Subrogation & Recovery Law Blog

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

John R. Slattery — Wed, 03 Mar 2010 14:32:45 -0500

The 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

It 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.

California's Electronic Discovery Act: Changing The Rules For Competency In The 21st Century

Bradley G. Grumbley — Sun, 28 Feb 2010 23:56:12 -0500

California’s Electronic Discovery Act (the “Act”) obligates counsel to consider any issues relating to the discovery of electronically stored information” at the mandatory initial meet and confer. By passing the Act, the California Legislature recognized that the digital revolution has changed the way businesses, clients, consumers, and professionals manage, access, and save documents and information. The office of today bears little resemblance to the typewriters, dictaphones, and adding machines commonly seen throughout the workplace in the 1960’s and depicted on AMC’s television series Mad Men. These antiquated machines have been replaced by inexpensive personal computers that complete the tasks and manage the information of multiple machines in a fraction of the time. The use and storage of digital information poses new responsibilities and challenges for attorneys in protecting and promoting their clients’ interests.

Electronically stored information (“ESI”) creates new duties and responsibilities for attorneys. California’s Rules of Professional Conduct require every attorney to apply the diligence, learning and skill reasonably necessary for the performance of their services. The pervasive use and reliance on electronic data demands that attorneys be computer literate to fulfill this duty and understand the role electronic data and documents play in litigation. In addition, the California Supreme Court has made it clear that lawyers must instruct their clients to preserve and maintain any potentially relevant evidence. In the modern era, a large amount of relevant evidence comes in the form of ESI. ESI can be a separate and distinct category of information from what is contained in an electronic document’s paper counterpart. For example, many electronic documents contain “metadata,” which is commonly defined as “data about data.” More specifically, metadata is “information describing the history, tracking, or management of an electronic document.” As an illustration, if an attorney produces an electronic document, but erases the metadata, it is like copying only the front of a paper document that has print on both sides. A failure to understand metadata risks the loss of valuable information.

Because of ESI, attorneys face new challenges in conducting and managing discovery for their clients. Litigators must consider the discovery of ESI to anticipate the time necessary to complete discovery and establish a plan for obtaining all relevant information. A few of the issues or questions that must be considered in discovering relevant ESI include: the number of computers, number of users, programs used (including proprietary software), policies on storing ESI, remote data storage, the names of network administrators, and file formats to request (i.e., doc, docx, xls, pdf, tif, etc.). Also, prudence may require the attendance of an information technology (“IT”) expert at the meet and confer. Employing the help of IT experts will assist those who are less computer-savvy in locating and securing relevant ESI. Depending on the amount of ESI, it may be helpful to depose a member of the opposing party’s IT staff as a person most knowledgeable.

Well-orchestrated electronic discovery has many benefits in litigation. As discussed above, electronic documents can provide valuable details (metadata) about a particular electronic document like who, when, and where that document was created. Moreover, reviewing electronic documents can increase efficiency because the information can be searched for key terms, phrases, and issues. But if a production request doesn’t specify whether the document should be produced in electronic or paper form, the producing party can choose. Federal courts have held that acceptance of documents in paper form satisfies the production obligation and the accepting party has waived any objection to the form of the document produced. Therefore, the electronic version and any metadata contained within the document will be lost.

The California Legislature has recognized the important and ubiquitous nature of ESI in modern litigation. The effective litigator will also observe its importance and develop a strategy for preserving and discovering ESI.

No If's, And's Or Butts: Self-Extinguishing Cigarettes

Anne Cook — Sun, 21 Feb 2010 22:18:50 -0500

The flammability of approved cigarettes is of great importance to insurers as significant property damage occurs each year from carelessly discarded smoking materials. According to NFPA's 2008 article U.S Smoking-Material Fire Problem, in 2006 over $606 million dollars of property damage occurred due to smoking materials. In order to try and reduce the number of fires related to cigarettes, most states require that cigarettes meet the testing procedures outlined in the American Society for Testing and Materials (ASTM) International's E2187, Standard Test Method for Measuring the Ignition Strength of Cigarettes. Cigarettes that comply with this testing standard are supposedly safer --- less likely to cause a fire than cigarettes that do not comply with this standard. The hope was that ASTM E2187 compliant cigarettes would self-extinguish thereby reducing the number of smoking material related fires.

