Subrogation has its roots in the equitable notion that the party who in good conscience is responsible for a loss should pay for the loss. Property insurance policies provide the natural opportunity for accomplishing that goal when a loss is caused by a third party and, absent insurance, that third party is liable under the law for the damage caused to the injured party.
Property insurers handle thousands of claims per year, and most of them will not involve potential third-party responsibility. Nevertheless, claims professionals must remain vigilant as a missed subrogation opportunity on any loss, especially a large loss, impacts recoveries. Using a hypothetical loss with certain facts will help us demonstrate how subrogation can be the land of missed opportunity.
Old School v. New School
There is a large fire at a multi-tenant warehouse built in the 1960s that causes substantial damage to the building itself and all of the tenants. The fire occurred on a summer night during a severe thunderstorm and there are reports in the news and on line that it was caused by lightning. According to the reports, the fire chief stated that the fire spread rapidly and the local fire department had to pull out of the building and take a defensive “surround and drown” approach to keep the neighboring buildings from catching fire.
The fire marshal reported that witnesses stated there was lightning in the area during the fire. One of the tenants in the building is insured by Old School Insurance Company. Another tenant is insured by New School Insurance Company. Both tenants promptly report the loss to their property insurance carriers. The insurers take opposite approaches.
The adjuster for Old School is pre-occupied from the outset by an aggressive insured and an even more aggressive public adjuster (PA). He is responding to the insured and the PA so he quickly looks at the news reports, goes to the loss scene, interviews the insured owner, and advises the company that he does not think there is any subrogation. He bases that recommendation on the reports that lightning caused the fire (and you cannot subrogate against God), the building is more than 50 years old (so there are likely statute of repose issues) and the lease appears to have contractual provisions—such as exculpatory clauses or waivers of subrogation—that will limit or preclude recovery. As a consequence of all of the above, he does not see any subrogation prospects or the need to hire an expert. The company agrees and closes the subrogation investigation.
The adjuster for New School decides to immediately retain an origin and cause investigator and subrogation counsel to handle the potential third-party liability issues while he focuses on the adjustment. The following possibilities demonstrate the consequences for the two different paths chosen by the insurers.
Consider Subrogation Immediately
By not hiring an independent origin and cause expert directly, or through counsel, Old School has failed to timely investigate the loss and potentially lost the opportunity to identify and preserve evidence. Public sector fire investigators can be an asset depending upon their findings in a particular case, but the prudent course of action is to retain independent investigators as early as possible. The number one reason potential recoveries are lost is the failure to identify and preserve evidence necessary to prove third-party responsibility. The timely investigation of the loss site and preservation of evidence are fundamental to successful subrogation. The fire itself altered the scene and the evidence, but an early, detailed, and coordinated investigation to determine what happened, place potential parties on notice so they can participate, and to identify and preserve key evidence are crucial first steps.
Retain the Right Experts
The experts must be qualified. The only thing worse than no investigation is a poor one. Almost all fire cases start with origin and cause experts. The National Fire Protection Association (NFPA) publishes a guide for fire and explosions, NFPA 921, with which competent investigators, both private and public sector, must be familiar. Other, more specialized, experts such as electrical engineers, mechanical engineers, materials engineers, etc. can and should be brought in as needed once the cause is determined. Twenty years ago, the United States Supreme Court changed the landscape for expert testimony. Any expert retained may face challenges to his or her credentials and methodology if the case proceeds to litigation in federal or state court. Taking the proper steps early can alleviate potential problems later after significant resources have been spent.
Place Parties on Notice
As soon as it becomes apparent that there are potentially responsible parties involved, they should be put on notice and given a reasonable time to view the scene. Most cases will involve some level of initial investigation to identify potentially responsible parties but the longer you wait to place them on notice the greater risk you run of a charge that you altered or spoiled the evidence and are subject to possible sanctions. While every case is different, the closer the scene is to the way you found it, the better.
