Alternative Risk
Transfer Solutions
Rising medical malpractice costs are inflicting real pain on
patients, doctors, hospitals, nursing homes, and insurers.
Insurers are paying out significantly more in claims than they
collect in premiums, and many have scaled back their
exposure to the medical malpractice market and, in some
cases, exited the market completely. Insurers that remain have
imposed significant rate increases in order to cover their costs.
According to the American Medical Association (AMA), the medical liability
situation has reached a crisis point in at least 20 states and is looming in many
others. Trauma Centers and specialist practices, such as obstetrics and gynecology,
are increasingly under threat. Also under pressure are the nation’s hospitals, nursing
homes, and other health care facilities. These facilities are being forced to close or
to reduce the range of services they can offer to the communities they serve.
Medical Malpractice
Insurance Crisis
JOHN J. O’BRIEN, JD, CLU, CPCU
Vice President and Director, Client Services
Wilmington Trust SP Services (South Carolina), Inc.
Page 2
Medical Malpractice Insurance Crisis
Medical malpractice insurance coverage problems
are regional or state specific, so the severity of the
situation differs from state to state. Various state
legislative attempts at malpractice reform have been
implemented, including peer review, state
catastrophic funds, caps on damages (particularly
non-economic damage caps), prohibitions on venue
shopping, mandatory arbitration, and outright
insurance premium rate control (i.e., California’s
Proposition 103).
While these attempts have experienced some
success, the medical malpractice crisis continues to
grow. Accordingly, the medical community can
continue to wait for further state and federal
legislative mandates, or this community can seek a
proactive approach to dealing with this problem—
the alternative risk transfer solution.
The Alternative Solution
Today’s medical malpractice insurance market is a
mix of traditional insurers, provider-owned groups
(physicians and hospitals), and alternative risk
transfer entities. The primary alternative market
structures available to health care providers are risk
retention groups, captive insurance companies,
reciprocals, and purchasing groups. The majority of
medical malpractice alternative vehicles are formed
as risk retention groups or captives. While captives
and risk retention groups are formed for the same
purpose, there are important distinctions and
benefits associated with each of these vehicles.
Control is the primary reason for implementing an
alternative risk transfer (ART) solution: control over
underwriting guidelines and procedures, control of
rates, control of coverage, and control of claims.
Certain physicians may find that coverage is not
available in the commercial market because of the
nature of their practice, claims history, or gaps in
their coverage. ART solutions are better positioned
and provide the flexibility needed to administer such
individual differences. In addition, seekers of an
alternative solution may be motivated to find a risk
transfer vehicle that will not lump their exposure
with poor underwriting risks. Statistics support the
theory that a few physicians are responsible for a
majority of the medical malpractice claims.
Accordingly, ART options, including the formation
of onshore/offshore captives and risk retention
groups, are becoming increasingly popular in the
health care community.
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The charts below indicate that health care captives will grow significantly in
coming years. Of the 12 new Risk retention Groups (RRGs) added to the Risk
Retention Reporter in the first quarter of 2006, ten are in health care.
Page 4
RRGs are primarily used by small to medium size
hospitals or medical centers, small to medium size
assisted living or nursing home organizations, as well
as physicians’ groups.
RRGs have a distinct advantage over all other
available alternative risk financing vehicles. They are
the only entities authorized to actively market and
sell insurance in all 50 states without being subject to
the extremely cumbersome and costly state-by-state
regulatory environment imposed on all other forms
of insurance carriers, provided they have properly
registered in the states where they operate, they are
in good standing in their state of domicile, and they
abide by the owner/insured requirements under the
LRRA. In most cases the only other means by which
groups of individuals and small organizations could
operate a multi-state alternative risk program would
be to partner with a fronting carrier. A front is a
multi-state admitted commercial carrier that allows
other entities to utilize its paper, and sometimes
underwriting and claims services, for a fee.
Unfortunately, the recent hard market and medical
malpractice crises have resulted in many fronting
carriers discontinuing their operations, and the ones
that have remained have increased their fees and
collateral requirements significantly. Without the
ability to utilize the RRG structure, most groups of
individuals and small organizations that have
gathered to form alternative risk financing vehicles
in recent years would not have been able to afford
to do so.
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Medical Malpractice Insurance Crisis
Types of Alternative
Risk Transfer Vehicles
Risk Retention Groups (RRGs)
Federal law actually created the concept of Risk
Retention Groups. The initial purpose of these
groups was to mitigate the impacts of a different
crisis - the availability of product liability insurance.
The original federal act was known as the Product
Liability Risk Retention Act of 1981 (PLRRA).
Subsequently in 1986, the Liability Risk Retention
Act (LRRA) was adopted to allow risk retention
groups and purchasing groups for all types of liability
insurance, including medical malpractice.
Risk retention groups do not have to be licensed in
every state like a traditional insurance company. A
risk retention group is licensed and created under
state law but, pursuant to federal law, is authorized to
sell insurance in all states.
The members of the risk retention group own the
insurance company and are insured by the insurance
company. Owners must be insureds and insureds
must be owners. This form of ownership is required
by law, and it enables members to have control over
rates, coverage, loss control, defense costs, risk
management, and underwriting. Furthermore, the
group has control over the selection of managers,
auditors, actuaries, attorneys, and other service
providers necessary in operating the RRG.
Page 5
Captive Insurance Companies (Captives)
A captive insurance company is an insurance
company that insures the risks of its owners and is
licensed in a domicile that permits licensing of
such groups. This includes onshore domiciles like
Nevada, Vermont, South Carolina, and Delaware, as
well as offshore domiciles like the Caymans and
Bermuda. Unlike risk retention groups, a captive is
only authorized to write insurance in the domicile
where it is licensed and, as such, is subject to
regulation in each jurisdiction where it conducts
business.
Traditionally, offshore domiciles have been selected
by medical malpractice groups because of lower
minimum capitalization requirements and less
conservative premium-to-surplus ratio require-
ments. The Cayman Islands, in particular, have
gained a reputation for understanding the health
care profession’s insurance needs and providing a
high level of expertise in the regulation of medical
malpractice captives. Because of this receptivity
towards medical malpractice captives, the Caymans
seem to be the location of choice for those seeking
to establish an offshore facility.
More recently, captive formation in onshore
locations has gained significant momentum. This is
in part due to the increase in the number of U.S.
domiciles allowing the formation of captives, an
improvement in the captive laws and regulations in
U.S. domiciles, the renewed tax haven perception of
offshore domiciles due to the recent Enron debacle,
With these vehicles,
medical professionals
have direct involvement in
risk and loss control and
do not have to subsidize
the overhead and profits
of a commercial carrier of
malpractice insurance.
Page 6
and changes to tax laws that have eliminated many
of the tax benefits of offshore jurisdictions. Vermont
has become the onshore health care leader and the
number one worldwide domicile in terms of
premium size for health care, with in excess of 85
captive programs and $1.2 billion in health care
premiums.
Another distinct advantage to a captive, particularly
for larger health care facilities, such as urban hospitals
with a wide variety of risks, is that the captive can
provide all lines of coverage, including commercial
auto, worker’s compensation, and employer’s liability.
These types of coverage are not available under risk
retention or purchasing group programs.
The forms and types of captive structures available
continue to evolve every year. However, most
captives can be categorized under three main
groupings: Single parent or pure captives; group
captives; or rent-a-captives.
Single Parent
Single parent or pure captives represent the majority
of active captives. They are typically stock
corporations owned 100% by their insured parent. An
example of a single parent captive would be a large
hospital that insures its malpractice risk, including
the liability of all staff physicians and all staff.
The hospital, through its own captive, now has the
advantage of being able to offer customized coverage
and level premiums without severe fluctuations. In
addition, the hospital will not have to worry about
lack of insurance availability from year-to-year
within its primary layer. The hospital will have
control over investment return, control over the
underwriting proposal, and increased control over
staff through risk management programs.
Single parent or pure captives are primarily used by
medium or large hospitals, or medical centers, as well
as medium or large assisted living or nursing home
organizations.
Group Captives
Group Captives provide insurance to groups that
share similar risks. Many group captives operate
much in the same manner as single parent captives
except, as the name implies, they are owned by and
insure a group of entities or individuals. This captive
form is typically chosen because the participants are
not large enough to form their own single parent
captive. While most single parent captives may
require minimum capital ranging from $120,000 to
$250,000, group captives may require up to $1.0
million in capital.
Associations may form a group captive that is owned
by the association members or by the association
itself. In addition, non-profit associations can
sponsor or own captives, e.g., Medical Associations.
The non-profit association captive is typically set up
as an exempt organization and must only cover
controlled affiliates. Distributions to members are
generally prohibited.
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Medical Malpractice Insurance Crisis
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Group Captives are primarily used by small and
medium size hospitals or medical centers, small to
medium assisted living or nursing home
organizations, as well as physician’s groups. Physician
captives would often need a minimum of 60 to 100
physicians to be viable depending on the type of
practice/specialty.
Rent-a-Captives
In certain respects, rent-a-captives are a relatively
new type of captive and have grown significantly in
popularity in recent years. This structure is designed
for those insureds who want to take small steps in
entering the alternative market or who cannot afford
to fund the capital and operating cost requirements
for a free-standing captive. Rent-a-captives combine
characteristics of single parent and group captives.
As the name implies, rent-a-captives allow third
parties to insure their own risk in the captive for a
fee. The rent-a-captive owner fronts the capital and
surplus required for the underwriting of risk and also
typically provides many of the services required for
the administration of the program. Therefore, rent-
a-captive users relinquish a large part of the
management control of their program to the rent-a-
captive owner.
The biggest advantages of rent-a-captives are ease of
access, as they are typically turn-key operations;
lower start-up costs as no capital infusion is required;
and possible lower ongoing costs of operation from
pooling of services.
It is important to note, however, that while no start-
up capital is required, the rent-a-captive owner may
require significant levels of collateral or guarantees to
protect the owner from insurance losses that may be
greater than expected. Because the rental facility is
typically a non-admitted carrier, a fronting company
usually issues the paper and reinsures into the captive
cell under a reinsurance agreement securitized by a
letter of credit or other security.
In the late 1990s, a new form of rent-a-captive was
introduced, known as the protected cell, the
segregated cell, or the sponsored captive. These
captives operate virtually the same way as pure rent-
a-captives except that the risk of the participants or
users is kept separate from each other. In other
words, the assets of one participant cannot be used to
pay the losses of another participant in the event of
adverse results. However, it is important to note that,
while most captive experts feel confident about its
contractual validity, the segregated cell legislation has
never been tested in the Courts.
Risk Purchasing Groups (RPGs)
Risk Purchasing Groups came into existence as a
result of the federal Risk Retention Act of 1986.
Unlike a risk retention group an RPG is not an
insurance company, but an association of insurance
buyers with a common identity (e.g., a medical
Page 8
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Medical Malpractice Insurance Crisis
A reciprocal may have an advantage over a risk
retention group because in certain states it qualifies
as an insurance company and may contribute to the
state insurance guarantee fund. Therefore, in the
event of insolvency, claimants can make a claim
against the insurance guarantee fund. A reciprocal
may insure any subscriber, whether related to the
organization or not. Accounting is done through the
subscriber’s accounts and income is allocated
annually to members.
Hybrid structures
It should also be noted that in some circumstances,
or to achieve specific goals, there might be benefits
in combining some of the above structures. For
example, some tax exempt organizations involved in
the health care industry have formed reciprocal risk
retention groups. This structure has the benefit of
providing both the ability of writing insurance in
all 50 states (RRGs) and accessibility to some tax
advantages offered by the reciprocal structure to tax
exempt organizations. Detailed tax implications of
hybrids is beyond the scope of this paper.
specialty society) who form an organization to
purchase liability insurance on a group basis. Since
an RPG purchases coverage from an insurance
carrier, no capital contributions are required in order
to join. The company from which the RPG
purchases insurance need not be licensed in every
state. The purchasing group’s insurer must indicate
how much premium was generated by the
purchasing group in each state on its National
Association of Insurance Commissioners’ annual
statement. Physicians considering purchasing
insurance through an RPG should inquire about the
strength of the insurance company that provides
coverage to the purchasing group.
Reciprocal Insurance Companies
A reciprocal insurance company is an
unincorporated association in which the insureds
have subscriber accounts and there is joint and
several liability among subscribers. Basically, a
reciprocal insurance company is a group of
individuals or entities that exchange promises – each
subscriber agrees to pay its pro rata share of certain
risks of the other participants.
Reciprocal arrangements are not corporate entities,
but less formal arrangements overseen by a common
attorney-in-fact appointed by the subscribers. The
reciprocal form (also known as an “inter-insurance
exchange”) has been around for over 100 years.
Page 9
Decision-Making Process—
Should we use an Alternative
Risk Transfer Vehicle?
As discussed previously, the use of alternative risk
transfer vehicles as a means of addressing the
national epidemic of skyrocketing medical mal-
practice insurance costs has grown considerably.
With these vehicles, medical professionals have
direct involvement in risk and loss control and do
not have to subsidize the overhead and profits of a
commercial carrier of malpractice insurance.
Alternative vehicles afford the physician the
opportunity to take control of his or her response to
situations where malpractice has occurred or has
been alleged. Through trial and error, many well-run
alternative vehicles have learned to place strong
emphasis on early recognition, and even give
acknowledgement to the patient when a medical
error takes place. In fact, this is the method of
operation for several successful physician-owned
captives. This is sometimes a very difficult step for a
physician to initially take, and it may not be the
procedure historically taken. Physicians are
concerned that actions taken post error will be subject
to examination in subsequent court proceedings.
Regardless of their philosophy of handling claims,
since alternative risk transfer vehicles do require a
commitment of time and resources, they may not be
the best solutions for all medical malpractice
insurance needs. Accordingly, there are a few key
variables that should be analyzed when evaluating
the feasibility of such a vehicle.
—Premium Size. To overcome the start-up costs
and ongoing operating expenses, ART programs will
often require annual premiums of $1 million or more
to have long-term viability.
—Good historical loss experience. An insured with a
good historical loss record that is experiencing
premium increases resulting from the commercial
insurance market cycles is an ideal candidate for a
captive program.
—Commercial market availability. As previously
discussed, medical malpractice insurance costs are
skyrocketing and the availability of commercial
insurance for this market is declining. ART vehicles
provide more control over insurance rates and ensure
that insurance will be available at levels necessary to
cover malpractice exposure.
—Risk retention appetite. While they are real insur-
ance companies, captives (especially single parent) are
really a formalized form of self insurance. An adverse
result at the captive level will negatively impact the
results of its parent(s) through financial consolidation
or via premium increases. If your organization is risk
adverse, a captive may not be right for you.
—Dedicated project leader. An ART is a complex
entity subject to accounting, tax, and regulatory
guidelines that may be unfamiliar to the organiza-
tion(s) or individuals considering this form of insur-
ance. The presence of a dedicated project leader, with
senior management credibility or credibility with
peers, in the case of physician group captive programs,
will greatly enhance the successfulness of forming
and operating the alternative risk transfer vehicle.
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Medical Malpractice Insurance Crisis
Should I form a Captive or
a Risk Retention Group?
Both captives and risk retention groups are viable
ART vehicles for dealing with today’s medical
malpractice insurance problems. However, as
evidenced by the table on page 11, each has specific
characteristics that must be considered when making
an informed decision.
It should be noted that with any well run medical
malpractice alternative vehicle, whether it is a captive
or a risk retention group, the insured or insureds
should be involved as much as possible in all major
decisions impacting the operation of the entity,
as well as all issues surrounding the ART’s
ongoing operation.
Of course, prior to implementing any ART, a
feasibility study must be completed, which will
include an actuarial study, as well as a financial and
operations evaluation of the insurance situation. In
addition, a feasibility study should, if it reaches the
conclusion that an alternative risk transfer vehicle is
the best solution, provide for consideration of one or
a few proposed structures, including a comparison of
domiciles and available ownership considerations.
Tax Treatment of
Alternative Vehicles
A very important issue facing the designers of an
alternative structure for both taxable and tax-exempt
health care organizations and practitioners is the
deductibility of premiums paid to the ART program
and the tax treatment of the captive or risk
retention group itself. This topic is well beyond
the scope of this paper, but should be addressed
with professionals prior to setting up any type of
ART vehicle.
Captives and Wealth
Protection and Wealth
Preservation for Physicians
Many physicians are also very interested in the
possible employment of captive vehicles for wealth
protection and wealth preservation strategies. These
considerations should be discussed with the
physician’s advisors. Captives can be used in the
areas of insured-owned life insurance, annuities, and
disability policies, as well as employee benefits.
Conclusion
In conclusion, ART vehicles, when structured and
run properly, can effectively manage risk and
control insurance costs. In addition, ARTs bring
the advantage of direct involvement in risk and
loss control, along with the potential for reduced
premiums for health care practitioners. ARTs can
provide a viable alternative to waiting out the
medical malpractice storm.
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Page 12
John J. O’Brien, JD, CLU, CPCU
wilmingtontrust.com
Delaware (Corporate Headquarters)
Wilmington
302.636.6766
New York
New York City
212.751.9500
Nevada
Las Vegas
702.866.2200
South Carolina
Charleston
843.723.0418
Vermont
Burlington
802.865.4331
Cayman Islands
Grand Cayman
345.946.4091
Channel Islands
Jersey
4415.3449.5555
UK
London
4420.7614.1111
Ireland
Dublin
+353 (0)1.612.5555
Germany
Frankfurt
+4969.2992.5385
John is responsible for overseeing the design, implementation, formation,
and ongoing management services required by captive insurance company
clients. His duties also include liaising with regulatory authorities.
Prior to joining Wilmington Trust SP Services (South Carolina), Inc. in
2005, John was the CEO of Charleston Captive Management Company.
Generally acknowledged as one of the earliest proponents of the captive
industry in South Carolina, John founded the first captive insurance
management company in the state and helped form the South Carolina
Captive Insurance Association, serving as president and as a member of
the board of directors.
John has over three decades of experience as an attorney in private
practice and in the insurance industry. He holds a JD from the University
of Tennessee and earned his bachelor’s degree from LaSalle College. He
has taught and written extensively on insurance matters and addressed
insurance conferences in many locations. He has also testified as an
insurance expert in state and federal courts.
Tuesday, October 6, 2009
Subrogation Expert Arbitration Services -Origins of Subrogation
THE ORIGINS OF SUBROGATION
BY JOHN J. O’BRIEN JD,CLU,CPCU
“It would be unconscionable for an insured not to let his insurance company share in any damages he recovers from a wrongdoer.” Lord Mansfield in Mason v. Sainsbury 1782.
Origins Of Insurance In America
There seems to be a tendency for writers who are not historians when entering into historical areas to take liberties with accuracy that they would not take if they were recording present day facts and events. I believe this phenomenon exists because these writers are satisfied with recreating or recording historical facts directly from the writings of others without questions. There is also a lowering of standards that occurs when non-historians report history because they assume that their readers will not subject their historic material to microscopic examination. Writers in the insurance history theater sometimes publish “historic facts”, which simply are not true. With each repetition of the alleged historic facts and with each higher level of authority that publish them uncorrected, they gain broader popular acceptance and become less susceptible to correction.
I am not a historian and so I offer the following material with the caveat set forth in the preceding paragraph with the hope that those writers who have gone before me are not too far off and that you have left your microscopes at home.
Let us begin by taking this opportunity to correct one of those “historic facts” before it becomes too cemented in the accepted history of insurance. Many of you have read or heard that the city of origin of the first fire insurance company in America is Philadelphia and that Benjamin Franklin was the founder of this insurance company.
Benjamin Franklin did form The Philadelphia Contributorship, which is the oldest insurance company in our country, which is still in existence. Over and over again you will hear that insurance began in America with The Philadelphia Contributorship.
Benjamin Franklin in his Pennsylvania Gazette announced on February 18, 1752:
“All persons inclined to subscribe to the articles of insurance
of house from fire, in and near the city, are desired to appear
at the court-house, where attendance will be given to take in
their subscriptions every seventh day of the week, in the afternoon,
until the thirteenth of April next, being the day appointed by said
articles for electing twelve directors and a treasurer.”
In fact The Philadelphia Contributorship was the second fire insurance company in America. The first fire insurance company was established a few blocks from my office here in Charleston, South Carolina. The name of the company was the Friendly Society and it was formed on January 18, 1732 in Charles Town (now Charleston) South Carolina. The South Carolina Gazette announced the formation of the company on that day:
“At a meeting Of sundry of the Freeholder, of the Town at the House of MR. Giguilliat, Proposals were offered for establishing an insurance office against FIRE…”
It was not until January 3, 1736 that Articles of Agreement were filed. Instrumental in the formation of this company were Charles C. Pinckney and Jacob Motte. Pinckney later became Chief Justice of South Carolina. Motte was Public Treasurer of the Province from 1743 until his death in 1770.