Unfortunately, recent ignition tests by Fire Findings shows little to no difference between ASTM E2187 approved cigarettes and traditional, non-ASTM E2187 cigarettes. See, Fire Findings, Vol.18, No.1 (Winter 2010). Fire Findings tested the propensity for ASTM E2187 cigarettes to ignite trash, dry potting soil and peat moss, and gasoline. The results of these tests were similar to the results of their previous tests of traditional cigarettes. Fire Findings concluded that both types of cigarettes, ASTM E2187 approved and non-approved, can ignite similar materials in real world situations. The next time your get a fire loss involving a cigarette, don't be so quick to discard it simply because the cigarette met the ASTM E2187 standard.

Colorado's Subrogation "Made Whole Rule" Under Discussion

Leslie Hulburt — Wed, 17 Feb 2010 17:55:35 -0500

Colorado's legislature is considering passing a bill that would limit subrogation in personal injury cases. House Bill 10-1186 is aimed at situations where the insured would not be made whole if the insurer was allowed to recover its payments through subrogation. In other words, if there is a limited pool of money to go around, the insured needs to be fully compensated before the insurer can recover its payments. If the bill is passed into law, an insurer would be prohibited from bringing a direct subrogation action against a third party if the insured was not fully compensated for his or her damages by the policy.

As drafted, the proposed bill seems only to apply to personal injury and health care cases and does not include property damage cases. Specifically, the bill defines an injured party in pertinent part as "a person who has sustained bodily injury as the result of the act or omission of a third party." If passed, the bill would prohibit an insurer from recovering payments, either directly or from the insured, if the insured has not been fully compensated for his personal injuries.

The bill was introduced in January 2010 and is currently with the Judiciary Committee. Cozen O'Connor attorneys, along with lobbyists for other interested parties, recently met with the sponsors of the bill seeking modifications to the proposed language specifying that the bill only deals with health care matters. The bill's future can be monitored at this blog or the Colorado legislature's website.

MOVING UNINTENDED ACCELERATION CLAIMS FORWARD: SUBROGATION POTENTIAL FOR TOYOTA'S 8.1 MILLION RECALLED VEHICLES

Ned E. Tolbert — Wed, 10 Feb 2010 16:00:29 -0500

Toyota’s unprecedented recall of some 8.1 million vehicles will impact consumers, businesses, and their insurance carriers all over the country. Since 1999, an estimated 2,000 complaints of sudden unintended acceleration in Toyota and Lexus vehicles have been reported to the National Highway Traffic Safety Administration ["NHTSA"]. On February 9, 2010, Toyota issued a global recall of its 2010 Prius hybrid after over 100 complaints of “delayed brake performance” were filed with the NHTSA. [See, timeline of recalls.]

Damages to persons and property as a result of these apparent defects will result in numerous insurance claims scattered throughout the fifty states. The breadth of this recall presents significant subrogation and recovery potential. But the potential complexity and fragmentation of claims raises obstacles to efficiently and effectively prosecuting many separate cases.

Mutual cooperation agreements allow carriers to maximize recovery while minimizing and sharing expenses. Cooperation allows for the appointment of review masters and experts to determine liability and damages related to prior, existing, and future claims. These claims may include payments to insureds for property damage, personal injury, worker’s compensation benefits, business interruption, and loss of goodwill.

It is anticipated that the insurance industry will act quickly and expediently to review past and existing claims related to matters that involve Toyota vehicles. Given the expanse of the recall effort by the automaker and the efforts directed by Toyota to rectify manufacturing and design defects, it is possible that the automaker will also seek a forum for cost effective and expedient resolution of claims related to the defective vehicles.

The availability of multi-district litigation modules and mutual cooperation agreements combined with the efforts of the automaker will effectively endow both the insurance industry and the automaker with a viable alternative to multiple forum litigation.

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

Eric Hanson — Mon, 01 Feb 2010 14:00:37 -0500

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

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

California's Attorney-Client Privilege Upheld

Tom Regan — Tue, 19 Jan 2010 13:54:47 -0500

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

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

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

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

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

Anti-Subrogation - Not So Fast Says The Delaware Superior Court

Peter Caltagirone — Mon, 18 Jan 2010 11:51:14 -0500

The Delaware Superior Court recently ruled that despite the existence of an express waiver of subrogation in a condominium association’s CC&R’s, a chimney sweep could pursue a contribution claim against the unit owner where a fire started under the Delaware Uniform Contribution Among Joint Tortfeasor’s Act.