All lawyers in the country involved in litigation are aware of the word “spoliation.” The doctrine has exploded in the last 30 years. Research discloses that from 1970 to 1980 less than 100 judicial opinions mentioned that term. From 1980 to 1990, it grew slowly to 147 opinions. From 1990 to 2000, it jumped to 887 opinions and from 2000 to 2010, it exploded to 4,257 judicial opinions where “spoliation” was mentioned.
Identify and Preserve Evidence
The final step in this critical first stage is identifying and preserving the relevant evidence to prove your theory. It also may have to include the other potential sources of ignition excluded by your expert or the fire marshal as the cause of the fire. Photographs and videotape of the scene as first found and during the investigation are important but may not substitute for actual notice to a defendant if the defendant can prove it should have been placed on notice before the scene was altered.
Issues can—and will—arise about what evidence should or must be preserved and who will bear the costs. Attention should be placed on chain of custody to reduce the risk that an opponent can raise about the evidence’s authenticity. Working through the issues is better than ignoring them and hoping to avoid a spoliation motion or sanctions.
Navigate Legal Hurdles
Contracts, including lease agreements, often contain clauses that attempt to preclude or limit claims against one or both parties to the contract. In many cases, the limitation language, exculpatory clause, or waiver of subrogation may well apply. Nevertheless, the language must be carefully reviewed as such contractual attempts to reduce or eliminate responsibility are not favored by the law and may be avoided or circumvented if the proper language is not used, then the party attempting to enforce the terms itself has violated the agreement, there is gross negligence or other special circumstances.
Obtaining all the relevant documents such as contracts and warranties is an important part of the process for gathering evidence and there will be cases that cannot be pursued because of such contractual limitations. The decision whether to forego subrogation should be made after all of the relevant documents are obtained and reviewed in the context of the facts that gave rise to the incident.
Explore All Theories
There are cases where the initial cause of the loss cannot be determined or, if determined, is not the responsibility of a third-party but there is evidence that the fire should have been contained such that there is a potential claim for its spread. Such cases typically involve fires with alarm or sprinkler issues, storage or use of combustible or highly flammable materials, failure to follow applicable building codes, or failure to properly take care of a vacant building or area of a building. It may not be necessary to prove how the fire started in such cases but that the fire damage would have been less if the potential defendant had acted reasonably.
With respect to alarm or extinguishing systems, it is even possible that the fire may have been the fault of the plaintiff but the proper operation of the system would have resulted in a small fire with minimal damage rather than the catastrophe that ensued because of the failure of the extinguishing system. All potential theories of liability for a large loss should be explored, which include the enhancement or spread of the damages even if the cause of the loss is undetermined or not the responsibility of a third party.
Is There Potential Subrogation?
Returning to our hypothetical, it turns out that the investigation performed by New School’s origin and cause investigator revealed that while constructed in the 1960s, the warehouse was converted to its present use nine years ago by a reputable general contractor. The fire started in the space of a tenant whose employees were operating a new machine, not lightning. There had been issues with the fire detection and sprinkler systems in that tenant’s space which had been brought to the attention of the landlord.
The fire spread rapidly because of issues with the sprinkler system and wall coverings that may not have been properly treated were in that space. As a result of the investigation, New School placed the following parties on notice of a potential claim and invited them to the loss site: the landlord, the tenant where the fire started, the manufacturer of the machine being used, the general contractor of the conversion of the building, and the contractor who installed the wall coverings.
A date was set after all parties were placed on notice for anyone who was interested, or their liability carrier, to send representatives to the loss scene to take photographs and identify any evidence that party wanted to preserve. Arrangements were thereafter made to have electrical engineers examine the machine for a potential product defect. Samples of the wall coverings were retained and exemplars obtained for testing. Numerous photographs and videos were taken of the loss scene and the evidence during the inspections.
There is no guarantee that New School Insurance Company will obtain a subrogation recovery by way of settlement or a verdict based upon the above facts but Old School Insurance Company likely missed its chance at a potential recovery.