Articles

Subrogation Arising Out of Catastrophic Weather Events -- Is God Solely to Blame?

by John R. Schleiter | 10.14.2004

Large catastrophic events, although true crises, are capable of presenting significant subrogation opportunities. Hurricanes, floods, and wildfires are just a few of the events which create such opportunities. Unfortunately, many times these opportunities are overlooked in the insurance industry, summarily deemed to be the result of an Act of God.

When dealing with catastrophic events, the question is not “if” such an event will occur, but, rather, “when” such an event will occur. Weather related catastrophes are an annual certainty. Consequently, insurers need to be ever vigilant in their preparation for such catastrophic events so that they will be ready to immediately respond from a subrogation perspective.

The purpose of this article is to identify the types of events which may lead to a subrogation recovery, both on a large scale and a small scale. We will also set forth a proposed course of action which carriers may adopt to advance the prompt and efficient investigation of resulting losses so as to not prejudice subrogation potential.

Picking the Winners

When evaluating claims arising out of catastrophic events for subrogation potential, one must consider whether the underlying cause of the resulting damage can be partially attributed to the negligence of a third party. In other words, is there a third party whose negligence combined with the natural phenomenon in such a way as to cause or increase the damage. The following are but a few of the many examples of avenues for subrogation identified and pursued resulting from damages occasioned by catastrophic events.

Significant Rain Events

In July, 2003 a rainstorm which was categorized by the local media as a “100-year storm” passed through Romeoville, Illinois causing significant property damage. One such casualty was the collapse of the roof of a 500,000 square foot warehouse which resulted in more than $10 million in damages. The roof collapsed from the weight of the water which accumulated due to the inability of the roof drains to handle the amount of water produced by the storm over such a short period of time.

Despite the initial impression that the cause of the collapse was the massive rain event, investigators were retained by the involved property insurers to look further into the cause of the collapse. This decision was made for two reasons. First, the warehouse was only a year old. Second, the building was located in an office park wherein most other similar buildings in the park did not sustain any roof damage as a result of the storm.

Experts from a meteorological consulting firm were retained and confirmed that while significant, the cell which passed over the Romeoville area did not qualify as an “official” 100 year storm. A review of the local building codes and regulations revealed that buildings must be constructed with water remediation systems capable of withstanding rains “up to” a 100 year storm. Consequently, subrogation efforts were initiated against those involved in the design and construction of the building.

Back-up of Sewers & Drains

In the summer of 2000, floor drains in an athletic facility located at a University in Chicago backed up following a rain storm. The back-up resulted in the destruction of a recently installed wood gymnasium floor. Since several of the neighboring businesses and homeowners experienced significant basement flooding, the initial subrogation assessment could have been that the cause of the loss was an Act of God.

A further investigation was conducted and it was discovered that the University recently contracted for the installation of a system to control the flow of water from the athletic facility’s gutters into the city’s storm sewers. The purpose of the system was to avoid overwhelming the city sewers. However, a critical component of the system was defectively designed and installed. This defective workmanship was deemed a concurrent cause of the loss, and subrogation was pursued against the contractor responsible for the design and installation of the defective component.

Wind Storms

In the summer of 2003, a microburst occurred in Chicago generating winds in excess of 100 mph. A large refrigerated warehouse fell victim to the storm. The roof of the warehouse blew off and the walls collapsed.

Following the storm, certain of the refrigerated and/or frozen items being stored in the warehouse became spoiled as a result of ambient temperatures in excess of 90_ F – temperatures common in Chicago during the month of July. Analysis of meteorological data regarding the velocity of the winds led to the conclusion that the building was not, per se, constructed in violation of local building codes. Further, the building was several decades old. Therefore, even assuming, arguendo, a defect in the initial construction of the building, the age of the building would result in an action against the entities involved in the initial design and construction of the building being summarily dismissed due to the governing statute of repose.

Despite the foregoing, black-letter bailment law provides that when bailed property is lost or damaged while in the bailee’s (warehouseman’s) possession, the bailee is presumed negligent. Thus, it is the burden of the bailee to prove that it acted with due care under the circumstances. In the case at issue, through further investigation it was learned that immediately following the occurrence, certain of the bailors made demand upon the bailee for access to the building to retrieve their foodstuffs. Access was denied. Moreover, the bailee took it upon itself to transport certain of the foodstuffs to other warehouses owned by the bailee. The bailee would not have exercised due care and caution in the transport of the foodstuffs if they were at any point in time out of temperature during such transport. Consequently, subrogation efforts were initiated against the owner of the warehouse seeking in excess of $1 million in damages.