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

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

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

What Must A Chimney Sweep Do? - The Delaware Superior Court Requires Full Compliance with NFPA 211

Paul R. Bartolacci — Mon, 18 Jan 2010 10:36:46 -0500

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

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

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

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

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

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

Texas Chain...Of Distribution

Anne Cook — Mon, 11 Jan 2010 17:34:15 -0500

With a global economy more and more products are being shipped to the United States from foreign countries daily. When these products fail, it is expensive and time consuming to seek recovery from the foreign manufacturer. But before throwing out your products claim, look at your state's laws on pursuing those entities in the chain of distribution of the product. For example, distributors usually coordinate the sale of the product from the manufacturer to the seller and many times never even touch the product. Despite their limited role of organizing the transfer of the goods, their liability can be unlimited in some circumstances.

In Texas, if you establish that the manufacturer of the product is insolvent or not subject to the jurisdiction of the court then the distributor can be held fully liable for the damages caused by the product as though they were, in fact, the manufacturer. See Civil Practice & Remedies Code § 82.003. Many distributors try to insulate themselves from liability in Texas by pleading the manufacturer is a "responsible third party" under Section 33.004 of the Civil Practice & Remedies Code. This type of plea allows the distributor to put the manufacturer's name on the jury charge when the manufacturer is not a party to the litigation so the jury can then decide the percentage of responsibility between the manufacturer and the distributor. Logically, jurors are going to put the majority of responsibility on the manufacturer who made the product as opposed to the distributor who may never have even touched the product. Don't be fooled by this bit of legal maneuvering by a distributor. The "responsible third party" statute only applies when both parties are negligent. Under Section 82.003, the distributor can be held liable for the damages associated with the defective product without any negligence on the part of the distributor. Since the distributor's responsibility for the product arises from the statutorily imposed guidelines of Section 82.003 of the Civil Practice & Remedies Code and not from any negligent act it did or failed to do, the distributor cannot escape liability by trying to push a percentage of fault onto the manufacturer under Section 33.004.

Each state has its own laws regarding the liability of distributors and those should be reviewed before closing a claim for a defective product manufactured overseas.

Subrogation Rights Under A Standard Mortgage Clause In Canada

Pamela Pengelley — Tue, 05 Jan 2010 13:50:52 -0500

A. What is A Standard Mortgage Clause?

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

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

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

B. A Standard Mortgage Clause is an Independent Contract

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

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

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

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

C. Example of a Standard Mortgage Clause

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

IT IS HEREBY PROVIDED AND AGREED THAT:

1. BREACH OF CONDITIONS BY MORTGAGOR, OWNER OR OCCUPANT

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

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

2. RIGHT OF SUBROGATION

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

…

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

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

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

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

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

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

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

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

The Court of Appeal clarified that:

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

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

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

Life Without Plastics Is Incomprehensible" - The story of Acetal....

Philip Carroll — Thu, 24 Dec 2009 10:52:05 -0500

While plastics have forever changed the way we live, the story isn't always as rosy as the American Chemistry Council infers in the quoted slogan.

Introduced in 1956, acetal (also known as polyacetal, polyformadehyde or polyoxymethlene) was developed for high stiffness, low friction and stability. This material was successfully used in the manufacture of automotive parts such as cams, bearings, gears, etc. But in the 1970's acetal was introduced into plumbing systems, with disastrous results. Over the last 30 years, acetal plumbing parts have shown a high failure rate, resulting in billions of dollars in property losses.

Publicized failures of acetal plumbing parts were seen in the 1980s. Acetal was used to fabricate fittings incorporated into residential water supply piping made of Polybutylene ("PB"). Homes across the country were suffering PB water system failures, causing water losses. Class action litigation ensued, with one of the largest in US history (Cox v. Shell Oil Co., et. al) settling for $950 million. A cause of the PB piping failures was degradation of the acetal fittings, which led to fracture and water release.

Acetal plumbing fittings resurfaced in the 1990s. This time, acetal was formed in fittings incorporated into flexible water supply lines manufactured by various companies, including Robert Manufacturing, Watts Industries and Fluid Master). Failures began to surface in late 1990 and 2000. The failures had a similar appearance, with the plastic coupling fittings suffering cracking or full fracture.

More recently acetal failures have arose in toilet valve assemblies, including those manufactured by Coast Foundry and Fluid Master. Acetal was used in certain models to fabricate the toilet valve shaft, float arm and trigger.

