Subrogation & Recovery Law Blog

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

Jason S. Schulze — Mon, 14 May 2012 12:42:32 -0500

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

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

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

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

Turning an Implied Insured into a Co-insured

Bryan Campbell — Mon, 09 Apr 2012 12:23:58 -0500

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

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

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

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

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

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

Utilizing Federal Rule 27--Depositions to Perpetuate Testimony

James Campise — Wed, 04 Apr 2012 11:21:53 -0500

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

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

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

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

Expert Opinions in Wisconsin--What Has Changed?

Thaddeus Baria — Mon, 19 Mar 2012 15:49:10 -0500

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

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

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

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

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

Robert W. Phelan — Tue, 13 Mar 2012 14:16:53 -0500

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

LIPA

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

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

Notice of Claim

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

Statute of Limitations

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

Entities selected to manage and operate the Long Island Electric Grid on LIPA’s behalf

Currently, a US subsidiary of the UK-based company National Grid plc maintains LIPA’s transmission and distribution system under a management services agreement. The US National Grid subsidiary also carries out other business through a number of subsidiary companies, all still doing business as “National Grid”. For example, Niagara Mohawk Power Corporation d/b/a/ National Grid owns separate, non-Long Island electric lines and should not be confused with the Long Island operations of National Grid.

Nevertheless, on December 15, 2011, LIPA selected Public Service Enterprise Group (“PSEG”) to take over management and operation of the electric grid, starting in January 2014. The new contract is for 10 years and requires PSEG to create a wholly-owned subsidiary to be located on Long Island and dedicated to LIPA and its 1.1 million customers. Before the contracts between LIPA and PSEG become effective, regulatory approvals are required from the Internal Revenue Service, the NYS Attorney General and the Office of the State Comptroller.

If you intend to file suit in the next few years against LIPA, make sure that you investigate whether you should also name either National Grid or PSEG or its wholly-owned Long Island subsidiary as an additional applicable party to the lawsuit depending upon when the loss occurred.

New Rule for Hearings in Arbitration Forums

Joseph F. Rich — Thu, 08 Mar 2012 10:37:24 -0500

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

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

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

Michigan Expands Contractors' Tort Liability

Larry Eaton — Mon, 05 Mar 2012 10:59:48 -0500

A beautiful Michigan home burned down in 2007 due to an improperly installed fireplace. The home was re-built in 2007, but a year later, the home burned again. The insurer paid both losses, and asked subrogation counsel to investigate the matter for subrogation potential. The experts concluded that the second house fire was due to the fireplace having been improperly installed during the reconstruction of the home. Suit was brought accordingly. However, the Michigan trial court, contrary to its own views, felt obligated to grant summary judgment to the defendant fireplace installer due to the law in Michigan at the time. Subrogation counsel filed an appeal.

As we have previously reported, in its June 6, 2011 decision in Loweke v. Ann Arbor Ceiling & Partition Co., LLC,______Mich. NW2d _____(Docket No. 141168), under Michigan's Fultz doctrine, a contractor had no tort liability for injuries or damages to property for work performed in furtherance of its contract unless, by applying a "separate and distinct mode of analysis," a new condition was created as a result of that work, leading to the injury complained of. In practice, proving the creation of such a "separate and distinct" new condition proved to be quite difficult in the context of several court decisions following Fultz. This problem was made worse for potential claimants if the faulty work was performed by someone with whom they were not in privity of contract, such as, in many cases, a subcontractor.the Michigan Supreme Court significantly modified its prior holding in Fultz v. Union-Commerce Assoc., 470 Mich. 460, 683 NW2d 587 (Mich. Sup. Ct., 2004).

In Loweke, the Michigan Supreme Court stated its intention to "clarify" the holding in Fultz by, in essence, reverting to more traditional tort law. The Court stated that even when one is performing contractual work, that "does not alter the fact that there [exists] a preexisting obligation or duty to avoid harm when one acts….[W]hile the mere existence of a contractual promise does not ordinarily provide the basis of a duty of care to a third party in tort, the existence of a contract [also] does not extinguish duties of care otherwise existing ..." The Loweke Court stated: "Fultz did not extinguish the simple idea that is imbedded deep within the American common law of torts … if one having assumed to act, does so negligently," then liability exists as to a third party for "failure of the defendant to exercise care and skill in the performance itself."

