Subrogation Rights Under Oklahoma’s Workers’ Compensation Act

In 2011, the Oklahoma legislature overhauled the state’s workers’ compensation system, even going so far as to change the name of the law to “The Oklahoma’s Workers’ Compensation Code”. Portions of the new law were challenged and Oklahoma courts struck certain provisions of the new law after finding they were unconstitutional.

Still seeking to reform their state’s workers’ compensation system, the Oklahoma legislature went back to work and, on May 6, 2013, Oklahoma Governor Mary Fallin signed into law Title 85A of the Oklahoma Workers’ Compensation Act. Title 85A, designed to reform the state’s workers’ compensation laws and ultimately replace existing Title 85, establishes an important date for health care and subrogation professionals to consider when handling these claims in Oklahoma. Injuries occurring prior to February 1, 2014 will be governed by old Title 85, while injuries occurring on or after February 1, 2014 will be subject to new Title 85A

The new law allows an injured employee to recover benefits under the Act while simultaneously filing a claim against a third-party. The employee is required to give the employer/carrier notice of the third-party lawsuit and provide the employer/carrier the opportunity to intervene. Once placed on notice, the employer/carrier must intervene in order to protect its subrogation rights.

Section 43 of the new Act also provides a statutory formula which governs the distribution of any third-party recovery. First, reasonable attorney’s fees and costs of collection are deducted from the recovery. Next, the employer/carrier receives either two-thirds (2/3) of the remaining recovery or its entire amount of its workers’ compensation lien, whichever is less. The remaining balance will be paid to the injured party or their dependents.

Importantly, the old Act required a carrier to pay a pro-rata share of the employee’s attorney’s fees and the costs incurred in recovering against the third party. However, for injuries occurring after February 1, 2014, the Act makes no reference to a carrier’s obligation to contribute toward the employee’s attorney’s fees or costs. It appears the application of the above formula is intended to replace the pro-rata apportionment.

The new Act imposes a similar set of rules to govern actions initiated by an employer/carrier. When an employer/carrier seeks recovery from a third-party responsible for the injury or death, the employer/carrier must notify the injured employee of its intention to do so. Specifically, written notice must be sent to the injured employee advising them of their right to hire a private attorney to pursue “any benefits to which the claimant is entitled in addition to the subrogation interest”. If the employer/carrier recovers against the third party, the injured employee is entitled to any amount of recovery which is in excess of the subrogation lien, after reasonable costs of collection are deducted.

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Count Me Out! Considerations in Determining Whether to Opt Out of a Class Action Lawsuit

A class action lawsuit claiming a product defect is used to recover damages for a large group of people harmed by the product. When receiving notice of a class action that may involve a product in one or more of your cases, you do have some decisions to make. If you have concerns that the amount of damages awarded to each claimant is too small, then you will need to determine, if available, if you wish to “opt out.” Each claim and each class action presents different factors that should be considered when determining whether to opt out. The size of the claim and the type of damages sought by the class action are two of the most important factors to consider.

• The claim is substantially larger than the typical class members’ claim

One benefit of a class action is that it allows for litigation of small claims that would not otherwise be economically feasible to pursue. The compilation of these small claims can result in a very low recovery amount to each class member. When the amount of a subrogation claim is substantially larger than the typical class members’ claim, and the amount of the claim justifies the cost of litigation, it is generally more effective to opt out of the class and pursue an individual claim against the manufacturer. Further, class action lawsuits are oftentimes pursued for many, many years, meaning that any recovery in an individual lawsuit will likely be received long before any recovery in a class action lawsuit.

• The class damages are limited

Oftentimes damages sought in a class action lawsuit are limited to the cost of replacing or repairing the defective product. This excludes the cost of repairing the damages the defective product caused, which is generally the larger, insured claim. In that situation, if the claim is not excluded from the class action by opting out, any claim for additional property damages will be barred by the legal defense of res judicata. Any additional property damages then become non-recoverable, so special attention should be paid to the opt out date noticed in a class action lawsuit.

It is important to consider each loss independently in determining whether to opt out of a class action lawsuit. Although the amount of the claim and the type of damages being pursued are some of the most important factors to consider, attention should be given to the particular facts of the case and the provisions of the order certifying the class action.

