Subrogating Liability Claims

Saturday, May 19, 2007 | 0

By Gary L. Wickert

When the subject of subrogation arises, we all too often think of property, workers' compensation, auto and/or health claims. However, our industry leaves a lot of recoveries on the table because many opportunities for liability subrogation go unnoticed and untapped.

Subrogation is the stepping into the shoes of another -- usually an insured who has suffered a loss as a result of a third person's negligence. In many states, when a liability carrier pays a claim, the file is closed.

Little thought is given to the carrier's right to proceed against other tortfeasors whose negligence contributed to the loss or the right to recover all or a significant portion of their claim payments from the third party. Known as "liability subrogation" or "indemnity and/or contribution claims," such potential recovery opportunities all too often are not pursued. The file is closed and the subrogation opportunity dies on the vine. Potential recoveries are never realized.

Generally, a subrogating carrier may pursue any rights its insured has against the third party tortfeasors. However, indemnity and contribution actions arise whenever a tortfeasor (the liability carrier's insured) is damaged by paying for a loss which should be borne solely or primarily by another person or entity.

The "damage" is the liability payment it makes because of a third party's liability claim against the insured.

The carrier, therefore, is seeking to make good on its insured's right of contribution (the duty of a joint tortfeasor to pay its fair share of damages caused by its negligence), or indemnity (the duty of a joint tortfeasor to completely make good to another tortfeasor for all damages paid due to some contractual, statutory, or common law duty).

It is important to note that all jurisdictions are different, and some states only allow a torfeasor to settle that portion of a damage claim which it caused by its negligence.

Most states allow a carrier to equitably proceed against a joint tortfeasor to recover the portion of the damages for which the joint tortfeasor is responsible.

For example, an owner or general contractor who is forced to make a liability payment to an injured person or even for property damages due to a fire, may be able to pursue the subcontractor whose negligence actually caused the loss.

Also, allowed in most states is the ability of a seller of a defective product to proceed against the manufacturer for any payments it made and the ability of an employer to proceed against an employee, if it so desires, for any payments it made which were the result of actions of the employee. These indemnity actions are either allowed by statute or common law.

Some states, such as South Carolina, require a settling party to pursue equitable indemnity, but only if the settlement is bona fide, the decision to settle is a reasonable means of protecting the innocent party's interests, the amount of the settlement is reasonable in light of the third party's estimated damages, and the risk and extent of the defendant's exposure should the case be tried. Griffin v. Van Norman, 397 S.E.2d 378 (S.C. App. 1990).

In Griffin, a home seller, who had no knowledge that an exterminator's wood infestation report to purchasers was false, was allowed to recover from the exterminator the amount it paid to the purchasers in order to settle a fraudulent representation claim brought against the sellers by the purchasers.

Far too often, we see claims such as these closed within our clients' systems, with no effort at recovery made. The statute of limitations for such subrogation claims in most jurisdictions does not begin to run on the date of the loss.

Rather, it frequently (but not always) begins to run on the date the underlying claim is settled or paid.

A misunderstanding about this may be one reason so many recovery opportunities are overlooked.

Another reason may be the fact that the claims handlers involved were trained mainly in liability adjusting and not subrogation.

When two or more persons' actions contribute to cause a loss, payment by one of the tortfeasors usually means that party has a right to seek contribution against the other "at fault" party. Known as contribution, this method of subrogation has been bolstered by the passage of the Uniform Contribution Among Joint Tortfeasors Act. By 1988, seventeen states had adopted it.

The following states have adopted it by statute.

Arizona: A.R.S. Sections 12-2501 to 12-2509

Colorado: West's C.R.S.A. Sections 13-50.5-101 to 13-50.5-106

Florida: West's F.S.A. Section 768.31

Massachusetts: M.G.L.A. c. 231B, Sections 1 to 4

Nevada: N.R.S. Sections 17.225 to 17.305

North Carolina: N.C.G.S. Sections 1B-1 to 1B-6

North Dakota: N.D.C.C. Sections 32-38-01 to 32-38-04

Ohio: Ohio R.C. Sections 2307.31 to 2307.34

Oklahoma: 12 Okla. Stat. Ann. Section 832

South Carolina: S.C. Code 1976, Sections 15-38-10 to 15-38-70

Tennessee: T.C.A. Sections 29-11-101 to 2911-106

The Uniform Contribution Among Tortfeasors Act reads as follows:

(a) Except as otherwise provided in this Act, where two or more persons become jointly or severally liable in tort for the same injury to person or property or for the same wrongful death, there is a right of contribution among them even though judgment has not been recovered against all or any of them.

(b) The right of contribution exists only in favor of a tortfeasor who has paid more than his pro rata share of the common liability, and his total recovery is limited to the amount paid by him in excess of his pro rata share. No tortfeasor is compelled to make contribution beyond his own pro rata share of the entire liability.

(c) There is no right of contribution in favor of any tortfeasor who has intentionally [wilfully or wantonly] caused or contributed to the injury or wrongful death.

(d) A tortfeasor who enters into a settlement with a claimant is not entitled to recover contribution from another tortfeasor whose liability for the injury or wrongful death is not extinguished by the settlement nor in respect to any amount paid in a settlement which is in excess of what was reasonable.

(e) A liability insurer, who by payment has discharged in full or in part the liability of a tortfeasor and has thereby discharged in full its obligation as insurer, is subrogated to the tortfeasor's right of contribution to the extent of the amount it has paid in excess of the tortfeasor's pro rata share of the common liability. This provision does not limit or impair any right of subrogation arising from any other relationship.

(f) This Act does not impair any right of indemnity under existing law. Where one tortfeasor is entitled to indemnity from another, the right of the indemnity obligee is for indemnity and not contribution, and the indemnity obligor is not entitled to contribution from the obligee for any portion of his indemnity obligation.

(g) This Act shall not apply to breaches of trust or of other fiduciary obligation. It is imperative that insurance companies take a look at the recovery dollars which are simply not being realized in the areas of contribution, indemnity and liability subrogation. One thing is certain, these recovery opportunities will never be realized if they are not recognized.

This column first appeared in the May newsletter for the clients of Matthiesen, Wickert & Lehrer, S.C.

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