In an unpublished opinion issued on December 22, 2011, relying upon Loweke, the Michigan Court of Appeals reversed the trial court's decision. The Court observed that it would ordinarily remand to the trial court to reconsider its summary judgment decision in light of the new Supreme Court authority, but since the trial court had made clear that it felt it was required to reach its conclusion in light of Fultz, the Court of Appeals instead reversed the trial court's grant of summary judgment outright and remanded the case to the trial court for further proceedings. This reversal now provides an opportunity, as well as a legal basis, to seek recovery of damages from the fireplace installer.

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

William E. Gericke — Mon, 20 Feb 2012 12:03:20 -0500

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

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

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

Sandman sued both Quincy Mutual and its subrogation counsel for misrepresentation, malpractice, negligent affliction of emotional distress, violation of the implied covenant of good faith and fair dealing, and violations of G.L.c. 93A (the Massachusetts Consumer Protection Act). Sandman claimed Quincy Mutual’s subrogation counsel told her that Quincy Mutual had hired him to pursue her uninsured losses as well as the subrogated claim, but failed to do so. Sandman’s claim against Quincy Mutual was that it was vicariously liable for the malpractice and misrepresentations of its subrogation counsel. Quincy Mutual argued that it could not be vicariously liable for the representations and professional negligence of its subrogation counsel because as an attorney and an independent professional, counsel had a non-delegable duty of care to Sandman.

Fortunately, the court agreed and relied on the holding in Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387 (2003), wherein the Massachusetts Supreme Judicial Court held that since an insurer is not permitted to practice law, it must rely on independent counsel for the conduct of the litigation, and in doing so, does not assume a non-delegable duty to present an adequate defense or representation of the insured. Id. at 408-409. The Court went on to hold that since the conduct of the litigation is the responsibility of trial counsel, the insurer is not vicariously liable for the negligence of the attorneys who conduct the defense or representation of the insured. Id.

In dismissing Sandman’s Complaint against Quincy Mutual, the court held there was no basis upon which Quincy Mutual may be vicariously liable for its subrogation counsel’s malpractice because it was counsel who controlled the strategy, conduct, and daily details of representation of the insured, and counsel’s ethical obligations to the insured prevented the insurer from exercising the degree of control necessary to justify the imposition of vicarious liability. Although Sandman’s action against Quincy Mutual was dismissed, her malpractice suit against Quincy Mutual’s subrogation counsel is still pending.

Although the insured’s action against Quincy Mutual was dismissed, the entire suit could have been avoided if subrogation counsel had clearly spelled out whether or not the insured’s uninsured claims were being pursued in the carrier’s action against the defendant tortfeasor. If counsel had entered into a retention agreement with the insured to represent her uninsured losses, the details of the representation would have been spelled out as required by the Massachusetts Rules of Professional Conduct. Subrogation counsel’s failure to enter into a retention agreement with the insured, and failure to advise the insured that her losses were not being pursued, caused his client, the property insurance carrier, to be dragged into a lawsuit unnecessarily. It also landed him in a malpractice suit. In order to avoid a similar situation from occurring in the future, counsel has to make the insured aware of their role in the case and whether or not the insured’s uninsured losses are being represented in any lawsuit.

