(Editor's Note: This article was contributed by William N. Clark, Jr., a member of the subrogation and recovery department at Cozen O'Connor.)

2012 was significant for decisions impacting property damage and workers' compensation subrogation. Several state Supreme Courts and Federal Circuit Courts tackled everything from immunity to repair costs that will affect subrogation claims for years to come. Here is a brief look at these decisions and the potential future implications for claims professionals.

Immunity from Subrogation
This year was a particularly active one for courts addressing immunity in subrogation cases. In 2012, two Federal Circuit Courts wrestled with governmental immunity for subrogation claims, and the Pennsylvania Supreme Court held that Pennsylvania state, county and municipal governments are immune from liability for workers' compensation subrogation claims.

The Second Circuit (binding on District Courts in New York, Connecticut and Vermont), addressed the Federal Sovereign Immunity Act (FSIA) as it applies to subrogation claims against foreign governments in USAA Casualty v. Permanent Mission of the Republic of Nambia. The court looked at whether foreign governments are immune under the FSIA for subrogation property-damage claims caused by a foreign government's violation of New York City building codes.

The FSIA provides that foreign governments are generally immune from jurisdiction, and hence liability, within the United States unless a specific exception to FSIA's broad immunity applies. Among others, the exceptions include tortious activity, unless the tort is committed as part of discretionary activity.

The Second Circuit held that the foreign government had a duty to comply with New York City building codes when it renovated a townhouse used as a mission to the United Nations. The Republic of Nambia could not delegate the duty to comply with New York building codes to its construction contractors. Finally, the court held that while the decision to renovate a structure is discretionary, once a foreign government decides to undertake a construction project, compliance with building codes is mandatory, and the foreign government is not immune and is subject to jurisdiction in the United States. This could open the door for cases against foreign governments and their agencies for violations of construction and building codes.

Government Agencies
In Re: Katrina Canal Breaches Litigation, the Fifth Circuit (binding on District Courts in Texas, Louisiana and Mississippi) tackled U.S. federal tort immunity as it applies to property claims against the U.S. Army Corps of Engineers for claims arising out of Hurricane Katrina. In September 2012, in a surprise reversal of its previous decision in March 2012, the Fifth Circuit expanded tort immunity for the U.S. Army Corps of Engineers.

First, the Fifth Circuit held that the U.S. Army Corps of Engineers and other federal agencies enjoy almost absolute immunity for flood damages resulting from flood control projects under the Flood Control Act of 1938. Second, the court held that U.S. Army Corps of Engineers enjoys broad immunity for non-flood control projects that result in flood damages. The only exception is for non-discretionary activities, namely violations of clear statutory and regulatory responsibilities.

The Fifth Circuit decision has potentially broad implications for government immunity cases going forward. Since the court interpreted the Federal Tort Claims Act, the Fifth Circuit's ruling will apply not only to flood claims against the U.S. Army Corps of Engineers but also to other types of claims against federal agencies. Moreover, since many state tort claims acts are modeled after the Federal Tort Claims Act, claims professionals can expect to see an increase in federal and state agencies asserting immunity—arguing that the activity that caused the loss involved a discretionary act, and therefore the government is immune.

As a result, if faced with a potential claim against a government agency, it is critical to identify whether the agency involved violated a statute or regulation. The first step is to retain experts who are knowledgeable about statutes and codes. Such experts can assist in determining if, in fact, the government's action violated a statutory or regulatory requirement. This can help build the argument that the governmental activity was nondiscretionary and will subject the government to tort liability for violating those requirements.

Immunity was also an issue on the workers' compensation side. The Supreme Court of Pennsylvania held that a 1993 amendment to Pennsylvania's workers' compensation statute provided complete immunity to government actors for related subrogation claims in Frazier v. WCAB (Bayada Nurses Inc.). After interpreting conflicting provisions in the statute, the court ruled that a workers' compensation insurer has no subrogation rights against a negligent government actor. Moreover, the court also held that the workers' compensation carrier has no lien rights from a claimant's settlement with a government agency. For claims professionals, this means that workers' compensation carriers for private employers may not subrogate against state, county and municipal actors.

