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Five Random Thoughts About Subrogation Recovery

July 02, 2007 BY Paul Burke

I have had the opportunity to assist insurance carriers with subrogation recovery for many more years that I care to think about.  What follows are five "random thoughts" that I would like to share with you based upon my experiences as subrogation counsel.  Frankly, most of these experiences were bad ones.  My successes as a subrogation counsel tend to blur and fade away, but those times when I have been "burned" in a subrogation matter leave a far deeper impression and are the source of these random thoughts.  

First Random Thought:  Look for the "Waiver of Subrogation" Clause.

If you are not familiar with these things, let me explain.  A waiver of subrogation clause is exactly what it sounds like.  In more and more contracts now, the parties to the contract will agree that if one of them "screws up," they will let their insurance companies clean up the mess and agree that not only will they not sue each other about the mess, but they will make sure that their insurance companies won't either.

At first blush, this seems somehow to be basically wrong.  How can any insured possibly give away its insurer's subrogation rights, often without ever consulting the insurer.  The bad news (if you are the subrogating insurance carrier) or the good news (if you are a liability carrier) is that they can.

The truth is, the courts love these clauses.  They end litigation and courts like that a lot.  So the hard lesson here is to go looking for this waiver of subrogation language before you have invested a lot of time and resources into a potential subrogation claim.  If you are dealing with a dispute that involves commercial leases or construction documents, there's a 99% chance that there is a waiver of subrogation hiding in there somewhere. Save everybody a lot of time and trouble and go find it at the beginning.

Second Random Thought:  You Can't Always Get What You Paid . . .

Let's do this one by example.  A homeowner's carrier has a kitchen fire claim.  After diligent investigation, the carrier determines that the fire was caused by the heinous and easily provable manufacturing defects in the toaster oven .  The homeowner carrier pays the claim which includes the repair of the dwelling and replacing a good number of personal contents.  At the end of the day, $100,000 has been spent to repair the house and replace the damaged contents.

This is a slam dunk subrogation case and the carrier wants its $100,000 back.  The good news is that the proof is so solid, that the liability carrier for the toaster concedes liability and promptly offers to settle the claim for $66,000.  When you protest about this discounted offer, they seem surprised because they have offered you the maximum you can recover at trial.

They may be right.

When an insurance policy promises to replace damaged items with new items, they have done so because they have agreed to in an insurance contract.  However, when you then sue the wrongdoer for the damage caused by their bad conduct, under the laws of most states, you are only required to put the injured party back where they were before the fire happened.  In other words, in a lawsuit, you can't recover for the new dinette set youreplaced, you can only recover the value of the 10 year old dinette set.  Just because the policy required you to replace the goods, you are most likely not going to be entitled to the replacement cost value in a subrogation action.

Random Thought Three:  The Economic Loss Rule is Hopelessly Complicated.

There is this thing out there called the "economic loss rule."  I have a general understanding of it and I suspect that's about as good as anybody can hope for.  First, a little background on what the economic loss rule is.  In the middle of the last century, a revolution of sorts occurred in the commercial laws of this country.  The result of this "revolution" was the Uniform Commercial Code.  One of the features of this body of law is that it provided an elaborate framework for properly shifting the risk of damage to goods that were sold in this country.  One of the most common methods found in the commercial code for allocating these risks are warranties and limits of warranty.  The general thinking was that the two parties to a contract to buy a product should, in that contract itself, decide who bears the risk if the product does not perform in the way it is supposed to.

Now, let's take these principles and apply them in a subrogation case. 

Say, for example, you insure a large steam turbine that has recently been installed in a plant.  The steam turbine, unfortunately, does not perform properly and destroys itself.  The only real damage was to the thing itself. Under the economic loss rule, you will probably be limited to any recovery that is allowed by the sales contract - - i.e., the warranties.  The traditional remedies of negligence or strict liability will not be available since the thinking is that any risk of damage to the good itself were allocated in the contract.

If, in the process of destroying itself, it happens to destroy an entire building, those damages would not be covered by the economic loss rule (generally) since they could not have been properly accounted for in the contract for the sale of the goods. 

Thus far, this kind of makes sense.  Unfortunately, each state that has dealt with this has created many exceptions making the economic loss rule barely recognizable.  It is out there and if you are dealing with damages that are primarily to the product itself, you will probably have to unravel how it applies to your claim.

RANDOM THOUGHT FOUR:  Make Sure Your Insured is on Board.

Let's go back to earlier example.  There has been a kitchen fire and the homeowner's carrier has paid the claim. The carrier also brought in an expert who has found a clear defect in the toaster.  The toaster manufacturer, and this is much closer to reality, does not accept liability and you have to sue.  You've got your expert, you've got your evidence of damages (properly discounted for replacement cost), and you are ready to go.

What a nasty surprise when the lawyer for the toaster oven takes the deposition of the insured and the insured thinks your theory about the toaster oven is nonsense because he hasn't used the toaster oven in almost three months due to his commitment to the Adkins diet revolution. 

Even if you have brought the lawsuit in the name of the insurance carrier, the jury will find the actual insured's testimony extremely compelling.  Make sure they're kept in the loop and that they buy your theory.

Often, this problem is handled naturally because there may be uninsured damages and the insured may be participating in your lawsuit. 

RANDOM THOUGHT FIVE:  Be Kind To Your Arbitration Panel.

In many of your smaller claims, Intercompany Arbitration is going to be a method by which the claim is resolved.

One of the things we were taught in law school when preparing written arguments is to be kind to the judge.  In other words, make it easy.

Simply attaching a stack of claims documents, photographs, statements, and a generalized statement of claim is not being "kind" to the person(s) that will be deciding your arbitration claim. 

For example, if you have an expert report that supports your claim, you should not just refer the reader to the report.  Highlight that portion of the report (you may want to consider simply putting a tab on the relevant page) that supports your position.

If you have a recorded statement that supports your position, highlight and tab that portion of the statement that supports your position.  If you have substantial documents in support of your damages, highlight and tab any summary documents such as the statement of loss or proof of loss.  Make it easy and make it clear.

Again, all these examples come from bitter experience and I hope it will spare you some of the problems they have caused me.

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The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

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