“We Therefore, whose names are hereunto subscribed, Freeholders and Owners of Houses, Messuages and Tenements in Charles Town taking the Premises into Consideration, Do by these presents freely and voluntarily, and for our mutual Benefit and Advantage, covenant, promise, conclude and agree for ourselves and our respective Heirs, Executors and Administrators, to and with each other of us, in manner and form following, that is to say, Imprimus, We do covenant, promise, conclude and agree, That we will, and we do by these presents form ourselves ( as far as by Law we may) into a Society for the mutual Insurance of our respective Massuages and Tenements in Charles Town (which shall be entered in Books of the Directors of Society to be insured) from Losses by Fire, and do name and call ourselves the Friendly Society.”
Many of the descendants of the founders and of this first insurance company are still engaged in the insurance business in South Carolina. However the Friendly Society did not have a long existence. One Tuesday, November 18th, 1740 a large part of waterfront Charles Town was destroyed by fire. Both Mott and Pinckney lost heavily in the fire. Approximately four hundred homes, businesses and public buildings were destroyed.
The fire was also responsible for the financial ruin of the Friendly Society. On the other hand the Philadelphia Contributorship is still in existence in Philadelphia making it the oldest existing fire insurance company in United States.
Charlestonians are a very proud lot and it is reported that we are known for our good manners and for our friendliness. Even our first insurance company used the term “friendly” in its name and we still are very friendly here despite the hardships of earthquakes, fires and hurricanes we have had to endure over the centuries. And as for our manners, let me take my hat off to Philadelphia and its Contributorship, the oldest existing fire insurance company in America, and congratulate it for its endurance. My apologies to them for these efforts to have Charleston take its proper place in the history of insurance. I hope that in its “brotherly love,” Philadelphia; my birthplace, will understand.
Origins Of Insurance In The History Of Man
Insurance as a concept and as an organized business around the world predated both Charleston’s Friendly Society and the city of brotherly love’s Contributorship by many centuries.
In fact, insurance has probably always been a part of human history because insurance in its purist form is nothing other than “risk sharing.” The posting of a sentry outside of a cave could be interpreted to be a form of insurance. The concept of hunting in pacts for prey rather than alone was a risk-sharing concept – a way that injury could be minimized among the tribe.
The inhabitants of Mesopotamia in 2,400 BC consisted of many cultures including Sumerians, Assyrians, Arcadians and Babylonians. The merchants of Mesopotamia formed pacts with each other and traveled together across deserts with many camels so that the replacement of camels that were lost on the journey would be guaranteed.
These practices were very early examples of mutual insurance where a group of people come together and share risks and responsibilities. The practiced reached a certain level of refinement in early Greece about 500 BC when Greek merchant marines would pool their resources in maritime undertakings and in the case of piracy or shipwreck, no single individual would have to shoulder the entire loss.
The first insurance policy was actually issued in Pisa, Italy in 1385. I always wonder if this policy contained the exclusion we find in today’s insurance policies for earth movement of any kind to exclude the tendency of buildings to sink and lean there as does the city’s famous leaning tower.
In 1629 Holland set up the East India Company. This company insured maritime transports, caravans, goods and warehouses against storms, pirates and fires.
The company charged large premiums and assumed responsibility for tremendous
losses.
After the great fire destroyed thousands of houses in London as well as St. Paul’s Cathedral and in response to this the first fire insurance company was formed in England in 1710.. Note the difference here. In England a catastrophic fire was the catalyst for the formation of the first fire insurance company there. By contrast in America a catastrophic fire ended the short life of the first fire insurance company – The Friendly Society.
A discussion of insurance history is incomplete without mention of Lloyd’s. Before the formation of Lloyd’s in England individuals underwrote marine contracts. Typically a broker would carry the policy insuring an insurance transaction or ship from one individual to another until the required number of shares was sold to insure the risk. The individuals who subscribed would sign their names at the bottom of the insurance policy and this led to the use of the term “underwriters”.
The establishment in London of coffeehouse changed this practice and with the coffeehouses the merchants, underwriters and mariners had a common place to meet. Edward Lloyd owned one of these coffeehouses and he began publishing Lloyd’s News and his coffeehouse became popular for the transaction of all kinds of maritime, insurance and other businesses.
In 1769 the underwriters at Lloyd’s organized themselves as a syndicate and began to conduct business under the name of Lloyd’s and moved to the Royal Exchange. From 1769 Lloyd’s became the underwriting center of London if not the world.
Today venerable Lloyd’s of London is actually a collection of individual underwriting groups know as “syndicates”. Lloyd’s is known today to insure almost anything if the price is right. i.e. Tina Turner’s legs. The syndicate managers let “names” invest in Lloyd’s operations and, until recent times, share in large profits. The unfortunate down side of being a “name” is that a “name” must pledge everything they own to make good on the debts of the syndicates. In the early nineties claims from hurricanes and asbestos class action law suits primarily in America caused losses to outrun profits at Lloyd’s and this resulted in many well attended estate sales in England as the “names” personal assets were sold to keep Lloyd’s a float.
The Origins Of Subrogation
The concept of subrogation began in ancient Rome. If Claudias paid Caesars debt to Brutus, then Claudia’s filled the shoes of Brodus as to his ability to recover from Caesar.
It wasn’t long after insurance companies began paying claims that insurance executives began to thing of ways to recoup some of the money that they had paid out
to their insureds and subrogation began to appear in insurance practice. Subrogation is firmly based in the concept of indemnity and a method where insurance can be made affordable. The gains achieved through subrogation are eventually passed on to the insurance buying public through lower insurance premiums.
In 18th century England, Lord Mansfield (the father of insurance) recognized subrogation in court cases. The underlying doctrine was to prevent a windfall to an individual insured. The Courts did not think it fair that a person could recover both against the insurance company that insured the loss as well as recovering against the person who caused the loss. The courts and the insurance companies felt that to allow the insured to recover twice would be a “windfall” to the insured. By the way as you may already know the King owned all the trees in England but the peasants could have the trees that fell or branches that came down when the wind blew – hence the origin of the term “windfall”.
There are actually two views as to how the doctrine of subrogation developed. The first view is that it developed as part of the English legal system known as equity. The equity side of the courts strove to right “wrongs” and to follow the natural law. They attempted to be fair. The idea is that double indemnity offends natural justice.
The other view is that the doctrine stems from the common law. Applying common law (law that is not written down as an ordinance or statute) courts implied that every insurance contract contained a term that gave the insurer the tacit permission of its policyholder to exercise any recovery rights that may exist against the party that caused the wrong even though that party is not a party to the contract. Hence we find the origins for the word subrogation, which means “substitution”. In these cases it means the substitution of the insurer for the insured.
The founding father of insurance law Lord Mansfield addressed the concept of subrogation in Mason vs. Sainsbury in 1782. He spoke in that case about the right of
the insurer to step into the shoes of its insured and recover its losses. In Mason vs. Sainsbury rioters ransacked Mr. Mason’s house and his insurance company paid the claim. At the time there was a Riot Act of 1714 that provided a means to recover damages against the local administrative district body. The insurance company pursued a recovery action against this administrative body in the name of its insured.
This case was predated by the case of Randall vs. Cochran 1748 where the insurer for an English ship taken by the Spanish was permitted to bring suit in the name of its insured against the administrators of a public prize found that was compiled by the British government from the sale of captured Spanish ships. The Lord Chancellor declared:
“…the plaintiffs had the plainest equity that could be. The person originally
sustaining the loss was the owner; but after satisfaction made to him, the
insurer…the asssured stands as trustee for the insurer, in proportion for
what he paid…”
One hundred years later came the case of Castellan vs. Preston, which is probably the leading case in England establishing the principal of Subrogation. In that case a house that the owner had agreed to sell was damaged by fire before it was sold. His insurers indemnified him for the value of the repairs. The buyer for the house paid full price for the house in its damaged condition. Subsequently, the insurers learn that there insured had received full price for the house without deduction for the insurance proceeds that it paid to its insured - the seller of the property. Lord Justice Rhett set forth the principal that has been followed in England and United States up until present time:
“… The contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, … the insured shall be fully indemnify, but shall never be more than fully indemnify. This is the fundamental principle of insurance, if ever a proposition is brought forward which is at variance with it, that proposition must certainly be wrong. ”
Subrogation In America
It is difficult to pinpoint one early case in the United States that can be said to mark the beginning of our court’s recognition of the doctrine of subrogation. Essentially subrogation as a doctrine was transferred from England over to this country as part of Anglo Saxon law and equity. It has always been accepted here. Cases in the late 19th-century contain descriptions of subrogation and represent a clear understanding and acceptance of the concept.
In 1888 the United States Supreme Court was asked to consider the subrogation claim of Aetna Life Insurance Company against the township of Middleport, Illinois. The town had issued bearer bonds to the Chicago, Danville & Vincennes Railroad Company to convince the railroad to construct a railroad through the township. Aetna purchased the bonds from the railroad. The railroad built the line but then went out of business and Aetna tried to collect on the bonds claiming that the railroad had acted and the line was a benefit for the town and that by virtue of equitable subrogation Aena stood in the place of the railroad. The court in its decision pointed out that equitable subrogation is a well recognized doctrine but that in this particular case, the court felt that Aetna had acted as a pure volunteer and that, therefore, the doctrine of equitable subrogation was not applicable..
A case decided on February 10, 1890 in Arkansas makes reference to an academic treatise on the subject, namely, Sheld on Subrogation and recites that:
“The right of the insurance company that has paid a loss to recover of the wrong-doer,
after payment of the loss does not depend upon contract, agreement, stipulation, or privity. Sheld. The right of subrogation is sometimes spoken of as an ‘equitable assignment,’ but that is only a convenient figure of speech. From the time of the insurance the insurer has a pecuniary interest in the thing insured, and he becomes entitled to a legal remedy whenever he suffers a loss by reason of that interest, and it appears that the loss has been occasioned by the wrongful act of another. Of course, he has no right of action until he has paid the loss to the insured, because until that time he has suffered no damage.”
So fairly uniformly American courts from colonial times have recognized with favor the principle of subrogation as it was stated as recently as 1999 in a case involving none other than Lloyds themselves:
“Subrogation has been equated to and interchanged with the word
substitution and the basic idea is that of substituting the insurance carrier
for the insured in the insured’s action against a third party. Subrogation is
an equitable doctrine and is applicable whenever a debt or obligation
is paid from the funds of one person although primarily payable from the
funds of another.” Prime Hospitality Corp. et al v. Underwriters at
Lloyd’s et al, Civil No 1997-91 United States District Court for the
District of the Virgin Islands, 1999 U.S. Dist. LEXIS 6725
Many of the earliest cases dealing with subrogation in this country are discussed throughout this education series and will help us develop a though knowledge of the evolution of subrogation up to the present century.
There are some writers and jurist who believe that subrogation is not an appropriate remedy because there is no actual proof that subrogation recoveries are passed on to the insurance buying public. These critics of subrogation view subrogation as nothing more than a windfall for the insurance industry.
At the present time there is at least one state that has legislation pending that would eliminate the insurance company’s right to subrogation. Ironically the basis of this legislation is that a claimant should be allowed to recover both against a wrongdoer and his insurance company? A legislator should not consider voting in favor of such legislation without studying and understanding the logic and thought given by Lord Mansfield and those jurist who came after him both here and in England. Over two centuries of thoughtful consideration and reasoned opinions should not be thrown aside in an unthinking reaction to purported “consumerism”. Where is Lord Mansfield when we need him?
Bibliography
Hasson, Subrogation in Insurance Law- A Critical Evaluation, 5 Oxford J. Legal Stud. 416, (1985).
Mitchell, Charles, Subrogation, Restitution and Indemnity- the Law of Subrogation, Oxford University Press, 1994.
Quinn, Michael Sean, Review of Subrogation, Restitution, and Indemnity, Texas Law Review, 74 Tex. L. Rev. 1361, May, 1996.
Stempel, Jeffery W. Interpretation of Insurance Contracts: Law and Strategy for Insurers and PolicyHolders. Boston Mass: Little Brown, (1994).
BY JOHN J. O’BRIEN JD,CLU,CPCU
“It would be unconscionable for an insured not to let his insurance company share in any damages he recovers from a wrongdoer.” Lord Mansfield in Mason v. Sainsbury 1782.
Origins Of Insurance In America
There seems to be a tendency for writers who are not historians when entering into historical areas to take liberties with accuracy that they would not take if they were recording present day facts and events. I believe this phenomenon exists because these writers are satisfied with recreating or recording historical facts directly from the writings of others without questions. There is also a lowering of standards that occurs when non-historians report history because they assume that their readers will not subject their historic material to microscopic examination. Writers in the insurance history theater sometimes publish “historic facts”, which simply are not true. With each repetition of the alleged historic facts and with each higher level of authority that publish them uncorrected, they gain broader popular acceptance and become less susceptible to correction.
I am not a historian and so I offer the following material with the caveat set forth in the preceding paragraph with the hope that those writers who have gone before me are not too far off and that you have left your microscopes at home.
Let us begin by taking this opportunity to correct one of those “historic facts” before it becomes too cemented in the accepted history of insurance. Many of you have read or heard that the city of origin of the first fire insurance company in America is Philadelphia and that Benjamin Franklin was the founder of this insurance company.
Benjamin Franklin did form The Philadelphia Contributorship, which is the oldest insurance company in our country, which is still in existence. Over and over again you will hear that insurance began in America with The Philadelphia Contributorship.
Benjamin Franklin in his Pennsylvania Gazette announced on February 18, 1752:
“All persons inclined to subscribe to the articles of insurance
of house from fire, in and near the city, are desired to appear
at the court-house, where attendance will be given to take in
their subscriptions every seventh day of the week, in the afternoon,
until the thirteenth of April next, being the day appointed by said
articles for electing twelve directors and a treasurer.”
In fact The Philadelphia Contributorship was the second fire insurance company in America. The first fire insurance company was established a few blocks from my office here in Charleston, South Carolina. The name of the company was the Friendly Society and it was formed on January 18, 1732 in Charles Town (now Charleston) South Carolina. The South Carolina Gazette announced the formation of the company on that day:
“At a meeting Of sundry of the Freeholder, of the Town at the House of MR. Giguilliat, Proposals were offered for establishing an insurance office against FIRE…”
It was not until January 3, 1736 that Articles of Agreement were filed. Instrumental in the formation of this company were Charles C. Pinckney and Jacob Motte. Pinckney later became Chief Justice of South Carolina. Motte was Public Treasurer of the Province from 1743 until his death in 1770.
“We Therefore, whose names are hereunto subscribed, Freeholders and Owners of Houses, Messuages and Tenements in Charles Town taking the Premises into Consideration, Do by these presents freely and voluntarily, and for our mutual Benefit and Advantage, covenant, promise, conclude and agree for ourselves and our respective Heirs, Executors and Administrators, to and with each other of us, in manner and form following, that is to say, Imprimus, We do covenant, promise, conclude and agree, That we will, and we do by these presents form ourselves ( as far as by Law we may) into a Society for the mutual Insurance of our respective Massuages and Tenements in Charles Town (which shall be entered in Books of the Directors of Society to be insured) from Losses by Fire, and do name and call ourselves the Friendly Society.”
Many of the descendants of the founders and of this first insurance company are still engaged in the insurance business in South Carolina. However the Friendly Society did not have a long existence. One Tuesday, November 18th, 1740 a large part of waterfront Charles Town was destroyed by fire. Both Mott and Pinckney lost heavily in the fire. Approximately four hundred homes, businesses and public buildings were destroyed.
The fire was also responsible for the financial ruin of the Friendly Society. On the other hand the Philadelphia Contributorship is still in existence in Philadelphia making it the oldest existing fire insurance company in United States.
Charlestonians are a very proud lot and it is reported that we are known for our good manners and for our friendliness. Even our first insurance company used the term “friendly” in its name and we still are very friendly here despite the hardships of earthquakes, fires and hurricanes we have had to endure over the centuries. And as for our manners, let me take my hat off to Philadelphia and its Contributorship, the oldest existing fire insurance company in America, and congratulate it for its endurance. My apologies to them for these efforts to have Charleston take its proper place in the history of insurance. I hope that in its “brotherly love,” Philadelphia; my birthplace, will understand.
Origins Of Insurance In The History Of Man
Insurance as a concept and as an organized business around the world predated both Charleston’s Friendly Society and the city of brotherly love’s Contributorship by many centuries.
In fact, insurance has probably always been a part of human history because insurance in its purist form is nothing other than “risk sharing.” The posting of a sentry outside of a cave could be interpreted to be a form of insurance. The concept of hunting in pacts for prey rather than alone was a risk-sharing concept – a way that injury could be minimized among the tribe.
The inhabitants of Mesopotamia in 2,400 BC consisted of many cultures including Sumerians, Assyrians, Arcadians and Babylonians. The merchants of Mesopotamia formed pacts with each other and traveled together across deserts with many camels so that the replacement of camels that were lost on the journey would be guaranteed.
These practices were very early examples of mutual insurance where a group of people come together and share risks and responsibilities. The practiced reached a certain level of refinement in early Greece about 500 BC when Greek merchant marines would pool their resources in maritime undertakings and in the case of piracy or shipwreck, no single individual would have to shoulder the entire loss.
The first insurance policy was actually issued in Pisa, Italy in 1385. I always wonder if this policy contained the exclusion we find in today’s insurance policies for earth movement of any kind to exclude the tendency of buildings to sink and lean there as does the city’s famous leaning tower.
In 1629 Holland set up the East India Company. This company insured maritime transports, caravans, goods and warehouses against storms, pirates and fires.
The company charged large premiums and assumed responsibility for tremendous
losses.
After the great fire destroyed thousands of houses in London as well as St. Paul’s Cathedral and in response to this the first fire insurance company was formed in England in 1710.. Note the difference here. In England a catastrophic fire was the catalyst for the formation of the first fire insurance company there. By contrast in America a catastrophic fire ended the short life of the first fire insurance company – The Friendly Society.
A discussion of insurance history is incomplete without mention of Lloyd’s. Before the formation of Lloyd’s in England individuals underwrote marine contracts. Typically a broker would carry the policy insuring an insurance transaction or ship from one individual to another until the required number of shares was sold to insure the risk. The individuals who subscribed would sign their names at the bottom of the insurance policy and this led to the use of the term “underwriters”.
The establishment in London of coffeehouse changed this practice and with the coffeehouses the merchants, underwriters and mariners had a common place to meet. Edward Lloyd owned one of these coffeehouses and he began publishing Lloyd’s News and his coffeehouse became popular for the transaction of all kinds of maritime, insurance and other businesses.
In 1769 the underwriters at Lloyd’s organized themselves as a syndicate and began to conduct business under the name of Lloyd’s and moved to the Royal Exchange. From 1769 Lloyd’s became the underwriting center of London if not the world.
Today venerable Lloyd’s of London is actually a collection of individual underwriting groups know as “syndicates”. Lloyd’s is known today to insure almost anything if the price is right. i.e. Tina Turner’s legs. The syndicate managers let “names” invest in Lloyd’s operations and, until recent times, share in large profits. The unfortunate down side of being a “name” is that a “name” must pledge everything they own to make good on the debts of the syndicates. In the early nineties claims from hurricanes and asbestos class action law suits primarily in America caused losses to outrun profits at Lloyd’s and this resulted in many well attended estate sales in England as the “names” personal assets were sold to keep Lloyd’s a float.
The Origins Of Subrogation
The concept of subrogation began in ancient Rome. If Claudias paid Caesars debt to Brutus, then Claudia’s filled the shoes of Brodus as to his ability to recover from Caesar.
It wasn’t long after insurance companies began paying claims that insurance executives began to thing of ways to recoup some of the money that they had paid out
to their insureds and subrogation began to appear in insurance practice. Subrogation is firmly based in the concept of indemnity and a method where insurance can be made affordable. The gains achieved through subrogation are eventually passed on to the insurance buying public through lower insurance premiums.
In 18th century England, Lord Mansfield (the father of insurance) recognized subrogation in court cases. The underlying doctrine was to prevent a windfall to an individual insured. The Courts did not think it fair that a person could recover both against the insurance company that insured the loss as well as recovering against the person who caused the loss. The courts and the insurance companies felt that to allow the insured to recover twice would be a “windfall” to the insured. By the way as you may already know the King owned all the trees in England but the peasants could have the trees that fell or branches that came down when the wind blew – hence the origin of the term “windfall”.
There are actually two views as to how the doctrine of subrogation developed. The first view is that it developed as part of the English legal system known as equity. The equity side of the courts strove to right “wrongs” and to follow the natural law. They attempted to be fair. The idea is that double indemnity offends natural justice.
The other view is that the doctrine stems from the common law. Applying common law (law that is not written down as an ordinance or statute) courts implied that every insurance contract contained a term that gave the insurer the tacit permission of its policyholder to exercise any recovery rights that may exist against the party that caused the wrong even though that party is not a party to the contract. Hence we find the origins for the word subrogation, which means “substitution”. In these cases it means the substitution of the insurer for the insured.