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

Joseph F. Rich — Mon, 13 Feb 2012 17:53:49 -0500

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

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

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

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

Pennsylvania Rejects Independent Action for Negligent Spoliation

Mark Mullen — Mon, 06 Feb 2012 12:32:41 -0500

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

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

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

New Discovery Rules in Utah may Streamline Your Subrogation Case

Tom Regan — Fri, 27 Jan 2012 09:57:30 -0500

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

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

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

Tier	Amount of Damages	Total Fact Deposition Hours	Rule 33 Interrogatories including all discrete subparts	Rule 34 Requests for Production	Rule 36 Requests for Admission	Days to Complete Standard Fact Discovery
1	$50,000 or less	3	0	5	5	120
2	More than $50,000 and less than $300,000 or non-monetary relief	15	10	10	10	180
3	$300,000 or more	30	20	20	20	210

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

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

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

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

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

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

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

California's Right to Repair Act: What teeth does it have when its requirements are not followed?

Nicholas J. Neidzwski — Tue, 24 Jan 2012 14:30:12 -0500

Imagine Mr. and Mrs. Johnson are recent first-time homeowners in California. Last year, they purchased a new home built by Lemon Construction. Shortly after moving into the home, the Johnsons went on a short vacation. To their dismay, they returned the following week to find the entire upstairs of their new house completely flooded.

Investigation revealed that Lemon Construction built the home with a poorly constructed roof, which did not hold up in the first major rainfall of the year. After discovering the flood, the Johnsons immediately hired a friend who was a roof installer to repair and finish their roof. The Johnsons also promptly notified their insurance carrier, which agreed to cover the cost of the roof repair. The Johnsons' insurer also immediately hired a company to restore the second floor of the home. Two months later, when repairs were almost complete, the Johnsons and their insurance carrier decided to file suit against Lemon Construction.

In the above hypothetical, did the Johnsons and/or their insurer create a legal obstacle in the planned action against Lemon Construction?

Unfortunately for the Johnsons, California's "Right to Repair Act" will likely be used as a defense by Lemon Construction because they were not given the opportunity to inspect and offer to repair the home prior to commencing repairs.

California is one of many states that has enacted laws requiring a homeowner to follow certain procedures prior to filing suit against a builder based upon construction defects. California's "Right to Repair Act" applies to residential units sold on or after January 1, 2003. The Act governs cases "seeking recovery of damages arising out of, or related to deficiencies in, the residential construction, design, specifications, surveying, supervision, testing, or observation of construction..." Regarding the hypothetical above, the Act applies to alleged violations of the following standard: "[r]oofs, roofing systems...shall not allow water to enter the structure..."

The Act sets forth various pre-litigation requirements which center upon the homeowner (1) giving the builder sufficient notice of a potential claim which states the alleged violation of the Act, and (2) allowing the builder the opportunity to inspect and repair the alleged violation prior to commencing suit.

The main difficulty in following the Act's pre-litigation procedures is best illustrated by the Act's requirements in Civ. Code Sections 916 & 917. Section 916 allows a builder 14 days after receipt of a homeowner's notice of a claim to complete an "initial inspection" of the residence. Section 917 provides that "[w]ithin 30 days of the initial or, if requested, second inspection or testing, the builder may offer in writing to repair the violation." Read together, a builder could easily wait two months before even deciding whether to undertake repairs. Strict adherence to these rules could leave homeowners like the Johnsons in limbo.

In the Johnsons' situation, Lemon Construction will argue a failure to adhere to the Act's pre-suit requirements. The remedy provided in the Act, however, does not lend Lemon Construction any support. Per Civ. Code Section 930(b), if a claimant "does not conform with the requirements of [the Act], the builder may bring a motion to stay any subsequent court action or other proceeding until the requirements of this chapter have been satisfied." In another words, Section 930(b) gives a builder the opportunity to stop a lawsuit to inspect and then choose to repair a home.

But what if the repairs have already been started or even completed? In these situations, the Act is silent, and there has yet to be any guidance from the California courts on this issue. If Lemon Construction asserts a defense based upon the Act, the Act's lack of any remedy for those who have started repairs may be a viable response.

Nonetheless, if possible, the Act's pre-litigation procedures should be followed to avoid the Lemon Construction defense. The builder should be given (1) notice of the alleged violation and (2) the opportunity to inspect and repair. If, however, repairs are already underway or completed, nothing in the Act or any related case law technically prevents the homeowner or their carrier from pursuing the builder.