There are two primary causes of these failures. Acetal has been recognized within the plastics industry since as early as the 1950's to be sensitive to acid hydrolysis (a chemical reaction during which one or more water molecules are split into hydrogen and hydroxide ions) and oxidation (the addition of oxygen to a compound with a loss of electrons) by agents such a chlorine. And since chlorine is a required additive for virtually all domestic water systems, degradation of acetal plumbing products is an all to frequent occurrence. Low levels of chlorine in potable water supplies can be sufficient enough to cause stress corrosion cracking (sudden failure of normally ductile metals or tough thermoplastics ) to develop, a problem which has been experienced in both the USA and Europe. Acetal is also notch sensitive, meaning the materials susceptibility to fracture. Acetals have the highest crystallinity (degree of structural order in a solid) of any thermoplastics making it strong and fatigue resistant. This toughness (or lack of ductility) makes it susceptible to fracture where there is a notch, a sudden change in the surface section, a crack, or scratch. Because acetals are notch sensitive, sharp corners must be avoided in part design. This has been an issue in various acetal product designs, including the thread geometry of the water supply coupling nuts and toilet valve triggers, resulting in premature failures.

Many of the plastic components dealt with in subrogation have a tale to tale. Uncovering the material's "story" may be the key to recovery.

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

Karen Fultz — Thu, 17 Dec 2009 17:58:12 -0500

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

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

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

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

SUPPLEMENTAL REPORT REGARDING THE NEW YORK COLLATERAL SOURCE/SUBROGATION BILL

Elliott Feldman — Mon, 07 Dec 2009 12:42:01 -0500

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

Elliott Feldman — Mon, 30 Nov 2009 18:21:07 -0500

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

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

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

California's "Made Whole Rule"

Kevin Bush — Tue, 24 Nov 2009 10:57:38 -0500

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

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

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

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

Analysis of Katrina Opinion re: MRGO Claims

Elliott Feldman — Fri, 20 Nov 2009 09:29:10 -0500

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."

Claimants 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

Elliott Feldman — Mon, 16 Nov 2009 13:40:56 -0500

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

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

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

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

Economic Loss Doctrine Broadened in Tennessee

Leslie Hulburt — Tue, 10 Nov 2009 13:31:02 -0500

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

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

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

Creating component part exceptions. (California)
Confining the doctrine to products liability or very similar situations. (Florida);
Statutorily providing for new home warranty laws against construction defects.(Connecticut, Indiana, Louisiana, Maryland, Minnesota, Mississippi, New Jersey, New York, and Virginia);
Statutorily providing for notice and right to repair and associated actions (California, Nevada);
Finding that builders have a duty in tort to act without negligence in the construction of residences (Colorado, South Carolina), or
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.

Chinese Drywall Litigation: Preservation of Evidence

Joshua Goodman — Thu, 05 Nov 2009 17:07:48 -0500

On June 15, 2009, a special panel on multidistrict litigation ordered 10 federal cases involving liability for allegedly defective Chinese manufactured drywall consolidated in the U.S. District Court of the Eastern District of Louisiana with Judge Eldon E. Fallon. It was also ordered that another 67 liability actions involving allegedly defective Chinese manufactured drywall pending in other federal districts, and any other related state or federal action, be treated as potential tag-along actions and consolidated in the same court.

This procedure, referred to as multidistrict litigation, is utilized in the federal court system to consolidate pending federal and state civil cases filed throughout the United States with common questions of fact. The consolidation allows one federal judge to manage, among other things, pretrial procedures, discovery, and dispositive motions. However, after all discovery and pretrial rulings, if issues remain to be tried, the case will be remanded back to the court where it was originally filed for trial.

Judge Fallon has entered a number of orders in the Chinese drywall multi-district litigation. One of interest was entered on October 9, 2009, as Pretrial Order No. 1(B). In that order, Judge Fallon sets forth the duties and obligations for the preservation of physical evidence that must be followed by all individuals in all jurisdictions.

In summary, all individuals and entities who have or intend to pursue claims relating to allegedly defective Chinese manufactured drywall must preserve certain portions of the defective drywall and the damaged property at their own expense. Parties are required to preserve multiple samples of the drywall, drywall end tape, HVAC coil material samples, plumbing component samples, electrical component samples, and other damaged property. All evidence must be photographed or videotaped. Photographs of the evidence should be taken before and after it is removed from the property and documented on a floor plan. Thereafter, all preserved evidence must be individually stored in double-bagged polyethylene zip-lock bags. The samples must be clearly labeled on the outside of one plastic bag and then placed inside the second plastic bag. The label should include the name and address of the property, the date the samples were taken, the type of evidence, and the location where the item was taken from within the property. Finally, the evidence must be stored in a reasonably climate controlled location and free of water or moisture.

The preservation of evidence is key to any claim involving damage to property. As such, anyone pursuing or intending to pursue a claim for damage caused by allegedly defective drywall should read and strictly comply with Pretrial Order No. 1(B).