant potential for the equipment operator to move the equipment too close to the burn pile, causing combustible components of the equipment to ignite. On many pieces of equipment, the cold air intake is located at the rear of the machine, behind the operator. We have investigated several fires wherein the operator, looking forward, did not realize that the rear of the machine was perilously close to a burning debris pile, and a smoldering ember is sucked into the machine’s cold air intake, causing a fire in the engine compartment. This potential fire cause makes it crucial that the subrogating carrier establish the pre-fire location and movements of the equipment as soon as possible following a loss. The carrier should make every effort to obtain this information directly from the operator of the equipment and other individuals who were actually present when the fire occurred; obtaining the information from a foreman or company representative who was not present at the time of the loss is not a substitute for first-hand statements.
 

Finally, the carrier should be aware that not all fire investigators and engineers are created equal for purposes of investigating a heavy equipment fire. If possible, the subrogating carrier should retain a fire investigator familiar with heavy equipment fires and a mechanical or electrical engineer who specializes in heavy equipment, as non-specialist fire investigators and engineers may not be able to quickly and accurately identify all potential ignition sources on the relevant equipment.

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

 

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


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

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


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


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


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


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


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

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


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

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

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


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


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

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

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


 

Subrogation vs Contribution--Does it Matter?

Practitioners and judges frequently use the terms subrogation and contribution interchangeably. This is legally incorrect and, as one insurance company recently learned, the distinction between the two concepts can be fatal.

In American States Insurance Company v. National Fire Insurance Company of Hartford 2012 DJDAR 197, an insurance carrier attempted to subrogate against another carrier to recover defense and indemnity costs incurred on behalf of the same insureds. The trial court determined that the action was barred by the two year statute of limitations for equitable contribution. The carrier then attempted an "end run" by amending its complaint to assert a cause of action for equitable subrogation. The Court of Appeal held that the sustaining of a demurrer to the amended complaint on the grounds that the underlying case was one for equitable contribution and, therefore, was time-barred.

The Court of Appeal distinguished equitable contribution from equitable subrogation. It held that equitable contribution is the right to recover not from the party primarily liable for the loss, but rather from a co-obligor who shares liability with the party seeking contribution. Conversely, equitable subrogation is a purely derivative cause of action and may only be asserted against the wrongdoer who caused the loss incurred by the insured.

The moral of the story-it is essential to properly identify whether a case is for equitable contribution or equitable subrogation. The statute of limitations differs for the two causes of action and may time-bar an otherwise properly pled claim!
 

Failure To Warn: Read The Fine Print

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

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

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

Subrogation in Louisiana: Differences and Opportunities

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

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

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

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

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

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

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

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

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

Inverse Condemnation Alive and Well in Oregon

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

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

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

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

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

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

The Georgia Supreme Court held that the statute of repose begins to run when a finished product is sold as new to the intended consumer who is to receive the product. The Court stated “nothing in either the statute [51-1-11(b)(1) and 51-1-11(b)(2)], or this Court's precedent, supports a conclusion that liability under O.C.G.A § 51-1-11(b)(1) attaches while the product remains in the hands of the manufacturer, or that the statute of repose under O.C.G.A § 51-1-11(b)(2) begins while the product is still in the hands of the manufacturer. [Further,] O.C.G.A § 51-1-11(b)(2) refers to the sale of the finished product to the consumer who is intended to receive it as new. The statements in Johnson, to the contrary, are in error.”

The holding in Campbell OVERRULES Johnson. Now, for purposes of the statute of repose, the controlling factor will be when the final product, which contains the subject component, was first purchased, not when the component part was first used by the manufacturer.
 

Lasko Recalls 4.8 Million Box Fans

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

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

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

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

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

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

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

Be Careful Not to Split the Cause of Action

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

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

In Federal Ins. Co. v. Cheoy Lee Shipyards, Ltd., the Southern District of Florida addressed the rule against splitting causes of action. A yacht was hit by a large wave causing the coachroof superstructure to fail. Nine months later, the yacht owner filed a breach of warranty claim against the yacht manufacturer for defects which were in existence prior to the damages caused by the wave. The Court noted that the yacht owner did not include a claim for damages caused by the wave. The Court noted that the yacht owner knew about the damages caused by the wave when it filed its breach of warranty claim against the yacht manufacturer. The Court determined that the insured, "and thus its insurer"(!) decided to split their causes of action by not including the wave-related damages. The Court rejected the subrogating insurer's argument that the damages arising from the wave incident constituted a separate and distinct cause of action from the pre-existing warranty damages. The Court also rejected the insurer's argument that the subrogation claim falls within Florida's "insurance exception" to the rule against splitting causes of action because the damages were "of the same type" as the insured's breach of warranty action. "The rule against splitting causes of action makes it incumbent upon plaintiffs to raise all available claims involving the same circumstances in one action… The alleged breaches by defendants occurred at one time, during manufacture, and all such claims should have been brought in one action even though the damages may have occurred at two different times." The Court found it significant that the damages caused by the wave incident occurred prior to the deadline for amending pleadings in the insured's breach of warranty case. Therefore, there was no argument that the subrogating insurer was not aware of the claim while the first action was pending. The Court concluded, "this case involves an insurance company (and an insured yacht owner), who chose not to seek similar damages stemming from similar claims from a later incident in the Prior Action although it had every opportunity to do so."

The moral of the story for subrogating insurers, keep an eye on what your insured is doing because you may have to act quickly to preserve your claim. Consult subrogation counsel as soon as you are aware of your subrogation claim and find out if your insured has filed, or plans to file a lawsuit arising out of the same incident, or against the same tortfeasors involved in your subrogation claim.
 

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

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

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

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

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

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

Careless Smoking Claims Soon to be Extinguished by Fire Safe Cigarettes

Has your cause and origin investigator concluded that a carelessly discarded cigarette started a fire? If so, you should determine the location from which and manner in which the cigarettes were bought. If the cigarette at issue was not “fire safe”, there may be a small time-frame left within which to pursue a subrogation claim against internet retailers for selling an illegal cigarette within your insured's state.

