New Hurdles for Defect Claims by Condo Associations in Texas

DEFECT.1There are two new sections in the Texas Property Code which will provide protection for developers and their design professionals from actions brought by condominium associations for construction defect or design claims. The impetus for this change grew out of concerns by developers and design professionals that as constituted, the Texas Residential Construction Act (“RCLA”) did not provide sufficient protection from questionable lawsuits brought by condominium associations that had not obtained approval and consent of the individual unit owners to prosecute the lawsuit.

The new provisions are codified in Sections 82.119 and 82.120 of the Texas Property Code. These sections generally require a condominium association to present an independent third-party report from a licensed professional engineer which identifies defective elements in the common areas before it can file a lawsuit against developers or design professionals. Upon presentation of the report, the developer and design professionals will be afforded an opportunity to inspect and cure any deficiencies that are raised in the report. In addition, the provision provides a mechanism by which the unit owners must meet and approve the filing of any legal action related to construction or design defect claims. The approval before filing any legal action must be obtained from those owners holding more than 50 percent of the total votes allocated under the condominium declarations. At least 30 days prior to such a meeting, the unit owners must be provided with basic information regarding the potential legal action including a general description of the claim, what damages are being requested, how long prosecution of the lawsuit may take, and the chances of success. This notice to the unit owners must include a number of items including (a) a copy of the engineer’s report; (b) any attorney fee contract for counsel representing the association; (c) a description of all efforts to resolve the claim; (d) a disclosure that filing the lawsuit or initiating arbitration may affect the market value, marketability, or financing of the units while the claim is pending; and (e) how the association will fund the litigation. Curiously, this disclosure notice cannot be prepared by the law firm proposed to represent the association. To account for these new procedural hurdles, the limitations period for filing suit or arbitration is now tolled until one year after the date that these procedures are initiated by the association (provided that the procedures are initiated during the final year of the applicable statute of limitations).

Section 82.120 now authorizes condominium associations to mandate binding arbitration in its declarations for construction defect and design claims. This provision further limits the ability of unit owners to amend the declarations to modify any mandatory arbitration requirement if the applicable claims is based on acts or omissions that occurred prior to the amendment.

Both of these provisions merit close review by claims professionals handling construction defect or design claims for condominium associations and/or its subrogated insurers in Texas.

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Looking to the Constitution for Recovery Options Due to Seasonal Flooding

Flood.1Earlier this year, Houstonians awoke to find most of their city underwater. This month, South Carolina experienced torrential rains that were so severe that—in some areas—the total rainfall exceeded the expected rain totals for a 1 in 1,000 year storm. The World Resources Institute, in collaboration with four Dutch research organizations, estimated that total U.S. property damage from flooding could increase to over $400 billion by 2030. Flood damage will consistently be a serious issue for the insurance industry and one that needs to be constantly evaluated for recovery opportunities.

It is difficult to recover from the government for damages due to seasonal flooding. Both the Flood Control Act of 1928 (33 U.S.C. 702a et seq.) and common-law discretionary-function doctrine affords the government blanket immunity for flood-control plans. Generally, only a Fifth Amendment Takings-Claim is a viable theory against the federal government for damages caused by flooding. However, tradition dictated that a Fifth Amendment Takings-Claim required a permanent intrusion on private property rights. Thus, property owners had no remedy for the type of temporary flooding that occurs during seasonal flooding.

In 2012, the issue of whether damages caused by temporary flooding could be actionable under the Fifth Amendment was addressed by the United States Supreme Court. See Arkansas Game and Fish Commission v. United States, 133 S.Ct. 511 (2012). In a unanimous decision, the Court held that government-induced flooding of a temporary duration was compensable under the Fifth Amendment. The Court further stated that there was no bright-line rule to determining whether temporary-flooding rose to the level of a compensable taking. However, the Court provided the following guidelines for the lower courts to examine: (1) the duration of flooding; (2) the character of the land and owner’s anticipated use; (3) severity of the interference. Further, the Court held that taking must be an intended consequence of a government action or the recurrence of the flooding be so numerous as to be the reasonably foreseeable result of an authorized government action. (emphasis added)