BMW Recalls Mini and Mini Cooper Cars

Howard Maycon — Tue, 17 Jan 2012 12:24:11 -0500

On January 10, 2012, BMW of North America, LLC, announced a voluntary recall of 88,911 Mini and Mini Cooper cars manufactured between 2006-2011 and equipped with 4-cylinder turbocharged engines. The recall arises from overheating of a circuit board which electronically controls an auxiliary water pump that cools the turbocharger in the vehicles. In extreme cases, the overheating of the circuit board can lead to smoldering of the water pump and could result in a vehicle fire. There have been 12 fires reported to the National Highway Transportation Safety Administration, though none have resulted in accidents or injuries. Per BMW, each of the reported fires occurred while the vehicles were standing still. The recalled models include: 2007-11 Mini Cooper S; 2008-11 Mini Cooper Clubman; 2009-11 Mini Cooper S Convertible; 2009-11 Mini JCW; 2009-11 Mini JCW Clubman; 2009-11 Mini JCW Convertible; 2011 Mini Cooper S Countryman.

Subrogation vs Contribution--Does it Matter?

Mark Roth — Tue, 10 Jan 2012 14:52:48 -0500

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!

EDRs--You Never Know Who's Watching

Peter A. Lynch — Tue, 03 Jan 2012 12:48:43 -0500

EDRs or "black boxes" now are contained in a wide range of consumer products including copiers, household appliances, alarm systems and cars. "EDRs" can provide a final data picture of how a product was last operating before a failure happened. Technological advances include building EDRs with a read write tamper proof cabability. For example, an unexpected rise in temperature or surge in power can trigger an EDR that may support an eye witness observation that a product was on fire, smoking or operating erratically. Critics condemn EDRs suggesting they are surveillance monitors akin to those used by "Big Brother" in George Orwell's novel "1984." The reality is far different. EDRs objectively record data within state prescribed privacy legislative requirements.

Smart Technology

Smart Technology refers to systems that monitor and diagnose appliances while in use to include home energy and security systems. Those systems can control heating and air conditioning systems to increase safety while saving energy. These systems can take measurements at pre-determined intervals by use of meters and controls.

Major companies such as Panasonic, General Electric and LG offer Smart Technology systems. LG offers appliances with THINQ Technology that meters and controls "smart" refrigerators, dishwashers, stoves, ovens, etc. LG offers a smart diagnosis program that claims to notice when a home appliance does not operate properly and issues alerts. That system will soon become WI-FI capable. Panasonic has a product line called ECONAVI, that covers 30 household appliances and will monitor usage and a user's living environment. GE offers a similar program called Nucleus Energy Manager that collects real time information on a product's usage.

Conclusion

Subrogation professionals should encourage their consultants to actively seek out and recover EDR information when available. That data may provide a wealth of information about the operating parameters of a product believed to have been involved in a failure. That data can then be evaluated and assessed as part of the overall subrogation investigation.

Discovery of Confidential Settlement Information

John Reis — Tue, 20 Dec 2011 10:11:12 -0500

How airtight is a confidentiality provision in a settlement agreement? In a recent case out of Florida, the court protected a confidential settlement agreement from disclosure to a remaining party. Wal-Mart Stores, Inc. v. Nicolette Strachan et al., ___ So. 2d __, 36 Fla. L. Weekly D2262, Case No. 4D11-2539 (Fla. 4^th DCA Oct. 12, 2011). However, is the Wal-Mart decision particular to its facts and jurisdiction? How do other courts view confidentiality provisions? As illustrated below, there are three basic approaches to discoverability of confidential settlements. The prevailing approach is a balancing approach, but there are also two opposing bright-line approaches: the “not discoverable” approach (even if relevant) and the “discoverable” approach (if relevant).