The founding father of insurance law Lord Mansfield addressed the concept of subrogation in Mason vs. Sainsbury in 1782. He spoke in that case about the right of
the insurer to step into the shoes of its insured and recover its losses. In Mason vs. Sainsbury rioters ransacked Mr. Mason’s house and his insurance company paid the claim. At the time there was a Riot Act of 1714 that provided a means to recover damages against the local administrative district body. The insurance company pursued a recovery action against this administrative body in the name of its insured.
This case was predated by the case of Randall vs. Cochran 1748 where the insurer for an English ship taken by the Spanish was permitted to bring suit in the name of its insured against the administrators of a public prize found that was compiled by the British government from the sale of captured Spanish ships. The Lord Chancellor declared:
“…the plaintiffs had the plainest equity that could be. The person originally
sustaining the loss was the owner; but after satisfaction made to him, the
insurer…the asssured stands as trustee for the insurer, in proportion for
what he paid…”
One hundred years later came the case of Castellan vs. Preston, which is probably the leading case in England establishing the principal of Subrogation. In that case a house that the owner had agreed to sell was damaged by fire before it was sold. His insurers indemnified him for the value of the repairs. The buyer for the house paid full price for the house in its damaged condition. Subsequently, the insurers learn that there insured had received full price for the house without deduction for the insurance proceeds that it paid to its insured - the seller of the property. Lord Justice Rhett set forth the principal that has been followed in England and United States up until present time:
“… The contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, … the insured shall be fully indemnify, but shall never be more than fully indemnify. This is the fundamental principle of insurance, if ever a proposition is brought forward which is at variance with it, that proposition must certainly be wrong. ”
Subrogation In America
It is difficult to pinpoint one early case in the United States that can be said to mark the beginning of our court’s recognition of the doctrine of subrogation. Essentially subrogation as a doctrine was transferred from England over to this country as part of Anglo Saxon law and equity. It has always been accepted here. Cases in the late 19th-century contain descriptions of subrogation and represent a clear understanding and acceptance of the concept.
In 1888 the United States Supreme Court was asked to consider the subrogation claim of Aetna Life Insurance Company against the township of Middleport, Illinois. The town had issued bearer bonds to the Chicago, Danville & Vincennes Railroad Company to convince the railroad to construct a railroad through the township. Aetna purchased the bonds from the railroad. The railroad built the line but then went out of business and Aetna tried to collect on the bonds claiming that the railroad had acted and the line was a benefit for the town and that by virtue of equitable subrogation Aena stood in the place of the railroad. The court in its decision pointed out that equitable subrogation is a well recognized doctrine but that in this particular case, the court felt that Aetna had acted as a pure volunteer and that, therefore, the doctrine of equitable subrogation was not applicable..
A case decided on February 10, 1890 in Arkansas makes reference to an academic treatise on the subject, namely, Sheld on Subrogation and recites that:
“The right of the insurance company that has paid a loss to recover of the wrong-doer,
after payment of the loss does not depend upon contract, agreement, stipulation, or privity. Sheld. The right of subrogation is sometimes spoken of as an ‘equitable assignment,’ but that is only a convenient figure of speech. From the time of the insurance the insurer has a pecuniary interest in the thing insured, and he becomes entitled to a legal remedy whenever he suffers a loss by reason of that interest, and it appears that the loss has been occasioned by the wrongful act of another. Of course, he has no right of action until he has paid the loss to the insured, because until that time he has suffered no damage.”
So fairly uniformly American courts from colonial times have recognized with favor the principle of subrogation as it was stated as recently as 1999 in a case involving none other than Lloyds themselves:
“Subrogation has been equated to and interchanged with the word
substitution and the basic idea is that of substituting the insurance carrier
for the insured in the insured’s action against a third party. Subrogation is
an equitable doctrine and is applicable whenever a debt or obligation
is paid from the funds of one person although primarily payable from the
funds of another.” Prime Hospitality Corp. et al v. Underwriters at
Lloyd’s et al, Civil No 1997-91 United States District Court for the
District of the Virgin Islands, 1999 U.S. Dist. LEXIS 6725
Many of the earliest cases dealing with subrogation in this country are discussed throughout this education series and will help us develop a though knowledge of the evolution of subrogation up to the present century.
There are some writers and jurist who believe that subrogation is not an appropriate remedy because there is no actual proof that subrogation recoveries are passed on to the insurance buying public. These critics of subrogation view subrogation as nothing more than a windfall for the insurance industry.
At the present time there is at least one state that has legislation pending that would eliminate the insurance company’s right to subrogation. Ironically the basis of this legislation is that a claimant should be allowed to recover both against a wrongdoer and his insurance company? A legislator should not consider voting in favor of such legislation without studying and understanding the logic and thought given by Lord Mansfield and those jurist who came after him both here and in England. Over two centuries of thoughtful consideration and reasoned opinions should not be thrown aside in an unthinking reaction to purported “consumerism”. Where is Lord Mansfield when we need him?
Bibliography
Hasson, Subrogation in Insurance Law- A Critical Evaluation, 5 Oxford J. Legal Stud. 416, (1985).
Mitchell, Charles, Subrogation, Restitution and Indemnity- the Law of Subrogation, Oxford University Press, 1994.
Quinn, Michael Sean, Review of Subrogation, Restitution, and Indemnity, Texas Law Review, 74 Tex. L. Rev. 1361, May, 1996.
Stempel, Jeffery W. Interpretation of Insurance Contracts: Law and Strategy for Insurers and PolicyHolders. Boston Mass: Little Brown, (1994).
Captive Consulting - Protected Cell Companies:Firewalls Revisited (Reprint from Captive Companies Reports)
Protected Cell Companies: Firewalls Revisited
Editor’s Note: The following was written by John J. O’Brien JD, CLU, CPCU. He may be reached at lionsthree@aol.com. This article is a follow-up to his CICR May 2004 article, "Segregated Cell Captives: Are Firewalls Fireproof?" [LINK]
Segregated portfolio insurance programs have garnered widespread acceptance within the alternative risk community. Also known as "segregated portfolio companies (SPCs)" or "protected cell companies (PCCs)," they have traditionally been single entities made up of individual, unincorporated cells. Core capital is provided by the owners, and in addition, each cell has its own capital provided by the client using that cell.
Participation of the client is formalized through a shareholder’s agreement. Uniformly, the legislation providing for the formation of SPCs and PCCs provides that the assets of one cell are protected from the creditors of another. The revenue stream, assets, and liabilities of each cell are kept separate and apart from all other cells so that no cell is affected by the business or operations of another or of the SPC or PCC itself. The divisions separating the cells are commonly referred to as “firewalls” in the United States, or as “ring circles” in Europe. Each cell is identified by a unique name—sometimes a number.
Why People Like Them. These arrangements are promoted as an easy and cost-effective way for small organizations, wealthy individuals, agents or brokers, and nonprofits to avail themselves of the benefits offered through participating in risk-sharing profits. A major financial value is because entry is available through a shareholders’ or participation agreement without the need for formation of a new corporation. These facilities are extensively employed, particularly in Bermuda in estate planning, and asset protection sometimes involving high-value life insurance self-managed programs intended to be free of estate taxes. The participation agreement provides that disputes will be resolved pursuant to the law where the SPC or PCC is established and by the courts there.
Segregated cells originated in Guernsey with the Protected Cell Companies Ordinance 1997, and other domiciles have enacted similar laws. The Guernsey Act has had a recent and very interesting amendment that provides for incorporation of the individual cells. It amended its segregated cell legislation to provide for incorporating segregated cells and also provided that existing non-incorporated cells can convert to the corporate cell form. Other domiciles have or are considering amending their statutes to provide for incorporated segregated cells. Onshore, the District of Columbia has enacted similar legislation.
“The paradox of the creation of this new form of “incorporated” segregated cell for me is that stateside legislative developments, as well as cases decided by U.S. courts since 2003, have left me now believing that the limited liability arrangements of unincorporated cell arrangements had become more likely to be recognized and enforced by judges in the United States. However, one wonders what effect this legislation will have on the thousands of existing unincorporated cell arrangements.” ~John O’Brien
Clearly, the creation of incorporated cell legislation will add another level of security to cell arrangements. However, will existing unincorporated cell arrangements now be considered inferior in their ability to shield cell assets from non-cell creditors? And furthermore, was this new form of cell legislation truly needed?
“Series LLCs” May Provide an Answer. U.S. business operations are no longer limited to sole proprietorships, partnerships, corporations, and limited liability companies (LLCs). LLCs have been around since the late 1970s, and appear to be the most popular corporate form. The "C" corporation is still available and can be treated as a partnership by making a subchapter “S” election with the Internal Revenue Service. However, the LLC provides limited liability and has the advantage of being treated like a partnership for tax purposes, because in 1998, the IRS granted LLCs pass-through status.
The latest development, introduced in Delaware in 1996, is the “Series LLC,” which has amazing similarity to SPCs and PCCs. The Series LLC is truly unique in that the LLC can designate a series of specified properties, business purposes, or investment objectives, and then segregate the debts, liabilities, and obligations relating to a particular series to be enforceable only against the assets of that particular series and not against the assets of the Series LLC generally or against any other series within the Series LLC.
Hypothetically, a national real estate developer for example could, within the same corporate structure, segregate the financials of individual real estate developments around the country and the failure of one residential development in a part of the country would be isolated from the success of other projects in other parts of the country. Furthermore, the assets of each, as well as the core assets of the Series LLC, would be protected from attachment for the debts and obligations of the failed venture. Eight states have followed the lead of Delaware in enacting Series LLCs.
Similarities to Segregated Cells. The provisions of the Series LLCs are dramatically similar to the segregated cell facilities and protected cell company legislation of offshore captive insurance domiciles like Bermuda and Guernsey. The offshore protected cell legislation and the Series LLC each contains requirements that must be followed to protect the core assets of the Series LLC or any other series from an enforcement action against the assets of a failed Series LLC. In the Series LLC, the following must be observed:
ü Separate financial records must be maintained for each series.
ü Notice must be placed on the face of the certificate of formation that one or more series are being established.
ü Accounting must keep series assets separate from the accounting of the Series LLC or any other series within the Series LLC.
ü The operating agreement must clearly designate and define one or more series of interest.
An attorney arguing for acceptance of the segregated liability of SPCs and PCCs, particularly of the offshore brand, can now simply point to domestic “Series LLCs” to explain to a U.S. judge how SPCs and PCCs are structured and why the firewalls should be respected. The Series LLCs provide our U.S. courts with a domestic example of how limited liability and segregation of assets can be provided for without separate incorporations.
The Effect of Mutual Risk and Legion Failures. The Bermuda-based Mutual Risk Management collapse as a leading provider of rental and segregated cell facilities and the insolvency of Mutual Risk Management’s U.S.-based Legion Insurance brought about a myriad of U.S. court cases. Those cases have created a strong precedent for courts to give full faith and credit to the applicability of offshore forums and law when considering cell arrangements. Occurring simultaneously with the development of the Series LLC, the Mutual Risk Management court decisions—while not dealing directly with the issue of upholding firewalls between individual assets—do send a clear message that our United States courts will defer to the terms set forth in the establishment of offshore cell or rental arrangements.
The Pemaquid Underwriter Brokerage, Inc. v. Mutual Holdings (Bermuda) LTD, No. 02–4691 (JAP), 2003 U.S. Dist. LEXIS 26480 (D.N.J. June 3, 2003), case concerned Bermuda-based Mutual Risk Management (MRM), a firm offering risk management and financing products and services. MRM was the parent of Mutual Indemnity (Bermuda) LTD, Legion Insurance, and Commonwealth Risk Services. Legion Insurance, a New Jersey corporation with its principal offices located in Philadelphia, was in the throes of bankruptcy during this litigation.
The case arose from Permaquid's participation in a rent-a-captive in Bermuda. Pemaquid, an MRM client based in New Jersey, purchased reinsurance from Mutual Indemnity, with Legion acting as the front for the program. As is typical in this situation, all collateral sent to the rent-a-captive to support its share of the risk is intended to be kept separate from the assets of the other participants.
Permaquid alleged, inter alia, that Mutual Indemnity failed to disclose Legion's deteriorating financial condition, did not keep Permaquid's assets in "segregated cells," improperly drew on Permaquid's letters of credit, and prevented Peraquid from benefiting from its own underwriting profits and investment income because of the failure of Legion. Further, Permaquid argued that the case should be tried in the United States. The defendants argued for dismissal based on the forum selection clause in the shareholders' agreement requiring the parties to litigate all disputes in Bermuda. After considering many good arguments from the plaintiffs as to why the court should exert jurisdiction over the dispute, the court sent the parties to Bermuda to litigate the matter, stating:
Here the Shareholder’s Agreement forum selection clause explicitly provided that the agreement "has been made and executed in Bermuda and shall be exclusively governed by and in accordance with the laws of Bermuda and any dispute concerning this Agreement shall be resolved exclusively by the courts of Bermuda.”
Another highly important case is Legion Insurance v. Stateco, Inc., No. C 05–03007 (JF), U.S. Dist. (N.D. Cal. October 11, 2006), involving the efforts of the Pennsylvania insurance commissioner to recover funds to pay disappointed U.S. claimants. Public policy clearly favored a U.S. court asserting jurisdiction. Instead, a court that most would consider "plaintiff-oriented," upheld the forum selection clause and Bermuda law and courts.
The insurance commissioner/liquidator/plaintiff was attempting to recover funds from various reinsurance companies of the fronting company, Legion Insurance, the MRM subsidiary mentioned above in the Pemaquid case. Under the reinsurance treaty, MRM would hold the premiums on behalf of the participating reinsurers. Under both a shareholders' and management agreement signed by Statego, disputes were to be determined by Bermuda courts. Statego advanced many reasons for U.S. jurisdiction, including a strong public policy argument that these programs affected the claims of thousands of U.S. insurance customers. Despite this, the California court did not assert jurisdiction over the Bermuda interests and instead upheld the forum selection clause asserting that international business interests rely on forum selection clauses in their dealings and that there is a strong public policy reason that U.S. courts uphold them.
Further evidence is found in the propensity for U.S. courts to defer to the law and agreements of other domiciles in offshore alternative risk claim situations in the fact that on April 25, 2003, the Supreme Court of Bermuda established a "Scheme of Arrangements" with MRM and any potential creditors under Section 99 of the Companies Act of 1981, and that this scheme was given full force and effect by the U.S. Bankruptcy Court for the Southern District of N.Y. that issued a permanent injunction in support of the Scheme.
A Prediction. So, laying aside for a moment the introduction of new incorporated cell legislation, how was the stage being set for a U.S. court upholding the firewalls created by non-incorporated offshore segregated cell facilities? It appears to me that based on the United States having Series-based LLCs providing for segregation of assets in non-incorporated cells, and the precedent established by what U.S. courts have uniformly decided in the Mutual Risk Management cases, that a gambling man would predict that the protections allegedly provided by unincorporated offshore segregated firewalls would withstand the scrutiny of U.S. courts. Those courts would give full faith and credit to the laws of the offshore domiciles and the business agreements companies and individuals enter into offshore.
I would, however, offer one caveat: U.S. courts tend to give full faith and credit to domiciles that enact “reasonable” legislation, and that an informal measurement of “reasonableness” is how close the other country’s legislation matches our own. Competent counsel arguing for the U.S. Courts to assert jurisdiction will attempt to hold up the offshore legislation to contempt. Certain domicile’s legislation can perhaps be viewed as overreaching. An example would be provisions providing that if a creditor is successful in attaching any money through a good judicial fight in another domicile, he has to hold it in trust for the debtor. I think it is to Bermuda’s credit that in the MRM cases, U.S. courts have given full faith and credit to Bermuda in the face of claims of U.S. creditors.
As of last year, both Guernsey and one U.S. domicile’s law contain provisions for incorporation of the individual cells, although both domiciles continue to allow for the segregated liability between cells, even without the separate incorporation of cells. Clearly, the incorporation of the cells in a cell facility will add a new level of security. Also, it will add a new level of expense, as the offshore practitioners pointed out to me over 4 years ago. A key inquiry: Does this new legislation in some fashion weaken the strength of those cell arrangements where the cells are not incorporated? From a historic perspective, an argument could be made that it does.
Cell arrangements in Bermuda began with simple rent-a-cell arrangements. Because it was felt that the rent-a-cell facilities did not have adequate protection, the concept of segregated cell facilities took hold in Bermuda. Certainly, lawyers in Bermuda must have felt that the rental facility without the segregated cell feature was not up to the task.
Five years ago, during the World Captive Forum panel presentation in which I participated, the notion of an incorporated segregated cell was not looked on favorably by advocates of Bermuda cell facilities. Now, apparently the idea is catching on—at least in Guernsey, the District of Columbia, and in some other domiciles. But the question that surfaces is whether those legislators felt that the unincorporated segregated cell facility, like the rental cell before it, fell short in its design for the segregated protection of assets. When a U.S. court, or for that matter a court anywhere, next considers the safety of unincorporated cells, an advocate attempting to pierce those firewalls or ring circles will surely argue that the defendant had the option to incorporate the cell or convert it to a corporation but elected not to—perhaps at its own peril!
There might be good reasons from a tax point of view for incorporating a cell. Tax reasons might be advanced as distinguishing an incorporated cell from an unincorporated cell. In making selections when limited liability is a concern, sophisticated purchasers and advisers will be drawn toward the arrangement that provides the best asset protection. However, billions of dollars of alternative risk protection are already stationed in offshore arrangements and recent onshore arrangements of the rental cell or the unincorporated segregated cell variety.
Some Final Thoughts. A good question to ask—and one that will be surely asked by U.S. courts considering the rent-a-cell or segregated cell arrangement, is this: Does the enactment of new cell design legislation reinforce the position that the earlier cell arrangements have a weakness that needed correction? For example, was segregated cell legislation needed to provide the limited liability protection that the rent-a-cell arrangement lacked? And, was incorporated cell legislation needed to provide the limited liability protection that the segregated cell arrangement did not have?
It would be a good idea for participants in an unincorporated cell, in attempting to spare their assets from the claims of others, to be prepared to offer expert testimony that the firewalls were always there. These legislative changes providing for incorporated cells are only efforts to support those firewalls, or there are other reasons (such as tax considerations) driving the choice to incorporate. “Incorporated or not, the firewalls are impenetrable!” should be the argument.
The Series LLC developments and the court decisions since my original article in May 2004 [LINK] have left me with these two thoughts:
1. My personal opinion that incorporation may not be as highly recommended a choice as it once was to assure limited liability between cells.
2. It appears that a U.S. court may never consider the issue on its merits in any case and will instead defer to the law and courts of the offshore home of the cell facility, as the courts did in the Mutual Risk Management cases.
Perhaps, the horse is already out of the barn on the issue of the need for incorporation, since the movement toward incorporation being provided for in legislation has already begun. But it could be that further thought should be given to the need for incorporation provisions in cell legislation. There may be a need for existing cell structures—and there are a significant number of these—to either convert to separate incorporations or perhaps be perceived as mounting an inferior steed.
CICR comment: We recommend reading the lead tax article in this issue on the recent IRS position on cell captives. []
Editor’s Note: The following was written by John J. O’Brien JD, CLU, CPCU. He may be reached at lionsthree@aol.com. This article is a follow-up to his CICR May 2004 article, "Segregated Cell Captives: Are Firewalls Fireproof?" [LINK]
Segregated portfolio insurance programs have garnered widespread acceptance within the alternative risk community. Also known as "segregated portfolio companies (SPCs)" or "protected cell companies (PCCs)," they have traditionally been single entities made up of individual, unincorporated cells. Core capital is provided by the owners, and in addition, each cell has its own capital provided by the client using that cell.
Participation of the client is formalized through a shareholder’s agreement. Uniformly, the legislation providing for the formation of SPCs and PCCs provides that the assets of one cell are protected from the creditors of another. The revenue stream, assets, and liabilities of each cell are kept separate and apart from all other cells so that no cell is affected by the business or operations of another or of the SPC or PCC itself. The divisions separating the cells are commonly referred to as “firewalls” in the United States, or as “ring circles” in Europe. Each cell is identified by a unique name—sometimes a number.
Why People Like Them. These arrangements are promoted as an easy and cost-effective way for small organizations, wealthy individuals, agents or brokers, and nonprofits to avail themselves of the benefits offered through participating in risk-sharing profits. A major financial value is because entry is available through a shareholders’ or participation agreement without the need for formation of a new corporation. These facilities are extensively employed, particularly in Bermuda in estate planning, and asset protection sometimes involving high-value life insurance self-managed programs intended to be free of estate taxes. The participation agreement provides that disputes will be resolved pursuant to the law where the SPC or PCC is established and by the courts there.