Wild Fires

In May 2000, a wild fire ravaged out of control and burned 50,000 acres in northern New Mexico, destroying hundreds of homes. The fires near Los Alamos were set by the National Park Service as a controlled burn. However, the incipient fire quickly spread out of control.

Following the fire, insurance companies made claims for subrogation to the Federal Emergency Management Agency (FEMA). FEMA responded to these claims by, in most cases, reimbursing the insurers for losses sustained by their insureds. By pursuing subrogation efforts beyond a hasty conclusion that the losses were the result of a wild fire, several insurers were able to recover in the aggregate millions of dollars.

Surface Flooding

In 1993, a naturally occurring flood along the upper Mississippi River covered parts of nine states, lasted three months, and caused an estimated $21 billion dollars in damages. As the flood waters rose, over 1,300 new automobiles being stored at an outdoor railway storage facility in Kenosha, Wisconsin fell victim to the rising waters. The car manufacturer submitted a claim to its insurer, which ultimately paid over $11 million.

Since the flood was the result of the “storm of the century,” surely there was no subrogation potential. Luckily for the insurer’s sake, during a quarterly file review of closed subrogation files, an adept examiner had a hunch otherwise. The examiner learned of a prior flood event in the area years earlier. A hydrological study was performed which, together with an analysis of topographical surveys, revealed that the vehicles may have been stored on a 100-year floodplain.

Based on this information, suit was commenced against the owners of the land on which the vehicles were stored. Discovery resulted in the production of certain contractual documents between the car manufacturer and the owners of the land which contained provisions discussing requisite drainage requirements for the land. Ultimately, the land owner admitted that parking $17 million dollars worth of automobiles on a floodplain was in breach of the drainage provisions, and agreed to paying a high seven-figure settlement to the plaintiffs.

“Smaller” Claims

Claims which are “smaller,” in terms of indemnity dollars, resulting from storm related events must also be considered for subrogation potential. The following are but a couple of the more common occurrences which may result in a reasonable basis to pursue subrogation.

This day and age, surge suppressors are common in many households. The purpose of these devices is to arrest high voltage spikes and prevent the resulting surge from damaging the electrical appliance plugged into the suppressor. Many times, lightening results in such spikes. If the suppressor fails, the surge may result in damage to the downstream electrical item. If this item is large enough for the homeowner to submit an insurance claim – say, for example, a plasma television – the failure of the surge suppressor may result in a successful subrogation recovery.

Another common occurrence out of which subrogation must be considered is hail storms. Every summer in the Midwest, hailstorms damage hundreds of homeowners’ roofs. Very rarely is subrogation considered for claims resulting from a hail storm. However, such a conclusion should not be so hastily reached.

Perhaps the easiest way to identify possible subrogation arising out of hail damage is to have the claims adjuster determine whether neighboring roofs sustained a similar degree of damage. If, for example, one roof in a residential subdivision sustained significantly greater damage than other nearby roofs, a concurring cause of the damage may very well be faulty roofing materials, or the improper installation of those materials. We have seen this being the case not only with asphalt shingles, but also with other types of roofing materials, such as rubber membrane roofs.

Act Now – Act Fast

Too often, the opportunity knocks, but by the time you push back the chain, push back the bolt, unhook the two locks and shut off the burglar alarm, it's too late. --Rita Coolidge, Singer

In all of the above examples, the need for fast action in the investigation of subrogation potential is a pre-requisite to maximizing subrogation potential. From a recovery standpoint, two of the most troublesome issues are statutes of repose and evidence preservation. Of course, these two issues are far from being the only issues, and, therefore, as discussed in further detail below, it is prudent for the insurer to enlist the assistance of outside consultants and/or attorneys to assist in the timely identification of such potential pitfalls.

Statutes of Repose

The difference between a statute of limitation and a statute of repose is the point from which the limitation of time is measured. Statutes of limitation begin at the date of injury or the discovery of the deficiency. Statutes of repose, as they relate to deficiencies in improvements to real property, begin to run from the date of substantial completion of the improvement.

Consider for sake of example high winds resulting in structural damage to a building. If it is concluded that a concurrent cause of the damage was the defective construction of the building, there may be a basis to pursue a subrogation action against those involved in the construction of the building. One potential bar to such an action would be a governing statute of repose. If the involved jurisdiction has a statute of repose - for example a 10 year statute of repose - and construction of the building was substantially completed on July 15, 1996, the resulting subrogation action must generally be filed on or before July 15, 2006. Assuming an unconditional 10 year period of repose, the statute expires on July 15, 2006 regardless of when the loss occurs.