New York was the first state to adopt a fire safe cigarette requirement. The state of New York passed legislation on August 16, 2000 that called for all cigarettes sold in the state of New York to have reduced ignition propensity by July 2003.

The tobacco industry, which had for decades actively opposed passage of state and federal requirements for cigarette fire safety standards, argued that it was not technically feasible to manufacture such a cigarette. In direct response to the proposed rule-making, Brown & Williamson Tobacco Corp., R J Reynolds Tobacco Co., Specialty Tobacco Council directed a comment in opposition to the legislation and the proposed standard. The tobacco companies’ objected that “[i]t has not been demonstrated that the performance standard specified in section 4 of the proposed rule will impact real world fire scenarios.” Assessment of Public Comment – Fire Safety Standards for Cigarettes. 2003.

The State administrative agency rejected the tobacco companies’ position, responding:

Large changes in ignition strength test results can be expected to reflect significant changes in fire risk. There is reason to expect that compliance with the performance standard specified in section 429.4 of the proposed rule will result in a significant reduction in cigarette-initiated fires. Reducing the heat output and the burning time of a cigarette will reduce the likelihood that it will ignite a fire.

New York set a minimum performance requirement for cigarettes which are to be tested in accordance with the American Society of Testing and Materials standard E2187-02b. The standard requires a lit cigarette to be placed on ten layers of standard filter paper in a draft-free environment and then observed to determine whether or not the tobacco column burns through its full length. A brand is in compliance if no more than 25 percent of the 40 cigarettes tested in a trial exhibit full length burns. 

After NY passed its pioneering law, all 50 U.S. states since have required that all cigarettes sold by 2012 must be “fire safe,” that is, have sharply reduced ignition strength or ability to start fires. These cigarettes are also known as Lower Ignition Propensity (LIP), Reduced Fire Risk (RFR), self-extinguishing, fire-safe or Reduced Ignition Propensity (RIP) cigarettes. In the United States, "FSC" above the barcode officially stands for Fire Standards Compliant (FSC). State laws generally contain exceptions permitting the sale of non-FSCs that have been tax-stamped by wholesalers and retailers in the state prior to the effective date of the state’s FSC law. State by state legislation updates can be referenced here.

Some smokers claim they have found a difference in the taste of FSC cigarettes from non-FSC cigarettes, leading to more internet sales of non-FSC cigarettes. Other smokers have reported adverse reactions to FSC cigarettes. There also has been a rise in people rolling their own cigarettes instead of continuing to smoke FSC cigarettes. Additionally, given the inconsistencies in the march of the FSC legislation across the U.S., smokers have had time to purchase non-FSC cigarettes from online vendors.

In summary, be sure to thoroughly examine the circumstances and determine whether the cigarette involved was sold by an internet retailer. Their may be subrogation potential against the online vendor for selling an illegal product or violating relevant consumer protection laws.
 

Timely Tips for Weather Related Property Damage Claims

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

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

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

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

2. Take Measurements.  Precipitation levels and temperatures can very greatly over a short distance. Often, the meteorological data for the region may not accurately represent the actual data at the loss site. It is therefore important to take a measurement of the exact temperature or precipitation levels as close to the moment when the failure occurred as possible. Your expert will help you do this correctly (tip #4).

3. Hire Subrogation Counsel ASAP. Targets may need to be placed on notice. Given the need to quickly begin repairs, this needs to be done promptly. Notice is immediately followed by a joint site inspection. Getting subrogation counsel involved early moves this crucial step along quickly while also guaranteeing that (a) all possible theories of liability are considered early on while the scene is still preserved, (b) communications regarding subrogation potential are better protected from discovery, and (c) the lawyer who will be protecting your subrogation rights is building your case from the very beginning.

4. Get an Expert ASAP. Subrogation counsel can help you identify the best expert for the loss. Often times, a pipe didn’t freeze up just because it was “extremely cold.” Similarly, what seems like a large snow load might still be insufficient to collapse a roof had it been built properly. Getting your expert to the loss site instead of sending them physical evidence to analyze will allow them to identify additional theories of liability. Additionally, they can help you take accurate measurements, discussed in tip #2. Get your experts involved early.

5. Preserve Evidence. In a pipe freeze-up or a roofing collapse case, the failure most often occurs within a component which is part of a much larger system. For example, a pipe freeze-up may be caused by a failure in an HVAC system located on the other side of the building and not due to a deficiency in the pipe itself. A roofing collapse may be caused by a deficiency throughout the entire roof and not just the section of the collapse. Because identifying the correct evidence to preserve in these cases is difficult, get your experts involved early so they may take all necessary photographs and be on site to determine the evidence preservation that is necessary to prove your subrogation case.

6. Get Documents and Statements. Your insureds are often your best resource to figuring out what happened and/or what entities accessed key components to the system that failed and caused the loss. Get statements and supporting documentation, including installation and service records, early on before memories fade and documents disappear.

Most importantly, taking quick action can often heat up your otherwise frozen subrogation claim.
 

Under-Odorized Propane Gas Recalled

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

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

New Consumer Complaint Database May Aid Subrogation Efforts

On March 11, 2011, the Consumer Product Safety Commission (“CPSC”) will officially launch a new website which offers a forum for consumers to register complaints about product-related safety issues. The database, located at 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.
 

Confidentiality Agreements: The Trappings of Concession to Agree

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

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

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

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

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

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

Insurance and Subrogation in the UAE

 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.