The Wal-Mart Case

The Wal-Mart court hinged on the relevance of the settlement terms. The plaintiffs settled with three out of four defendants, leaving Wal-Mart as the only remaining defendant. Wal-Mart moved to compel production of the amount of the settlement paid by each of the settling defendants. The trial court denied the motion. On appeal, the Fourth District Court of Appeal agreed with the lower court. But the reasons for non-disclosure were particular to a quirk of Florida law. In 2006, the Florida legislature essentially abolished joint and several liability. Therefore, because Wal-Mart would not be responsible for the fault of anyone but itself, the amounts of the settlements could not lead to the discovery of admissible evidence at trial. The opinion does is consistent with the balancing approach of other jurisdictions.

Balancing Approach

The balancing approach weighs the interests of the party seeking disclosure against those of the settling parties, usually siding with the settling parties unless the terms are relevant. A good example of the balancing approach is Hinshaw, Winkler, Draa, March & Still v. Superior Court (Kauffman), 51 Cal. App. 4^th 233, 58 Cal. Rptr. 2d 791 (1996). There, the California Court of Appeal balanced the constitutional right of privacy against the interests of “facilitating ascertainment of trust in connection with legal proceedings.”

The balancing approach will sometimes allow for discovery of the agreement. For example, limited discovery of settlement amounts was allowed in the case of New York v. Solvent Chemical Co., 214 F.R.D. 106 ( W.D.N.Y. 2003). There, a non-settling defendant/third-party plaintiff sought to take the deposition of a third-party defendant corporation still actively a party in the case. The party seeking discovery sought to explore the nature and extent of settlement negotiations. The court held that the amounts of the settlements were indeed relevant and allowed that issue to be explored. However, nothing else about the settlement agreement or the negotiations leading up to it were subject to discovery as they were irrelevant to the case and invaded the attorney-client privilege and work product doctrine.

The “Not Discoverable” Approach

An example of a court mandating non-disclosure of confidential settlement terms, even if relevant, comes from New Jersey. In UMC/Stanford, Inc. v. Allianz Underwriters Ins. Co., 267 N.J. Super 52, 67-71, 647 A.2d 182, 190-192 (1994), a policyholder entered into a confidential settlement with certain insurers. A non-settling insurer sought the terms of the settlement agreement, arguing it needed the information to determine if the insurers had paid the entirety of the policyholder’s claimed loss. On public policy grounds, the court upheld the terms of the confidentiality provisions and blocked disclosure of the settlement agreement. The court reasoned that (a) settlements are socially desirable and confidentiality fosters settlements, and (b) the confidentiality provision was bargained-for and such private dealings should be respected.

The “Discoverable” Approach

An example of the other extreme, mandating disclosure of confidential settlement terms, comes from Texas. In Re Continental Insurance Company, 994 S.W.2d 423 (Tex. App. 1999) involves a coverage dispute wherein the policyholder settled with certain of its insurers. One non-settling excess insurer sought full disclosure of all terms of the settlement agreements between the settling parties. The excess insure wanted to know if the policyholder had been made whole by the payments of the settling insurers. In ordering disclosure of the confidential settlement agreement, the court held that “[i]ndividuals cannot protect relevant information from discovery by confidentiality provisions in contracts, even settlement agreements. The private agreement between two individuals does not override the discovery rules.”

Practical Lessons

If you want to discover the terms of a settlement agreement, be prepared to demonstrate why it is relevant to an issue in your case. In every jurisdiction the information sought must be relevant. The most likely provision that will be discoverable is the amount of the settlement, particularly for set-off reasons. If set-off is not available in your case, be prepared to articulate some other reasonable basis for obtaining the terms.

Parties may also consider a protective order executed by all parties and adopted by the Court well before settlement. Such an agreement usually sets in place agreed procedures for documents viewed as confidential and binds all parties down the road. Although disclosure of confidentiality provisions often depends on the quirks of the case and the court, good lawyering can tip the balance.

