Chapter 13 Subrogation and Salvage

• Library: The Commercial Property Insurance Policy Deskbook (ABA) (2018 Ed.)

CHAPTER 13 Subrogation and Salvage

Cases with Subrogation Potential

There is subrogation potential to the insurer on nearly every loss the adjuster investigates, no matter how slim the chances of collecting from the other party. The commercial property insured is required to work with and assist the insurer in perfecting its right of subrogation.

The adjuster must listen carefully to what the insured says when he or she tells the adjuster what happened. The adjuster will ask questions with subrogation in mind. The adjuster, while investigating a loss, will think about what the insured would do if the insured had no insurance. Whenever an insurer can recover, by subrogation, some or all of what it pays to the insured it is to the benefit of the insured since its loss ratio is reduced and the chances of its premium increasing after a loss is reduced.

The adjuster needs to always have in mind that if the wrongdoer is insured, the chances of collection increase logarithmically even if liability is slim because of the doctrine of comparative negligence. Some insurers, being highly practical businesspeople, will settle almost any case for the perceived cost of defending it. The adjuster should always be thinking about who, or what, is responsible for the loss. If possible, the adjuster should identify the wrongdoer's insurer since insurers are easier to negotiate with than individuals and corporations.

Although it is usually the obligation of an insurance adjuster to pay a claim, the adjuster must recognize that he or she is also a profit center for the insurer who, by developing a subrogation case, can reduce or eliminate the net loss paid by collecting from others. Failure to consider the person responsible for a loss is a failure of a major duty of a claims person.

The Fire Case as a Basis for Subrogation

Fires do not normally occur absent the negligence of some person. The adjuster must determine how the fire started, where the fire started, and why it spread. If the fire was caused by the negligence of the insured—as are most—there will be no opportunity for subrogation. If, on the other hand the fire is due to the negligence or intentional conduct of another, there is a potential for subrogation.

Hiring a fire cause investigator is a good investment in almost every fire case. If the insured did not accidentally or intentionally set the fire then the adjuster should be able to exercise the right to subrogation recovery.

If an insured clumsily tips over a candle and ignites his sofa you might think there was no subrogation possible. However, the adjuster must determine:

• Who designed and manufactured the candle?
• Was it safe for the clumsy insured to use?
• Who designed and manufactured the sofa?
• Was it too easy to burn and thus unsafe?
• Who placed the candle where the insured could knock it over? Did he or she breach a duty of care that would cause the insured to foresee a fire?

Leases as a Basis for Subrogation

Almost every lease of real or personal property imposes obligations on the lessee and provides rights to the lessor. An insurer may, under the right to subrogation, exercise the rights provided by a lease agreement. Therefore, a thorough claims investigation must include this agreement in every loss where the property is rented by or to an insured. The insured landlord or tenant should be prompt in providing the adjuster a copy of the lease covering the property where the loss occurred.

The lease usually tells, as between the lessor and the lessee, who is responsible for any casualty to particular pieces of property. The adjuster may find that another insurer, that of the lessor, also insures the tenants' improvements and betterments and is responsible under the lease for the cost to repair them. The lease may contain an express or implied waiver of subrogation. The adjuster must obtain all of the following:

• the full name of the insured and his capacity (an individual, corporate officer, employee, trustee or partner);
• the date, place, and facts of the loss;
• if a product is involved, the identity of the product, including its name, manufacturer, model number, serial number, and distributor;
• the remains of any potentially defective product, secured by an independent testing laboratory;
• photographs of everything;
• copies of all relevant contracts and policies of insurance;
• the names and addresses of all witnesses and any people involved with the origin of the loss even if they are not witnesses; and
• a recorded or signed statement from the insured and all witnesses.

After completing the investigation, the adjuster must report his or her conclusion as to the party or parties at fault. Since it will almost never be only one person or entity, the adjuster should estimate the percentages of fault attributable to each party. The adjuster must get a sworn proof of loss properly notarized or signed under penalty of perjury by the insured and a subrogation agreement that assigns to the company all of the rights of the insured against the third parties up to the amounts paid by the insurer.

If the adjuster cannot resolve the subrogation claim short of litigation, the information gathered should be given to a lawyer so that he or she may adequately pursue the rights of the insurer to subrogation in the courts. There are law firms who specialize in dealing with subrogation matters who have established relationships with various insurers and usually work on a contingency fee basis.

For the subrogation effort to be successful, the adjuster should hire his or her own expert for the case. If the adjuster joins with another adjuster representing a different party to hire an expert some courts will conclude that the insurer has waived the work product protection and require that the reports be disclosed to all defendants.

Sometimes the reports of the original expert are less than adequate and can be kept from the defendants by exercise of the work product protection. If the adjuster shares the expert with other insurers the adjuster may compel the lawyer to disclose information that, because it was written early in the investigation, may be wrong and/or unfavorable to the insurer's cause.

The adjuster should not let the expert write a report unless it is totally favorable to the case. If the report is unfavorable, the expert should be advised not to write a report. The expert can then be declared to be a consultant and cannot, as a result, be hired by the other side. His or her opinions will be protected work product that cannot be discovered. The expert may have made a mistake or was incompetent for the task assigned.

By making the expert a consultant, the insurer has the opportunity to get a more competent expert. There is no duty of good faith to tortfeasors. The insured, if he was not insured, would have no obligation to tell a third party responsible for his injury that he had a poorly written expert report that helps the other side. Regardless, the adjuster must analyze the viability of the subrogation case and if not viable or if a competent expert tells the adjuster there is no case, subrogation attempts should be abandoned.

The adjuster must preserve the evidence before letting the salvage be carted away. The salvage remaining after a loss can be extremely valuable in establishing the cause and extent of loss and could be needed to prove a subrogation case. That portion of the salvage that relates to the cause of loss should be preserved carefully so that it is available to prove the insurer's case in court. Allowing such evidence to be disposed of after a loss can give rise to a suit for spoliation of evidence that could expose the insured and the insurer to claims for damages.

The adjuster should speak with the official investigators. The opinions of official investigators, like an arson investigator, may provide an unbiased expert opinion that will carry more weight with a lay jury than an expert who is paid a fee for his or her opinions. The opinions of the official investigators also provide a means to weigh and evaluate the opinions of private experts.

The adjuster should not let the insured release the liability of anyone who may be responsible for the damage to the property that is the subject of the insurance. The adjuster can explain to the insured that once the claim is paid, the insurer has the right to subrogation, and if the insured deprives the insurer of its right of subrogation the insured can find itself with no coverage at all. If the insured signs a release after the loss, the insurer—whose subrogation rights are derivative only—can lose the right of subrogation.

In California, for example, the Court of Appeal in Liberty Mutual Insurance Co. v. Altfillisch Construction Co.¹ held that an insured was required to return to the insurer the money paid because it released the responsible party without permission and deprived the insurer of its right of subrogation.

Some policies of first party property insurance allow an insured to waive the right of subrogation before the loss to anyone. Some policies allow the insured to waive the right of its insurer to subrogation after the loss to certain classes of individuals like tenants. If the insured waives subrogation within the rights provided by the policy, the insurer can close its file—it has given away all rights to subrogation and cannot succeed.

A Vermont court found that

1. a waiver-of-subrogation provision in construction contract did not violate public policy despite allegation of gross negligence;
2.

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