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Vehicle Fire Investigations – A Subro Perspective

Earlier this month ABC news aired a special on what was characterized as an unusually large number of BMW fires across the country while the vehicles were turned off for hours if not days. ABC reported that they investigated over 40 parked car fires across the country over a five year span. Since ABC reported that the incidents involved vehicles not subject to any recall, consumer groups have been pushing BMW for an explanation. BMW responded that they had not seen any pattern of product defect issues with these fires and were critical of ABC for what it referred to as “sensationalist” reporting about cars catching fire. A link to the story can be found here.

Regardless of where one stands on the issue, this reporting makes for an appropriate time to discuss vehicle fire investigations in general. While certainly our antennas should go up whenever we see a pattern or increase in fire incidents from a particular make or model vehicle, subro professionals should always be careful to not be presumptuous in any investigation of a vehicle fire. We must be mindful that the reasons for a vehicle fire vary. Potential non-incendiary causes include product defect, improper service, maintenance issues, and after-sale alterations to the vehicle. When receiving a subrogation case involving a vehicle fire, subro professionals should work quickly to get appropriate experts on scene to investigate the vehicle and surrounding area before the vehicle is moved and evidence is potentially altered. Often critical evidence from the cause of a vehicle fie can fall from the engine compartment into the fire debris below the vehicle. Moving the vehicle for later examination should only be done after this debris has been examined and preserved. Subro professionals should also work with the vehicle owner to get as much information as possible on the service history of the vehicle. Was there any major work performed on the vehicle, or merely routine oil changes? Did the insured routinely use only one service company, such as the dealership where the car was purchased (allowing for the argument that only one entity ever touched the engine compartment), or did the insured have the vehicle serviced by multiple service companies? Locating an exemplar vehicle for comparison during a joint evidence examination may be helpful to your experts. And certainly a review of the National Highway Traffic and Safety Administration’s recall website for vehicles should be examined, but a vehicle being on or off of this list should not be considered conclusive evidence that the fire was the result of a defect.

It is absolutely true that properly maintained vehicles should not suddenly burst into flames and justify a thorough investigation. Indeed the list of potential fire causing defects are car can have are significant, be it faulty ignition switch, faulty cruise control hexport, improperly designed or manufactured fuel line, or a myriad of other potential causes. In fact, in 2015 a record high of 51.2 million vehicles were recalled through 868 separate recall incidents. However, subro professionals should not get the cart before the horse and presume that a fire which started from the engine compartment will lead to a recovery.  As always, a thorough investigation should always be conducted.

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Connecticut Makes ‘Modest Refinements’ to Product Liability Law

The Connecticut Supreme Court, in Bifolck v. Philip Morris, Inc., recently made what the Court termed “modest refinements” to Connecticut’s product liability law. Case No. SC 19310 (Conn. Dec. 29, 2016). To recover under Connecticut’s Product Liability Act, a plaintiff alleging a product was defectively designed, defectively manufactured, or defective for a failure to warn must prove:

A.) The defendant was engaged in the business of selling the product;

B.) The product was in a defective condition unreasonably dangerous to the consumer or user;

C.) The defect caused the plaintiff’s injury;

D.) The defect existed when the product was sold; and

E.) The product reached the consumer without substantial change in its condition.

Bifolck clarified how a plaintiff must prove the second element – the product was in a defective condition unreasonably dangerous to the consumer – when the plaintiff contends the product was defectively designed.

Bifolck held Connecticut’s primary test for determining whether a product is defectively designed is the “risk-utility test.” Under the risk-utility test, a plaintiff must show: 1.) A reasonable alternative design was available that would have avoided or reduced the product’s harm; and/or 2.) The product’s risk of harm so clearly exceeds the product’s utility that a reasonable consumer would not buy the product. The Court explained “these theories are not mutually exclusive,” and noted it would be “helpful” for a plaintiff to allege whether it intends to pursue prong one, prong two, or both prongs one and two of the risk-utility test. Bifolck also acknowledged a plaintiff can establish the second element of a product liability claim by showing the product failed to meet “legitimate, commonly held, minimum safety expectations,” known as the consumer expectation test.

