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I recently had occasion to assist in helping my fiancee get fully indemnified for a claim in which two insurance carriers were involved. I won't say who the two carriers were, but suffice it to say that one of them trained me much more proficiently than the person I was dealing with at that company. I believe the person they were using as their adjuster was an independent, and probably a catadjuster. I never got a straight answer on that. I wasn't able to get the point across to this carrier that there was no subrogation involved in this claim, but there was a potential for contribution, until I worked my way up a couple levels of management. So, in the hopes of helping some others understand the difference, here's a (hopefully) fun little quiz:
(By the way, I am sure you know the answers to this, Leland. My hope is that some other people will take a stab at this before you help explain it probably better than I can.)
1. What is subrogation and what elements need to exist before subrogation should be pursued?
2. What is contribution and what elements need to exist before contribution should be pursued?
3. For each of the following scenarios - are they situations in which subrogation should be pursued, contribution should be pursued, neither or both?
a. The insured is a unit owner in a condominium complex. The upstairs neighbor leaves the bathtub running while they go to the kitchen to take the pie they are baking out of the oven. They forget about the running water. The bathroom overflows and comes cascading down into the insured's unit. The upstairs neighbor has unit owner's insurance with company X. The insured has unit owner's insurance with company Y. The condo association is insured by company Z. Subrogation or contribution, neither or both? Who would you proceed against? What information do you need before you decide whether to proceed or not?
b. The insured's adult daughter, who lives with the insured, throws something down the toilet in the second floor bathroom that clogs it up. She flushes the toilet and runs off to work because she is already late. She returns home nine hours later to discover that the toilet did not stop running and there is water cascading down into the first floor of the townhouse. The insured has unit owner's insurance with Company Y. The Condo Association is insured by Company Z. Two months into the claim the adjuster for Company Y discovers that she has paid for some items that should have been paid for by Company Z. Subrogation or contribution, neither or both? Who would you proceed against? What information do you need before you decide whether to proceed or not?
c. The insured lives in a condo complex that is 25 years old. Black mold appears on the bathroom wall of the insured's unit. When a plumber is called in to fix the possible plumbing problem, he cuts a hole in the wall and discovers that the water is coming from a leak in the shower plumbing of the unit above the insured's. The upstairs neighbor has unit owner's insurance with company X. The insured has unit owner's insurance with company Y. The condo association is insured by company Z. Company Y pays for the damage. Subrogation or contribution, neither or both? Who would you proceed against? What information do you need before you decide whether to proceed or not?
I'll try to breathe a little life into this Steve, but then have to get busy to hit the road again.
For starters, as to "a" and "c", the bylaws or leases need to be reviewed in order to determine who owns what (from the studs in, or from the wall surface in, etc.). There may also be waivers of subrogation in the documents.
Posted By Medulus on 02 Jul 2012 07:05 PM
Looks like no one wants to touch this one. It is an important issue, though, even for catadjusters. I hate to answer my own questions before anyone else has given it a shot. Maybe we'll have to call in the big guns after all and look to Leland or someone else who has been around for awhile to give their answers.
I am not ashamed to say that "I do NOT know the correct answer other than whatever logic would dictate" However, I have been around long enough to know that logical answer isn't always the correct answer.
Even with 90% of my experience is as a CAT adjuster, these kinds of questions are something I SHOULD know.
So with that, I see myself more as an "Appraiser" who documents and recommends payment as opposed to an "Adjuster" who documents and adjusts and pays the claim.
Great questions Steve!
If I'm speaking with the general public, my simplest response regarding subrogation is "reimbursement".
If reimbursement is to occur, the ensuing subrogation investigation must reveal that a third party was negligent (did a third party create an unreasonable risk of harm/damage to another?). Before we get too far into this, I will acknowledge that most of the time, carriers will have a separate subrogation department that generally has adjusters who are adept in liability losses more so than property. Thus, it is up to the catastrophic adjuster (the primary audience in this forum) to determine if it is reasonable to determine if the loss resulted from eventual and expected failure, act of nature, or not. If there is a potential for contributory factors that hit towards potential subrogation, then that adjuster should make a reasonable attempt to secure the mfg. or installer info and history. Once this is done, the remaining investigation is delegated to adjusters adept in subrogation and/or liability claims both in-house and independent.