The most problematic situations occur when a statute of repose is close to expiring. It is not uncommon for a loss to occur mere days prior to the expiration of a repose statute. The period of time between the substantial completion of the building and the expiration of the statute is the amount of time counsel will have to complete his or her investigation into causation and prepare and file the necessary suit papers. Therefore, it is critical that the age of the involved building immediately be identified.

Evidence Preservation

Catastrophic losses also present problems relating to evidence preservation. Once damaged buildings are demolished, so too is the best evidence of defective workmanship, materials or design. Such evidence is critical in that it is necessary to support the concurring causal connection between the negligent improvement and the resulting damage.

Plan Your Attack in Advance

The above examples of statutes of repose and evidence preservation are, perhaps, the most significant and most common hurdles one must overcome so as to not immediately jeopardize subrogation potential. However, one would be remiss to believe that they are the only hurdles. There are a myriad of other issues which need to be addressed and considered very early on following the claim submission which are of tantamount importance as far as subrogation is concerned.

Therefore, the insurer must have a plan in place in advance of catastrophic storm events which sets forth an efficient and effective way to evaluate the subrogation potential of resulting claims. This plan must not heavily rely on overwhelmed field adjusters. The field adjuster’s primary concern is the handling of the massive volume of claims.

We submit that if an insurer is serious about capitalizing on subrogation following catastrophic events, that it should assign to one person the role of being in charge of catastrophic loss subrogation investigations. Logic would dictate that the subrogation “manager” be appointed long before the catastrophe occurs.

At the start, the manager’s goal should be to identify one claim with subrogation potential out of all those submitted in a geographic area which experienced a catastrophic storm. As this manager becomes more familiar with efficiently and effectively identifying the types of catastrophic claims which may possess subrogation potential, it should logically follow that the number of viable subrogation claims he or she is able to identify will increase.

An alternative to considering all claims submitted would be to consider only those over a certain dollar amount. Although the insurer would be only considering a small fraction of the total claims submitted, because the claims it is considering involve significant dollars, it stands to reason that the size of any resulting subrogation recovery would make up for the diminished number of claims considered.

The subrogation manager will, of course, be dependent on the adjuster to convey certain basic information regarding claims. The manager will be able to efficiently process this information since, as opposed to the adjuster, he or she is not involved in the adjustment process. Attached to this article as Exhibit A is an exemplar form which the adjuster could electronically submit to the subrogation manager for the claims he or she is adjusting.

Many claims will be quickly ruled in or ruled out based on their not meeting certain threshold factors. One such critical factor is age of the building. If the age of the building falls outside the governing statute of repose, no further subrogation consideration need be given to the claim.

Another significant entry on the form is the adjuster’s observation as to whether neighboring buildings sustained damages. If, for example in the situation of a hurricane, there were two neighboring, but not adjoining, strip malls on the same stretch of road, and only one of the malls sustained structural damage, this “pattern” may indicate that a concurring cause of the damage was a defect in the design or construction of that particular mall.

Once the subrogation manager has identified the set of claims which may possess subrogation potential, the prudent course of action would be to contact an outside attorney for assistance in the further investigation of subrogation potential. The attorney can, in turn, enlist the assistance of a structural engineer, civil engineer, or mechanical engineer to assist in the further investigation.

Conclusion

In summary, losses resulting from catastrophic events should not be quickly and summarily dismissed as resulting solely from an Act of God. Further investigation may uncover a concurrent cause, such as the negligence of a contractor or product manufacturer. The contractor or manufacturer may very well constitute a viable subrogation target.

Time is of the essence in identifying and processing these types of claims. The use of a catastrophe subrogation manager will assist in expeditiously identifying the claims which may possess subrogation potential. At the onset, the manager’s goal should be to identify a mere handful of such claims. As the subrogation manager becomes more adept at identifying potentially viable claims, the number of subrogation recoveries will logically increase.

Once potentially viable claims have been identified, outside counsel should be retained to assist the company in conducting a further investigation. The immediate involvement of the manager and counsel will minimize the chance of an impending statute of repose barring an otherwise viable subrogation action. Further, counsel and his or her consultants will be able to readily identify eventual critical evidence and ensure its documentation and continued preservation.

Any resulting recovery as a result of the pursuit of subrogation claims arising out of catastrophic events should certainly, in the short term, be considered “found money.” This “found money” was money which for all intents and purposes the company had written off. Due to the very nature of catastrophic events, the resulting claims tend to be significant in terms of indemnity dollars. Consequently, this “found money” may very well equate into a substantial sum.

Subrogator

Tags: Insurance Subrogation