Recently, the U.S. Court of Federal Claims, applying the rule from Arkansas Game and Fish Commission, found in favor for the plaintiffs in their claims against the government for flood damage after Hurricane Katrina. See St. Bernard Parish Government, et al v. United States, No. 05-1119, (May 1, 2015). The plaintiffs owned property in the Lower Ninth Ward and St. Bernard Parish (districts outside New Orleans) that were damaged by flood water originating from levee failures along the MR-GO waterway. MR-GO was a 71 mile waterway that was built as a short-cut for vessels traveling from the Gulf of Mexico to New Orleans. The Court adopted the plaintiffs’ experts’ opinions that the government’s failure to maintain MR-GO and the unintended destruction of the surrounding wet-lands caused an increased storm surge from Hurricane Katrina. The Court further agreed with the plaintiffs’ experts that MR-GO funneled the storm-surge into the Greater New Orleans-area, which led to the levee failures.

The St. Bernard Parish Government case is important because it indicates an expansion of the “reasonably foreseeable,” standard. The plaintiffs in St. Bernard relied on the government’s negligence in maintaining MR-GO and in the destruction of the protective wetlands to prove causation. Unlike the facts in Arkansas Game and Fish Commission, the government undertook no plan or action that caused flooding in the Lower Ninth Ward and St. Bernard Parish. Further, the trial court limited the importance that the temporary flooding needed to occur on a regular basis or seasonal basis. Plaintiff’s damages were a result of Hurricane Katrina’s flooding, however, the trial court accepted the testimony of lay witnesses that flooding occurred on other occasions in order to satisfy the numerous recurrence factor.

The government advised the trial court that it intended to appeal its decision on liability. Due to the possible government liability – not only for intentionally flooding property, but also if its negligence in maintaining the numerous waterways under its jurisdiction leads to a temporary flooding – this is an important case to track as it moves through the Court of Appeals.

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Consider Using Social Media to Enhance Your Subro Investigation

ICYMI: Social Media has Revolutionized the Gathering, Sharing and Publication of Information both Newsworthy and Non-Newsworthy. The use of social media posts authored by members of the public and casual observers to describe news-as-it-happens is prominent even among traditional media outlets. Social media posts, as we know (I do not want to belabor this), have several uses that range from keeping up with friends and family to keeping up with injuries to players on your favorite sports team. Craig Ferguson (and his robot sidekick Geoff) turned Twitter posts into comedy for the sleep deprived in Ferguson’s regular “Check ze Tweets” segments. While hilarity is most often not involved in any subrogation investigation, you should consider researching social media posts to supplement or kick-start your next investigation.

For example, I was checking ze tweets while waiting for my turn in court the other day and learned within minutes that a fire was ongoing at an in-town institution. Tweets were flying in first from casual observers and second from news outlets that described the location where smoke was first observed at the scene and where people thought the fire started. Many tweets included photographs that would make great trial exhibits and possibly aid the origin and cause investigation team with their efforts.

The uses to which social media posts can be used in your next subrogation investigation include the identification of witnesses, the possible finding of admissions of at-fault parties, the gathering of photographs taken from unique perspectives and vantage points at crucial points in time, the describing of unfolding events and the describing of events that may have occurred right up until the time of a particular occurrence. For example, this person’s tweet suggests that she may have been present at or near the time a fire started:

Social Media Tweet1.1



While this tweet suggests its author was observing the firefighting efforts:

Social Media Tweet2.2



Photographs taken by passersby are a-plenty:

Social Media Tweet3.3







Not to say that incorporating social media research into your next subrogation investigation will unearth that smoking gun, but you’ll never know unless you look for it.  Also, you can tell your significant other that you’re working the next time you’re busted for spending too much time with Facebook, your Twitter feed, your Instagram feed, Snapchat . . .

