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

2012 was significant for decisions impacting property damage andworkers' compensation subrogation. Several state Supreme Courts andFederal Circuit Courts tackled everything from immunity to repaircosts that will affect subrogation claims for years to come. Hereis a brief look at these decisions and the potential futureimplications for claims professionals.

Immunity from Subrogation
This year was aparticularly active one for courts addressing immunity insubrogation cases. In 2012, two Federal Circuit Courts wrestledwith governmental immunity for subrogation claims, and thePennsylvania Supreme Court held that Pennsylvania state, county andmunicipal 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 ImmunityAct (FSIA) as it applies to subrogation claims against foreigngovernments in USAA Casualty v. Permanent Mission of theRepublic of Nambia. The court looked at whether foreigngovernments are immune under the FSIA for subrogationproperty-damage claims caused by a foreign government's violationof New York City building codes.

The FSIA provides that foreign governments are generally immunefrom jurisdiction, and hence liability, within the United Statesunless a specific exception to FSIA's broad immunity applies. Amongothers, the exceptions include tortious activity, unless the tortis committed as part of discretionary activity.

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

Government Agencies
In Re: KatrinaCanal Breaches Litigation, the Fifth Circuit (binding onDistrict Courts in Texas, Louisiana and Mississippi) tackled U.S.federal tort immunity as it applies to property claims against theU.S. Army Corps of Engineers for claims arising out of HurricaneKatrina. In September 2012, in a surprise reversal of its previousdecision in March 2012, the Fifth Circuit expanded tort immunityfor the U.S. Army Corps of Engineers.

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

The Fifth Circuit decision has potentially broadimplications for government immunity cases going forward. Since thecourt interpreted the Federal Tort Claims Act, the Fifth Circuit'sruling will apply not only to flood claims against the U.S. ArmyCorps of Engineers but also to other types of claims againstfederal agencies. Moreover, since many state tort claims acts aremodeled after the Federal Tort Claims Act, claims professionals canexpect to see an increase in federal and state agencies assertingimmunity—arguing that the activity that caused the loss involved adiscretionary act, and therefore the government is immune.

As a result, if faced with a potential claim against agovernment agency, it is critical to identify whether the agencyinvolved violated a statute or regulation. The first step is toretain experts who are knowledgeable about statutes and codes. Suchexperts can assist in determining if, in fact, the government'saction violated a statutory or regulatory requirement. This canhelp build the argument that the governmental activity wasnondiscretionary and will subject the government to tort liabilityfor violating those requirements.

Immunity was also an issue on the workers' compensation side.The Supreme Court of Pennsylvania held that a 1993 amendment toPennsylvania's workers' compensation statute provided completeimmunity to government actors for related subrogation claims inFrazier v. WCAB (Bayada Nurses Inc.). Afterinterpreting conflicting provisions in the statute, the court ruledthat a workers' compensation insurer has no subrogation rightsagainst a negligent government actor. Moreover, the court also heldthat the workers' compensation carrier has no lien rights from aclaimant's settlement with a government agency. For claimsprofessionals, this means that workers' compensation carriers forprivate employers may not subrogate against state, county andmunicipal actors.

Property Damage Repair
Two state SupremeCourts addressed property damages this year. The Georgia SupremeCourt addressed insurance coverage for stigma damages in RoyalCapital Development, LLC v. Maryland Casualty Company. Stigmadamages involve the potential loss of market value of property evenafter the property is fully repaired because of the stigmaassociated with the property damage. Numerous states havedisclosure laws requiring sellers of real estate and personalproperty to reveal prior damage. Arguably, the property's marketvalue is less after the repairs because the property owner has todisclose the prior loss at the time of sale.

In Royal Capital, the insurance carrier paid for thecost to repair a commercial building to its pre-loss physicalcondition. However, the insurer denied coverage for the allegedloss of value the insured was claiming due to the stigma associatedwith the building's damage and subsequent repair.

The Georgia Supreme Court ruled that stigma damages are validsince the purpose of an insurance policy is to place the insured,as nearly as possible, in the same position they would have been inwithout the damage. The court wrote “recognition of diminution invalue as an element of loss to be recovered on the same basis asother elements of loss merely reflects economic reality…the measureof damage…is intended to place an injured party, as nearly aspossible, in the same position they would have been in had theinjury never occurred.”

The Royal Capital decision is likely to spur anincrease in coverage claims for stigma damages. To the extent thatan insured alleges stigma damages, claims professionals will likelyhave to undertake the standard cost of repair analysis and mighthave to engage valuation professionals to determine if the propertysuffered stigma damage. 

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

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

The Supreme Court of Texas held that repair estimates, repairbills and invoices are not sufficient evidence that the repaircosts were “reasonable and necessary.” In so doing, the courtexpressly rejected the argument that the repair estimates wereinherently reasonable because they relied on a widely usedinsurance program for estimating losses.

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

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

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

Like 2012, 2013 is poised to be an equally eventful andimpactful year that could change the landscape for subrogationactions.