Segregated cells originated in Guernsey with the Protected Cell Companies Ordinance 1997, and other domiciles have enacted similar laws. The Guernsey Act has had a recent and very interesting amendment that provides for incorporation of the individual cells. It amended its segregated cell legislation to provide for incorporating segregated cells and also provided that existing non-incorporated cells can convert to the corporate cell form. Other domiciles have or are considering amending their statutes to provide for incorporated segregated cells. Onshore, the District of Columbia has enacted similar legislation.
“The paradox of the creation of this new form of “incorporated” segregated cell for me is that stateside legislative developments, as well as cases decided by U.S. courts since 2003, have left me now believing that the limited liability arrangements of unincorporated cell arrangements had become more likely to be recognized and enforced by judges in the United States. However, one wonders what effect this legislation will have on the thousands of existing unincorporated cell arrangements.” ~John O’Brien
Clearly, the creation of incorporated cell legislation will add another level of security to cell arrangements. However, will existing unincorporated cell arrangements now be considered inferior in their ability to shield cell assets from non-cell creditors? And furthermore, was this new form of cell legislation truly needed?
“Series LLCs” May Provide an Answer. U.S. business operations are no longer limited to sole proprietorships, partnerships, corporations, and limited liability companies (LLCs). LLCs have been around since the late 1970s, and appear to be the most popular corporate form. The "C" corporation is still available and can be treated as a partnership by making a subchapter “S” election with the Internal Revenue Service. However, the LLC provides limited liability and has the advantage of being treated like a partnership for tax purposes, because in 1998, the IRS granted LLCs pass-through status.
The latest development, introduced in Delaware in 1996, is the “Series LLC,” which has amazing similarity to SPCs and PCCs. The Series LLC is truly unique in that the LLC can designate a series of specified properties, business purposes, or investment objectives, and then segregate the debts, liabilities, and obligations relating to a particular series to be enforceable only against the assets of that particular series and not against the assets of the Series LLC generally or against any other series within the Series LLC.
Hypothetically, a national real estate developer for example could, within the same corporate structure, segregate the financials of individual real estate developments around the country and the failure of one residential development in a part of the country would be isolated from the success of other projects in other parts of the country. Furthermore, the assets of each, as well as the core assets of the Series LLC, would be protected from attachment for the debts and obligations of the failed venture. Eight states have followed the lead of Delaware in enacting Series LLCs.
Similarities to Segregated Cells. The provisions of the Series LLCs are dramatically similar to the segregated cell facilities and protected cell company legislation of offshore captive insurance domiciles like Bermuda and Guernsey. The offshore protected cell legislation and the Series LLC each contains requirements that must be followed to protect the core assets of the Series LLC or any other series from an enforcement action against the assets of a failed Series LLC. In the Series LLC, the following must be observed:
ü Separate financial records must be maintained for each series.
ü Notice must be placed on the face of the certificate of formation that one or more series are being established.
ü Accounting must keep series assets separate from the accounting of the Series LLC or any other series within the Series LLC.
ü The operating agreement must clearly designate and define one or more series of interest.
An attorney arguing for acceptance of the segregated liability of SPCs and PCCs, particularly of the offshore brand, can now simply point to domestic “Series LLCs” to explain to a U.S. judge how SPCs and PCCs are structured and why the firewalls should be respected. The Series LLCs provide our U.S. courts with a domestic example of how limited liability and segregation of assets can be provided for without separate incorporations.
The Effect of Mutual Risk and Legion Failures. The Bermuda-based Mutual Risk Management collapse as a leading provider of rental and segregated cell facilities and the insolvency of Mutual Risk Management’s U.S.-based Legion Insurance brought about a myriad of U.S. court cases. Those cases have created a strong precedent for courts to give full faith and credit to the applicability of offshore forums and law when considering cell arrangements. Occurring simultaneously with the development of the Series LLC, the Mutual Risk Management court decisions—while not dealing directly with the issue of upholding firewalls between individual assets—do send a clear message that our United States courts will defer to the terms set forth in the establishment of offshore cell or rental arrangements.
The Pemaquid Underwriter Brokerage, Inc. v. Mutual Holdings (Bermuda) LTD, No. 02–4691 (JAP), 2003 U.S. Dist. LEXIS 26480 (D.N.J. June 3, 2003), case concerned Bermuda-based Mutual Risk Management (MRM), a firm offering risk management and financing products and services. MRM was the parent of Mutual Indemnity (Bermuda) LTD, Legion Insurance, and Commonwealth Risk Services. Legion Insurance, a New Jersey corporation with its principal offices located in Philadelphia, was in the throes of bankruptcy during this litigation.
The case arose from Permaquid's participation in a rent-a-captive in Bermuda. Pemaquid, an MRM client based in New Jersey, purchased reinsurance from Mutual Indemnity, with Legion acting as the front for the program. As is typical in this situation, all collateral sent to the rent-a-captive to support its share of the risk is intended to be kept separate from the assets of the other participants.
Permaquid alleged, inter alia, that Mutual Indemnity failed to disclose Legion's deteriorating financial condition, did not keep Permaquid's assets in "segregated cells," improperly drew on Permaquid's letters of credit, and prevented Peraquid from benefiting from its own underwriting profits and investment income because of the failure of Legion. Further, Permaquid argued that the case should be tried in the United States. The defendants argued for dismissal based on the forum selection clause in the shareholders' agreement requiring the parties to litigate all disputes in Bermuda. After considering many good arguments from the plaintiffs as to why the court should exert jurisdiction over the dispute, the court sent the parties to Bermuda to litigate the matter, stating:
Here the Shareholder’s Agreement forum selection clause explicitly provided that the agreement "has been made and executed in Bermuda and shall be exclusively governed by and in accordance with the laws of Bermuda and any dispute concerning this Agreement shall be resolved exclusively by the courts of Bermuda.”
Another highly important case is Legion Insurance v. Stateco, Inc., No. C 05–03007 (JF), U.S. Dist. (N.D. Cal. October 11, 2006), involving the efforts of the Pennsylvania insurance commissioner to recover funds to pay disappointed U.S. claimants. Public policy clearly favored a U.S. court asserting jurisdiction. Instead, a court that most would consider "plaintiff-oriented," upheld the forum selection clause and Bermuda law and courts.
The insurance commissioner/liquidator/plaintiff was attempting to recover funds from various reinsurance companies of the fronting company, Legion Insurance, the MRM subsidiary mentioned above in the Pemaquid case. Under the reinsurance treaty, MRM would hold the premiums on behalf of the participating reinsurers. Under both a shareholders' and management agreement signed by Statego, disputes were to be determined by Bermuda courts. Statego advanced many reasons for U.S. jurisdiction, including a strong public policy argument that these programs affected the claims of thousands of U.S. insurance customers. Despite this, the California court did not assert jurisdiction over the Bermuda interests and instead upheld the forum selection clause asserting that international business interests rely on forum selection clauses in their dealings and that there is a strong public policy reason that U.S. courts uphold them.
Further evidence is found in the propensity for U.S. courts to defer to the law and agreements of other domiciles in offshore alternative risk claim situations in the fact that on April 25, 2003, the Supreme Court of Bermuda established a "Scheme of Arrangements" with MRM and any potential creditors under Section 99 of the Companies Act of 1981, and that this scheme was given full force and effect by the U.S. Bankruptcy Court for the Southern District of N.Y. that issued a permanent injunction in support of the Scheme.
A Prediction. So, laying aside for a moment the introduction of new incorporated cell legislation, how was the stage being set for a U.S. court upholding the firewalls created by non-incorporated offshore segregated cell facilities? It appears to me that based on the United States having Series-based LLCs providing for segregation of assets in non-incorporated cells, and the precedent established by what U.S. courts have uniformly decided in the Mutual Risk Management cases, that a gambling man would predict that the protections allegedly provided by unincorporated offshore segregated firewalls would withstand the scrutiny of U.S. courts. Those courts would give full faith and credit to the laws of the offshore domiciles and the business agreements companies and individuals enter into offshore.
I would, however, offer one caveat: U.S. courts tend to give full faith and credit to domiciles that enact “reasonable” legislation, and that an informal measurement of “reasonableness” is how close the other country’s legislation matches our own. Competent counsel arguing for the U.S. Courts to assert jurisdiction will attempt to hold up the offshore legislation to contempt. Certain domicile’s legislation can perhaps be viewed as overreaching. An example would be provisions providing that if a creditor is successful in attaching any money through a good judicial fight in another domicile, he has to hold it in trust for the debtor. I think it is to Bermuda’s credit that in the MRM cases, U.S. courts have given full faith and credit to Bermuda in the face of claims of U.S. creditors.
As of last year, both Guernsey and one U.S. domicile’s law contain provisions for incorporation of the individual cells, although both domiciles continue to allow for the segregated liability between cells, even without the separate incorporation of cells. Clearly, the incorporation of the cells in a cell facility will add a new level of security. Also, it will add a new level of expense, as the offshore practitioners pointed out to me over 4 years ago. A key inquiry: Does this new legislation in some fashion weaken the strength of those cell arrangements where the cells are not incorporated? From a historic perspective, an argument could be made that it does.
Cell arrangements in Bermuda began with simple rent-a-cell arrangements. Because it was felt that the rent-a-cell facilities did not have adequate protection, the concept of segregated cell facilities took hold in Bermuda. Certainly, lawyers in Bermuda must have felt that the rental facility without the segregated cell feature was not up to the task.
Five years ago, during the World Captive Forum panel presentation in which I participated, the notion of an incorporated segregated cell was not looked on favorably by advocates of Bermuda cell facilities. Now, apparently the idea is catching on—at least in Guernsey, the District of Columbia, and in some other domiciles. But the question that surfaces is whether those legislators felt that the unincorporated segregated cell facility, like the rental cell before it, fell short in its design for the segregated protection of assets. When a U.S. court, or for that matter a court anywhere, next considers the safety of unincorporated cells, an advocate attempting to pierce those firewalls or ring circles will surely argue that the defendant had the option to incorporate the cell or convert it to a corporation but elected not to—perhaps at its own peril!
There might be good reasons from a tax point of view for incorporating a cell. Tax reasons might be advanced as distinguishing an incorporated cell from an unincorporated cell. In making selections when limited liability is a concern, sophisticated purchasers and advisers will be drawn toward the arrangement that provides the best asset protection. However, billions of dollars of alternative risk protection are already stationed in offshore arrangements and recent onshore arrangements of the rental cell or the unincorporated segregated cell variety.
Some Final Thoughts. A good question to ask—and one that will be surely asked by U.S. courts considering the rent-a-cell or segregated cell arrangement, is this: Does the enactment of new cell design legislation reinforce the position that the earlier cell arrangements have a weakness that needed correction? For example, was segregated cell legislation needed to provide the limited liability protection that the rent-a-cell arrangement lacked? And, was incorporated cell legislation needed to provide the limited liability protection that the segregated cell arrangement did not have?
It would be a good idea for participants in an unincorporated cell, in attempting to spare their assets from the claims of others, to be prepared to offer expert testimony that the firewalls were always there. These legislative changes providing for incorporated cells are only efforts to support those firewalls, or there are other reasons (such as tax considerations) driving the choice to incorporate. “Incorporated or not, the firewalls are impenetrable!” should be the argument.
The Series LLC developments and the court decisions since my original article in May 2004 [LINK] have left me with these two thoughts:
1. My personal opinion that incorporation may not be as highly recommended a choice as it once was to assure limited liability between cells.
2. It appears that a U.S. court may never consider the issue on its merits in any case and will instead defer to the law and courts of the offshore home of the cell facility, as the courts did in the Mutual Risk Management cases.
Perhaps, the horse is already out of the barn on the issue of the need for incorporation, since the movement toward incorporation being provided for in legislation has already begun. But it could be that further thought should be given to the need for incorporation provisions in cell legislation. There may be a need for existing cell structures—and there are a significant number of these—to either convert to separate incorporations or perhaps be perceived as mounting an inferior steed.
CICR comment: We recommend reading the lead tax article in this issue on the recent IRS position on cell captives. []
SUBROGATION ARBITRATION SERVICES -THE RUN OF THE MILL NEGLIGENCE CLAIM
THE RUN OF THE MILL NEGLIGENCE SUBROGATION CLAIM
JOHN J. O’BRIEN JD, CLU, CPCU
Index:
Introduction
Ordinary Negligence
Forseeability, “but for” and “substantial factor” tests.
Intervening Agency
Concurrent Causation
Negligence Per Se
Ultra hazardous or Abnormally Dangerous Activities (strict liability)
Res Ipsa Loquitor
Respondeat Superior-Vicarious Liability
Negligent Entrustment
Negligent Supervision and Parental Responsibility
Defenses to Negligence Actions
a. Contributory Negligence
b. Last Clear Chance
c. Sudden Emergencies
d. Comparative Negligence
e. Assumption of Risk
f. Act of God
Immunities
Premises Liability
a. Licensee or Invitee
b. Hotels and Landlord’s Liability for Criminal Acts of Others
Intentional Torts
Conclusion
The Negligence Claim
By John J. O’Brien, JD, CLU, CPCU
“Like Lewis Carroll’s snark, cause- in- fact is not easy to describe or locate. Even when we feel that we have grasped it, more often than not we are left clutching just another boorjum or perhaps thin air. And like Carroll’s snark hunters, lawyers and legal scholars have doggedly pursued the elusive concept of cause-in-fact; they have rarely, however, captured it in words adequate to define it or describe what tort goals it serves.” James E. Viator, “When Cause-in-Fact is More Than A Fact: The Malone-Green Debate On The Role Of Policy In Determining Factual Causation In Tort Law.
The Run of the Mill Negligence Subrogation Claim
Introduction
Negligence is the most important basis for liability against another party in the United States today. The concept of negligence has been expanded considerably
through the advent of product liability and warranty doctrines to a degree that product liability and warranty theories of liability hold a separate distinct identity unto themselves in the area of tort liability. On the other hand historically, negligence as a basis for liability in lawsuits by employees against employers has been curtailed through worker’s compensation legislation in all states. Negligence today is continually challenged by legislatures and special interest groups who wish to place caps on damages, exempt public entities and public servants from civil responsibility, provide compensation without pointing blame as in no-fault legislation or even prohibit subrogated insurance companies from access to the civil courts.
Subrogation representatives are required to develop a solid background in the law of negligence. Subrogation is a derivative action. The rights of the subrogated insurance company can rise no higher than its insured. If the insured does not have a good tort case, then his insurance company’s position is no better. It is of interest to know that the modern day law of negligence has lessened the responsibility of a tortfeasor for his negligent actions. Negligence has its origins in strict liability, which emerged from early Anglo-Saxon law. At least until the early 1500s a negligent party was responsible for his acts without regard to intent or causality, “The doer of a deed was responsible whether he acted innocently or inadvertently, because he was the doer…” Wigmore, “Responsibility for Tortious Acts: It’s History”, 7 Harv.L. Rev. 315, at 317 (1984) This theory that a man acts at his own peril and is answerable in trespass even though the injury happened by accident or misfortune had many supporters in this country and was discussed extensively by Oliver Wendell Holmes in his treatise The Common Law before he rejected the theory under what appeared to be a concern that it would breed inactivity amongst Americans which would hinder the growth of our nation:
“ A man need not, it is true, do this or that act,--the term act implies a choice,--but he must act somehow. Furthermore, the public generally profits by individual activity. As action cannot be avoided, and tends to the public good, there is obviously no policy in throwing the hazard of what is at once desirable and inevitable upon the actor.” Holmes, The Common Law, (1981), p. 95
Holmes’ sense of justice was offended by this earlier theory of strict liability flowing from acts alone and he sought instead to have the nation endorse the prudent man approach to liability in negligence which is the view adopted by legal scholars and courts today:
“Unless my act is of a nature to threaten others, unless under the circumstances a
prudent man would have foreseen the possibility of harm, it is no more justifiable to make me indemnify my neighbor against the consequences, than to make do the same thing if I had fallen upon him in a fit, or to compel me to insure him against lightning.” P. 96
Some negligence issues such as in bailment and products liability are so prevalent in the subrogation area that they have been given their own treatise in this education series.
Ordinary Negligence
Each of us under our law has a duty towards each other. We operate as prudent people when we drive our motor vehicles, operate our businesses, engage in social activities and maintain our properties and must conduct ourselves in a reasonable fashion so as not to cause injuries to the person or property of others. Our system of laws reflects this by providing either through statute or court decisions that citizens have a duty to exercise reasonable care in their activities so as not to cause injury to others. If this duty, which is owed to others, is violated, then the law provides a remedy to injured parties to sue a tortfeasor and recover damages. Actionable negligence consists of three necessary elements:
1. A duty on the part of defendant;
2. A failure to perform that duty; and
An injury to the plaintiff resulting from the failure.
Some writers paraphrase these three elements and speak in terms of not a duty of the
defendant but a right of the plaintiff hence, according to these writers, the elements of a tort are:
1. A legally protected right
2. A wrongful invasion of that right, and
3. Damages as a proximate result. Lorimer, Perlet, Kempin & Hodosh, The Legal Environment of Insurance, Volume 11, American Institute for Property and Liability Underwriters, Third Edition, (1987)
Foreseeability, “but for” and “substantial factor”
The three prong test of duty, breach of duty and damages proximately caused by that breach is uniformly applied in every state; however, a subrogation professional, depending on the jurisdiction where the claim arises may find that additional criteria should be considered in investigating proximate cause. These criteria or tests may be defined as the “but for” rule, “the substantial factor rule” and/or “the foreseeability rule”. The standard for negligence in each state is treated in the state-by-state reference section of this text. States vary in the application of these rules in the standard for negligence. For example, the standard for negligence in Arizona includes a “but for” rule i.e. the damages would not have occurred “but for” the defendant’s conduct. Markowitz v. Arizona Parks Bd., 146 Ariz 352, 354-59, 706 P.2d 364, 366-71 (1985).
In Colorado a forseeability test is applied in determining proximate cause: “The duty to exercise reasonable care extends only to foreseeable damages and injuries that occur to foreseeable plaintiffs.” Leppke v. Segura, 632 P.2d 1057, 1059 (Colo. App. 1981).
Connecticutt follows the substantial factor rule and in Connecticut the plaintiff must
demonstrate that the defendant’s negligence was a substantial factor in producing plaintiff’s damages. Mahoney v. Beatman, 110 Conn. 184, 147 A. 762 (1929).
Perhaps a good way to understand these concepts is to resort to the case law study approach used by American law schools. In Arkansas, to prevail on negligence claims a plaintiff must show a duty, a breach of that duty, injury proximately caused by that breach and damage to the plaintiff. Proximate cause is defined by Arkansas courts as “that which in a natural and continuous sequence, unbroken by any sufficient intervening cause, produces the injury, and without which the result would not have occurred.” Union Pacific R.R. v. Sharp, 330 Ark. 174, 952 S.W. 2d 98 (1998).
It would appear based on the Union Pacific case that Arkansas today follows a substantial factor approach to proximate cause. The breach must produce the injury (unbroken by any sufficient intervening cause) thus leaving the breach as the substantial cause of the injury. We have borrowed the facts from a 1963 Arkansas case that actually applied a foreseeability test of proximate cause and here examine the result applying “foreseeability”, “but for” as well as the “substantial factor” tests.
“Substantial factor” has been defined as “an actual, real factor, although the result may be unusual or unexpected.” Pennsylvania Suggested Standard of Civil Jury Instructions Section 3.5
The “but for” test is less stringent than the substantial factor test. In fact some judges find that jurors understand it without specific instructions since they understand it from every day activities. For example,” but for my bringing an umbrella today, I would have been rained on”.
Under the Restatement of Laws test of substantial factor, one must find that “but for” the defendant’s negligence, the plaintiff would not have suffered injury and that the defendant’s negligence was a “substantial factor” in causing those injuries. “But for” is necessary but not sufficient. Restatement (Second) of Torts
Section, 432 Negligent Conduct as Necessary Antecedent of Harm
In Hartsock v. Forsgren, Inc., 236 Ark. 167, 365 S.W. 2d 117 (1963) the Arkansas defendant maintained a large tank for the storage of tar and negligently permitted some of it to escape onto a children’s playground. The plaintiff’s nine year old son got some of the tar on his feet and the plaintiff’s were attempting to remove the tar with gasoline when a second child fired a cap-pistol creating a spark that ignited the gasoline fumes and resulted in serious burns to the nine year old child.
In the actual case, the court dismissed the plaintiff’s case against the defendant claiming that this sort of injury, as well as the intervening acts of the other human beings, was not foreseeable:
“To be negligent a person must be in a position to realize that his conduct involves a hazard to others. In the Hill case we described a negligent act as ‘one from which an ordinary prudent person in the actor’s position—in the same or similar circumstances-would foresee such an appreciable risk of harm to others as to cause him not to do the act, or to do it in a more careful manner.’ Later in Collier v. Citizens Coach Co., 231 Ark. 489, 330 S.W. 2d 74, we added:
‘Forseeability is an element in the determination of whether a person is guilty of negligence and has nothing whatever to do with proximate cause.’ Moreover, when the voluntary acts of human beings intervene between the defendant’s acts and the plaintiff’s injury, the problem of foreseeability is still the same: Was the third
person’s conduct sufficiently foreseeable to have the effect of making the defendant’s act a negligent one? Harper & James, The Law of Torts, @ 20.5; Rest., Torts, @ 447.”236 ARK 167, 169
Next, we apply the “but for” rule to the same facts. It would be stated as follows: but for the defendant negligently maintaining its tar tanks by the schoolyard, the plaintiff would have never suffered these injuries. As can be seen, in a “but for” jurisdiction, one could argue that the plaintiff should be able to recover.