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Spoliation Motion Denied – Lack of Proof as to Any Prejuduce

Spoliation.1In National Fire Insurance Company of Hartford a/s/o RX Plus Pharmacy Corp. v. Fair Only Real Estate Corp., Index No., 157143, Judge Nancy M. Bannon of the Supreme Court of the State of New York, New York County, denied defendant’s motion pursuant to CPLR 3126 to dismiss the plaintiff’s claim for damages for injury to plaintiff’s insured’s property and to preclude it from offering evidence in support of its damages claim at the time of trial, based upon the plaintiff’s alleged spoliation of evidence.

This matter involves a subrogation action to recover insurance benefits paid to the plaintiff’s insured RX Plus Pharmacy Corp. (“RX”), for damages to injury to RX’s property, arising out of an April 11, 2010 fire that allegedly started at the defendant’s property and spread to the adjacent property leased by RX. As a result of the fire, RX, a pharmacy, inventory was damaged which consisted primarily of pharmaceutical products. RX submitted a claim under its policy to the plaintiff and the plaintiff hired a salvage company, non-party Callan Salvage & Appraisal Co., Inc. (“Callan”) to handle the contents and inventory of RX’s leased premises, dispose of the salvaged material, and provide a valuation of RX’s losses. The plaintiff also retained counsel, who in nine days after the fire, advised the defendant of the plaintiff’s intention to pursue its subrogation rights. After Callan removed all the debris from RX’s premises and inventoried the damage, Callan destroyed all the pharmaceuticals and controlled substance found at the premises and assessed the value of RX’s damaged inventory to be in excess of $322,181.49, RX’s maximum coverage limit. Defendant moved to dismiss plaintiff’s claims for damages or preclusion based on the disposal of the salvaged materials and ability to view the damaged evidence.

The Court in deciding defendant’s motion stated that the Supreme Court has “broad discretion to provide proportionate relief to the party deprived of the lost evidence, such as precluding proof favorable to the spoliator to restore balance to the litigation… or employing an adverse inference instruction at the trial of the action.” Ortega v. City of New York, 9 NY3d 69, 76, (2007); see CPLR 3126; Voom HD Holdings LLC v. Echostar Satellite LLC, 93 AD3d 33 (1st Dept. 2012); General Security, Ins. Co. v. Nir, 50 AD3d 489 (1st Dept. 2008). However, “striking a pleading is a drastic section to impose in the absence of willful or contumacious conduct.” Ianucci v. Rose, 8 AD3d 437 (2nd Dept. 2004). The Court also cited to Kirkland v. New York City Housing Authority, 236 AD2d 170, 173 (1st Dept. 1997), which stated the following:

under New York Law, spoliation sanctions are appropriate where a litigant, intentionally or negligently, disposes of crucial items of evidence involved in an accident before the adversary has an opportunity to inspect them and after being placed on notice that such evidence might be needed for future litigation.

The Court stated that in this matter the parties do not dispute that RX’s damaged pharmaceuticals and other inventory were destroyed while future litigation was contemplated and prior to the defendant’s inspection of such evidence. However, the court determined that the defendant failed to establish that the destroyed inventory is crucial to its defense and that it was severely prejudiced by the destruction of the items. The court reasoned that the destroyed items solely relate to the measure of damages, and not to the defendant’s liability, if any, in causing the fire. Thus, the court surmised that the destruction of RX’s damaged inventory, effects the plaintiff’s ability to sustain its burden of proving its damages, rather than the defendant’s ability to defend its case, and has not given the plaintiff an unfair advantage in the litigation. The court noted that the defendant has obtained the plaintiff’s claim file which contains invoices, photos, a detailed inventory and other records relating to the damaged items, deposed the adjuster who handled the claim and thus, the defendant has failed to show that the absence of the damaged items themselves is fatal to its case or that it has been otherwise prejudiced by the destruction of RX’s damaged inventory.

The decision is important as it depicts how the court views spoliation relating to the destruction of damaged items. However, when relying on this decision, is it important to differentiate whether your case is related to spoliation of damaged items vs. spoliation of evidence relating to liability of the defendant which the court may view differently depending on the circumstances.