 

Regarding insurance contracts, the UAE Civil Code has twenty-nine articles in its insurance section relating to, inter alia, misrepresentation and non-disclosure. The law also has a specific subrogation clause, Article 1030, which states:

 

“It shall be permissible for the insurer to take the place of the assured in respect of any indemnity paid to him for loss, in bringing the claims of the assured against the person who caused the loss out of which the liability of the insurer arose …”

 

There is no current law which sets out how the day to day business of insurance should be conducted, nor is there any concept of binding precedent in the courts, which would give insurers or insureds some certainty as to how a court would resolve conflicts.  Finally, one is not permitted to purchase insurance from a non-UAE registered entity for liability arising out of a UAE onshore risk, although reinsurance written externally is permitted. The result is that the majority of large risks are being fronted out 100%. A significant number of foreign reinsurers sit in the Dubai International Finance Centre (“DIFC”) which is an offshore financial district sitting onshore in the heart of Dubai City, together with many international financial organisations who base their ME operations there.

Overall, and because of the law’s infancy in this area, there is a significant lack of local capacity and appetite for litigation. That said, and partly because of the economic downturn, this attitude is slowly changing. 

Contractual Privity Not Required Between Subrogating Insurer and Defendant

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

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

California Superior Courts Now Offer Expedited Jury Trial Options

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

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

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

Subrogation in South Africa: There's No Difference Between a Farthing and a Rand

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]”.
 

Spoliation Sanctions and The Gang That Couldn't Spoliate Straight

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

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

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

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

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

In England and Wales, How Much Longer Will Experts be Immune?

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.
 

Insured's Settlement Submarines Subrogation

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

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

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

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

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

Natural Gas Risers -Often Overlooked as a Potential Fire Cause

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

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

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

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

JURY RULES THAT CSST IS A DEFECTIVE PRODUCT IN LANDMARK CASE

Cozen O'Connor recently handled the first trial to go to a jury on the issue of strict liability against a manufacturer of CSST (corrugated stainless steel tubing). We are pleased to announce that, following an eight day trial conducted by Mark Utke of our Philadelphia office, the jury found CSST to be a defective product and imposed strict liability against Omegaflex, one of the major manufacturers of CSST.   Mark represented Terence and Judith Tincher, as well as their property insurance carrier, for both subrogated and uninsured losses. The jury awarded 100% recovery of both the subrogated and uninsured losses, for a total judgment that will exceed $1,000,000.  Tincher v. Omegaflex involved a CSST line that was installed in 1998 and failed from the effects of indirect lightning in June of 2007, and was tried in the Common Pleas Court of Chester County, Pennsylvania.

Recipients of our Subrogation Alerts and readers of the blog know of the issues arising from the development of CSST.  Since 1988, CSST has been used in industrial, commercial and residential construction to transport pressurized propane and natural gas.  The tubing walls are flexible and only approximately 10 mils thick (the equivalent of four sheets of paper), making CSST extremely vulnerable to the energy from indirect lightning strikes.  While seeking to go to ground, the energy can result in a perforation in the tubing. When this occurs, an arc ignites the pressurized gas and causes a blow torch effect, which typically results in a significant fire. CSST failures are annually responsible for millions of dollars in property damage across the United States, and hundreds of claims are pending against the various manufacturers of CSST.

Omegaflex sells a brand of CSST known as TracPipe, which first came on the market in 1996, as a replacement for traditional black iron pipe.  To date, over 750 million feet of this product has been sold across the country.  The purported advantages of TracPipe are its flexibility, ease of installation, and ability to reduce the incidents of gas leaks.  At trial, Omegaflex argued TracPipe’s ability to survive natural disasters, such as earthquakes and tornadoes, far outweighed any disadvantage associated with  the product, including its vulnerability in confronting indirect lightning strikes.  Omegaflex also argued that a properly bonded CSST system could withstand the energy produced from an indirect lightning strike.  Omegaflex's failure to ever  test TracPipe’s ability to withstand such energy, when properly bonded, proved fatal to its defense. 

The National Electric and Fuel Gas Codes both contain bonding requirements for household gas and electric systems.  However, these codes are intended to address life safety issues arising from stray electric current, as opposed to the dissipation of the energy created by an indirect lightning strike.  Despite this, CSST manufacturers, as an industry, argue that compliance with these code requirements demonstrates their products to be safe.  However, the National Fire Protection Association is currently evaluating the effectiveness of bonding as it relates to CSST and has considered recommending a complete ban on the sale of CSST, absent a demonstration by the industry that bonding can be a safe and effective means of safely dissipating the electrical energy created by an indirect lightning strike.

The Tincher verdict, significant on its own, has the potential to impact cases against Omegaflex beyond Chester County, Pennsylvania. A viable argument exists to extend the principles of collateral estoppel to apply to other cases against the manufacturer in other jurisdictions, involving similar facts and claims of defect. The defective nature of the product would no longer be an issue for the jury to decide, given the prior determination by the Tincher jury. 

For additional information, please feel free to contact either Mark Utke or any of  the 130 subrogation attorneys at Cozen O’Connor.

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

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

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

NFPA Issues Safety Alert Regarding Antifreeze in Residential Sprinklers

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

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

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

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

 

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

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

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

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

Car Fire Cases: Recalling the Recall

Defective car cases can be challenging to pursue.   When the car is subject to a recall, recovery potential usually improves.  If the vehicle’s owner knew about the recall and had the repairs done, do not despair—many times those repairs are inadequate.

One example is the defective Ford speed control deactivation switches.   The switches have been the subject of recalls since 1999 and continuing through to 2009.   However, on February 2, 2008, Ford issued a "recall of the recall" as to 225,000 of its previously recalled cars that had supposedly been "fixed."   The problem, as portrayed by Ford, was that a certain batch of fused wiring jumper harnesses installed in vehicles had "defective fusing."   Sources would later say that the problem was also an ambiguity in the service instructions, causing technicians to make mistakes in executing the fix.

Another example is the recall campaign for the 2001-2004 Mazda Tributes, which described the problem with the ABS modules as follows:

What is the problem?
…. [T]he Anti-lock Brake System (ABS) Module connector may have missing or dislodged wire seals.  This condition could allow contamination to enter the module connector creating a potential for an electrical short.  …. This condition could occur either when the vehicle ignition switch is in the off position or while the vehicle is being operated.