And next apply the substantial factor rule to these facts. This rule says that if a person’s act was a substantial factor in bringing on the damages suffered by the plaintiff then it is a proximate cause. Arguing the case to recover a subrogation claim for medical expenses paid to this injured child, one would say that the substantial factor was the flammable tar that defendant’s negligence caused to be on the skin of this child. The other child with a cap gun was a “quirk” and the other child was not negligent but only acting as a child. He could not have possibly known at his age that a cap pistol could cause harm to the other child. The parents, one would argue, were not acting negligently in that it is reasonable that one use a solvent to remove tar. The concept as an advocate for a position is to remove a duty and breach from other parties and leave the defendant’s actions as, at least, “a substantial factor”.
We can apply these three tests to the following facts. A landlord neglects his duty to provide hot water for a tenant. The tenant boils the water and while carrying the hot water from the kitchen to the bathroom, drops the water on a baby causing third degree burns.
Under the “ forseeability” test, there probably would be no liability placed on the landlord; however under the “but for” test there is liability, (but for the landlord’s
negligence, the injuries would have never taken place) and arguably, the landlord’s negligence was a substantial factor in causing these injuries. Consequently recovery could be had under the “but for”, as well as, the “substantial factor” tests but not under the forseeability test.
Intervening Agency
The defendant is not liable if the injuries are caused by an intervening agency that breaks the chain of causation and sets a new chain of causation in motion. Oftentimes in bailment cases, the vehicle for which a claim has been paid was stolen from a garage or parking lot and the subrogation claim is denied on the basis of an intervening agency. However, typically the actions of the thief are not an independent cause. Generally, the argument that is made is that the proper precautions were not taken by the garage such as locks, lights, alarms and guards to prevent crimes such as vandalism and theft so the argument is that the so-called intervening act was foreseeable and does not relieve the negligent garage or parking lot of responsibility. Cases like this are frequently presenting themselves in the subrogation arena and generally recovery on these actions can be accomplished particularly in high crime areas where the frequent occurrence of theft is know to the garage owner and he has not taken the proper precautions to protect an insured’s vehicle.
Many times an insured’s vehicle is not the one stolen but the one that the thief runs into with a stolen vehicle. Subrogation claims in such instances have been brought against the garage or parking lot owner where the vehicle was stolen. This writer has pursued such a claim unsuccessfully in a “forseeability jurisdiction” arguing that damage to third party vehicles was a foreseeable consequence of creating a situation where vehicles can be stolen. The failed endeavor was bolstered with national statistics that stolen vehicles are one hundred times more likely than non-stolen
vehicles to be engaged in accidents involving property damage and personal injuries to third parties.
Subrogation professionals in the property insurance arena are often faced with damage caused by criminals- specifically vandals or arsonist – and seek to recover against a property owner or landowner who knew of criminal activity and vagrants and took no action to prevent their presence or their activities. For example, an insured’s building may have been damaged by a fire caused in a neighboring vacant building by trespassers burning newspapers and refuse in an attempt to keep warm. Subrogation actions against the property owner of the vacant building often meet with failure under the common law rule that there is no duty to protect persons from the criminal acts of others.
But again the test is typically forseeability in most jurisdictions and recovery is obtainable under circumstances where the acts of an intervening criminal are foreseeable.
In Britton v. Wooten, 817 S.W. 2d 443 (1991) the landlord sued the lessee for destruction of a building. The lessee operated a grocery store and its employees stacked trash, papers and combustible material all the way up to the eaves. Third parties set fire to it and the fire climbed the trash to the roof of the building causing the whole building to burn. The lessee argued that they were not responsible because of the intervening actions of criminals. The Court looked at the Restatement of Torts and found liability. Ironically, it was the lessee who inadvertently directed the Court to the Restatement:
“Respondent cites Restatement (Second) of Torts, Sec. 448 in support of the continued viability of criminal acts, per se, as sufficient to cut the chain of causation. That section postulates that ‘an intentional tort or crime is superseding cause’ where
the defendant’s ‘negligent conduct’ only creates ‘a situation which afforded an opportunity’ for another to commit an intentional tort or crime, but it adds an important caveat:
‘…unless the actor (the defendant) at the time of his negligent conduct realized or should have realized the likelihood that such a situation might be created, and that a third person might avail himself of the opportunity to commit such a tort or crime.’”
The Court found that the defendant did create a situation where it was foreseeable that someone might set fire to this stacked combustible material.
Concurrent Causation
When two or more independent causes combine to produce an injury, each defendant is liable for the entire injury even though the act of either would not have produced the injury. This single indivisible injury rule has its foundation in England and was recognized in the first Restatement of Torts in the 1930s. The rule holds that when two or more actors have caused a single indivisible harm through independent, tortuous acts and indivisible actions, the injured party may recover all damages from each of the actors.
This doctrine is distinguishable from principles of successive causation where injuries suffered by the plaintiff attributable to two defendants can be separated and it is plaintiff’s burden to separate them.
A case illustrating concurrent causation is McLeod v. American Motors Corp.,
723 F.2d 830 (1984) in which the plaintiff was injured by a combination of a rear end collision of her vehicle by a drunk driver and her seat belt not operating properly.
The jury found both the manufacturer of plaintiff’s vehicle and the drunk driver responsible. American Motors appealed claiming that the jury should have apportioned damages. The United States Court of Appeals disagreed with American Motors:
“The Florida cases distinguish between concurrent and successive causation. The typical concurrent causation case involves two defendants whose acts occur at or about the same time and together produce plaintiff’s injury. In this situation, Florida law clearly makes each of the defendants jointly and severally liable for the full amount of plaintiff’s damages. De La Concha v. Pinero ,104 So. 2d 25, 28 (Fla. 1958). The typical successive causation case, on the other hand, involves two or more defendants whose acts occur at distinct times and together produce plaintiff’s total injuries. Florida law apparently holds that in successive injury cases the jury should be allowed to apportion damages between the defendants; however, if damages are not reasonably apportionable, plaintiff may recover the full amount from either of the two defendants. Washewich v. LaFave, 248 So. 2d 670, 672 (Fla. App. 1971); Wise v. Carter, 119 So. 2d 2d 40 ( Fla. App. 1960).
Negligence Per Se
Certain actions are so inherently dangerous that they are considered to be negligent per se. The court may declare them to be negligent without submitting the issue to a jury. Violation of a statute may be negligent per se under certain circumstances. Breach of a statute gives rise to negligence per se claim if the person harmed by the violation are within the intended protection of the statute and the harm suffered is of the type the legislation was intended to prevent.
Often times there is a debate over whether a negligent driver’s failure to hold a
driver’s license should be considered negligence per se. The answer is no. An unlicensed driver is neither barred from recovering for injuries received by himself in an automobile accident nor is he liable for injuries received by another simply because he does not have a driver’s license. There is a small minority of courts that hold that failure to have a license is not conclusive but may be considered as some evidence of negligence.
In the case of Bobbitt v. Ruyman , No.91AP-1423 (Regular Calender) Court of Appeals of Ohio, Tenth Appellate District, Franklin County, 1992 Ohio App 3220, decided June 16, 1992, the defendant was successful in having the plaintiff’s case dismissed claiming that the plaintiff bicyclist was negligent per se. Plaintiff had sued defendant alleging negligent operation of a motor vehicle, which collided with a bicycle plaintiff operated. Defendant moved for summary judgment asserting that the plaintiff was negligent per se and the proximate cause of his own injuries because he was riding his bicycle at night without a light and he was riding his bicycle on the sidewalk in violation of two city ordinances.
In dismissing the case against the defendant the court noted:
“in order to constitute negligence in the violation of an ordinance or statute, it is necessary that the obligation imposed be for the benefit of the person alleging injury, and this, of course, means that one so claiming must stand upon the proposition that the ordinance was intended for his protection.”
“Contrary to plaintiff’s contention, both ordinances were passed for plaintiff’s benefit and to protect against incidents such as the present. While C.C. 2173.06, regarding headlamps, arguably was passed for the benefit of the public as a whole, the ordinance clearly was passed for the benefit of bicyclists by enabling others to see bicycle
traffic. Further, C.C. 2173.10, regarding operation of bicycles on sidewalks, was passed for the protection not of pedestrians, but bicyclists, who are not anticipated as part of the usual pedestrian sidewalk traffic. Despite plaintiff’s urging to the contrary, the ordinances need not be designed for the protection of motorist in order for defendant to assert that plaintiff is negligent per se in violating C.C. 2173,06 and 2173.10. Plaintiff having violated those sections, his actions constitute negligence per se.”
Ultra hazardous or Abnormally Dangerous Activities (strict liability)
Defendant can be held strictly liable for engaging in activities that are considered to present an extreme danger to others. Most states follow the very early case of Rylands v. Fletcher, 3 H. & C. 774, 159 Eng. Rep 737 (1865). In Rylands, a mill owner ordered construction of a dam to get waterpower. The resulting reservoir lay over ancient abandoned coalmines. The mill owner had no reason to suspect that these old diggings led into an operating colliery, but they did. When the dam was closed, water ran down the old shafts, sweeping into and flooding the colliery. The mill owner obtained the water for his own use without drainage facilities. The mill owner’s use was classified as a “non-natural user.”
Courts have expanded Rylands from use of water on land to a wide range of activities including air shows, fireworks, blasting, rock crushing, storage of chemicals, target shooting, and gasoline tanks.
Under the common law if a person keeps or conducts activities on his land which are likely to cause mischief and if something goes wrong, then he is prima facie responsible and answerable for all damages. Negligence is clearly irrelevant to the doctrine. Carrying on the activity itself where injury results is negligence per se.
Under modern case law and under the Restatement of Torts, “abnormally dangerous activity” is substituted for “ultra hazardous activity”. Under the Restatement one who carries on an abnormally dangerous activity is subject to liability for damages caused to another even though he has exercised the utmost care to prevent harm.
Res Ipsa Loquitur
Res Ipsa Loquitur is a rule of evidence applicable in many jurisdictions in the United States in negligent cases. In a case involving the doctrine of res ipsa loquitur, the jury is permitted to consider circumstantial evidence. The jury is permitted to infer negligence from an accident that ordinarily would not have occurred unless someone was negligent. The jury is not required to make such an inference. The jury may either make such inference or refuse to do so.
Res Ipsa Loquitur literally means, “The thing speaks for itself.” It has its origins in England where a chancellor argued that a flour barrel had fallen out of a second story window and injured his client. He argued successfully that flour barrels do not fall out of second story windows unless somebody is careless. The doctrine allows a jury to infer negligence even though no direct evidence of negligence has been introduced. Negligence may not be inferred from the mere fact of injury. The circumstances accompanying the injury permit the inference of negligence.
The elements of res ipsa loquitur that are required to justify an inference of negligence are: (1) a legal duty owing from the defendant to exercise a certain degree of care in connection with a particular instrumentality to prevent the occurrence that has happened; (2) the subject instrumentality at the time of the occurrence must have been under the defendant’s control and management in such a way that there can be no serious question concerning the defendant’s responsibility for the misadventure of
the instrument; (3) the instrument for which the defendant was responsible must be the producing cause of the plaintiff’s injury; (4) the event which brought on the plaintiff’s harm is such that would not ordinarily occur except for the want of requisite care on the part of the defendant as the person responsible for the injuring agency.
In 1995 the Supreme Court of Nebraska considered the doctrine of res ipsa loquitur favorably in a case involving livestock that escaped from pens. The plaintiff’s semi-tractor trailer collided with several of the approximately 175 of the defendant’s cows that were present on highway 6. The cows had broken down a gate to their pen. The defendant offered evidence that the materials used was sturdy and that the gates were periodically inspected and that he exercised the ordinary care required of him. The plaintiff thus had to rely upon the doctrine of res ipsa loqitur that the occurrence of the cows escaping from their pen and appearing on a public highway does not occur in the absence of negligence.
The trial court charged the jury on res ipsa loquitor and the jury awarded damages to plaintiff for the damages to his truck. The Supreme Court of Nebraska affirmed the trial court reversing the court of appeals:
“The Court of Appeals err in holding that res ipsa loquitur is inapplicable to all escaped-livestock cases. There are certain factual situations, a evidenced by the case at bar, wherein livestock ordinarily would not escape onto a public highway in the absence of some negligence.” Roberts v. Weber & Sons, Co. 248 Neb. 243; 533 N.W.2d 664 (June 23,1995).
Respondeat Superior- Vicarious Liability
Courts rely upon the doctrine of respondeat superior as the basis of a master’s liability for injuries to others caused by the negligent acts of his servants. A master under this doctrine may be found vicariously liable for the actions of his servants if the tort was committed within the scope of employment. Whether an act is committed within the scope of employment generally revolves around some type of control theory. An act is considered to be within the scope of employment if at the time of doing the negligent act the employee was acting in furtherance of the employer’s business and the employer had the right to exercise some degree of control over the employee in the conduct of such activity.
A principal is generally liable for the torts of his or her agent under the following circumstances:
a. when the acts are authorized;
b. when the acts are ratified by the principal; or
c. when the acts are within the implied authority of the agent, such as those committed within the scope of his or her employment and in furtherance of the principal’s business.
When the injury is the result of complete departure from the course of employment and purely personal enterprise, the employer generally is not held liable. Furthermore, the principal is not ordinarily liable for willful or intentional injuries of the agent.
Even though an agent does an act which is contrary to the principal’s directions,
the principal may still be liable if the act was within the scope of authority of the agent and in furtherance of the principal’s business. An employee may decide that for that it would be in the best interest of his employer’s business to drive all night and thus reach a customer’s place of business early in the morning even though his employer has a rule that employees should not drive past eleven o’clock in the
evening. The employee is involved in a collision after falling asleep while driving at three o’clock in the morning. In this situation the employer could be held to be liable since the employee was acting in furtherance of his employer’s business.
Where the injury results from a complete departure from the course of employment and is purely personal, the employer is generally not held liable.
The early case of James v. Williams 177 La. 1033; 150 So. 9 ( 1933) is illustrative. Williams operated a funeral business. A funeral car owned by the defendant and being driven by his employee struck plaintiff James. The employee had the car without the knowledge of the defendant and was at the time driving a fellow employee home from work. The defendant did not supply transportation for employees back and forth to work. The court found in favor of the employer:
“The rule which prevails here and elsewhere is that ‘the owner of an automobile is not liable to one who is injured by the negligence of his chauffeur while operating the machine without his knowledge or permission, and for a purpose other than for which he was employed, as where the driver is on errand personal to himself.’ Tinker v. Hirst, supra; 2 R.C.L. 1198.”150 So. 9, 11.
If the agent is classified as an independent contractor the principal can still be responsible for his acts if the principal maintains control over the methods by which the independent contractor performs the work or the principal can also be held responsible for negligence in the selection of the independent contractor.
Generally, some items to look for in determining whether a principal is exerting control over an alleged independent contractor so as to convert the independent contractor to the status of an agent are:
1.The skill required to perform the task assigned to the independent contractor.
Who supplies the tools.
Who directs or decides the manner in which the job is completed.
Type of occupation-whether in the locality the work is usually done by specialist without supervision.
Whether the independent contractor has a line of business, which is distinct from that of the principal.
Terms of employment contract. Did the parties believe they were creating an employer/employee relationship?
Who controls the time in which the job is performed and the hours of work.
Where is the job performed – at the principal’s place of business under his supervision or at another location?
Right of the principal to dismiss the independent contractor.
Payment by time rather than a fixed amount for a job.
Negligent Entrustment
The doctrine of negligent entrustment requires that the defendant carelessly allow someone to use an instrument that could cause harm and that the incompetence of the person in a position of trust was the proximate cause of the injury. The most common example today of negligent entrustment is the parent who permits an incompetent child driver to use an automobile and then the child negligently injures a third person.
Another common example of this theory is when an owner of a vehicle entrusts his vehicle or its operation to a person whom he knows or with the exercise of due care should have known, to be an intoxicated driver. Coble v. Knight, 130 N.C. App. 652; Swicegood v. Cooper, 341 N.C. 178.
Negligent Supervision and Parental Responsibility
This theory is a little different than negligent entrustment. Here the complaint is not that the incompetent child was given a dangerous instrumentality, rather it is that the parents failed to control or supervise their children.
In addition many states have statutes which will be collected in the appendix of this book at the next printing that provide for parental liability for damages caused by minor children. As a general rule these statutes provide for a dollar amount of liability sometimes as little as $300. Typically, liability is automatic and does not require any negligence on the part of the parents.
In order to prevail under a claim of parental negligent supervision in the absence of a statute creating this vicarious responsibility of a parent, the plaintiff must show that: (1) the parents knew of their child’s particular reckless or negligent tendencies (thus knew they needed to exercise control over him) (2) the parents had the ability to exercise control; and (3) the parents did not exercise that control. Finally, the plaintiffs must show that the alleged parental negligence was the proximate and foreseeable cause of the injury suffered. Hau v. Gill 1999 Ohio App. 3258 (1999).
DEFENSES TO NEGLIGENCE ACTIONS
The appendix of this book contains a state-by-state breakdown of those states that follow contributory negligence, comparative negligence and the various forms of each. Contained here is a very general and brief treatment of defenses to negligence actions including contributory and comparative negligence.
a. Contributory Negligence
There was a time when most states would not permit a plaintiff to recover if plaintiff's
own negligence contributed to his injuries. Some states still follow this doctrine. Thus, for example, in the state of North Carolina, contributory negligence is a complete defense to claims of negligence and products liability.
Contributory negligence in those states that follow the doctrine generally is not a defense to gross negligence. However, gross contributory negligence is a defense to gross negligence.
Every person has the responsibility to exercise care for his own safety against injury and if he fails to exercise such care, he is guilty of contributory negligence. The defendant has the burden to show that the plaintiff’s failure to perform a legal duty proximately resulted in plaintiff’s injuries. If defendant is successful in this endeavor in those few jurisdictions that still apply a contributory negligence standard, the defendant can escape liability.
The North Carolina Court of Appeals in ordering a new trial, (after an appeal of a jury award that gave a roadway flagman that was struck in the back by defendant’s automobile no damages), criticizes the doctrine:
“From the outset, we recognize that there are serious questions regarding the validity of the doctrine of contributory negligence as evidenced by the fact that
forty-six states have abandoned the doctrine in favor of comparative negligence .
See Henry Woods, Comparative Fault Sec.1.11 (2nd ed, 1987 and Cum. Supp 1993); Fowler v. Harper, Fleming James, Jr. and Oscar S. Gray, 4 Law of Torts Sec. 22.1 (2nd ed. 1986 and Cum. Supp. 1993). We further acknowledge that the United States Supreme Court has described contributory negligence as a ‘discredited doctrine which automatically destroys all claims of injured persons who have contributed to their injuries in any degree, however slight.’ Pope & Talbot, Inc. v. Hawn, 346 U.S. 406,
409, 98 L.Ed. 143, 150, 74 S. Ct. 202 (1953). The doctrine of contributory negligence, which is a creature of common law followed in this State since Morrison v. Cornelius, 63 N.C. 346 (1869), remains the law of this State until our Supreme Court overrules Morrison…” Bosley v. Alexander, 114 N.C. App. 470
b. Last Clear Chance
A defense that is sometimes available to offset the defense of contributory negligence is the doctrine of “last clear chance”. This applies where the plaintiff by his own negligence places himself in a dangerous condition and the defendant is aware of plaintiff’s condition or aware that the plaintiff was oblivious to the danger and the defendant by the exercise of reasonable care should have been able to avoid injuring plaintiff and the defendant fails or refuses to use every reasonable method to avoid injury and as a result of defendant’s failure, the plaintiff is injured. If the plaintiff proves last clear chance the plaintiff may recover notwithstanding the plaintiff’s contributory negligence.
Sudden Emergency
The defense of sudden emergency may be available in a subrogation negligence action. It allows a jury to consider whether the actions of the defendant were reasonable under the emergency circumstances even though they may not have been reasonable under other circumstances. It is not a legal defense that bars an action rather it is an affirmative defense that allows the jury to apply a different standard of care because the accident was caused by external forces outside the control of the defendant. Sudden emergencies include tire blowouts, ice, fog and snow. Typically they do not include coming upon a stopped vehicle in the roadway.