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Claims Against Good Faith Purchasers of Stolen Scrap Metal

scrap metal.1Too often in cases involving stolen property, subrogating carriers do not look any further than the actual thieves for potential subrogation targets. For a variety of reasons, even if they are identified and apprehended, the thieves may not be viable subrogation targets. However, where the sale of the stolen property can be traced, you may also have a claim against the entity that purchases that stolen property even if the purchase was in good faith. In many instances, the buyer of the stolen goods is a much more viable subrogation target than the thief who sells it to them.

Pennsylvania, like many other jurisdictions, still recognizes a cause of action for conversion by the rightful owner of stolen property against an entity that has in good faith purchased the stolen property from a third party that stole it. The Pennsylvania courts have held that a good faith purchaser of goods from a converter is also a converter and must answer in damages to the true owner because one who purchases goods from a thief does not acquire the right to those goods over the true owner.

For subrogation purposes, this theory may be particularly useful when dealing with the sale of stolen scrap metal to a scrap yard or recycling facility. This theory effectively makes the purchaser of stolen goods strictly liable to the rightful owner regardless of the reasonableness of their conduct in purchasing the stolen goods. For purposes of a conversion claim, the only thing that a plaintiff must prove to establish liability is that the plaintiff was the rightful owner of the stolen goods and that the defendant purchased those stolen goods.

In 2008, in order to deal with the growing epidemic of the sale of stolen scrap metal and attempt to deter potential scrap metal thieves, Pennsylvania adopted the Scrap Material Theft Prevention Act. 73 P.S. §1943.3. The Act places specific requirements on purchasers of scrap metal to get certain information from sellers and keep this information on file. The Act also restricts scrap metal processors and recycling facilities from purchasing certain types of metal unless the seller is a commercial enterprise. In the case of commercial enterprises, the Act requires, among other things, a signed authorization from the owner or officer of the commercial enterprise stating that the person delivering the scrap material is designated to receive payment for the scrap metal. Numerous other jurisdictions have adopted similar acts to try to curtail the theft of scrap metal.

In HRANEC v. Metalico Pittsburgh, Inc., 107 A.3d 114 (Pa. Sup. Ct. 2014), the Pennsylvania Superior Court reaffirmed that a good faith purchaser of stolen scrap metal is liable for conversion to the rightful owner for the full value of the stolen property even after passage of the Scrap Material Theft Prevention Act. The case makes clear that the Act does not impact common law conversion claims against good faith purchasers of stolen goods. Even if a good faith purchaser of stolen goods fully complies with the Act, the good faith purchaser would still be liable under a conversion theory. However, the Act does provide a basis for an additional theory of liability. While the Act does not statutorily create a private right of action, a violation of the provisions of the Act by a scrap metal purchaser may constitute negligence per se. This cause of action was specifically addressed by the court in the Metalico case.

In addition to providing an alternative potential theory against purchasers of stolen goods to a common law conversion claim, the record keeping requirements of the Act also make proving a conversion claim much easier. In most instances, the purchasers own records are sufficient to establish a prima facie case that a conversion has occurred.

Of course for a successful subrogation recovery, in addition to proving liability, it is important that the defendant have either assets or insurance coverage to recover from. Conversion is an intentional tort and good faith purchasers of stolen items may not have coverage for this under traditional liability insurance policies. However, many insurance carriers now offer specialty liability insurance coverage to recycling facilities and scrap metal processors which covers them against conversion claims. More sophisticated entities are likely to have this type of coverage in place.

If you find yourself with a case involving stolen scrap metal in a jurisdiction other than Pennsylvania, you should look to see if your jurisdiction recognizes a claim for conversion against good faith purchasers of stolen property and also whether it has a statute that governs the purchase of scrap metal as these may both provide viable avenues for subrogation.

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Maryland’s Riot Act: Subrogation Potential for Property Damages Occurring During Riots

On April 27, 2015 protests in Baltimore, Maryland regarding the death of Freddie Gray escalated into violent riots. These riots resulted in extensive and significant property damage throughout the city. Often, such damages are covered by insurance companies that insure the affected properties. In the aftermath of such events, questions arise as to whether any governmental entities can be held liable for these damages and whether insurance companies may bring subrogation claims against such entities. Maryland addressed the first question in the aftermath of the Baltimore bank riots of 1835 and enacted legislation specifically addressing governmental liability for damages caused by civil disorder. See MD. PUBLIC SAFETY CODE ANN. §§ 14-1001 et seq. (2014).

