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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Illinois Expands Reach of Implied Warranty of Habitability to Subsequent Purchasers

House.1In deciding an issue of first impression, an Illinois appellate court expanded in early May the application of the implied warranty of habitability. “Implied warranty of habitability” is a group of words that fails to roll smoothly off the tongue and that may send some readers running for the hills knowing that the words that follow will likely be legal-ish and, well, boring. As a nod to coolness and to cut down on the Ugh Factor in reading this post, I’ll refer to the warranty as the IWH in this brief post.

The IWH is a good thing for home buyers, home owners and, in turn, subrogating property insurance carriers. The IWH is also an American thing—at the time its application was first gaining traction, the 1950s, it represented a departure from property laws that had been imported and derived from the “buyer beware” laws of Great Britain.[1]

While the IWH is a baby boomer in U.S. law, it’s a Gen X-er in Illinois, being first recognized in the early 1970s. Illinois courts describe the IWH (in what some may take as fightin’ words) as a “creature of public policy” and “judicial innovation.”[2]  The purpose of the IWH is geared towards protecting innocent purchasers of new homes from harm caused by construction defects that the purchasers couldn’t have discovered at the time the home was purchased.

For the last 3 decades, the protections for homebuyers built into the IWH have extended to subsequent purchasers of a home. Illinois recognizes that, like the first purchaser of a home, subsequent purchasers of the same home “rely on the expertise of the person who built the home to a substantial degree.” However, Illinois courts have traditionally allowed builders to disclaim and home buyers to waive the IWH despite the strong public policy behind the doctrine. Such waivers, if not prevalent, are commonplace in home purchase and home construction contracts.

The Illinois First District Appellate Court recently held in Fattah v. Bim that an otherwise “good” waiver of the IWH between a home’s builder/seller and the home’s first purchaser may not bar an IWH claim made by a subsequent purchaser against the builder/seller. In Fattah, Buyer #1 purchased a newly constructed home from Bim. The purchase contract included a waiver of the IWH but it did not include language extending the application of the waiver to purchasers beyond Buyer #1. Fattah then bought the home from Buyer #1 three years after the home was first sold. Only 5 months after the second sale of the home, portions of the structure started to collapse.

The appellate court rejected the notion that the waiver of the IWH extended to Fattah because there was no evidence that Fattah was aware of the waiver or otherwise made a party to the waiver by its terms. Illinois’ previous extension of the IWH to subsequent purchasers, coupled with the lack of language in either the original sales contract or the sales contract between Fattah and Buyer #1 that would have notified Fattah of the waiver’s existence, mandated the favorable outcome for Fattah. Even the presence of an “as-is” clause in the contract between Fattah and Buyer #1 failed to trigger the waiver in favor of the builder. In remanding the case for further proceedings, the appellate court noted that “[i]nterestingly, while lack of privity defeats the waiver, lack of privity does not defeat the warranty.”

The Fattah case illustrates an avenue of recovery around a contractual waiver, lends legitimacy to pursuing contractors based on implied warranty theories, and begs you to consider the IWH theory of liability even when your insured is a second or third purchaser and agreed to an “as-is” clause in buying a home.

[1] Michael A. Brower, The “Backlash” of the Implied Warranty of Habitability: Theory vs. Analysis, 60 DePaul L. Rev. 849 (2011); Roger L. Price & M. Ryan Pinkston, The Implied Warranty of Habitability in Illinois: A Critical Review, 98 Ill. Bar J. 92, 93 (Feb. 2010).

[2] Fattah v. Bim, 2015 IL App (1st) 140171 ¶ 21 (May 1, 2015).



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International Recovery Spotlight: Recovery Rights of Insurers in China for Medical Expenses

international.1The Chinese Insurance Law provides that subrogation rights are not available to the insurer of an insurance policy concerning life or bodily injury, if the insurer has paid the insured or the beneficiary for death, bodily injury or illness suffered by the insured due to a third party’s action. The rationale behind such rule is believed to be that the right of claim relating to the loss of life or bodily injury is specific to the victim and shall not be assigned. Furthermore, the “unjust enrichment” which subrogation is originally designed to prevent (among other things) shall not apply to the loss of life or bodily injury because such type of damages cannot be measured by monetary terms.

It has been an area of controversy, however, whether an insurer may acquire subrogation rights for medical expenses paid to the insured in such context. Due to the lack of specific legal provisions and clear official interpretations, practices vary from locale to locale. In some instances, the insurer’s payment of medical expenses incurred related to death, bodily injury or illness suffered by the insured due to a third party’s action is deemed to be a type of compensation within the nature of “making whole”, and therefore could result in appropriate subrogation rights. Most of the insurance companies, however, would categorize such type of medical expenses as a part of the payment under the insurance concerning life or bodily injury, and exclude them from the benefits of subrogation rights. Such inconsistent practices often result in dispute among parties to an insurance policy as well as dramatically different outcome for lawsuits with similar facts.