“ A sudden emergency is a combination of circumstances that calls for immediate
action or a sudden or unexpected occasion for action. A driver of a vehicle who, through no fault of (his) (her) own, is placed in a sudden emergency, is not chargeable with negligence if the driver exercises that degree of care which a reasonable careful person would have exercised under the same or similar circumstances “ Mathis v. IBP, Inc., 2001 Iowa App 342
d. Comparative Negligence
While contributory negligence rules may prevent a plaintiff from recovering altogether, comparative negligence rules allow the plaintiff to recover but reduce his damages by the injuries caused by his own negligence. Under this doctrine when both the defendant and the plaintiff are at fault, a court will apportion damages between them.
Most states have a comparative negligence rule consisting of one of the following types:
1. Pure rule
2. 50% rule
3. 49% rule
4. Slight versus gross rule
Comparative negligence allows a party who was a major factor in an accident to recover against a party who was less at fault. So if there is a two-car accident and the plaintiff is 60% responsible but suffers injuries, he can recover 40% of his damages against the defendant.
Fifty- Percent Negligence allows a plaintiff to recover damages so long as his or her negligence is no greater than that of the other party. His damages are reduced by the
degree of his fault but if his fault exceeds fifty percent as compared to the other party, he can recover nothing against that defendant.
The Forty Nine Percent Rule allows a plaintiff to recover damages unless his negligence is fifty percent or more. If he is fifty percent at fault he recovers nothing.
Under the Slight versus Gross rule the plaintiff can recover only when his negligence is slight in comparison with the other party’s gross negligence. The plaintiff’s damages are reduced by the degree of his or her negligence.
e. Assumption of Risk
This doctrine is based on the maxim violenti non-fit injuria that means that no injury is caused to someone who consents to the injury. Assumption of risks requires that the person has full knowledge of a condition; such condition must be patently dangerous to him; and he must voluntarily expose himself to the hazard created.
Under the old contributory negligence theory, assumption of the risk was a bar to recovery; however, comparative fault considerations have led to the classification of assumption of the risk into at least three types.
Express assumption of risk occurs when a plaintiff specifically agrees prior to an injury to take his chances as to a known risk. For example, a person agrees to hold a big game safari company harmless for injuries or death arising from hunting lions in deepest Africa. Typically the courts enforce such agreements.
Implied assumption of risk is somewhat different. Implied assumptions of risks are of two kinds. There are those situations where the plaintiff by implication has assumed known risks in a particular activity i.e. one sits in left field knowing that baseballs
are normally hit into the stands there and sometimes fans are hit by these baseballs.
Then there are those situations of implied assumption of risk where the plaintiff knowingly encounters a risk that has been created by the defendant’s negligence. While traditionally this may have been a bar to recovery, in comparative negligence jurisdictions, courts use the actions of plaintiff in assuming the risks merely to reduce his recovery. In essence, assumption of risk in these situations is no more than a comparative fault inquiry.
f. Act of God
The defense of act of God is available in most jurisdictions if the evidence shows that the occurrence was an act occasioned exclusively by violence of nature without the interference of any human agency. It is an act not foreshadowed by the usual course of nature, and whose magnitude and destructiveness could not have been anticipated or provided against by the exercise of ordinary foresight. In order for the Act of God defense to apply, the natural event must be he sole proximate cause of an injury. It excludes all circumstances produced by a human agency.
A subrogation representative that is pursuing defective construction cases often sees “Act of God” defenses. Defective construction cases usually arise after a storm where the defective construction becomes apparent. These issues are discussed in greater detail in the chapter dealing with faulty construction subrogation.
Immunities
Generally, there are four classes of immunities, namely, sovereign or government, public official, charitable and intra-familial.
Under sovereign immunity, the federal government, state governments and municipal
corporations are immune from suit for functions relating to government but not for proprietary functions. A proprietary function is any business pursuit that a private enterprise could perform, such as supplying gas and water, fire protection, maintaining a park or highways. A political body is subject to suit just like any private entity while performing proprietary functions. Many times, however in claims against political entities there are requirements for notice, dollar limits on liability and sometimes prohibitions against subrogation claims. Consequently, subrogation claims against political entities require special care and attention.
A municipality may be held liable for damages resulting from government functions when the activity results in impairment of property. For example a municipality that operates a sewer treatment plant, in the exercise of its governmental functions, causes damage to property may be held liable.
Claims against the United States are brought pursuant to the Federal Tort Claims Act, which is found at Title 28 Code of Federal Regulations Part 14. It is a complicated field and numerous defenses are available depending on the particular agency involved. Sovereign immunity may apply in some instances. The statute of limitations under the Federal Tort Claims Act is six years; however, notice of the claim must be given within two years, and suit must be filed within six months of the date of denial of the claim by the federal agency.
At common law all charitable organizations enjoyed immunity from suit in tort under either a theory that the charity was assuming some of the responsibilities of government and thus entitled to immunity or under the trust fund theory that gifts were given to charities to be devoted to charitable purposes and the charity held this money in trust and it could not be used for any other purpose. Today, most states have rejected the doctrine of charitable immunity.
Intra-family immunity between spouses and parent and child existed because it was felt that such suits would disrupt family life, use up family resources and lead to collusion and fraud. Today most if not all states have abrogated these immunities. Apparently family members today get along just fine suing each other so long as there is enough insurance money to go around.
Premises Liability
A landowner may be liable to guest, business visitors and neighboring landowners. A landowner may be liable for natural conditions on his land if they create a hazard that the landowner could have corrected. In urban areas a landowner has a duty to use reasonable care to inspect trees to discover if there is a danger of collapse.
The Georgia case of Wesleyan College v. Weber 238 Ga. App. 90; 517 S.E. 2d 813 (1999) is illustrative of the duty of a property owner to inspect trees. The plaintiff’s wife was killed when her vehicle struck a fallen tree that had fallen in light winds from land owned by Wesleyan College onto a highway where she was driving her vehicle. Wesleyan College owns a narrow strip of land between four-lane Forsyth Road (U.S. 41) and a parallel railroad. This strip of property was across the highway from Wesleyan’s president’s house. Such strip was undeveloped and contained a large number of trees. There was evidence presented that the trees were overgrown with vines invested, rot at the bottom, and in generally poor condition. The ground crew at Wesleyan had recommended to the physical plant director that dead and dying trees should be removed but the work was not done because it would require that the highway be closed. In sustaining the large award of damages made by the trial court, this appellate court observed:
“It is still the prevailing rule that the owner of rural land is not required to inspect it to
make sure that every tree is safe and will not fall over into the public highway and kill a man, although there is already some little dissent even as to this, and at least if the defendant knows that the tree is dangerous he will be required to take affirmative steps. But when the tree is in an urban area, and falls into a city street, there is no dispute as to the landowner’s duty of reasonable care, including inspection to make sure that the tree is safe. The cases of trees therefore suggests that the ordinary rules as to negligence should apply in the case of natural conditions, and that it becomes a question of the nature of the locality, the seriousness of the danger, and the ease with which it may be prevented. A landowner who knows that a tree on his property is decayed and may fall and damage the property of an adjoining landowner is under a duty to eliminate the danger, even if the tree grew on and became a part of the land by natural condition. We are specifically limiting liability in this case to patent visible decay and not the normal usual latent micro-non-visible accumulative decay. In other words, there is no duty to consistently and constantly check all pine trees for non-visible rot as the manifestation of decay must be visible, apparent, and patent so that one could be aware that high winds might combine with visible rot and cause damage.” 517 S.E. 2d 813, 817.
The owner of land is not liable for normal flow of natural waters from his land nor is he liable for failure to remove snow or ice that has collected naturally on his land. Ordinances that require snow removal do not create grounds for private law suits.
Generally, there is no duty whatsoever owed to trespassers; however, an owner of land will be held accountable to trespassers for creating conditions with the intention of harming trespassers.
An owner of land is responsible for creating artificial conditions that result in damages to others. For example when an owner of land creates a drainage system that
discharges water onto a public highway, it is said that the owner of land has created a nuisance and is liable for the resulting damages. If a possessor of land creates an artificial condition that creates a hazard even for a trespasser, he has a duty to warn. For example, running a wire across a path that is used by snowmobiles.
An owner of land owes a special duty to young children to not have on his property conditions that may be thought of as attractive nuisances i.e. something artificial that is certain to attract young children to the land.
A. Licensee or Invitee
The duty owed a person on the premises of another depends upon the status of the visitor. Both an invitee and a licensee may recover where the injury results from the positive acts of the landowner. A licensee is on the premises with the permission of the landowner. The permission may be expressed or implied as arises because of the relationship of the parties, such as a customer who has an implied license to enter a store to make a purchase. An invitee is a person who comes to the premises for the mutual benefit of himself and the person in possession of the premises. A licensee is one who comes to the premises for his own interest, convenience or gratification, with the consent of the person in possession.
There is a distinction of the duty owed to an invitee as compared to a licensee. The duty owed to an invitee is greater. The Supreme Court of West Virginia dealt with the question of whether the user of a public sidewalk was an invitee or a licensee and concluded that since liability of a municipality is governed by statute, that premises liability questions are not applicable, however, the court did present a good discussion of the different levels of duty a landowner owes to an invitee, a licensee and a trespasser:
“II. DISCUSSION
A. Premises Liability Principles
The issue in this case is whether premise liability principles are applicable in an action against a municipality resulting from Huntington’s negligent failure to maintain its sidewalks in good repair. The circuit court ruled that premise liability principles were applicable to this case. Specifically, the circuit court ruled that Ms. Carrier was an invitee on the sidewalks of Huntington. The circuit court also ruled that Huntington owed no duty to Mrs. Carrier because the defective condition of the sidewalk was open and obvious.
Under premises liability principles an individual on private property may be an invitee, a licensee or a trespasser. Whether a party injured on the premises of another is an invitee, licensee or trespasser is significant under the law of West Virginia. The law imposes different duties of care on possessors of premises with regard to invitees, licensees and trespassers.
This Court has stated ‘ {a} person is an invitee when for purposes connected with the business conducted on the premises he enters or uses a place of business.’ Syl. Pt. 1, Burdette v. Burdette, 147 W. Va. 313; 127 S.E. 2d 249 (1962). The duty owed to an invitee was outlined in syllabus point 2 of Burdette. In Burdette, the Court concluded “ the owner or the occupant of premises owed to an invited person the duty to exercise ordinary care to keep and maintain the premises in a reasonable safe condition.’ Also, in syllabus point 3 of Burdette we held ‘the owner or the occupant of premises used for business purposes is not an insurer of the safety of an invited person present on such premises and, if such owner or occupant is not guilty of actionable negligence or willful or wanton misconduct and no nuisance exists, he is not liable for injuries there sustained by such invited person.
In defining a licensee in syllabus point 2 of Cole v. Fairchild, 198 W. Va. 736, 482 S.E. 2d 913 (1996), we said ‘ a person is a licensee when he or she has permission or consent to enter the premises of another not in response to any inducement offered by the owner or occupant, or for a purpose having some connection with a business actually or apparently carried on there by the occupant, but for his mere pleasure, convenience, or benefit.’ In the single syllabus of Hamilton v. Brown, 157 W. Va. 910, 207 S.E. 2d 923 (1974) this Court held that:
Mere permissive use of the premises, by expressed or implied authority ordinarily creates only a license, and as to a licensee, the law does not impose upon the owner of the property an obligation to provide against dangers which arise out of the existing conditions of the premises inasmuch as the licensee goes upon the premises subject to all the dangers attending such conditions.
As to a trespasser, we held in syllabus point 1 of Huffman v. Appalachian Power Co., 187 W. Va. 1, 415 S.E. 2d 145 (1991) that ‘ {a} trespasser is one who goes upon the property or premises of another without invitation, express or implied, and does so out of curiosity, or for his own purpose or convenience, and not in the performance of any duty to the owner.’ In syllabus point 2 of Huffman we held that ‘the owner or possessor of property does not owe trespassers a duty of ordinary care. With regard to a trespasser, a possessor of property only needs refrain from willful or wanton injury.”
Carrier v. City of Huntington, 202 W. Va. 30; 501 S.E. 2d 466, 468 (1998).
B. Hotels and Landlords Liability for Criminal Acts of Others
A growing area in the subrogation field is cases involving loss of property or injury to property brought about by the criminal actions of third parties but pursued against a hotel or landlord under claims that the loss would not have occurred had the hotel or
landlord exercised reasonable care to protect against these criminal acts.
At common law these defendants were under no obligation to protect their guests and tenants from intruders. Today, however, many courts are imposing duties on lessors, hotels, stores, shopping centers and public entities to protect against criminal acts that are foreseeable.
The early New Jersey case of Braitman v. Overlook Terrace, 68 N.J. 368, 346, A.2d 76 (1975) is illustrative. In that case there was a break-in and a thief took the tenant’s personal property and jewelry. The lock to the apartment was defective and the tenant had complained to the landlord. In finding the landlord responsible the court quoted from a case involving an assault in a public area of an apartment complex:
“… conditions of modern day urban apartment living, particularly in the circumstances of this case. The rationale of the general rule exonerating a third party from any duty to protect another from a criminal attack has no applicability to the landlord-tenant relationship in multiple dwelling houses. The landlord is no insurer of his tenants’ safety, but he certainly is no bystander. And where as here, the landlord has notice of repeated criminal assaults and robberies, has notice that these crimes occurred in the portion of the premises exclusively within his control, has every reason to expect like crimes to happen again, and has the exclusive power to take preventive action, it does not seem unfair to place upon the landlord a duty to take those steps which are within his power to minimize the predictable risk to his tenants. 68 N.J. 368, 374 citing Kline v. 1500 Massachusetts Ave. Apartment Corp., 141 U.S. App. D.C. 370, 439 F. 2d 477 (D.C. Cir 1970).”
Intentional Torts
In addition to negligent torts, the law provides a remedy for intentional torts which
include assault and battery, false imprisonment, intentional infliction of emotional stress, defamation, invasion of privacy, fraud, outrage or bad faith, interference with relationship between others, misuse of legal process, intentional torts against property and nuisance. Clearly, in the case of an intentional tort that results in a subrogation claim, there is a remedy. The problem typically is not the issue of liability but the problem of recoverability. Most insurance policies in force do not provide proceeds for intentional acts of insureds and most criminal defendants are both without insurance and without resources. Consequently, intentional torts are not treated in this chapter as a separate entity but are discussed throughout when applicable such as under the standard auto or homeowner’s insurance policy.
Conclusion
This concludes the chapter on the negligence subrogation claim. Such actions place subrogation professionals in a wide area of the law. Knowledge of the nuances and precedents that prevail in this arena cannot help making us more effective in the work that we are performing each day.
Bibliography
Banks, McDowell, Foreseeability in Contract and Tort: The Problems of Responsibility and Remoteness, 36 Case W. Res. 286, 1985 Case Western Reserve Law Review.
Bohlen, “Voluntary Assumption of Risk.” 1906, 20 Harv. L. Rev 14.
Boston, Gerald W., Apportionment of Harm in Tort Law: A Proposed Restatement,
21 Dayton L. Rev. 267, 1996 University of Dayton Law Review, Winter, 1996.
Dean, Rodney A., The Claims Manager’s Guide to North Carolina Litigation Law, 1995 Published by the Author.
Fleming, Law of Torts, 2d Ed. 1961.
Green, Leon. The Causal Relation Issue in Negligence Law, 60 Mich. L. Rev. 543 (1962).
Green, Leon., Foreseeability in Negligence Law, 61 Column. L. Rev. 1401 (1961).
Johnson, Jamey B., Note: Torts-Res Ipsa Loquitur is Inapplicable when a Plaintiff Offers Expert Testimony to Furnish a Complete Explanation of the Specific Cause of an Accident. 25 U. Balt. L. Rev. 261.
Jones, William K., Strict Liability for Hazardous Enterprises, 92 Colum.L. Rev 1705
Lorimer, Perlet, Kempin, Hodosh and Porter, The Legal Environment of Insurance, Two Volumes, Fourth Edition, 1993, American Institute for Chartered Property Casualty Underwriters.
Malone, Wex., Ruminations on Cause-In-Fact, 9 Stan. L. Rev. 60 (1956).
Rice, The Automobile Guest and the Rationale of Assumption of Risk, 1943, 27 Minn. L. Rev 33.
Twerski, The Many Faces of Misuse: An Inquiry Into the Emerging Doctrine of Comparative Causation, 29 Mercer L. Rev. 403 (1978).
Wigmore, Responsibility for Tortious Acts: Its History, 7 Harv. L.Rev. 315 (1894).
Wright, Richard W., Causation in Tort Law, 73 Calif. L. Rev. 1735, December, 1985.
Zwier, Cause in Fact” in Tort Law-A Philosophical and Historial Examination, 31 De Paul L. Rev. 769 (1982).
Cases
Bobbitt v. Ruyman, No 91 AP- 1423 Court of Appeals, Ohio (1992).
Bosley v. Alexander, 114 N.C. App. 470.
Braitman v. Overlook Terrace, 68 N.J. 368, 346, A.2d 76 (1975).
Britton v. Wooten, 817 S.W. 2d 443 (1991).
Burdette v. Burdette, 147 W.Va. 313; 127 S.E. 2d 249 (1962).
Carrier v. City of Huntington, 202 W.Va 30; 501 S.E. ad 466(1998).
Coble v. Knight, 130 N.C. App. 652; Swicegood v. Cooper, 341 N.C. 178.
Cole v. Fairchild, 198 W.Va. 736, 482 S.E. 2d 913 (1996).
Collier v. Citizens Coach Co., 231 Ark 489, 330 S.W. ad 74.
De La Concha v. Pinero ,104 So. 2d 25, 28 (Fla. 1958).
Fowler v. Harper, Fleming James, Jr. and Oscar S. Gray, 4 Law of Torts Sec. 22.1 (2nd ed. 1986 and Cum. Supp. 1993).
Hamilton v. Brown, 157 W. Va. 910, 207 S.E. 2d 923 (1974).
Hatsock v. Forsgren, Inc., 236 Ark 167, 365 S.W. ad 117 (1963).
Hau v. Gill, 1999 Ohio App. 3258 (1999).
Huffman v. Appalachian Power Company, 187 W. Va. 1, 415 S.E. 2d 145 (1991).
James v. Williams 177 La. 1033; 150 So. 9 ( 1933).
Kline v. 1500 Massachusetts Ave. Apartment Corporation, 141 U.S. App. D.C. 370, 439 F. 2d 477 (D.C. Cir 1970).
Leppke v. Segura, 632 P.2d 1057, 1059 (Colo. App. 1981).
Mahoney v. Beatman, 110 Conn. 184, 147 A. 762 (1929).
Markowitz v. Arizona Parks Bd., 146 Ariz 352, 354-59, 706 P.2d 364, 366-71 (1985).
Mathis v. IBP, Inc., 2001 Iowa App 342.
McLeod v. American Motors Corp., 723 F.2d 830 (1984).
Morrison v. Cornelius, 63 N.C. 346 (1869).
Pope & Talbot, Inc. v. Hawn, 346 U.S. 406, 409, 98 L.Ed. 143, 150, 74 S. Ct. 202 (1953).
Roberts v. Weber and Sons, Co. 248 Neb. 243; 533 N.W. ad 664 (June 23, 1995).
Rylands v. Fletcher, 3 H+C 774, 159 Eng. Rep 737 (1865).
Tinker V. Hirst, supra; 2 R.C.L. 1198. 150 So. 9, 11
Union Pacific R.R. v. Sharp, 330 Ark. 174, 952 S.W. 2d 98 (1998).
Washewich v. LaFave, 248 So. 2d 670, 672 (Fla. App. 1971).
Wesleyan College v. Weber,238 Ga. App 90; 517 S.E. ad 813 (1999).
Wise v. Carter, 119 So. 2d 2d 40 ( Fla. App. 1960).
JOHN J. O’BRIEN JD, CLU, CPCU
Index:
Introduction
Ordinary Negligence
Forseeability, “but for” and “substantial factor” tests.
Intervening Agency
Concurrent Causation
Negligence Per Se
Ultra hazardous or Abnormally Dangerous Activities (strict liability)
Res Ipsa Loquitor
Respondeat Superior-Vicarious Liability
Negligent Entrustment
Negligent Supervision and Parental Responsibility
Defenses to Negligence Actions
a. Contributory Negligence
b. Last Clear Chance
c. Sudden Emergencies
d. Comparative Negligence
e. Assumption of Risk
f. Act of God
Immunities
Premises Liability
a. Licensee or Invitee
b. Hotels and Landlord’s Liability for Criminal Acts of Others
Intentional Torts
Conclusion
The Negligence Claim
By John J. O’Brien, JD, CLU, CPCU
“Like Lewis Carroll’s snark, cause- in- fact is not easy to describe or locate. Even when we feel that we have grasped it, more often than not we are left clutching just another boorjum or perhaps thin air. And like Carroll’s snark hunters, lawyers and legal scholars have doggedly pursued the elusive concept of cause-in-fact; they have rarely, however, captured it in words adequate to define it or describe what tort goals it serves.” James E. Viator, “When Cause-in-Fact is More Than A Fact: The Malone-Green Debate On The Role Of Policy In Determining Factual Causation In Tort Law.