Fine Art Losses: Details, Details, Details

Stephen M. Halbeisen — Mon, 05 Dec 2011 16:06:51 -0500

Fine art losses come in many shapes and sizes. Oftentimes, fine art is a relatively small piece of a homeowner's or commercial property claim. Occasionally, however, the art represents the vast majority of a claim. You may have heard of the story in 2006 about casino mogul, Steve Wynn, who accidentally poked a hole in his own Picasso painting, "La Reve", which he had previously agreed to sell to another collector for $139 million. Post-conservation, Wynn decided to keep the painting.

When an item of fine art is damaged, how do you quantify the damage? Art is considered personal property. In most jurisdictions, the amount that may be recovered in a subrogation claim for damage to personal property is market value, which is defined as the price the property would bring if it were offered for sale by a willing but not obligated seller and purchased by a willing but not obligated buyer. If market value cannot be determined or the property is not subject to market valuation, other methods of valuation may be used, such as replacement value, actual or intrinsic value, and sometimes sentimental value.

With a loss that involves damage to fine art, the nature and extent of the damage must be determined. Was the art damaged by fire, smoke, water, or physical impact? Transferring the art to a temperature and humidity controlled environment is essential to mitigate the damage. There, the art can be held for inspection, storage and preservation. Art handlers experienced in removing, crating, transporting and storing fine art should be considered depending on the value of the art in question.

To prove up damages on a fine art loss, the pre-loss market value of the art must be established. Relevant information, such as a description of the work of art, purchase price, photographs, condition reports, provenance (history of ownership), appraisals, etc., should be gathered. Auction sales of an artist's work may be available through online services such as www.artnet.com and www.askart.com. Market value of art can rise and fall significantly over relatively short periods of time. Relevant factors include economic conditions and the demand for a specific artist's work. Therefore, it is critical to establish the market value as of the time immediately before the damage occurred. It may be necessary to engage a someone with expertise in the market value of the specific type of art, or the specific artist, involved. Art appraisers are not all alike. Some have little or no experience in marketing or selling the work of a particular artist. Some are private art dealers or work at auction houses like Christie's or Sotheby's with expertise in that artist's work. While sales history and comparable sales are sometimes available, art valuation can be a subjective undertaking. The appraisal expert needs to be someone who is qualified, competent and credible, and someone who has done his or her homework.

In addition, a determination must be made as to whether conservation efforts can help mitigate or remediate the damage. The American Institute for Conservation of Historic and Artistic Works (AIC), with over 3,500 members, encompasses groups and individuals that specialize in specific formats and topics, such as paper, electronic media, objects, painting, photographs, textiles, wood, etc. Hiring the right conservator can also greatly mitigate the damage. The more valuable the work of art, the more valuable the selection of conservator. If the work of art is not totally destroyed and can be treated by a conservator, a treatment plan should be established before any conservation work is undertaken. In the best case scenario, the art can be completely restored to its pre-loss condition. More often, however, the damage can be treated only to the extent possible without risking or causing further harm to the artwork. In those cases, the artwork cannot be fully restored, and to a certain extent remains permanently damaged.

Therefore, it will also be necessary to establish the post-conservation market value of the art. This can be particularly challenging because the person or entity that owned the work of art before the loss usually retains ownership of the item after the loss. In those cases, the loss in market value can only be estimated in terms of a percentage loss. For example, if the work of art had a pre-loss market value of $100,000, and the post-conservation market value is 25% less than the pre-loss market value, the provable loss of market value would be $25,000. This may be established by the same expert who establishes the pre-loss market value of the art. If the art is actually sold shortly after conservation is completed, that price will probably be sufficient evidence of post-conservation market value.

Given the highly subjective nature of art and price volatility in the art market, paying attention to the damages aspects of fine arts losses will pay dividends with respect to your first-party exposure, and it will significantly improve your ability to maximize your subrogation recoveries.

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

Jake Skaggs — Mon, 28 Nov 2011 12:27:41 -0500

When to draft an expert report is an area of disagreement amongst subrogation professionals, attorneys and experts. Typically the attorney will request that an expert wait to draft a report until discovery is complete and the deadline to designate testifying experts is on the horizon. Conversely, most adjusters ask for a report as soon as possible in order to finalize the claim. Luckily, the recent changes to the Federal Rules of Civil Procedure helps both the subrogation professional and adjuster achieve their goals.