This recall fails to explain the root cause of the defect and how that problem is addressed by the “fix”.  Rather, significant discretion is given to the service technician to decide whether to repair or replace the harness connector (“as appropriate”) and the connector to the ABS module, which gives much opportunity for human error.

In sum, the fact that recall work was done does not necessarily destroy your subrogation case.  In fact, it may open up more questions about the effectiveness of the recall and provide an additional theory of liability in certain circumstances.

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

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

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

 

The “Furtherance of Employer’s Interests” Test

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

 

Case By Case Basis: Factors to Consider

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

 

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

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

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

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

 

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.

Lowe's Dryer Installation Practices Foiled in Class Action Suit

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

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

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

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

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

OUT OF THE FRYING PAN, INTO THE FIRE!

 

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

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

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

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

NFPA Bans Use of Antifreeze in Sprinkler Systems

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

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

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

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

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

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


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

 

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

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

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

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

Chinese Drywall - Recent Settlements and Verdicts

Defectively manufactured drywall has been in the news for the past two years. Recently, there have been a string of favorable rulings, verdicts, and settlement for those damaged by the defective drywall. 

On May 10, 2010, in the case of Germano et al. v. Taishan Gypsum, Judge Fallon, who is presiding over the Multi District Litigation, entered a default judgment in favor of the plaintiff homeowners and awarded in excess of $2.6 million in damages against Taishan Gypsum Company. Presently, Taishan Gypsum is appealing the entry of the default judgment. 

On May 10, 2010, in the case of Hernandez v. Knauf Gips KG, et al, Judge Fallon entered a judgment in favor of the plaintiff homeowners and awarded $164,049.64 against Knauf Plasterboard Tianjin Company, Limited, plus reasonable attorneys’ fees, costs of the action, and interest from the date the judicial demand until paid. 

Two other federal lawsuits filed against Chinese drywall manufacturer Knauf have been settled. The suits were brought by Paul Clement and Celeste Schexnaydre, who own a home near New Orleans, Louisiana, and John Campbell, who owns 21 contaminated apartments in Slidell, Louisiana. The agreements were reached following a June 18th conference with Judge Fallon. Knauf agreed to pay to remediate the homes, pay at least $25,000 to store furniture, pay for apartment rental while homes were rebuilt, pay at least $15,000 to replace damaged appliances and personal property, and pay attorneys’ fees.  Additionally, Knauf agreed to pay Campbell for lost rental income, and to replace and test the drywall in one apartment while negotiating about the remediation of additional apartments.

On June 22, 2010, in the nation’s first Chinese drywall jury trial, a Florida jury found in favor of a homeowner and awarded $2.47 million against Banner Supply, which was found liable on the grounds of negligence, public nuisance and violation of Florida’s Deceptive and Unfair Trade Practices Act. Banner was found 55 percent responsible. Under Florida law, non-defendants in the case were also apportioned responsibility: Chinese drywall manufacturer Knauf Plasterboard Co. was found 35 percent at fault, and a Chinese exporter and a Miami importer, were each held 5 percent responsible. The jury unanimously awarded the homeowners $494,443 for remediation costs; $9,984 for replacement costs for personal property; $169,268 for temporary housing costs and moving expenses; $20,775 for cleaning costs; $3,320 for additional utilities costs; $920 for storage costs; $6,651 for additional interest on credit cards; $1.7 million for loss of enjoyment; and $60,000 for diminution of the value of their house.

Finally, Lowe’s Companies, Inc, the nation’s second largest home improvement store chain has agreed in principal to a national settlement of claims involving defective drywall. Lowe’s has agreed to pay $6.5 million (primarily in gift cards) to those affected by the defective drywall Lowe’s sold. The amounts paid to each affected customer will depend upon the total amount of documentation, which should include proof of purchase, defects, and damages. 

The Consumer Product Safety Commission has received a total of 3,296 complaints from homeowners in 37 states plus the District of Columbia, American Samoa, and Puerto Rico who claim to have been damaged by defective drywall made by a variety of companies. The cause of the problem is still highly debated and unknown by the various entities testing and inspecting the products. However, despite the unknown and debated cause of the defect, plaintiffs are prevailing against the manufacturers, distributors, installers, and sellers of the defective drywall.

For more information, please feel free to contact one of our offices.

Foreign Manufacturers Legal Accountability Act - Opening the Floodgates Against Overseas Defendants

Have you ever experienced this scenario: Your expert has identified the cause of a loss in the United States, but the manufacturer of the failed product is overseas? If so, then you have to start thinking about issues such as how you will serve process on the overseas defendant and will the foreign defendant be subject to personal jurisdiction in the United States? Congress is currently reviewing a bill designed to circumvent much of the frustration with serving process and obtaining jurisdiction over foreign manufacturers. Currently, in order to obtain jurisdiction in the United States over an overseas product manufacturer, you have to prove that the overseas defendant has sufficient contacts with the state in which you are filing suit. To prove sufficient contacts exist you have to gather as much information as you can on the defendant's contacts with your forum state, including:

•           Does the defendant have office/property/bank accounts in your forum state?
•           Does the defendant regularly ship products to the forum state?
•           Does the defendant advertise to ship products to the forum state?  

Often the foreign defendant may have little or no contacts with the forum state, preventing you from filing suit in the U.S. However, Congress is looking to make it easier for plaintiffs to both serve foreign defendants and obtain jurisdiction over them in a U.S. Court. The bill titled "Foreign Manufacturers Legal Accountability Act" is currently under review by Congress and is expected to pass in the near future. It requires foreign manufacturers of products/goods shipped to the United States to establish an agent in at least one U.S. State to accept service of process on behalf of the manufacturer. In addition, the bill requires that the foreign manufacturer consent to personal jurisdiction in the State or Federal courts of the State in which the registered agent is located. Congress' attempt to create personal jurisdiction over foreign manufacturers by statute is arguably inconsistent with the Due Process Clause of the Constitution from which our current personal jurisdiction standard was born. However, Congress did wisely include a provision that the State in which the registered agent is located be a state "with a substantial connection to the importation, distribution, or sale of the products of such foreign manufacturer or producer." This allows for the argument that the foreign manufacturer is conceding to sufficient minimum contacts with state in which the registered agent is located because the foreign manufacturer is picking the state it has sufficient contacts with to be the location for the agent. It is likely that the Supreme Court will eventually get involved in the issue. But if the current bill is passed and upheld by the Supreme Court we can expect the floodgates to open against foreign manufacturers since personal jurisdiction would be automatically established in the State in which the foreign manufacturer's registered agent for service of process is located. 