This statute is referred to as the Riot Act, and it allows individuals who suffer property damage during a riot to bring a claim for the actual value of the damages against the county or municipal corporation of the State in which the riot occurred. See id. § 14-1001(b). In order to recover under the statute, a potential claimant must prove that a county or municipal corporation (1) had good reason to believe the riot was about to take place or had sufficient notice to prevent the damages; and (2) had the ability to prevent the damages. See id. §14-1002(a)(1), (2). The claimant may not recover, however, if the county or municipal corporation can prove that it used reasonable diligence to prevent or suppress the riot. See id. § 14-1002(b). The statute only references a claim for “the injured party” and does not explicitly state whether this claim extends to insurance companies that are subrogated to their insureds’ rights. See id. § 14-1001(b) (2014).

Maryland courts have addressed this issue and determined that insurance companies may bring subrogation claims pursuant to the Riot Act. See Mayor & City Council of Baltimore v. Blibaum, 280 Md. 652 (1977). In Blibaum, the Maryland high court held that an insurance company could use a prior, but substantively identical, version of the Riot Act to bring a subrogation claim against the City of Baltimore for damages to the insured’s property during a riot. See id. at 664. The court explained that an insurer could bring a subrogation action even though the statute granted a cause of action to the “sufferer” and did not expressly mention insurers. See id. at 658. The statute did not preclude subrogation actions because, unlike similar riot statutes in states such as Pennsylvania and New Jersey, the Maryland statute was grounded in negligence as opposed to strict liability, so the city could not argue that it was inequitable to allow a subrogation claim under the statute. See id. at 660-664.

One issue Maryland courts have not addressed, however, is whether a provision in the Local Government Tort Claims Act (“LGTCA”) that limits damages that may be recovered against local governmental entities to $200,000 per individual claim and $500,000 per occurrence applies to claims brought under the Riot Act. MD. CTS. & JUD. PROC. CODE ANN. § 5-303(a)(1) (2014). This statute was amended to include this limitation after the enactment of the Riot Act and after any Maryland court had applied the statute. Currently, Maryland statutes allow for subrogation claims to be brought against governmental entities that can potentially result in liability for damages caused in riots such as those occurring after the death of Freddie Gray. The damages for any such claims, however, may be capped by the limitations contained in the LGTCA.

While insured damages as a result of the riot may be recoverable, subrogation professionals should be mindful of the sensitivities that could accompany litigation arising out of the riot and should proceed with appropriate patience and consideration.

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Preparing Your Case for Arbitration Forums Before Clicking “Submit”

Submit.1Writing Contentions: Every student learns how to “IRAC” in law school, and every lawyer hears repeated lectures from professors, judges, and veteran attorneys on the importance of effective brief writing. All that you have heard and learned should still be utilized in your contention writing for Intercompany Arbitration Forums. Your efforts should not be lowered because the case is presented in arbitration instead of a court. However, your language and format can be more informal, as long as your points are communicated well. Have a clean format and be sure to include at least these main sections: Introduction, Facts, Liability, Damages, Prayer, Comparative Fault/Contributory Negligence Issues, Rebuttal Arguments, etc.

Supporting Your Contentions with Evidence: Collect and submit all the evidence available that supports your contentions and damages. Statements and reports are of upmost importance to prevail on liability. Invoices, photos, damage summaries, etc. are of upmost importance to prevail on damages. However, also obtain and submit maps, photos, weather reports, diagrams, itemizations, etc., as appropriate for your case. The key is to support your contentions as best as possible and paint an easy-to-follow picture for the arbitrator(s).

Evidence is not due until the materials due date; however, your contentions should reference each piece of evidence, as it supports the facts and arguments stated. Therefore, if possible, collect and submit all the evidence at the same time you submit the contentions. This is extremely time efficient. If this is not possible, then set a reminder to collect the remaining evidence and submit everything before the deadline.