In 2011, Rule 26(b)(4) (expert disclosures) was amended to “protect drafts of any report or disclosure required under Rule 26(a)(2), regardless of the form in which the draft is recorded.” Originally, drafts of an expert’s report were discoverable when the testifying expert was disclosed. The expert had one chance to draft a complete report. Any changes to the report that were suggested by counsel, however mundane, subjected the expert to a scathing cross-examination and an inference that the lawyer was telling the expert what to say. Now, all drafts are protected from disclosure by the work-product privilege. This permits the lawyer to work with the expert to craft a thorough report and avoid incomplete or lazy report writing that may provide opposing counsel the necessary ammunition to damage a case.

But the question is--what is a draft and what is a final report? Because the rule was only recently amended, the case law interpreting the rule has not yet developed. The only decision thus far is out of the Western District of Louisiana. Magistrate Judge Mark Hornsby denied the plaintiff’s request for a report that was drafted 5 months before counsel was retained and the lawsuit was filed. See Greenwood 950, LLC v. Chesapeake Louisiana, LP 2011 WL 1234735 (W.D. La). The opinion is unpublished and carries no precedential value, however, it may provide guidance to other district judges and magistrates that are confronted with this issue.

The Advisory Committee to the rule amendment noted that the work-product privilege was extended to draft reports because unlimited access to expert discovery has “had undesirable effects.” 2010 Notes of Advisory Committee ¶ 2. The Advisory Committee specifically noted that the changes to the rule were due to rising costs under the old rule and the old rule hindered the free exchange of information between the attorney and expert. Id. The notes from the Advisory Committee imply that the rule should be interpreted broadly. A court will likely consider whether the report was drafted in anticipation of litigation and when counsel was retained. Determining what is a draft report and what is a final report is yet to be settled, but we will be closely monitoring any new developments.

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

Jason S. Schulze — Mon, 21 Nov 2011 10:44:18 -0500

Over the last several years, the insurance industry has experienced significant losses due to wildfires. In many instances, the wildfires resulted from the carelessness of a camper, or the criminal conduct of an arsonist. Wildfires have also been caused by damaged power lines, or fallen utility poles.

One other potential cause of large-scale wildfires involves situations where containment of a "prescribed" or "controlled" burn is lost. Although the terms are generally used interchangeably, prescribed and controlled burns are actually different. A prescribed burn is a fire set under specific weather conditions and with sufficient personnel and suppression equipment to achieve certain land management objectives. When utilized properly, a prescribed burn can enrich soil by adding nutrients and making the plant community healthy again. Conversely, a controlled burn is a fire set without specified weather conditions or vegetation management objectives. Common examples of controlled burns include burning brush piles or large quantities of trash.

Because of the inherent risk of either type of burn escaping, most states have enacted statutes governing liability for damages caused by an escaped fire. Many of the statutes actually recognize the importance of prescribed fires for wildfire risk mitigation, and provide specific instructions for ensuring that the burn is completed in a safe manner. Many of the statutes also have detailed procedures for notifying neighbors, applicable state agencies and local fire authorities before a burn is conducted.

In general, most states with prescribed burn statutes generally fall into one of two categories: those which follow the negligence rule, or those which adhere to a strict liability approach. For those states adhering to the negligence rule (and the vast majority do), it is necessary to show that the individual conducting the burn was negligent or failed to exercise the requisite degree of care to impose liability. Typical examples of acts and omissions that may constitute negligence include failing to properly utilize fireguards or barriers during the burn, attempting to burn at inopportune times, or failing to develop and follow a prescribed burn management plan ("PBMP").