Property Damage Repair
Two state Supreme Courts addressed property damages this year. The Georgia Supreme Court addressed insurance coverage for stigma damages in Royal Capital Development, LLC v. Maryland Casualty Company. Stigma damages involve the potential loss of market value of property even after the property is fully repaired because of the stigma associated with the property damage. Numerous states have disclosure laws requiring sellers of real estate and personal property to reveal prior damage. Arguably, the property's market value is less after the repairs because the property owner has to disclose the prior loss at the time of sale.

In Royal Capital, the insurance carrier paid for the cost to repair a commercial building to its pre-loss physical condition. However, the insurer denied coverage for the alleged loss of value the insured was claiming due to the stigma associated with the building's damage and subsequent repair.

The Georgia Supreme Court ruled that stigma damages are valid since the purpose of an insurance policy is to place the insured, as nearly as possible, in the same position they would have been in without the damage. The court wrote “recognition of diminution in value as an element of loss to be recovered on the same basis as other elements of loss merely reflects economic reality…the measure of damage…is intended to place an injured party, as nearly as possible, in the same position they would have been in had the injury never occurred.”

The Royal Capital decision is likely to spur an increase in coverage claims for stigma damages. To the extent that an insured alleges stigma damages, claims professionals will likely have to undertake the standard cost of repair analysis and might have to engage valuation professionals to determine if the property suffered stigma damage.

It is clear from the Royal Capital and other stigma damages cases decided in the last few years that claims for stigma damages are viable. It remains to be seen if carriers will pay stigma damages and seek recovery in subrogation claims. Regardless of whether stigma damages are uncovered losses and part of insured claims for uninsured losses, claims professionals have to ensure that the stigma damages are properly documented during first-party adjustment in order to maximize the ability to recoup stigma damages.

While the Georgia Supreme Court potentially opened the door for increased damages in Royal Capital, the Texas Supreme Court raised the evidence requirements for proving property damages in Hennan v. McGinty. The case involved water damage to a home and claims for the cost of repairs. The homeowner presented evidence from an expert who used a computer program that was “widely used in the insurance industry” as the basis for his repair cost estimates.

The Supreme Court of Texas held that repair estimates, repair bills and invoices are not sufficient evidence that the repair costs were “reasonable and necessary.” In so doing, the court expressly rejected the argument that the repair estimates were inherently reasonable because they relied on a widely used insurance program for estimating losses.

Based on this decision, computer-generated estimates and even actual repair bills, without specific testimony that the repairs were reasonable and necessary, are no longer sufficient evidence to prove damages in property-damage subrogation cases in Texas. Regrettably, the court did not provide instruction or clarification as to what evidence is needed to prove that damages are reasonable and necessary. Claims professionals should be prepared to defend the cost of repairs by documenting why the repairs were necessary to fix the property and why the cost of repairs were reasonable under the circumstances involved in each case.

Whether deciding governmental immunity defenses, or the measure of damages or the standards of proof required to establish the cost of repair, these top 2012 court cases underscore new challenges and opportunities for claims professional seeking recovery.

Looking Ahead
2013 will bring major subrogation case rulings with the U.S. Supreme Court slated to decide the fate of subrogation for health insurers under the Employees Retirement Security Act in U.S. Airways v. McCrutchen. The Second Circuit will also revisit the Foreign Sovereign Immunities Act in In Re Terrorist Attacks on September 11, 2001. The court will decide a broad spectrum of appeals arising from litigation against alleged foreign sponsors of al Qaeda, brought by both victims of the September 11 attack and property insurers that paid in excess of $4 billion for property and economic losses. Among other things, the court will decide the legal issues surrounding the Sovereign Foreign Immunities Act and Fifth Amendment Due Process in the context of the events of September 11, 2001 and largely define the standards governing whether parties injured as a result of a terrorist attack on U.S. soil may hale foreign sponsors of terrorism, including foreign governments, into U.S. courts to answer for their conduct.

Like 2012, 2013 is poised to be an equally eventful and impactful year that could change the landscape for subrogation actions.

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