Subrogated carriers pursuing design defect claims in Connecticut must be immediately mindful of two implications of Bifolck. First, while not yet required, there is a clear preference for a plaintiff to plead which prong(s) of the risk-utility test the plaintiff believes is most applicable to its claims. Carriers should draft pleadings accordingly.  Second, carriers must work closely with experts to make certain the evidence and testimony presented at trial fits into Connecticut’s more clearly defined risk-utility test.

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Federal Court Reaffirms Work v. Non-Work Distinction in AIA Subro Waiver

In a recent decision issued by the United States District Court, Eastern District of New York, Garden City Apartments, LLC v. Xcel Plumbing of New York, Inc. et al., No. 15-cv-1380 Document 84 (E.D.N.Y. 2017), the Court emphasized that a common waiver of subrogation clause does not afford protection against claims for property damage generally, but rather protects only claims for damage to the contractors “work” under the contract.

The subject action arose out of a fire in an apartment complex which caused the owner to sustain approximately 2.3 million in damage. The owner’s insurance carrier paid out the claim subject to an application of a $250,000.00 deductible. The carrier then filed a subrogation action against the fire suppression subcontractor. In turn, the fire protection subcontractor, relying on the waiver of subrogation in the trade contract, argued that the most it could be held responsible for was the amount of the deductible.

The waiver of subrogation clause in the trade contract stated the following:

OWNER and CONTRACTOR waive all rights against each other and against all other contractors or subcontractors for loss or damage to the extent reimbursed by Builder’s Risk or any other property or equipment insurance applicable to the Work, except such rights as they may have to the proceeds of such insurance.

Relying on the New York Court of Appeals decision in Kaf-Kaf Inc., v. Rodless Decorations, Inc., 90 N.Y.2d 654, 660 (1997), the Court held that the waiver of subrogation provision does not apply to claims for damages outside of the subcontractors “Work” as defined in the contract. As such, the owner’s insurer is only barred from subrogating with respect to property for which the contractor has an insurable interest, for example, its tools and the labor and materials it has furnished in connection with its “Work”. Id. at 235. Therefore, the Court held that the trade contract prevented the owner from recovering from the subcontractor for any loss to the Work to the extent those damages are reimbursed by Builder’s Risk or other insurance. However, with respect to losses sustained to the Property other than the Work, i.e. the “Non-Work” damages, the waiver does not bar the subrogating carrier from recovering from the subcontractor. Id. at 234.

The Garden City Apartments decision is an important reminder to subrogation professionals to carefully analyze the specific language of a waiver of subrogation provision in a contract. Although contractors and their defense counsel often argue that the presence of a waiver clause is fatal to a subrogating carrier’s case, New York Courts will not enforce this provision with respect to damages outside the scope of the provision.

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Sixth Circuit Refuses to Apply Kentucky’s Economic Loss Doctrine to Purchases by Consumers

The Sixth Circuit recently held that it would not apply Kentucky’s economic loss doctrine to consumer purchases, and consumers are free to pursue tort claims against manufacturers even when damage occurs only to a product itself.

The Sixth Circuit was sitting in diversity and ruled in State Farm Mut. Auto. Ins. Co. v. Norcold, Inc., that the plaintiff could pursue its product liability claims and the economic loss doctrine was inapplicable to the plaintiff’s subrogation action under Kentucky law. Plaintiff State Farm provided property insurance to its insured (an individual) who purchased a used recreational vehicle (RV). The RV came equipped with a Norcold refrigerator that was incorporated into the vehicle by the RV manufacturer. About a year after the RV was sold to State Farm’s insured the refrigerator caused a fire.

The fire caused no personal injuries or property damage other than to the RV itself. State Farm paid its insured for the damage and brought a subrogation claim against the refrigerator’s manufacturer, Norcold.

Norcold argued that Kentucky’s economic loss doctrine precluded State Farm’s product liability claims, and State Farm was limited only to contract damages. State Farm argued that Kentucky’s economic loss doctrine would not apply because the purchaser of the RV was a consumer, and not a commercial entity. The Sixth Circuit agreed with State Farm.