The Run of the Mill Negligence Subrogation Claim
Introduction
Negligence is the most important basis for liability against another party in the United States today. The concept of negligence has been expanded considerably
through the advent of product liability and warranty doctrines to a degree that product liability and warranty theories of liability hold a separate distinct identity unto themselves in the area of tort liability. On the other hand historically, negligence as a basis for liability in lawsuits by employees against employers has been curtailed through worker’s compensation legislation in all states. Negligence today is continually challenged by legislatures and special interest groups who wish to place caps on damages, exempt public entities and public servants from civil responsibility, provide compensation without pointing blame as in no-fault legislation or even prohibit subrogated insurance companies from access to the civil courts.
Subrogation representatives are required to develop a solid background in the law of negligence. Subrogation is a derivative action. The rights of the subrogated insurance company can rise no higher than its insured. If the insured does not have a good tort case, then his insurance company’s position is no better. It is of interest to know that the modern day law of negligence has lessened the responsibility of a tortfeasor for his negligent actions. Negligence has its origins in strict liability, which emerged from early Anglo-Saxon law. At least until the early 1500s a negligent party was responsible for his acts without regard to intent or causality, “The doer of a deed was responsible whether he acted innocently or inadvertently, because he was the doer…” Wigmore, “Responsibility for Tortious Acts: It’s History”, 7 Harv.L. Rev. 315, at 317 (1984) This theory that a man acts at his own peril and is answerable in trespass even though the injury happened by accident or misfortune had many supporters in this country and was discussed extensively by Oliver Wendell Holmes in his treatise The Common Law before he rejected the theory under what appeared to be a concern that it would breed inactivity amongst Americans which would hinder the growth of our nation:
“ A man need not, it is true, do this or that act,--the term act implies a choice,--but he must act somehow. Furthermore, the public generally profits by individual activity. As action cannot be avoided, and tends to the public good, there is obviously no policy in throwing the hazard of what is at once desirable and inevitable upon the actor.” Holmes, The Common Law, (1981), p. 95
Holmes’ sense of justice was offended by this earlier theory of strict liability flowing from acts alone and he sought instead to have the nation endorse the prudent man approach to liability in negligence which is the view adopted by legal scholars and courts today:
“Unless my act is of a nature to threaten others, unless under the circumstances a
prudent man would have foreseen the possibility of harm, it is no more justifiable to make me indemnify my neighbor against the consequences, than to make do the same thing if I had fallen upon him in a fit, or to compel me to insure him against lightning.” P. 96
Some negligence issues such as in bailment and products liability are so prevalent in the subrogation area that they have been given their own treatise in this education series.
Ordinary Negligence
Each of us under our law has a duty towards each other. We operate as prudent people when we drive our motor vehicles, operate our businesses, engage in social activities and maintain our properties and must conduct ourselves in a reasonable fashion so as not to cause injuries to the person or property of others. Our system of laws reflects this by providing either through statute or court decisions that citizens have a duty to exercise reasonable care in their activities so as not to cause injury to others. If this duty, which is owed to others, is violated, then the law provides a remedy to injured parties to sue a tortfeasor and recover damages. Actionable negligence consists of three necessary elements:
1. A duty on the part of defendant;
2. A failure to perform that duty; and
An injury to the plaintiff resulting from the failure.
Some writers paraphrase these three elements and speak in terms of not a duty of the
defendant but a right of the plaintiff hence, according to these writers, the elements of a tort are:
1. A legally protected right
2. A wrongful invasion of that right, and
3. Damages as a proximate result. Lorimer, Perlet, Kempin & Hodosh, The Legal Environment of Insurance, Volume 11, American Institute for Property and Liability Underwriters, Third Edition, (1987)
Foreseeability, “but for” and “substantial factor”
The three prong test of duty, breach of duty and damages proximately caused by that breach is uniformly applied in every state; however, a subrogation professional, depending on the jurisdiction where the claim arises may find that additional criteria should be considered in investigating proximate cause. These criteria or tests may be defined as the “but for” rule, “the substantial factor rule” and/or “the foreseeability rule”. The standard for negligence in each state is treated in the state-by-state reference section of this text. States vary in the application of these rules in the standard for negligence. For example, the standard for negligence in Arizona includes a “but for” rule i.e. the damages would not have occurred “but for” the defendant’s conduct. Markowitz v. Arizona Parks Bd., 146 Ariz 352, 354-59, 706 P.2d 364, 366-71 (1985).
In Colorado a forseeability test is applied in determining proximate cause: “The duty to exercise reasonable care extends only to foreseeable damages and injuries that occur to foreseeable plaintiffs.” Leppke v. Segura, 632 P.2d 1057, 1059 (Colo. App. 1981).
Connecticutt follows the substantial factor rule and in Connecticut the plaintiff must
demonstrate that the defendant’s negligence was a substantial factor in producing plaintiff’s damages. Mahoney v. Beatman, 110 Conn. 184, 147 A. 762 (1929).
Perhaps a good way to understand these concepts is to resort to the case law study approach used by American law schools. In Arkansas, to prevail on negligence claims a plaintiff must show a duty, a breach of that duty, injury proximately caused by that breach and damage to the plaintiff. Proximate cause is defined by Arkansas courts as “that which in a natural and continuous sequence, unbroken by any sufficient intervening cause, produces the injury, and without which the result would not have occurred.” Union Pacific R.R. v. Sharp, 330 Ark. 174, 952 S.W. 2d 98 (1998).
It would appear based on the Union Pacific case that Arkansas today follows a substantial factor approach to proximate cause. The breach must produce the injury (unbroken by any sufficient intervening cause) thus leaving the breach as the substantial cause of the injury. We have borrowed the facts from a 1963 Arkansas case that actually applied a foreseeability test of proximate cause and here examine the result applying “foreseeability”, “but for” as well as the “substantial factor” tests.
“Substantial factor” has been defined as “an actual, real factor, although the result may be unusual or unexpected.” Pennsylvania Suggested Standard of Civil Jury Instructions Section 3.5
The “but for” test is less stringent than the substantial factor test. In fact some judges find that jurors understand it without specific instructions since they understand it from every day activities. For example,” but for my bringing an umbrella today, I would have been rained on”.
Under the Restatement of Laws test of substantial factor, one must find that “but for” the defendant’s negligence, the plaintiff would not have suffered injury and that the defendant’s negligence was a “substantial factor” in causing those injuries. “But for” is necessary but not sufficient. Restatement (Second) of Torts
Section, 432 Negligent Conduct as Necessary Antecedent of Harm
In Hartsock v. Forsgren, Inc., 236 Ark. 167, 365 S.W. 2d 117 (1963) the Arkansas defendant maintained a large tank for the storage of tar and negligently permitted some of it to escape onto a children’s playground. The plaintiff’s nine year old son got some of the tar on his feet and the plaintiff’s were attempting to remove the tar with gasoline when a second child fired a cap-pistol creating a spark that ignited the gasoline fumes and resulted in serious burns to the nine year old child.
In the actual case, the court dismissed the plaintiff’s case against the defendant claiming that this sort of injury, as well as the intervening acts of the other human beings, was not foreseeable:
“To be negligent a person must be in a position to realize that his conduct involves a hazard to others. In the Hill case we described a negligent act as ‘one from which an ordinary prudent person in the actor’s position—in the same or similar circumstances-would foresee such an appreciable risk of harm to others as to cause him not to do the act, or to do it in a more careful manner.’ Later in Collier v. Citizens Coach Co., 231 Ark. 489, 330 S.W. 2d 74, we added:
‘Forseeability is an element in the determination of whether a person is guilty of negligence and has nothing whatever to do with proximate cause.’ Moreover, when the voluntary acts of human beings intervene between the defendant’s acts and the plaintiff’s injury, the problem of foreseeability is still the same: Was the third
person’s conduct sufficiently foreseeable to have the effect of making the defendant’s act a negligent one? Harper & James, The Law of Torts, @ 20.5; Rest., Torts, @ 447.”236 ARK 167, 169
Next, we apply the “but for” rule to the same facts. It would be stated as follows: but for the defendant negligently maintaining its tar tanks by the schoolyard, the plaintiff would have never suffered these injuries. As can be seen, in a “but for” jurisdiction, one could argue that the plaintiff should be able to recover.
And next apply the substantial factor rule to these facts. This rule says that if a person’s act was a substantial factor in bringing on the damages suffered by the plaintiff then it is a proximate cause. Arguing the case to recover a subrogation claim for medical expenses paid to this injured child, one would say that the substantial factor was the flammable tar that defendant’s negligence caused to be on the skin of this child. The other child with a cap gun was a “quirk” and the other child was not negligent but only acting as a child. He could not have possibly known at his age that a cap pistol could cause harm to the other child. The parents, one would argue, were not acting negligently in that it is reasonable that one use a solvent to remove tar. The concept as an advocate for a position is to remove a duty and breach from other parties and leave the defendant’s actions as, at least, “a substantial factor”.
We can apply these three tests to the following facts. A landlord neglects his duty to provide hot water for a tenant. The tenant boils the water and while carrying the hot water from the kitchen to the bathroom, drops the water on a baby causing third degree burns.
Under the “ forseeability” test, there probably would be no liability placed on the landlord; however under the “but for” test there is liability, (but for the landlord’s
negligence, the injuries would have never taken place) and arguably, the landlord’s negligence was a substantial factor in causing these injuries. Consequently recovery could be had under the “but for”, as well as, the “substantial factor” tests but not under the forseeability test.
Intervening Agency
The defendant is not liable if the injuries are caused by an intervening agency that breaks the chain of causation and sets a new chain of causation in motion. Oftentimes in bailment cases, the vehicle for which a claim has been paid was stolen from a garage or parking lot and the subrogation claim is denied on the basis of an intervening agency. However, typically the actions of the thief are not an independent cause. Generally, the argument that is made is that the proper precautions were not taken by the garage such as locks, lights, alarms and guards to prevent crimes such as vandalism and theft so the argument is that the so-called intervening act was foreseeable and does not relieve the negligent garage or parking lot of responsibility. Cases like this are frequently presenting themselves in the subrogation arena and generally recovery on these actions can be accomplished particularly in high crime areas where the frequent occurrence of theft is know to the garage owner and he has not taken the proper precautions to protect an insured’s vehicle.
Many times an insured’s vehicle is not the one stolen but the one that the thief runs into with a stolen vehicle. Subrogation claims in such instances have been brought against the garage or parking lot owner where the vehicle was stolen. This writer has pursued such a claim unsuccessfully in a “forseeability jurisdiction” arguing that damage to third party vehicles was a foreseeable consequence of creating a situation where vehicles can be stolen. The failed endeavor was bolstered with national statistics that stolen vehicles are one hundred times more likely than non-stolen
vehicles to be engaged in accidents involving property damage and personal injuries to third parties.
Subrogation professionals in the property insurance arena are often faced with damage caused by criminals- specifically vandals or arsonist – and seek to recover against a property owner or landowner who knew of criminal activity and vagrants and took no action to prevent their presence or their activities. For example, an insured’s building may have been damaged by a fire caused in a neighboring vacant building by trespassers burning newspapers and refuse in an attempt to keep warm. Subrogation actions against the property owner of the vacant building often meet with failure under the common law rule that there is no duty to protect persons from the criminal acts of others.
But again the test is typically forseeability in most jurisdictions and recovery is obtainable under circumstances where the acts of an intervening criminal are foreseeable.
In Britton v. Wooten, 817 S.W. 2d 443 (1991) the landlord sued the lessee for destruction of a building. The lessee operated a grocery store and its employees stacked trash, papers and combustible material all the way up to the eaves. Third parties set fire to it and the fire climbed the trash to the roof of the building causing the whole building to burn. The lessee argued that they were not responsible because of the intervening actions of criminals. The Court looked at the Restatement of Torts and found liability. Ironically, it was the lessee who inadvertently directed the Court to the Restatement:
“Respondent cites Restatement (Second) of Torts, Sec. 448 in support of the continued viability of criminal acts, per se, as sufficient to cut the chain of causation. That section postulates that ‘an intentional tort or crime is superseding cause’ where
the defendant’s ‘negligent conduct’ only creates ‘a situation which afforded an opportunity’ for another to commit an intentional tort or crime, but it adds an important caveat:
‘…unless the actor (the defendant) at the time of his negligent conduct realized or should have realized the likelihood that such a situation might be created, and that a third person might avail himself of the opportunity to commit such a tort or crime.’”
The Court found that the defendant did create a situation where it was foreseeable that someone might set fire to this stacked combustible material.
Concurrent Causation
When two or more independent causes combine to produce an injury, each defendant is liable for the entire injury even though the act of either would not have produced the injury. This single indivisible injury rule has its foundation in England and was recognized in the first Restatement of Torts in the 1930s. The rule holds that when two or more actors have caused a single indivisible harm through independent, tortuous acts and indivisible actions, the injured party may recover all damages from each of the actors.
This doctrine is distinguishable from principles of successive causation where injuries suffered by the plaintiff attributable to two defendants can be separated and it is plaintiff’s burden to separate them.
A case illustrating concurrent causation is McLeod v. American Motors Corp.,
723 F.2d 830 (1984) in which the plaintiff was injured by a combination of a rear end collision of her vehicle by a drunk driver and her seat belt not operating properly.
The jury found both the manufacturer of plaintiff’s vehicle and the drunk driver responsible. American Motors appealed claiming that the jury should have apportioned damages. The United States Court of Appeals disagreed with American Motors:
“The Florida cases distinguish between concurrent and successive causation. The typical concurrent causation case involves two defendants whose acts occur at or about the same time and together produce plaintiff’s injury. In this situation, Florida law clearly makes each of the defendants jointly and severally liable for the full amount of plaintiff’s damages. De La Concha v. Pinero ,104 So. 2d 25, 28 (Fla. 1958). The typical successive causation case, on the other hand, involves two or more defendants whose acts occur at distinct times and together produce plaintiff’s total injuries. Florida law apparently holds that in successive injury cases the jury should be allowed to apportion damages between the defendants; however, if damages are not reasonably apportionable, plaintiff may recover the full amount from either of the two defendants. Washewich v. LaFave, 248 So. 2d 670, 672 (Fla. App. 1971); Wise v. Carter, 119 So. 2d 2d 40 ( Fla. App. 1960).
Negligence Per Se
Certain actions are so inherently dangerous that they are considered to be negligent per se. The court may declare them to be negligent without submitting the issue to a jury. Violation of a statute may be negligent per se under certain circumstances. Breach of a statute gives rise to negligence per se claim if the person harmed by the violation are within the intended protection of the statute and the harm suffered is of the type the legislation was intended to prevent.
Often times there is a debate over whether a negligent driver’s failure to hold a
driver’s license should be considered negligence per se. The answer is no. An unlicensed driver is neither barred from recovering for injuries received by himself in an automobile accident nor is he liable for injuries received by another simply because he does not have a driver’s license. There is a small minority of courts that hold that failure to have a license is not conclusive but may be considered as some evidence of negligence.
In the case of Bobbitt v. Ruyman , No.91AP-1423 (Regular Calender) Court of Appeals of Ohio, Tenth Appellate District, Franklin County, 1992 Ohio App 3220, decided June 16, 1992, the defendant was successful in having the plaintiff’s case dismissed claiming that the plaintiff bicyclist was negligent per se. Plaintiff had sued defendant alleging negligent operation of a motor vehicle, which collided with a bicycle plaintiff operated. Defendant moved for summary judgment asserting that the plaintiff was negligent per se and the proximate cause of his own injuries because he was riding his bicycle at night without a light and he was riding his bicycle on the sidewalk in violation of two city ordinances.
In dismissing the case against the defendant the court noted:
“in order to constitute negligence in the violation of an ordinance or statute, it is necessary that the obligation imposed be for the benefit of the person alleging injury, and this, of course, means that one so claiming must stand upon the proposition that the ordinance was intended for his protection.”
“Contrary to plaintiff’s contention, both ordinances were passed for plaintiff’s benefit and to protect against incidents such as the present. While C.C. 2173.06, regarding headlamps, arguably was passed for the benefit of the public as a whole, the ordinance clearly was passed for the benefit of bicyclists by enabling others to see bicycle
traffic. Further, C.C. 2173.10, regarding operation of bicycles on sidewalks, was passed for the protection not of pedestrians, but bicyclists, who are not anticipated as part of the usual pedestrian sidewalk traffic. Despite plaintiff’s urging to the contrary, the ordinances need not be designed for the protection of motorist in order for defendant to assert that plaintiff is negligent per se in violating C.C. 2173,06 and 2173.10. Plaintiff having violated those sections, his actions constitute negligence per se.”
Ultra hazardous or Abnormally Dangerous Activities (strict liability)
Defendant can be held strictly liable for engaging in activities that are considered to present an extreme danger to others. Most states follow the very early case of Rylands v. Fletcher, 3 H. & C. 774, 159 Eng. Rep 737 (1865). In Rylands, a mill owner ordered construction of a dam to get waterpower. The resulting reservoir lay over ancient abandoned coalmines. The mill owner had no reason to suspect that these old diggings led into an operating colliery, but they did. When the dam was closed, water ran down the old shafts, sweeping into and flooding the colliery. The mill owner obtained the water for his own use without drainage facilities. The mill owner’s use was classified as a “non-natural user.”
Courts have expanded Rylands from use of water on land to a wide range of activities including air shows, fireworks, blasting, rock crushing, storage of chemicals, target shooting, and gasoline tanks.
Under the common law if a person keeps or conducts activities on his land which are likely to cause mischief and if something goes wrong, then he is prima facie responsible and answerable for all damages. Negligence is clearly irrelevant to the doctrine. Carrying on the activity itself where injury results is negligence per se.
Under modern case law and under the Restatement of Torts, “abnormally dangerous activity” is substituted for “ultra hazardous activity”. Under the Restatement one who carries on an abnormally dangerous activity is subject to liability for damages caused to another even though he has exercised the utmost care to prevent harm.
Res Ipsa Loquitur
Res Ipsa Loquitur is a rule of evidence applicable in many jurisdictions in the United States in negligent cases. In a case involving the doctrine of res ipsa loquitur, the jury is permitted to consider circumstantial evidence. The jury is permitted to infer negligence from an accident that ordinarily would not have occurred unless someone was negligent. The jury is not required to make such an inference. The jury may either make such inference or refuse to do so.
Res Ipsa Loquitur literally means, “The thing speaks for itself.” It has its origins in England where a chancellor argued that a flour barrel had fallen out of a second story window and injured his client. He argued successfully that flour barrels do not fall out of second story windows unless somebody is careless. The doctrine allows a jury to infer negligence even though no direct evidence of negligence has been introduced. Negligence may not be inferred from the mere fact of injury. The circumstances accompanying the injury permit the inference of negligence.
The elements of res ipsa loquitur that are required to justify an inference of negligence are: (1) a legal duty owing from the defendant to exercise a certain degree of care in connection with a particular instrumentality to prevent the occurrence that has happened; (2) the subject instrumentality at the time of the occurrence must have been under the defendant’s control and management in such a way that there can be no serious question concerning the defendant’s responsibility for the misadventure of
the instrument; (3) the instrument for which the defendant was responsible must be the producing cause of the plaintiff’s injury; (4) the event which brought on the plaintiff’s harm is such that would not ordinarily occur except for the want of requisite care on the part of the defendant as the person responsible for the injuring agency.
In 1995 the Supreme Court of Nebraska considered the doctrine of res ipsa loquitur favorably in a case involving livestock that escaped from pens. The plaintiff’s semi-tractor trailer collided with several of the approximately 175 of the defendant’s cows that were present on highway 6. The cows had broken down a gate to their pen. The defendant offered evidence that the materials used was sturdy and that the gates were periodically inspected and that he exercised the ordinary care required of him. The plaintiff thus had to rely upon the doctrine of res ipsa loqitur that the occurrence of the cows escaping from their pen and appearing on a public highway does not occur in the absence of negligence.
The trial court charged the jury on res ipsa loquitor and the jury awarded damages to plaintiff for the damages to his truck. The Supreme Court of Nebraska affirmed the trial court reversing the court of appeals:
“The Court of Appeals err in holding that res ipsa loquitur is inapplicable to all escaped-livestock cases. There are certain factual situations, a evidenced by the case at bar, wherein livestock ordinarily would not escape onto a public highway in the absence of some negligence.” Roberts v. Weber & Sons, Co. 248 Neb. 243; 533 N.W.2d 664 (June 23,1995).
Respondeat Superior- Vicarious Liability
Courts rely upon the doctrine of respondeat superior as the basis of a master’s liability for injuries to others caused by the negligent acts of his servants. A master under this doctrine may be found vicariously liable for the actions of his servants if the tort was committed within the scope of employment. Whether an act is committed within the scope of employment generally revolves around some type of control theory. An act is considered to be within the scope of employment if at the time of doing the negligent act the employee was acting in furtherance of the employer’s business and the employer had the right to exercise some degree of control over the employee in the conduct of such activity.