PTAC Fires Becoming Subrogation Opportunities

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

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

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

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

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

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

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

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

NFPA Reviewing Safety of CSST

As its name suggests, the National Fire Protection Association’s goal is to protect against fires. It is therefore not surprising that the number of fires involving corrugated stainless steel gas tubing over the last few years has caught the NFPA’s attention. In the fall of 2009, the NFPA formed a CSST Task Group. The Task Group was entrusted with the job of taking a closer look CSST’s potential for failure when confronted with energy from direct and indirect lightning strikes. The CSST Task Group has now met, submitted a report and has been discharged.

Only time will tell, but the CSST Task Group report may have a far ranging impact in both the construction and CSST industries. First, one of the main issues that the Task Group reviewed was whether bonding of CSST, as set forth in the present edition of the National Fuel Gas Code (NFPA 54), was enough to prevent lightning-induced CSST fires. The Task Group reports that it sought research supporting the continued use of the current CSST bonding requirements of NFPA 54. To this end, the Task Group specifically asked manufacturers of CSST to provide research performed by them on their behalf in this regard. The information the Task Group received in response was of “limited value” and “did not provide enough information to ascertain that the proposed bonding remedy will provide adequate protection from lightning induced surges.” The minutes of the Task Group meeting further reveal that at least one of the members observed failed CSST gas lines even in instances where the CSST was bonded per NFPA 54 and the manufacturer’s recommendation.

As a result of the Task Group’s work, the NFPA has decided that further review of CSST is warranted before the next version of NFPA 54 is published in 2014. Among other things, the NFPA is now looking to validate whether bonding of CSST is an adequate solution to the lightning exposure problem or if there are other alternative methods of installation that will make the product safe. 

Could this be the end of CSST as means of delivering gas products? Or, could this be the start of a movement to make CSST a genuinely safe product? The NFPA appears serious about making sure this product is safe. An Action Report dated June 23, 2010 concluded with these words of warning: 

Over the next full revision [of NFPA 54] currently scheduled to be in the Annual 2014 revision cycle, the industry and others advocating the continued use of CSST in gas piping systems shall validate the safe use of the product through independent third-party validated research and testing that can be reviewed and evaluated by the standards developers in a timely way… [I]t is incumbent upon the manufacturers or others promoting the use of CSST in gas piping systems to provide independently validated and reliable technical substantiation demonstrating the CSST can safely be used. If such substantiation is not provided, the Technical Committee on the National Fuel Gas Code must consider prohibited the use of CSST in NFPA 54. In addition, should the issues not be reasonably addressed by the end of the next full revision cycle, Annual 2014, the Council may take action as it deems appropriate up to and including prohibition of the use of CSST in NFPA 54.

For many who have already lost their homes due to lightning-induced CSST fires, these developments have already come too late. But for now, NFPA appears poised to act. Hopefully, we all will be safer for it.

WHEN YOU NEED HELPING PROVING A CONTENTS CLAIM

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.

CONNECTICUT APPELLATE COURT AFFIRMS SUBROGATION VICTORY

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

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

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

New York Court Rejects Defendant's Fire Modeling

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

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

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

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

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

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

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

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

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

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

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

Evidence Disposal: Your Trash May Be Someone's Treasure

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

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

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

Burning Issues In Fireplace Failures

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

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

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

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

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

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

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

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

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

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

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

 

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

 

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

 

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

 

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

 

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

The Malfunction Theory

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

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

1) The product is only a few years old;

2) The fire started inside the product;

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

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

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

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

Chinese Drywall - $2.6 Million Dollar Plaintiff Verdict in MDL

Exposed drywall in new constructionIn the multi-district litigation arising out of Chinese manufactured drywall, Judge Fallon of the United States District Court for the Eastern District of Louisiana issued an Opinion on April 8, 2010 finding in favor of plaintiff homeowners and awarding in excess of $2.6 million in damages against Taishan Gypsum Company. 

Additionally, Judge Fallon found that based upon the Findings of Fact and Conclusions of Law, that “scientific, economic, and practicality concerns dictate that the proper remediation for the Plaintiff-intervenors is to remove all drywall in their homes, all items which have suffered corrosion as a result of the Chinese drywall, and all items which will be materially damaged in the process of removal.”

In the written Opinion, Judge Fallon cites to the Cozen O'Connor's Chinese Drywall Litigation: Subrogation White Paper (2009) as an authoritative text in numerous places in his findings of fact.

For more information on the multi-district litigation arising out of the Chinese manufactured drywall, or to get a copy of the Cozen O’Connor Chinese Drywall Litigation Subrogation White Paper, please feel free to contact one of our offices.