A typical example involves shingles that have shifted down-slope and are only partially displaced. This is usually an installation defect whereby the shingles were not nailed properly and is not associated with wind. The adjuster should attempt to document the age, installer, and manufacturer. Present this information to the carrier and offer to assist with ensuing investigation if qualified to do so. Construction defect claims are a different beast which are investigation intensive and require the quintessential adjuster who is equally adept in both property and liability losses.
As stated above, for subrogation to take place, negligence must be present. There are four (4) elements to Negligence:
1. Duty Owed to others; what is a reasonable care that must be exercised in the design or installation of the product.
2. Breach of duty; did the design of the product take reasonable consideration of any foreseeable demise or did the installer take reasonable steps to ensure that the product was installed properly. In General Liability losses, one would ask if the store owner knew of a spill (hazard), did he take reasonable steps to clean it up (he owes this duty once he is aware of the hazard).
3. Proximate Causation: this issue essentially relates to the 'contribution' question that Steve brought up. In property losses, the cause is usually obvious. If it's not, experts are acquired to parse relevant facts and clearly document evidence that reveals the cause. When two (2) or more contributing factors are present, one would need to determine which state applies and decide if its jurisdiction is:
The investigation would also need to consider any intervening causes that may be present. These are reasonable defenses that could get your installer or manufacturer off the hook. An example of an intervening cause in using the above example regarding the roof is if an act of nature actually took place and caused wind damage to the roof as well as many others around it that were damaged by the same event. This usually is sufficient to rule out potential recovery against the faulty installation.
4. Damages; there must be damages associated with the loss. Nuisance claims exist that do not have any quantifiable damages. These are difficult and can result in summary judgements since they can't be quantified.
With all that said, the adjuster must hurry. Investigations can take time and there are state imposed time regulations. Regarding injury losses, you have statutes of limitations (triggered by an injury or event; auto accident or hurricane) and statutes of repose (triggered by an act; certificate of completion/installation).
Great explanation of subrogation and negligence, Jud. Every set of guidelines for independent adjusters I have ever read (including the instructions I wrote for the company for which I work) ask that the IA comment on subrogation and salvage potential. Most independents do all they can to avoid investigating subrogation. But most carrier subrogation units are primarily collections units. They farm out the investigation to engineers, private investigators, and attorneys (to name a few). If there is some basic investigation that can be done by the adjuster, I will gladly pay extra at time and expense to have the adjuster perform that portion of the investigation. It is a good, legitimate way to increase the fee billing.
By contribution, however, I meant something other than contribution to negligence. I was referring to what Chuck defined earlier. Contribution as a type of reimbursement has to do with when two or more insurance companies insure the same property. If one wanted to review the principles involved in contribution, he or she might want to check out "The Guiding Principles", which have been around since the seventies. They are not necessarily legally binding, but are generally followed by most insurance carriers when there is a dispute about who owes what.
By the way, what Mike said about the condo docs is spot on. I will add a bit to it. More and more people are moving into condo complexes, so more and more of our claims are going to be condo claims. A condominium is not necessarily residential either. There are business condos as well.
The first thing anyone handling a condo claim needs to know is what the condo law of the state says about who owns what and whose carrier is primary. These vary with each state. For instance, the condo laws of Florida make the drywall out the responsibility of the condo association's insurer and the wall, ceiling and floor coverings in the responsibility of the unit owner. Washington, on the other hand makes the condo association insurer primary for all building elements, but only if the condo docs state that they are primary. (Every condo policy from Washington I have dealt with either has has that condition in the condo docs or it was added as an addendum to the by-laws.) It has been awhile since I worked Maryland, but I believe their law provides that the association policy is primary for the building elements of the units as they were at time of sale. This would mean the unit owner policy is only responsible for their improvements and betterments. Some states have either very weak condo laws or no condo laws (California, for instance) that leave the condo docs as the defining authority on who insures what and who is primary. Some of these laws can leave the unit owner's policy and the association policy insuring the same property.