Rebuttal Arguments: There are no reply briefs submitted in Intercompany Arbitration Forums, so unless you are presenting your case live in front of the arbitrator(s) (which requires an administrative request when submitting your docket), then your initial contentions are your first and final words on presenting your case. With that in mind, have rebuttal arguments planned for your contentions. In most cases, the carriers have already went a round or two in fact finding and attempts at resolution. Therefore, by the time you are preparing for arbitration, you know the other side’s arguments. If you have facts, legal arguments, and/or evidence to rebut the Respondent’s opposition, then present them with your analysis in the initial contentions. This can be included in your regular sections for facts and liability, or you can create another section header toward the end.

In preparing your case for Intercompany Arbitration Forums, you are presenting the case from beginning to end before clicking the “Submit” button.  You must conduct the investigation, draft your contentions, locate and submit evidence, rebut the opposition’s arguments, and give your closing statement.  Thus, be prepared to present your entire case to the arbitrator(s) at the outset.

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Default Judgment Against Uninsured – As Good As If Written In Lipstick On A Cocktail Napkin

napkin.1Your standard case involves a loss caused by an insured party. Whether or not that party is actively participating, the carrier is bound by its duty to defend (as defined by California Insurance Code section 533.5(c)), and at least the policy limits can be up for grabs. Of course, in order for that carrier to offer the policy limits, you need to establish and prove a theory of liability and damages. Also, with the insured loss, there is at least a claims representative and/or a defense counsel to communicate with. Please note, if the carrier has not or cannot get ahold of their insured, then 1) the carrier may withdraw any offer of the policy limits, thereby denying coverage for non-cooperation; 2) you can successfully argue to strike a Defendant’s responsive pleading, or oppose a motion to set aside default.

The troubled case involves a loss caused by an uninsured party. The adverse party may not have coverage for one of several reasons (i.e., never obtained insurance, lapse in coverage, exclusions apply, noncooperation, etc.). This situation can make several aspects for your pursuit of subrogation recovery more difficult: 1) locating and effecting service of the party; 2) getting the party participating in negotiations and/or litigation; 3) getting the party to understand the legal consequences of the loss and the party’s participation (or lack thereof); etc.

Despite the difficulties, say your client urged you to push through litigation, just to see if the adverse party would turn up or come to reason.  You have located and served the adverse party, but the adverse party failed to file a response to the complaint.  Then you obtained default judgment.  Your client may be pleased to have official court documents granting full principal damages, plus interest, and reimbursement of all court costs. However, you know that those official court documents against an uninsured party are as good as if written in lipstick on a cocktail napkin, unless you can enforce judgment.

Enforcement against an uninsured party is difficult, time consuming, and a low likelihood of success.  In California, a civil judgment is valid for 10 years (California Code of Civil Procedure sections 683.110 et. seq.).  With that hope, you may be able to enforce the cocktail napkin within the decade.  It is best to complete a thorough asset check on individuals and small businesses on the outset of preparing your subrogation recovery strategy and definitely before expending time and resources in pursuing uninsured losses.


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If A Tree Falls And No One Hears It, Does Inverse Apply?

Tree Fall.1Confronted with a bevy of wildfire and flood claims, public and private utilities frequently contend that the instrumentality responsible for causing damage does not constitute a “public use” required for an inverse condemnation claim. The California Court of Appeals, Second Appellate District, in the City of Pasadena v Superior Court recently addressed whether a tree constituted a “public improvement” as required for an inverse condemnation cause of action. The case arose in the context of a windstorm, causing a tree to fall and damage a home. After paying the first-party claim, Mercury Casualty Company subrogated against the City of Pasadena alleging inverse condemnation and nuisance. After unsuccessfully seeking summary adjudication of the inverse cause of action, the City of Pasadena sought a writ of mandate. The City’s principal argument, citing Albers v County of Los Angeles (1965) 62 Cal. 2d 250, was that a tree is not “deliberately designed and constructed” a prerequisite to establishing proximate cause in an inverse case.