Many Chinese scholars are of the opinion, which is supported by some Chinese courts, that if the insured dies or becomes permanently disabled due to an insurance incident caused by a third party’s action, the insured or the beneficiary shall have the right to receive both the insurance payment and the third party’s compensation. Since a person’s life or disability may not be measured by monetary terms and the interests lost due to the death or disability may not be compared with the compensation received, there won’t be unjust enrichment even if the insured or the beneficiary is compensated by both the insurer and the third party tortfeasor. Consequently, the insurer shall not have the subrogation rights. On the other hand, if the insured’s loss is limited to medical expenses or other related expenses, she/he shall not be entitled to compensation by both the insurer and the third party tortfeasor. Accordingly, to prevent possible unjust enrichment, the insurer may acquire subrogation rights after paying such expenses.

Some practitioners go even further on this issue. They believe that even if the insured dies or becomes permanently disabled due to an insurance incident caused by a third party’s action, a case by case analysis is still necessary while determining the availability of subrogation rights. According to these practitioners, if the insurance payment under a life insurance policy is of the nature of “making whole”, subrogation rights shall be available. For example, accident insurance possesses the characteristics of both a life insurance and a property insurance, and the insurance payment thereunder sometimes may be of the nature of “making whole”. Therefore, subrogation rights may be available to insurers of accident insurance policies. Furthermore, although subrogation rights may not be available for death payment or permanent disability payment, the payment for medical expenses and lost work which is made as a part of the compensation for death or permanent disability shall be allowed to be recovered by the insurer using acquired subrogation rights.

In China, the primary source of law is the published laws and regulations and the official interpretations thereof. The prior court decisions are not given precedential authority in China. Therefore, the controversy over subrogation rights on medical expenses payment may continue unless and until a published law (or an official interpretation) clarifies this issue.

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Are “Sound Waves” the Future for Fighting Fires?

firefighter.1For their senior research project, two young engineering students at George Mason University came across an experiment conducted by the Defense Advanced Research Projects Agency (“DARPA”) in 2012 called “acoustic suppression of flame.” In a nutshell, the experiment focused on whether sound waves could disrupt flames. The research was ultimately abandoned after the agency was unable to effectively analyze whether the use of sounds waves could disrupt flames on a large scale.

After reviewing the research, the two engineers became interested in whether something portable and affordable could be created that would generate sound waves to suppress flames. Their original concept was a hand-held device that would extinguish kitchen fires and perhaps fires in small, confined spaces. If they could develop such a device, an obvious benefit would be the elimination of toxic and messy chemicals commonly found in commercial fire extinguishers. After much skepticism was expressed regarding their proposal, the two students began controlled experiments to determine whether the idea was commercially viable.

The engineers first placed flaming rubbing alcohol next to a large subwoofer. This approach was unsuccessful so they then tried ultra-high frequencies which made the flames vibrate but not go out. They finally used very low frequencies in the 30 to 60 hertz range and noticed that fires began to extinguish. After replicating this scenario many times, the engineers discovered that the sounds would “vibrate” the oxygen away from the flames. Once the small fires no longer had oxygen to keep them going, the fire would suffocate and die.

A prototype “sound extinguisher” was then created. It is basically a large can that is connected to a ventilated amp. A bass speaker installed inside the can emits sound which is then directed into a tube with a hole at the end which narrows the sound waves to a small area. The end of the tube and accompanying low frequency bass is what is projected at the flames. While the students have had success with extinguishing small alcohol-fueled fires, they are optimistic that it can work for other flammable chemicals as well. A local fire department has requested further testing of the sound extinguisher on structure fires, and the students are applying for a provisional patent. While this technology is still in its infancy, it at least provides the prospect of yet another alternative to effectively fight fires.

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Recent NY Decision Discusses the Scope of Limitations of Liability Contained in an Electric Utility’s Tariff and Other Affirmative Defenses


gavel.1On February 27, 2015, District Judge Joanna Seybert of the Eastern District of New York issued a significant and informative Decision on the issue of striking a defendant’s affirmative defenses in Allstate Ins. Co. v. Long Island Power Authority, 14-CV-0444, NYLJ 1202719533249 (E.D.N.Y., Decided February 27, 2015). The decision discusses the legal standard for moving to strike affirmative defenses, as well as explains in detail the Court’s rationale in either granting or denying the motion as to several common defenses asserted in tort actions. As discussed below, the Decision is particularly informative with respect to the scope of the limitations of liability contained in a New York power company’s Tariff. The decision also clarifies that spoliation of evidence is a discovery issue rather than an affirmative defense.

When a plaintiff commences litigation by filing a Complaint, the responsive pleading served by counsel for the defendant almost always contains “affirmative defenses” to the plaintiff’s causes of action. When suit is commenced against a New York utility, the utility’s Answer often includes an affirmative defense asserting that the plaintiff’s causes of action are barred by limitations of liability contained in the utility’s tariff. A tariff is document which sets forth and explains the terms and conditions of a utility company’s relationship with its customers. Tariffs are made available to the public and filed with the New York Public Service Commission (“PSC”), the entity which, among other things, is responsible for regulating and overseeing the water, gas, electric and telecommunications industries in New York.