AN INSURANCE CARRIER'S RIGHT TO SUBROGATE NEED NOT WAIT ON THE INSURED

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

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

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

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

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

Oral Trials In Mexico

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

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

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

Maximize Subrogation Potential With Early An Response

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

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


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


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


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


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


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

COGSA vs. Carmack - United States Supreme Court To Address Carmack's Application To Intermodal Shipments

At the end of last year the United States Supreme Court granted certiorari in two consolidated cases, Kawasaki Kisen Kaisha v. Regal-Beloit Corporation, No. 08-1553, and Union Pacific Railroad Company v. Regal-Beloit Corporation, No. 08-1554, to determine whether the inland portion of an intermodal shipment is subject to the Carmack Amendment even when no separate domestic bill of lading is issued. The specific question presented in No. 08-1553 is: “Whether the Carmack Amendment to the Interstate Commerce Act of 1887, which governs certain rail and motor transportation by common carriers within the United States, 49 U.S.C. §§ 11706 (rail carriers) & 14706 (motor carriers), applies to the inland rail leg of an intermodal shipment from overseas where the shipment was made under a ‘through’ bill of lading issued by an ocean carrier that extended the Carriage of Goods by Sea Act (COGSA), 46 U.S.C. § 30701.  Note, to the inland leg, there was no domestic bill of lading for rail transportation, and the ocean carrier privately subcontracted for rail transportation.” The Supreme Court previously determined that a through bill of lading could control inland transportation in Norfolk Southern Railway v. Kirby, 543 U.S. 14 (2004), but that decision only addressed the application of state law to a bill of lading that extended COGSA inland, where COGSA and the state law conflicted.  It did not consider the ramifications of the Carmack Amendment, and the United States Courts of Appeals have split in their treatment of the competing principles under COGSA and the Carmack Amendment.

The two cases currently pending before the Supreme Court concern the proper forum for suits over damage to cargo being delivered to the United States from China, where the cargo was damaged when the United States rail carrier’s train derailed in Oklahoma on the inland domestic leg of the international multimodal or intermodal shipment. Regal-Beloit, other shippers and their subrogees brought suits against the rail carrier and the ocean carrier in the United States. The carriers argued that the suits were required to be litigated in Japan based on a forum selection clause in the ocean carrier’s bill of lading that was proper under COGSA. The issue essentially came down to whether the contractual provisions in a bill of lading can control over the default statutory rules set forth in the Carmack Amendment when a loss occurs on the United States on the inland leg of an international intermodal shipment. The Ninth Circuit Court of Appeals determined that “the contractual extension of COGSA to the inland leg cannot supersede the requirements imposed by the Carmack Amendment unless the parties properly agree to opt out of Carmack. Regal-Beloit Corp. v. Kawasaki Kisen Kaisha Ltd., 557 F.3d 985 (9th Cir. 2009). The carriers appealed this decision to the United States Supreme Court.

The carriers’ briefs on the merits were filed on December 23, 2009, and the respondents’ briefs were filed on February 12, 2010. Four amicus briefs were filed in support of the carriers, including one for the United States filed by the United States Department of Justice. The Transportation & Logistics Council, Inc., a non-profit organization representing shippers nationwide, and the American Institute of Marine Underwriters filed an amicus brief in support of the respondents. Oral argument has been set for Wednesday, March 24, 2010. The Supreme Court should issue its decision within two to three months after oral argument.

The Supreme Court’s decision could have a significant impact on the amount of damages recoverable against a carrier involved in an international shipment. While COGSA permits carriers to limit their liability to $500 per package, a plaintiff suing under the Carmack Amendment is entitled to the actual loss or injury to the property if the carrier has not effectively limited its liability by a written declaration or agreement. Check back with the Subrogation & Recovery Blog for the latest news regarding the Supreme Court’s upcoming decision.

Using Freedom of Information Act Requests to your Advantage in Prosecuting Subrogation Claims

Freedom Key on KeyboardThe Freedom of Information Act (“FOIA”) can be a useful tool that subrogation professionals can employ to effectively gather information to build a successful products liability claim. In cases where a loss is caused by a defective product, a simple FOIA request to the Consumer Products Safety Commission (“CPSC”) can produce a veritable treasure trove of documents of reported incidents involving a particular product. 

The CPSC tracks all complaints it receives about safety issues involving products sold in the United States. The complaints can come from a variety of sources, including local, state, or federal government agencies, as well as from consumers who contact the CPSC’s hotline. Depending on the number of incidents and the magnitude of the risk to consumers, the CPSC may launch an in-depth investigation (“IDI”) of a particular product.

Subrogation professionals investigating a potential products liability claim can utilize the CPSC’s website and FOIA requests to assist in determining whether there have been issues with a particular product. A FOIA request can produce incident reports and IDI reports relating to the product in question. To find out whether a product has been recalled, you can conduct a search at the CPSC website at http://www.cpsc.gov/cpscpub/prerel/prerel.html

There are several ways to submit a FOIA request to the CPSC. The CPSC accepts submissions via mail, facsimile, and even by email. Here is the CPSC’s contact information for FOIA requests:

FOIA Requester Service Center
US Consumer Product Safety Commission
4330 East West Highway, Room 502
Bethesda, MD 20814
Tel. (301) 504-7923
Fax. (301) 504-0127
cpsc-foia@cpsc.gov

FilesIt is important to note that the individual making the request is responsible for the cost of reproducing the documents, although there are times when the CPSC will waive the fee. In any event, the cost pales in comparison to the cost of filing suit and obtaining the documents through discovery.  Additionally, the manufacturer of the product is afforded an opportunity to correct or challenge any of the requested information, and the manufacturer can block disclosure of incident reports where they can prove inaccuracies with supporting documentation.  There are also other rare instances where manufacturers can prevent disclose if the requested information contains trade secrets and confidential commercial or financial information. To read more about FOIA requests and about what information is available, go to the CPSC’s Guide to Public Information at http://www.cpsc.gov/about/guide.html#Introduction

Finally, be on the lookout for a searchable database, which the CPSC is in the process of developing. The database was mandated by Consumer Product Safety Improvement Act  of 2008. It is anticipated that the database will be online at www.saferproducts.gov in March 2011.