It is always a good idea to get a copy of the condo docs unless the condo law is so clear (like Florida) that it is easily understandable. It still may be a good idea to check other provisions of the by-laws because, like Mike explained, some condo by-laws contain a "no subrogation" clause that prevents one unit owner from subrogating against another or even subrogating against the association. This is where the difference between subrogation and contribution becomes very important. A "no subrogation" clause in a set of condo by-laws does not affect the right to seek contribution at all. That was the substance of my disagreement with my fiancee's adjuster. He kept telling me that there was a 'no subrogation" clause in the by-laws, and I kept telling him that subrogation was not at issue. I told him that he should instead be seeking contribution. I could not convince him of this. It was like talking to a rock, and it was clear he had never heard of contribution before but would not admit that there was a gap in his knowledge. He is not alone in this. This is actually common in the adjusting community, staff and independent.
Leland brings up some great questions that need to be answered as well. I like his idea about going upstairs and talking to the upstairs neighbor. More about that when we put together the final answers to the questions I originally posed.
On a person note, thank you for you congratulations, Mike, Leland, and Jud. And it's good to be back and feeling quasi-normal again.
Leland and I had lunch together at the California Earthquake Certification Seminar yesterday in Pomona. I still expect he will weigh in with his usual nuanced response, but in the meantime I am going to give my answers to the quiz I posed to initiate this thread.
1. Subrogation is the attempt by the insurance company to collect back money they spent from an at-fault party. In order for subrogation to be appropriate, there must be legal liability for the damage on the party of someone other than the insured. Jud has more than adequately explained the elements of legal liability in his post. In order for an insurer to have a right of subrogation, they must first pay the claim. If they deny the claim or it is below the deductible, there is no right on the part of the insurer to subrogate. However, the unit owner may still have a right to subrogate directly against the at fault party.
2. Contribution is the attempt by the insurer to collect back money they have spent for items that are also insured by another insurer or to get another insurer to contribute to the payment of a loss for which they both have some responsibility to pay. Chuck stated it more succinctly above. A typical contribution situation would be where the Homeowners Association insurer is responsible (or often primary) for condo building elements as the condo was originally sold while the Unit Owner's insurer is responsible (or often primary) for upgrades. An example would be where a carpet inside a condo unit is damaged. The current owner had previously replaced the average carpet which was original to the unit with wool carpet. The Association insurer might owe for average carpet, while the unit owner's carrier owes for the difference between the average carpet and the upgrade. If the Unit Owner's carrier pays for the entire cost of the carpet, they would be entitled to seek contribution from the Association's carrier. This is an important distinction because many condo CCR's and some state condo laws (Washington state comes to mind) forbid one unit owner's carrier from subrogating against another unit owner or against the association. It does not, however, forbid contribution.
3a. This is a potential subrogation situation where the upstairs unit owner appears, as described in the scenario, to be negligent. At the very least, the adjuster must determine whether the state condo law forbids subrogation, determine whether the condo documents forbid subrogation, and whether there was any malfunction of the bathtub (and if so, was it recently installed or worked on by any plumber, etc.). The right of subrogation derives from the insured, so if the insured is forbidden from subrogating so is their insurance carrier. Company Y may proceed against the upstairs unit owner and any other at-fault parties determined to be negligent (only after first paying the claim), and if those parties are smart they will report a liabity claim to their carrier (company X).
3b. This is a potential contribution situation. There is no potential for subrogation against the daughter because, as a relative of the insured living at the residence premises the daughter is also an insured. If it turned out that the toilet had a malfunction there could be subrogation potential against the manufacturer or installer, but assuming such is not the case, contribution is the appropriate response to this situation. Company Y paid for something that Company Z should have paid for because they were primary or because both companies insured the same property elements. Should company Z dispute that they owe any part of the loss, the appropriate venue for settling the dispute would likely be Intercompany Arbitration if both companies are signatories to the Intercompany Arbitration Agreement.
3c. I would say that, as described, this scenario lends itself to neither subrogation nor contribution provided both companies Y and Z pay their appropriate share of the loss. Some investigation should be done to determine whether any recent plumbing work has been performed on the upstairs plumbing where the leak occurred or whether the upstair unit owner knew the leak was occurring and did nothing about it. But, barring some unknown situation coming to light, and considering that the plumbing is likely 25 years old and behind a wall where it is not visible until it does damage, there is no negligence, no liability and no potential for contribution.
Those are my answers. I'm sure some of the other experienced adjusters on this site can add to them if they have the time and inclination.
Given the appalling lack of education provided even to carrier staff, if you know the difference between subrogation and contribution you will be in the top 20% of adjusters. So you rookies who are paying attention, you can now impress your file examiners with your superior knowledge.