In Allstate Ins. Co. v. Long Island Power Authority, the plaintiff, Allstate Insurance Company as subrogee of Lawrence F. Dooling and Barbara A. Dooling (“Allstate”), moved to strike seven affirmative defenses asserted in the Answer served by the defendants, Long Island Power Authority (“LIPA”) and National Grid (collectively, “defendants”). In this lawsuit, Allstate is seeking to recoup its payments to its subrogors (“the Doolings”) related to property damages sustained as a result of an electrical fire at their property in Hampton Bays, New York. Allstate’s Complaint alleges that the defendants negligently caused the electrical fire by failing to properly supply electricity to the property.

In deciding Allstate’s motion seeking to dismiss the defendants’ seven affirmative defenses, the Court acknowledged that a motion to strike is generally “determinable only after discovery and a hearing on the merits,” and that “[a] court may therefore strike only those defenses so legally insufficient that it is beyond cavil that defendants could not prevail upon them.” Id. at 5. However, in a Memorandum and Order likely to be referenced many times in the future, the Court partially granted and partially denied Allstate’s motion, which resulted in dismissal of four of the defendant’s affirmative defenses.

The Court’s decision and rationale is particularly insightful with respect to the dismissal of two of these affirmative defenses that arise often in tort litigation against utilities in New York. In their Sixth Affirmative Defense, the defendants relied on language contained in Leaf No. 27 of LIPA’s Tariff, which states, in pertinent part: “[LIPA] will not be liable … [f]or interrupted, irregular, defective or failed service if the causes are beyond [LIPA’s] control or are due to ordinary negligence of its employees or agents.” Id. at 8 (citation omitted). However, the Court determined that this Tariff was inapplicable in the present case which seeks to hold defendants liable for their negligent supplying of electricity rather than for an “interrupted, irregular, defective, or failed service.” Id. at 8. For this reason, the Court struck this affirmative defense as being inapplicable in this case. Significantly, the Court also noted that “even if the language of Leaf No. 27 covered liability arising out of the supply of electricity, Section 281.1 of the PSC’s regulations prohibits any such limitation of liability.” Id.

The defendants’ Fifth Affirmative Defense pertains to spoliation of evidence. In granting Allstate’s motion to strike this affirmative defense, the Court clarified that spoliation of evidence is not an affirmative defense, but rather a discovery issue. Specifically, the Court cited to New York case law holding that the rule dealing with spoliation of evidence “does not prevent recovery by the plaintiff; it merely leads to the exclusion of evidence or to the admission of negative evidence.” Id. at 8 (citation omitted).

In addition to being a resource of information regarding these commonly asserted affirmative defenses, the Court’s decision is important in that a motion to strike is rarely a device that is used by subrogating plaintiffs and is one that should be reviewed and analyzed when an answer to a complaint is interposed. If a motion to strike is appropriate, it can be a useful way to streamline the discovery process and narrow the issues pertinent to obtaining a successful recovery.

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Recent Illinois Case Provides Insight on Avoiding Implied Co-Insured Doctrine

tenant.1The Illinois supreme court case Dix Mut. Ins. Co. v. LaFramboise is often used to argue against landlord-tenant subrogation claims in Illinois. Under Dix, tenants are considered co-insureds under a landlord’s property insurance policy by virtue of making rent payments unless the lease clearly says otherwise. Because an insurer can’t pursue subrogation from an insured, Dix is regularly used as a defense to subrogation claims in situations where a tenant negligently damages a landlord’s property.

A recent unpublished opinion from Illinois’ Second District Appellate Court highlights lease terms that may overcome the obstacles to recovery posed by Dix. In Pekin Ins. Co. v. Murphy, the defendant tenants neglected a clogged toilet. The trial flushed the plaintiff’s subrogation lawsuit citing Dix. According to the appellate court, however, the lease “clearly allocated [to the defendants] the risk of water damage caused by defendants’ misuse and neglect of the premises.” The appellate court based its conclusion on clauses in the lease that (1) required the tenants to repair damage to the property resulting from their misuse or neglect and (2) required the tenants to maintain general liability insurance for property damage occurring on the property. Reinstating the plaintiff’s case, according to the court, was “consistent with the notion that subrogation . . . ‘designed to place ultimate responsibility for the loss upon the one on whom in good conscience it ought to fall and to reimburse the innocent party who is compelled to pay.’”

The lesson: be certain to thoroughly review the lease before flushing your next potential subrogation claim against a tenant in Illinois. Pekin v. Murphy illustrates lease language that an Illinois court may find unambiguously defeats the notion that the tenant is a coinsured under a particular lease.

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