In denying the writ, the City of Pasadena court distinguished Albers as proximate cause was not challenged by the City of Pasadena. The City of Pasadena court noted that to constitute a public improvement, there must be deliberate action by the state and a taking for public purposes. The court relied on a California Supreme Court case holding that the planting of trees to beautify public streets benefits the public and serves the public purpose of improving public roads. The City of Pasadena court concluded that the subject tree was part of a City forestry program to enhance its residents’ and visitors’ quality of life. This decision is significant in its expansion of “public use” to include trees, not typically thought of as “instrumentalities” of the state.

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Sanofi Pasteur and Covenants to Insure

temperature.1The co-author of the following post, Robert Sottile, is an Articling Student with Cozen O’Connor.

The Court of Appeal has recently published a new decision regarding covenants to insure in Ontario. In Sanofi Pasteur Limited v. UPS SCS, Inc., 2015 ONCA 88, the plaintiff, Sanofi, contracted with the Defendant, UPS SCS Inc. (“UPS”), to store the plaintiff’s vaccines in UPS’s temperature-controlled warehouse. Under this agreement, the plaintiff agreed to obtain “all-risk” property insurance for any damage to the vaccines while they were in storage. Several months after the agreement, UPS discovered the cooler storing the vaccines had malfunctioned, causing the vaccines to be exposed to excessively low temperatures. The vaccines were rendered unsellable, causing Sanofi to suffer a loss of approximately $8.2 million. After indemnifying Sanofi for the unsellable vaccines, the plaintiff’s insurers brought a subrogated action against UPS and several third parties for recovery from the lost vaccines. The defendants named in addition to UPS included the manufacturer of the temperature control system, the supplier and installer of the control system and the contractor who calibrated and tested the system.

In response to this subrogated action, a motion for summary judgment was brought seeking a dismissal of the claim. The defendants argued that the plaintiff’s contractual undertaking with UPS to obtain “all risk” property insurance for the vaccines barred a subrogated action against all of the defendants, including those not party to Sanofi’s contract with UPS that contained the covenant to insure. At the trial court level, the Superior Court of Justice agreed with the defendants and dismissed the plaintiff’s action in its entirety.

The plaintiff appealed the Superior Court’s decision to the Ontario Court of Appeal. A panel of three judges unanimously agreed with the Superior Court and dismissed the appeal. In its decision, the Court of Appeal affirmed that the defendants not party to Sanofi and UPS’s agreement were entitled to rely on the covenant to insure to bar the plaintiff’s claim. The Court of Appeal held that the covenant to insure was evidence of Sanofi’s intention to bear the burden of any loss from the storage, and having accepted this risk, could not also have intended to allocate the risk to third parties whose work comes within the scope of the contract.  Specifically, the Court stated the following at paragraph 61:

The fact that the Insurance Covenant specified that insurance is to be maintained in an amount ‘not less that the full replacement cost thereof’ also indicates that the parties intended all persons involved in the very activities contemplated by the Agreement and whose negligence is alleged to have caused the fortuitous loss to have the benefit of the Insurance Covenant (…) Having allocated this risk to itself (…) it cannot at the same time have intended to allocate the risk to persons who permitted UPS to provide the storage services contracted for.

When applying the traditional two-pronged, third party beneficiary test in its analysis, the Court of Appeal found that the parties intended to extend the benefit of the covenant to insure to the other defendants. In the Court’s opinion, the activities of these other defendants were the very activities that the covenant to insure intended to address, as stated in paragraph 72:

The Other Defendants were “involved” in the storage of the appellant’s vaccines and monitoring the temperatures in the cooler. They were persons who provided the products and services necessary to permit UPS to provide the temperature-controlled storage services under the Agreement.

The Court of Appeal further supported its decision to extend the benefit of the covenant to insure to third parties by holding that this finding is consistent with the commercial reality of Sanofi’s agreement with UPS. The Court noted that Sanofi was a sophisticated pharmaceutical company able to assess its risks and the financial consequence of damage to the vaccines while in storage. According to the Court, to hold UPS, or the other defendants, liable for this damage is not consistent with the commercial reality and would hold companies liable that did not bear the risk of damage. 

Sanofi has currently sought leave to appeal this decision to the Supreme Court of Canada.

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