OREGON COURT FINDS THAT A PHD IS NO DEFENSE FOR NEGLIGENT HOME DESIGN

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

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

 

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

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

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

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

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

SUPPLEMENTAL REPORT REGARDING THE NEW YORK COLLATERAL SOURCE/SUBROGATION BILL

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

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

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

Pennsylvania Supreme Court Civil Procedural Rules Committee Recommendations Regarding Subrogation

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

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

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

California's "Made Whole Rule"

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

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

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

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

Analysis of Katrina Opinion re: MRGO Claims

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

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

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

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

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

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

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

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

New York Legislature Passes Anti-Subrogation Law

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

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

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

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

Economic Loss Doctrine Broadened in Tennessee

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

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

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

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

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

Causation - English Style

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

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

 

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

 

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

 

What’s all the Fosse about?

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


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


Harbour
ing doubts?

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

 

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

Inverse Condemnation: The People's Champion

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

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

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

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

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

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

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

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

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

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

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

How Deep Are Your Insurers Pockets?

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

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

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

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

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

 

Equine Law Theories of Subrogation Part 3: Damages Issues

Measure of Damages

A critical part of any subrogation analysis is the determination of what damages are legally recoverable from a potentially liable third party. Unique to equine claims, the owner of the horse will often choose to insure the horse for less than its fair market value to avoid higher premiums. For this reason, the insured value rarely, if ever, equates to what is legally recoverable. In most jurisdictions, the fair market value of the horse is the proper measure of damages. To prove fair market value at trial, there must be a well supported opinion given by a qualified expert in the field. Although a third party may be liable for injuring the horse and rendering it incapable of performing its intended purpose, the horse may still have a significant residual value as a breeding horse or performing a new purpose. That residual value will likely be subtracted from the overall damages recoverable through litigation. In today’s climate of frequent expert challenges, choosing the right expert who can properly evaluate these issues is essential.

In addition to seeking the fair market value of the horse, an owner often asks whether he or she may seek pain and suffering or emotional distress damages for their loss. In the vast majority of jurisdictions, these types of damages are not recoverable because there is no physical manifestation of an injury to the policy holder. The owner will be limited to economic damages, which may include a claim for business interruption, loss of future breeding rights or loss of future value. 

First Dollar Out

SaddleWith many horses being underinsured, first dollar out questions often arise in equine subrogation claims. It is important to be aware of the policy language and any first dollar out rules in your jurisdiction. In addition, there is no penalty for underinsuring a horse.   A proration agreement is one way to effectively handle what could be a sticky situation with the insured after litigation begins.  Such an agreement also provides a platform for the carrier and the policy holder to discuss the actual recoverable damages before litigation ensues. Having these discussions up front helps to manage the sometimes unreasonable expectations of the policy holder who is devastated by the loss of their equine companion. 

 

Technology Can Maximize Subrogation Recoveries

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

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

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

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

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

Avoiding Service On Foreign Manufacturers

Subrogation cases often involve the pursuit of manufacturers in foreign countries.  Generally, service of process on those foreign manufacturers must be made pursuant to the requirements of the Hague Convention.  These requirements are time-consuming and costly, however, according to a recent California Appellate Court decision they may not always be necessary.

In Yamaha Motor Co., Ltd. v. Sup. Ct., the California Court of Appeal recently held that under certain circumstances a party may serve a foreign corporation by serving the corporation's American subsidiary.  The court considered factors including whether (1) there is ample regular contact between the local representative and the foreign defendant, (2) the likelihood that the local representative will notify the foreign defendant of the service, and (3) the overall relationship between the two companies.

The court concluded service on Yamaha-Japan was effectuated via service on Yamaha-American as this domestic entity was the “general manager in this state” and was the American face of the Japanese company.  Yamaha-America had (1) an exclusive arrangement to sell the foreign manufacturer's products, (2) provided warranty service and English owner manuals, (3) performed testing and marketing, and (4) received complaints about the manufacturer's products.  As a result, the court concluded that service of Yamaha-American was effective service for Yamaha-Japan under California law.  

Cases involving service of process on foreign manufacturers should be evaluated on a case-by-case basis to determine whether service on its American subsidiary will suffice.  If so, it will save time and money in the pursuit of your subrogation recovery.

Product Recalls: Bolstering Your Subrogation Case

Junk appliancesOne of the first things to do upon receipt of a new subrogation loss involving a product is to check to see if there are any recalls of that product.  Ultimately, if your cause and origin investigator determines the product is the cause of the loss, the recall can greatly strengthen your subrogation case.  It provides effective cross-examination of the manufacturer’s employees and experts, as well as substantial leverage in settlement discussions. 

The United States Consumer Product Safety Commission (“CPSC”) regularly advises the public of product recalls and is an excellent resource.  Recently, the CPSC issued the following product recalls which may be relevant to future subrogation claims:

On July 30, 2008, Frigidaire announced a voluntary recall of clothes washers due to a fire hazard.  An internal defect in the washers’ drain pump case overheats and presents a fire hazard.  This recall involves several models within the six brands manufactured by Frigidaire which were sold nationwide between February 2009 and May 2009.  The Frigidaire brands subject to this recall include Crosley, Frigidaire, Kelvinator, Kenmore, Wascomat and White-Westinghouse

On July 21, 2009, Fiesta Gas Grills announced a voluntary recall of its Blue Ember grills, which are fueled by propane.  These gas grills are manufactured by Unisplendor Corporation and Keesung Corporation, both in China. Fiesta is the national importer.  The hose of the gas tank can get too close to the firebox, exposing it to heat and creating a fire hazard. The grills were sold nationwide between November 2006 and June 2007 and in Canada between November 2006 and May 2009. 

On August 11, 2009, Griffin International issued a voluntary recall on Wii battery recharge stations.  Psyclone Essentials and React Wii 4-dock battery recharge stations are recalled due to a fire hazard. The battery pack can overheat, creating a fire hazard. The battery packs subject to this recall were sold at Target, Toys R Us and on amazon.com from January 2008 to July 2009.