The Sixth Circuit noted that the Kentucky Supreme Court had not ruled specifically on whether the economic loss doctrine applied to consumers. Kentucky’s Supreme Court only recently adopted the economic loss doctrine in Giddings & Lewis, Inc. v. Indus. Risk Insurers, 348 S.W.3d 729 (Ky. 2011), which dealt with application of the doctrine to a product purchased by a commercial entity. The Sixth Circuit used Giddings & Lewis, Inc. as guidance and predicted that the Kentucky Supreme Court would not apply the economic loss doctrine to a tort claim brought by an consumer.

In Giddings & Lewis, Inc. the Kentucky Supreme Court limited its ruling specifically to commercial purchases, and provided three policy reasons for applying the economic loss doctrine to those transactions: (1) maintaining the distinction between tort and contract law; (2) protecting the freedom to contractually allocate economic risk; and (3) encouraging the party best situated to assess the risk of economic loss to insure against that risk. The Sixth Circuit in Norcold, Inc. determined that these policies would not be satisfied by applying the economic loss doctrine to consumers. Specifically relating to (2) and (3).

The Sixth Circuit held that consumers are typically unsophisticated purchasers who do cannot engage in meaningful negotiations with a manufacturer and are often unaware of inherent risks of a product. Additionally, the court found that a manufacturer typically has a better understanding of a product’s performance than an average consumer, and the manufacturer can better insure against the risk of the product failing to perform.

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Watts Agrees to Settle Two Class Action Lawsuits Re Appliance Connectors

From the moment plumbing went indoors, there was the potential for water damage to buildings from faulty plumbing. And, the addition of appliances only increased the potential. But, what about the connection between the indoor plumbing and the appliance? The water pipes in a structure have to connect somehow to appliances that use water, like faucets, toilets, dishwashers and hot water heaters. These connectors are often times flexible connectors that allow for movement of the appliance for installation, maintenance and repairs. And, sometimes, these connectors are a vulnerable weak point in the water supply system resulting is major water leaks and significant property damages.

Watts Regulator Co. (“Watts”) is a company that, in addition to many other things, makes products to connect water pipes to appliances. Recently, Watts was sued by class action plaintiffs over alleged defects with certain appliance connectors, including one that was branded in a way that would indicate it would keep the user safe from water damages – the Watts Floodsafe® connector. However, it appears that at least the class action plaintiffs in two recent lawsuits believed otherwise.

In the past two years, two separate class action product liability lawsuits were brought against Watts Regulator Co. in the United States District Court for the District of Nebraska in the past two years. Sharp, et al v. Watts Regulator Co., involves claims related to the Watts Water Heater connector product (“Water Heater Connectors”), and Klug, et al. v. Watts Regulator Co. involves claims related to the Watts Floodsafe® connector product (“Floodsafe Connectors”). Both of these cases have recently been settled, and the settlements apply to anyone who owns or owned (or leases or leased) a residence or other structure in the United States containing either a Watts Water Heater Connector or Floodsafe Connector after November 4, 2008. This settlement includes persons who suffered property damage and/or paid to repair property damage (including subrogated insurance carriers) caused by the alleged failure of these products.

The Floodsafe Connectors were designed and sold for use with faucets, toilets, washing machines, dishwashers and icemakers. A Floodsafe or Water Heater connected with a label that identifies Watts, Watts Regulator, Anderson Barrows, Savard, Everbilt, Ace Hardware, Wolverine Brass, Do-It-Best, Grainger, CalFlex, MainLine, Aqua-Flo, Belanger, Danco, Flexconnex, Diamond Back, Lincoln, Mabe, PlumbMaster, PlumBest, PurePro, Kenney, Electrolux or Kenmore may qualify if the connector has certain physical features. The physical features for the Floodsafe connector include a check valve on one side of the connector, and for the Water Heater connector they include a red disc near both ends of the connector.

The time to opt out of the settlement ends March 7, 2017. So, any effort by a potential settlement class member to opt out of the settlement, and be able to file litigation against Watts directly must be made immediately. After March 7, 2017, a settlement class member will be bound by the terms of the settlement.