Only four states (Connecticut, North Dakota, New Hampshire and Oklahoma) adhere to a strict-liability approach for prescribed burns. In general, those states impose liability on the landowner and/or individual responsible for the burn for damage from an escaped fire regardless of his or her efforts to safely implement or control the burn. For example, the prescribed burn statute in Oklahoma specifically imposes liability on the landowner who owns the land where the fire originated for actual damages sustained by third-parties. Essentially, if a fire escapes, negligence is assumed and the only remaining issue to determine is the amount of actual damages sustained by third-parties. Interestingly, research has shown that the frequency of escaped prescribed fires tends to be lower in those states with more stringent prescribed burn statutes.

If confronted with damages caused by a prescribed burn, it is essential to determine whether the state where the burn occurred has a specific prescribed fire law. When reviewing the statute, particular notice should be paid to whether notification requirements and/or prescribed burn procedures were followed. It should also be determined whether the state follows the negligence rule or adheres to a strict-liability approach. For those states that adhere to the strict liability approach, there will typically be statutory language

Certificate of Merit Requirement in Federal Diversity Cases

David Fisk — Thu, 17 Nov 2011 14:31:23 -0500

In a recent opinion filed by the United States Court of Appeals for the Third Circuit in Liggon-Redding v. Sugarman, the Third Circuit decided that Pennsylvania Rule of Civil Procedure 1042.3, requiring the filing of a certificate of merit in malpractice cases, is substantive law that federal courts must apply under Erie v. Tompkins, 304 U.S. 64 (1938). Prior to the Third Circuit’s decision, several federal district courts had held that Rule 1042.3 is a substantive rule of law that applies in professional liability actions proceeding in federal court. The Third Circuit has now conclusively decided this issue in Pennsylvania.

Although the Third Circuit’s opinion involved a legal malpractice case against an attorney, Rule 1042.3 applies to claims against any licensed professional, including architects and engineers. Several other states, including Arizona, California, Colorado, Georgia, Maryland, Minnesota, Nevada, New Jersey, Oregon, Pennsylvania, and Texas, have enacted similar laws that require a plaintiff to file a certificate or affidavit from a third-party design professional declaring that the plaintiff’s claim against an architect or engineer has merit. The general purpose of such laws is to provide a basis for the trial court to conclude that the plaintiff’s claims have merit and to prevent needless waste of judicial time and resources which would otherwise be spent on claims that have no material basis or justification in fact or in law.

Malpractice or negligence claims against architects and engineers that seek recovery for property damages caused by design defects can be brought in or removed to federal court if there is diversity of citizenship between the parties and the amount in controversy exceeds $75,000. Pursuant to the United States Supreme Court’s decision in Erie v. Tompkins, a federal court sitting in diversity must apply state substantive law and federal procedural law. Since certificate of merit laws have been enacted by states, federal courts must determine whether a certificate of merit law is substantive or procedural. As noted above, the Third Circuit recently concluded that Pennsylvania’s certificate of merit law is substantive state law. Therefore, a plaintiff must comply with Pennsylvania’s certificate of merit law when filing a lawsuit against an architect or engineer in a federal district court in Pennsylvania.

Not all certificate of merit laws are written the same and the filing requirements, including the deadline to file the certificate, may vary depending on the state, so not all of the Third Circuit’s reasoning in Liggon-Redding v. Sugarman will be applicable in other states. Prior to this most recent opinion, the Third Circuit had previously determined that the New Jersey certificate of merit law is substantive state law that plaintiffs in diversity cases must comply with. On the other hand, federal district courts in Georgia have found that Georgia’s certificate of merit law is not applicable to actions filed in federal court, but the Eleventh Circuit has declined to decide the issue. Similarly, the Fifth Circuit has not determined whether Texas’ certificate of merit law is substantive or procedural, but at least one federal district court has determined that it is a procedural rule that does not apply in a federal diversity case, while other courts have assumed, without examination or explanation, that Texas’ certificate of merit law applies in a federal diversity case.

When faced with a claim for property damage caused by a design defect, it is important to determine whether state law requires a certificate of merit when filing a lawsuit against a design professional. If you intend to pursue the claim in federal court, the prudent practice is to retain a third-party design professional to review the facts and circumstances surrounding the loss and comply with the requirements of the applicable certificate of merit law.