Equine Law Theories of Subrogation: Part 2 Hiring the Right Experts and Avoiding Spoliation

 Just like property damage claims, it is vital to hire the right experts and conduct a thorough and timely investigation. But unlike a typical property damage claim, with equine mortality claims it is often impractical and difficult to maintain the deceased horse for days or weeks to allow for all interested parties to retain experts and examine the horse. Many times, the board of health will not allow the horse to be retained. Nonetheless, immediate notice should be given in writing to any potentially responsible third parties. DNA samples should be collected and preserved to prove that the deceased horse is in fact the insured horse. If it is believed that a third party caused the death, it is also recommended that a full post mortem examination be conducted at either a university or a diagnostic laboratory in order to conclusively establish the cause of death. Photographic documentation and the appropriate records from an equine veterinarian are also helpful in combating any claims of spoliation.

In an equine injury situation, a veterinary expert will be necessary to causally connect the potential defendant’s conduct to the injury. Similar to a personal injury case, the right medical experts and records are needed to support such a claim. Notice to responsible third parties should be given immediately, and the injury should be properly documented with photographs, x-rays, blood tests, or the like. Taking things a step further, the subrogation professional may wish to consult with the veterinarian before a report is finalized to make sure the report is thorough, admissible at trial, and easily understood by an opposing adjuster, judge or jury.

Consideration should also be given to whether the treating veterinarian is qualified to serve as a litigation consultant and testify at trial. Many veterinarians, like medical doctors, may be hesitant to testify against others in their industry. When there is a potential malpractice claim against a veterinarian, this issue should be addressed up front with the treating veterinarian. If a new expert is needed, it is best to give him or her an opportunity to examine the horse in question as close as possible to the time of the injury. Often times the insurance company will hire a separate veterinarian to avoid any conflict of interest for the insured’s veterinarian, which gives the subrogation professional a choice of experts.

The Rules of the Road Have Changed

Automobile Production LineThe Rules of the Road have changed, literally, with the bankruptcy filings of Chrysler and GM. Their restructurings have moved through the bankruptcy court at a dizzying pace.  The sale of substantially all of Chrysler’s assets to Fiat was approved in June, and in mid-July, a judge approved the sale of GM's most-valuable assets to a new company, majority owned by the federal government.  These reorganizations are structured as asset sales to new entities "free and clear" of tort claims arising from vehicles manufactured and sold pre-bankruptcy.

Through this process, the automakers are eliminating thousands of dealers and leaving tort claimants to recover just pennies on the dollar through the bankruptcy court because Chrysler and GM for all intents and purposes were self-insured for products defect claims.

Chrysler already has obtained bankruptcy court approval of its "free and clear" sale that purports to prohibit the assertion of all current and future claims involving a vehicle it sold pre-bankruptcy against "new" Chrysler.  GM’s treatment of tort claims is somewhat different. Bowing to political pressure, "new" GM has agreed that it would accept liability for all claims involving GM cars that were sold prebankruptcy, so long as the accident occurred after the June 1, 2009 filing of GM’s bankruptcy petition. As with Chrysler, however, claims arising from pre-bankruptcy accidents would still get paid in nearly-worthless "bankruptcy dollars." 

The terms of the sale leave a large group of tort claimants and insurer subrogees largely out of luck in pursuing claims against Chrysler and GM.  While claims which involve cars sold pre-bankruptcy can still be brought against "new" GM if the accident occurred after the June 1 filing of the bankruptcy petition, insurers will find that most other subrogation claims, like those of the tort claimants, will be relegated to the bankruptcy court to be processed as nearly-worthless, unsecured bankruptcy claims.

While "new" GM has accepted some liability for these types of claims, "new" Chrysler has not.  Thus, it is likely that despite the terms of the bankruptcy court order which prohibits the assertion of current and future claims against Chrysler, future claimants will attempt to assert successor liability claims against "new" Chrysler.  In addition to challenging this portion of the bankruptcy court's order in Chrysler, many of these claimants will seek other sources of recovery, such as dealers and suppliers; potentially exposing their insurers to risks they did not foresee underwriting.

Equine Law Theories of Subrogation: Part I

The recent tragedy in Florida involving the sudden and untimely death of twenty-one polo ponies raises issues about equine subrogation possibilities. In that matter, a supplement is suspected in the death of polo horses. Because a horse cannot be “preserved” for inspection as with typical property losses, particular attention must be paid up front to protect any subrogation claim. This thread will routinely provide helpful tips for the adjuster and subrogation professional with regard to equine claims.

Theories of Equine Law Recovery

There are many potential third parties to look to for a recovery in an equine loss. If the horse is injured or killed, the question is what caused the injury or death. Assuming the stable owner is not the owner of the horse, the stable owner may be a potential target. If the barn or the grounds presented a dangerous condition that caused the injury or death, a premises liability case may exist. Before going too far down this road, the boarding agreement must be obtained and examined for any waivers of liability or waivers of subrogation. The stable will often carry a care, custody and control policy, or “CCC policy,” that covers any horses that are injured while in the care of the stable. Be sure to check policy limits, however, because some policies only pay a limited amount per horse and may have a low aggregated limit.

Another potential target is the treating veterinarian. If the treating veterinarian fails to properly treat or diagnose a condition that leads to the deterioration of that condition and permanent lameness or injury, a subrogation claim may be viable. Likewise, trainers may also be potential targets for failing to recognize a problem or failing to timely seek veterinary assistance. If the trainer does not address an injury, or disregards a veterinarian’s advice, the horse could suffer additional injury or permanent lameness if pushed to exercise and work. This is properly the subject of expert testimony—thus it is critical to have an consulting veterinarian or trainer to advise whether treating veterinarian and/or the trainer failed to meet the standard of care which was the proximate cause of the injury. 

Product manufacturers, including drug companies, are another potential target. There can be any number of ways a defective product could kill or injure a horse - from a defective heater causing a barn fire, to a horse-trailer tire blowing out and causing an accident. In a fire situation, local codes should be reviewed to determine whether any fire suppression system should have been installed and maintained by the stable manager. Thinking creatively about possible theories of recovery in the early stages is invaluable to know what parties to place on notice and what evidence and documentation should be retained.