Under the settlements, Watts has agreed to pay $14 million in total, $10 million into a settlement fund for Water Heater connectors and $4 million into a settlement fund for Floodsafe connectors. However, this fund will also be used to pay for notice, administration, litigation expenses, and attorneys’ fees too. So, if a settlement class member intends to seek funds from the settlement, it would be best to act quickly in that regard as well.

Terms and information regarding these class action settlements, and photographs to help identify the related products, can be found at www.ConnectorSettlements.com.

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CPSC Advises Voluntary Industry Standards for Rechargeable Batteries Inadequate

On January 23, 2017, Samsung announced that poorly designed and manufactured batteries are to blame for the fires associated with its Galaxy Note 7 phones.

The announcement comes after months of investigation by Samsung and three independent industry organizations. The investigation revealed problems with both the batteries that were originally used in the phone during its launch in August, as well as the batteries that were later used as replacements.

According to the results of the investigation, the outer casing for the first battery – manufactured by Samsung SDI – was too small to accommodate the internal components, allowing the components to short circuit and overheat. The second battery – manufactured by Amperex Technology – suffered from other design defects and a missing key component.
Samsung discontinued the Note 7 last year and agreed to recall 1.9 million phones after negotiations with the Consumer Product Safety Commission following several reports of the phones catching fire. Despite the worldwide recall, some customers have refused to stop using the phones.

On January 24, 2017, the CPSC, which is conducting its own investigation, issued a press release, stating that the industry’s voluntary standards for the design and manufacture of rechargeable batteries aren’t adequate. Those standards were first developed in 2006 and haven’t been revised since 2011. According to the press release, the CPSC and Samsung are working with the industry to “take a fresh look” at the standards.

“Industry needs to learn from this experience and improve consumer safety by putting more safeguards in place during the design and manufacturing stages to ensure that technologies run by lithium-ion batteries deliver their benefits without the serious safety risks,” CPSC Chairman Elliot Kaye stated in the release.

The current investigation by the CPSC is just the latest in a series of investigations raising concerns about the safety of lithium-ion batteries. The batteries are attractive to manufacturers because they hold power more efficiently and last longer than other power packs. However, they have also raised safety concerns because the chemicals inside the batteries hold so much energy that a failure can result in a fire or even a small explosion.

We will continue to monitor and blog about updates from the CPSC’s efforts to work with manufacturers to implement updated standards.

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Product Liability Claims When The Product Has No Manufacturer Label

There are many impediments to a successful investigation of a product liability claim – age of the product, preservation of evidence, chain of custody of the evidence, installation markings, etc. This article will discuss situations where there is a lack of identifying information on the product.

Products Lacking Manufacturer Identification

Picture the scenario where the insured suffered a water loss and the investigator easily determined cause and origin as the failed water supply line. But after expert examination the product possesses no markings as to identify a manufacturer, model or product number. Even your well-educated and experienced investigator advises that he/she is unable to identify the product’s maker.
A lack of identifying information on a product not only weakens a product defect case, but can stop the case dead in its tracks. The reasons for the lack of product identification can vary. Over time, through corrosion and suffering the elements, a product’s identification label can wear off. The lack of product identification may also be a result of the water or fire damage of the incident. Alternatively, the product many not have ever had any product information.

Is there a requirement for manufacturers to label products with some sort of information to identify the make, model, and age? In fact, the U.S. Consumer Product Safety Commission generally does require labeling on products and packaging. However, labeling requirements differ based on the type of product, posed hazards, foreseeable uses, etc.

Additional Methods to Identify a Product

If you are dealing with a product that caused your loss, but there is no label readily indicating the source, there are other ways to identify the manufacturer. The insured, contractors, subcontractors, installers, maintenance personnel, etc., can all be questioned. You can also investigate whether the product is original to the construction of the property; whether the insured, contractor, installer, maintenance worker, etc. has invoices or record logs on products used on the property; whether the contractor, installer, maintenance worker, etc. utilizes only particular brands; whether the purchaser only purchases products at particular supply stores, etc. It is possible that after these inquiries, the manufacturer of the product can be identified.

Another great resource are experts, which may have seen a similar looking product or can provide an opinion based on experience as to the manufacturer. Some experts and vendors catalogue exemplars of products for the specific purpose of assisting customers with product identification. However, as you can imagine, the catalogue must be quite extensive, frequently updated, and easily searchable to be effective. In some cases a simple label or identifying mark on a product can lead to the manufacturer of the product.

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Washington’s Independent Duty Doctrine – Actual Injury or Prop Damage Not Required

Since recently departing from the economic loss rule, Washington courts have continued to expand the scope and applicability of the independent duty doctrine in a variety of circumstances. A recent appellate case, The Point at Westport Harbor Homeowners’ Association v. Engineers Northwest, Inc.,[1] further enlarges the doctrine to include scenarios where no actual property damage occurs but only the threat of future damage.

Until 2010, Washington courts traditionally adhered to the economic loss rule whereby plaintiffs were prevented from recovering “economic” damages in tort and were required instead to pursue such damages in contract claims. The doctrine presented significant barriers for plaintiffs, especially in cases where the defendant was clearly negligent but a lack of contractual privity prevented the plaintiff from recovering economic damages. This all changed in 2010 when the Washington Supreme Court replaced the economic loss rule with the “independent duty doctrine.”[2] Under the new approach, a plaintiff can recover for economic losses if the defendant is shown to have breached a tort duty independent of any contract.[3] Since its adoption, Washington courts have continued to expand the scope of the independent duty doctrine in various circumstances.

This latest case involves construction defect allegations brought by a condominium homeowner’s association (HOA) against various defendants arising out of the development and construction of The Pointe Condominiums at Westport Harbor. The suit included negligence claims against the structural engineering firm, Engineers Northwest, Inc. (ENW). Specifically, the HOA alleged that the condominium buildings suffered from both design and construction defects that rendered it “unreasonable dangerous to its occupants” in the event of a seismic event. The HOA sought compensatory damages only for the costs of investigating and repairing the deficiencies, and did not allege any consequential injuries to persons or property arising from the defects themselves. Notably, the HOA did not have a contractual relationship with ENW, which was hired directly by the developer.

ENW moved for summary judgement arguing, among other things, that the independent duty doctrine barred negligence claims for harm that was in effect an economic loss. ENW acknowledged that it was responsible for some of the alleged construction defects; however, it argued that any tort duty it bore was limited to only those cases where its negligence resulted in personal injury or actual physical damage to property. Thus, because the HOA alleged only “potential damage” and not actual property damage to the condominium buildings, it could not maintain a claim under the independent duty doctrine.[4]

ENW’s motion for summary judgement was denied by the trial court. In affirming, the Court of Appeals first held that despite not having a contractual relationship with ENW, the HOA nevertheless possessed a legally protected interest in the condominium buildings such that ENW owed it a reasonable duty of care.[5] The Court went on to hold that a structural engineer’s independent duty of care “encompasses, inter alia, the prevention of safety risks . . . . [e]ven where such safety risks do not cause consequential damage to persons or property.”[6] Consequently, the HOA could maintain a claim against ENW for its failure to design a building that was structurally sound pursuant to the independent duty doctrine.

This latest case marks a trend of expanding opportunities for subrogating carriers to recovery from potentially responsible third parties under the independent duty doctrine. In the property damage context, it is no longer necessary to show actual property damage in order to establish liability, rather the mere impairment of a building or other item of property may suffice. Conceivably, this could create third-party liability in a slew of claims that ordinarily would not present recovery potential and subrogating carriers should seek to recognize these new opportunities.

Footnotes:

Westport Harbor, 193 Wn. App. 695 (Div. II May 3, 2016).
Affiliated FM Insurance Co. v. LTK Consulting Services, Inc., 243 P.3d 521 (2010).
Eastwood v. Horse Harbor Foundation, Inc., 241 P.3d 1256 (2010).
Westport Harbor, 193 Wn. App. 695 at ¶ 21.
Id. at ¶ 20.
Id. at ¶ 23 (citing Affiliated FM, 243 P.3d at 529-30).

 

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