A principal is generally liable for the torts of his or her agent under the following circumstances:
a. when the acts are authorized;
b. when the acts are ratified by the principal; or
c. when the acts are within the implied authority of the agent, such as those committed within the scope of his or her employment and in furtherance of the principal’s business.
When the injury is the result of complete departure from the course of employment and purely personal enterprise, the employer generally is not held liable. Furthermore, the principal is not ordinarily liable for willful or intentional injuries of the agent.
Even though an agent does an act which is contrary to the principal’s directions,
the principal may still be liable if the act was within the scope of authority of the agent and in furtherance of the principal’s business. An employee may decide that for that it would be in the best interest of his employer’s business to drive all night and thus reach a customer’s place of business early in the morning even though his employer has a rule that employees should not drive past eleven o’clock in the
evening. The employee is involved in a collision after falling asleep while driving at three o’clock in the morning. In this situation the employer could be held to be liable since the employee was acting in furtherance of his employer’s business.
Where the injury results from a complete departure from the course of employment and is purely personal, the employer is generally not held liable.
The early case of James v. Williams 177 La. 1033; 150 So. 9 ( 1933) is illustrative. Williams operated a funeral business. A funeral car owned by the defendant and being driven by his employee struck plaintiff James. The employee had the car without the knowledge of the defendant and was at the time driving a fellow employee home from work. The defendant did not supply transportation for employees back and forth to work. The court found in favor of the employer:
“The rule which prevails here and elsewhere is that ‘the owner of an automobile is not liable to one who is injured by the negligence of his chauffeur while operating the machine without his knowledge or permission, and for a purpose other than for which he was employed, as where the driver is on errand personal to himself.’ Tinker v. Hirst, supra; 2 R.C.L. 1198.”150 So. 9, 11.
If the agent is classified as an independent contractor the principal can still be responsible for his acts if the principal maintains control over the methods by which the independent contractor performs the work or the principal can also be held responsible for negligence in the selection of the independent contractor.
Generally, some items to look for in determining whether a principal is exerting control over an alleged independent contractor so as to convert the independent contractor to the status of an agent are:
1.The skill required to perform the task assigned to the independent contractor.
Who supplies the tools.
Who directs or decides the manner in which the job is completed.
Type of occupation-whether in the locality the work is usually done by specialist without supervision.
Whether the independent contractor has a line of business, which is distinct from that of the principal.
Terms of employment contract. Did the parties believe they were creating an employer/employee relationship?
Who controls the time in which the job is performed and the hours of work.
Where is the job performed – at the principal’s place of business under his supervision or at another location?
Right of the principal to dismiss the independent contractor.
Payment by time rather than a fixed amount for a job.
Negligent Entrustment
The doctrine of negligent entrustment requires that the defendant carelessly allow someone to use an instrument that could cause harm and that the incompetence of the person in a position of trust was the proximate cause of the injury. The most common example today of negligent entrustment is the parent who permits an incompetent child driver to use an automobile and then the child negligently injures a third person.
Another common example of this theory is when an owner of a vehicle entrusts his vehicle or its operation to a person whom he knows or with the exercise of due care should have known, to be an intoxicated driver. Coble v. Knight, 130 N.C. App. 652; Swicegood v. Cooper, 341 N.C. 178.
Negligent Supervision and Parental Responsibility
This theory is a little different than negligent entrustment. Here the complaint is not that the incompetent child was given a dangerous instrumentality, rather it is that the parents failed to control or supervise their children.
In addition many states have statutes which will be collected in the appendix of this book at the next printing that provide for parental liability for damages caused by minor children. As a general rule these statutes provide for a dollar amount of liability sometimes as little as $300. Typically, liability is automatic and does not require any negligence on the part of the parents.
In order to prevail under a claim of parental negligent supervision in the absence of a statute creating this vicarious responsibility of a parent, the plaintiff must show that: (1) the parents knew of their child’s particular reckless or negligent tendencies (thus knew they needed to exercise control over him) (2) the parents had the ability to exercise control; and (3) the parents did not exercise that control. Finally, the plaintiffs must show that the alleged parental negligence was the proximate and foreseeable cause of the injury suffered. Hau v. Gill 1999 Ohio App. 3258 (1999).
DEFENSES TO NEGLIGENCE ACTIONS
The appendix of this book contains a state-by-state breakdown of those states that follow contributory negligence, comparative negligence and the various forms of each. Contained here is a very general and brief treatment of defenses to negligence actions including contributory and comparative negligence.
a. Contributory Negligence
There was a time when most states would not permit a plaintiff to recover if plaintiff's
own negligence contributed to his injuries. Some states still follow this doctrine. Thus, for example, in the state of North Carolina, contributory negligence is a complete defense to claims of negligence and products liability.
Contributory negligence in those states that follow the doctrine generally is not a defense to gross negligence. However, gross contributory negligence is a defense to gross negligence.
Every person has the responsibility to exercise care for his own safety against injury and if he fails to exercise such care, he is guilty of contributory negligence. The defendant has the burden to show that the plaintiff’s failure to perform a legal duty proximately resulted in plaintiff’s injuries. If defendant is successful in this endeavor in those few jurisdictions that still apply a contributory negligence standard, the defendant can escape liability.
The North Carolina Court of Appeals in ordering a new trial, (after an appeal of a jury award that gave a roadway flagman that was struck in the back by defendant’s automobile no damages), criticizes the doctrine:
“From the outset, we recognize that there are serious questions regarding the validity of the doctrine of contributory negligence as evidenced by the fact that
forty-six states have abandoned the doctrine in favor of comparative negligence .
See Henry Woods, Comparative Fault Sec.1.11 (2nd ed, 1987 and Cum. Supp 1993); Fowler v. Harper, Fleming James, Jr. and Oscar S. Gray, 4 Law of Torts Sec. 22.1 (2nd ed. 1986 and Cum. Supp. 1993). We further acknowledge that the United States Supreme Court has described contributory negligence as a ‘discredited doctrine which automatically destroys all claims of injured persons who have contributed to their injuries in any degree, however slight.’ Pope & Talbot, Inc. v. Hawn, 346 U.S. 406,
409, 98 L.Ed. 143, 150, 74 S. Ct. 202 (1953). The doctrine of contributory negligence, which is a creature of common law followed in this State since Morrison v. Cornelius, 63 N.C. 346 (1869), remains the law of this State until our Supreme Court overrules Morrison…” Bosley v. Alexander, 114 N.C. App. 470
b. Last Clear Chance
A defense that is sometimes available to offset the defense of contributory negligence is the doctrine of “last clear chance”. This applies where the plaintiff by his own negligence places himself in a dangerous condition and the defendant is aware of plaintiff’s condition or aware that the plaintiff was oblivious to the danger and the defendant by the exercise of reasonable care should have been able to avoid injuring plaintiff and the defendant fails or refuses to use every reasonable method to avoid injury and as a result of defendant’s failure, the plaintiff is injured. If the plaintiff proves last clear chance the plaintiff may recover notwithstanding the plaintiff’s contributory negligence.
Sudden Emergency
The defense of sudden emergency may be available in a subrogation negligence action. It allows a jury to consider whether the actions of the defendant were reasonable under the emergency circumstances even though they may not have been reasonable under other circumstances. It is not a legal defense that bars an action rather it is an affirmative defense that allows the jury to apply a different standard of care because the accident was caused by external forces outside the control of the defendant. Sudden emergencies include tire blowouts, ice, fog and snow. Typically they do not include coming upon a stopped vehicle in the roadway.
“ A sudden emergency is a combination of circumstances that calls for immediate
action or a sudden or unexpected occasion for action. A driver of a vehicle who, through no fault of (his) (her) own, is placed in a sudden emergency, is not chargeable with negligence if the driver exercises that degree of care which a reasonable careful person would have exercised under the same or similar circumstances “ Mathis v. IBP, Inc., 2001 Iowa App 342
d. Comparative Negligence
While contributory negligence rules may prevent a plaintiff from recovering altogether, comparative negligence rules allow the plaintiff to recover but reduce his damages by the injuries caused by his own negligence. Under this doctrine when both the defendant and the plaintiff are at fault, a court will apportion damages between them.
Most states have a comparative negligence rule consisting of one of the following types:
1. Pure rule
2. 50% rule
3. 49% rule
4. Slight versus gross rule
Comparative negligence allows a party who was a major factor in an accident to recover against a party who was less at fault. So if there is a two-car accident and the plaintiff is 60% responsible but suffers injuries, he can recover 40% of his damages against the defendant.
Fifty- Percent Negligence allows a plaintiff to recover damages so long as his or her negligence is no greater than that of the other party. His damages are reduced by the
degree of his fault but if his fault exceeds fifty percent as compared to the other party, he can recover nothing against that defendant.
The Forty Nine Percent Rule allows a plaintiff to recover damages unless his negligence is fifty percent or more. If he is fifty percent at fault he recovers nothing.
Under the Slight versus Gross rule the plaintiff can recover only when his negligence is slight in comparison with the other party’s gross negligence. The plaintiff’s damages are reduced by the degree of his or her negligence.
e. Assumption of Risk
This doctrine is based on the maxim violenti non-fit injuria that means that no injury is caused to someone who consents to the injury. Assumption of risks requires that the person has full knowledge of a condition; such condition must be patently dangerous to him; and he must voluntarily expose himself to the hazard created.
Under the old contributory negligence theory, assumption of the risk was a bar to recovery; however, comparative fault considerations have led to the classification of assumption of the risk into at least three types.
Express assumption of risk occurs when a plaintiff specifically agrees prior to an injury to take his chances as to a known risk. For example, a person agrees to hold a big game safari company harmless for injuries or death arising from hunting lions in deepest Africa. Typically the courts enforce such agreements.
Implied assumption of risk is somewhat different. Implied assumptions of risks are of two kinds. There are those situations where the plaintiff by implication has assumed known risks in a particular activity i.e. one sits in left field knowing that baseballs
are normally hit into the stands there and sometimes fans are hit by these baseballs.
Then there are those situations of implied assumption of risk where the plaintiff knowingly encounters a risk that has been created by the defendant’s negligence. While traditionally this may have been a bar to recovery, in comparative negligence jurisdictions, courts use the actions of plaintiff in assuming the risks merely to reduce his recovery. In essence, assumption of risk in these situations is no more than a comparative fault inquiry.
f. Act of God
The defense of act of God is available in most jurisdictions if the evidence shows that the occurrence was an act occasioned exclusively by violence of nature without the interference of any human agency. It is an act not foreshadowed by the usual course of nature, and whose magnitude and destructiveness could not have been anticipated or provided against by the exercise of ordinary foresight. In order for the Act of God defense to apply, the natural event must be he sole proximate cause of an injury. It excludes all circumstances produced by a human agency.
A subrogation representative that is pursuing defective construction cases often sees “Act of God” defenses. Defective construction cases usually arise after a storm where the defective construction becomes apparent. These issues are discussed in greater detail in the chapter dealing with faulty construction subrogation.
Immunities
Generally, there are four classes of immunities, namely, sovereign or government, public official, charitable and intra-familial.
Under sovereign immunity, the federal government, state governments and municipal
corporations are immune from suit for functions relating to government but not for proprietary functions. A proprietary function is any business pursuit that a private enterprise could perform, such as supplying gas and water, fire protection, maintaining a park or highways. A political body is subject to suit just like any private entity while performing proprietary functions. Many times, however in claims against political entities there are requirements for notice, dollar limits on liability and sometimes prohibitions against subrogation claims. Consequently, subrogation claims against political entities require special care and attention.
A municipality may be held liable for damages resulting from government functions when the activity results in impairment of property. For example a municipality that operates a sewer treatment plant, in the exercise of its governmental functions, causes damage to property may be held liable.
Claims against the United States are brought pursuant to the Federal Tort Claims Act, which is found at Title 28 Code of Federal Regulations Part 14. It is a complicated field and numerous defenses are available depending on the particular agency involved. Sovereign immunity may apply in some instances. The statute of limitations under the Federal Tort Claims Act is six years; however, notice of the claim must be given within two years, and suit must be filed within six months of the date of denial of the claim by the federal agency.
At common law all charitable organizations enjoyed immunity from suit in tort under either a theory that the charity was assuming some of the responsibilities of government and thus entitled to immunity or under the trust fund theory that gifts were given to charities to be devoted to charitable purposes and the charity held this money in trust and it could not be used for any other purpose. Today, most states have rejected the doctrine of charitable immunity.
Intra-family immunity between spouses and parent and child existed because it was felt that such suits would disrupt family life, use up family resources and lead to collusion and fraud. Today most if not all states have abrogated these immunities. Apparently family members today get along just fine suing each other so long as there is enough insurance money to go around.
Premises Liability
A landowner may be liable to guest, business visitors and neighboring landowners. A landowner may be liable for natural conditions on his land if they create a hazard that the landowner could have corrected. In urban areas a landowner has a duty to use reasonable care to inspect trees to discover if there is a danger of collapse.
The Georgia case of Wesleyan College v. Weber 238 Ga. App. 90; 517 S.E. 2d 813 (1999) is illustrative of the duty of a property owner to inspect trees. The plaintiff’s wife was killed when her vehicle struck a fallen tree that had fallen in light winds from land owned by Wesleyan College onto a highway where she was driving her vehicle. Wesleyan College owns a narrow strip of land between four-lane Forsyth Road (U.S. 41) and a parallel railroad. This strip of property was across the highway from Wesleyan’s president’s house. Such strip was undeveloped and contained a large number of trees. There was evidence presented that the trees were overgrown with vines invested, rot at the bottom, and in generally poor condition. The ground crew at Wesleyan had recommended to the physical plant director that dead and dying trees should be removed but the work was not done because it would require that the highway be closed. In sustaining the large award of damages made by the trial court, this appellate court observed:
“It is still the prevailing rule that the owner of rural land is not required to inspect it to
make sure that every tree is safe and will not fall over into the public highway and kill a man, although there is already some little dissent even as to this, and at least if the defendant knows that the tree is dangerous he will be required to take affirmative steps. But when the tree is in an urban area, and falls into a city street, there is no dispute as to the landowner’s duty of reasonable care, including inspection to make sure that the tree is safe. The cases of trees therefore suggests that the ordinary rules as to negligence should apply in the case of natural conditions, and that it becomes a question of the nature of the locality, the seriousness of the danger, and the ease with which it may be prevented. A landowner who knows that a tree on his property is decayed and may fall and damage the property of an adjoining landowner is under a duty to eliminate the danger, even if the tree grew on and became a part of the land by natural condition. We are specifically limiting liability in this case to patent visible decay and not the normal usual latent micro-non-visible accumulative decay. In other words, there is no duty to consistently and constantly check all pine trees for non-visible rot as the manifestation of decay must be visible, apparent, and patent so that one could be aware that high winds might combine with visible rot and cause damage.” 517 S.E. 2d 813, 817.
The owner of land is not liable for normal flow of natural waters from his land nor is he liable for failure to remove snow or ice that has collected naturally on his land. Ordinances that require snow removal do not create grounds for private law suits.
Generally, there is no duty whatsoever owed to trespassers; however, an owner of land will be held accountable to trespassers for creating conditions with the intention of harming trespassers.
An owner of land is responsible for creating artificial conditions that result in damages to others. For example when an owner of land creates a drainage system that
discharges water onto a public highway, it is said that the owner of land has created a nuisance and is liable for the resulting damages. If a possessor of land creates an artificial condition that creates a hazard even for a trespasser, he has a duty to warn. For example, running a wire across a path that is used by snowmobiles.
An owner of land owes a special duty to young children to not have on his property conditions that may be thought of as attractive nuisances i.e. something artificial that is certain to attract young children to the land.
A. Licensee or Invitee
The duty owed a person on the premises of another depends upon the status of the visitor. Both an invitee and a licensee may recover where the injury results from the positive acts of the landowner. A licensee is on the premises with the permission of the landowner. The permission may be expressed or implied as arises because of the relationship of the parties, such as a customer who has an implied license to enter a store to make a purchase. An invitee is a person who comes to the premises for the mutual benefit of himself and the person in possession of the premises. A licensee is one who comes to the premises for his own interest, convenience or gratification, with the consent of the person in possession.
There is a distinction of the duty owed to an invitee as compared to a licensee. The duty owed to an invitee is greater. The Supreme Court of West Virginia dealt with the question of whether the user of a public sidewalk was an invitee or a licensee and concluded that since liability of a municipality is governed by statute, that premises liability questions are not applicable, however, the court did present a good discussion of the different levels of duty a landowner owes to an invitee, a licensee and a trespasser:
“II. DISCUSSION
A. Premises Liability Principles
The issue in this case is whether premise liability principles are applicable in an action against a municipality resulting from Huntington’s negligent failure to maintain its sidewalks in good repair. The circuit court ruled that premise liability principles were applicable to this case. Specifically, the circuit court ruled that Ms. Carrier was an invitee on the sidewalks of Huntington. The circuit court also ruled that Huntington owed no duty to Mrs. Carrier because the defective condition of the sidewalk was open and obvious.
Under premises liability principles an individual on private property may be an invitee, a licensee or a trespasser. Whether a party injured on the premises of another is an invitee, licensee or trespasser is significant under the law of West Virginia. The law imposes different duties of care on possessors of premises with regard to invitees, licensees and trespassers.
This Court has stated ‘ {a} person is an invitee when for purposes connected with the business conducted on the premises he enters or uses a place of business.’ Syl. Pt. 1, Burdette v. Burdette, 147 W. Va. 313; 127 S.E. 2d 249 (1962). The duty owed to an invitee was outlined in syllabus point 2 of Burdette. In Burdette, the Court concluded “ the owner or the occupant of premises owed to an invited person the duty to exercise ordinary care to keep and maintain the premises in a reasonable safe condition.’ Also, in syllabus point 3 of Burdette we held ‘the owner or the occupant of premises used for business purposes is not an insurer of the safety of an invited person present on such premises and, if such owner or occupant is not guilty of actionable negligence or willful or wanton misconduct and no nuisance exists, he is not liable for injuries there sustained by such invited person.
In defining a licensee in syllabus point 2 of Cole v. Fairchild, 198 W. Va. 736, 482 S.E. 2d 913 (1996), we said ‘ a person is a licensee when he or she has permission or consent to enter the premises of another not in response to any inducement offered by the owner or occupant, or for a purpose having some connection with a business actually or apparently carried on there by the occupant, but for his mere pleasure, convenience, or benefit.’ In the single syllabus of Hamilton v. Brown, 157 W. Va. 910, 207 S.E. 2d 923 (1974) this Court held that:
Mere permissive use of the premises, by expressed or implied authority ordinarily creates only a license, and as to a licensee, the law does not impose upon the owner of the property an obligation to provide against dangers which arise out of the existing conditions of the premises inasmuch as the licensee goes upon the premises subject to all the dangers attending such conditions.
As to a trespasser, we held in syllabus point 1 of Huffman v. Appalachian Power Co., 187 W. Va. 1, 415 S.E. 2d 145 (1991) that ‘ {a} trespasser is one who goes upon the property or premises of another without invitation, express or implied, and does so out of curiosity, or for his own purpose or convenience, and not in the performance of any duty to the owner.’ In syllabus point 2 of Huffman we held that ‘the owner or possessor of property does not owe trespassers a duty of ordinary care. With regard to a trespasser, a possessor of property only needs refrain from willful or wanton injury.”
Carrier v. City of Huntington, 202 W. Va. 30; 501 S.E. 2d 466, 468 (1998).
B. Hotels and Landlords Liability for Criminal Acts of Others
A growing area in the subrogation field is cases involving loss of property or injury to property brought about by the criminal actions of third parties but pursued against a hotel or landlord under claims that the loss would not have occurred had the hotel or
landlord exercised reasonable care to protect against these criminal acts.
At common law these defendants were under no obligation to protect their guests and tenants from intruders. Today, however, many courts are imposing duties on lessors, hotels, stores, shopping centers and public entities to protect against criminal acts that are foreseeable.
The early New Jersey case of Braitman v. Overlook Terrace, 68 N.J. 368, 346, A.2d 76 (1975) is illustrative. In that case there was a break-in and a thief took the tenant’s personal property and jewelry. The lock to the apartment was defective and the tenant had complained to the landlord. In finding the landlord responsible the court quoted from a case involving an assault in a public area of an apartment complex:
“… conditions of modern day urban apartment living, particularly in the circumstances of this case. The rationale of the general rule exonerating a third party from any duty to protect another from a criminal attack has no applicability to the landlord-tenant relationship in multiple dwelling houses. The landlord is no insurer of his tenants’ safety, but he certainly is no bystander. And where as here, the landlord has notice of repeated criminal assaults and robberies, has notice that these crimes occurred in the portion of the premises exclusively within his control, has every reason to expect like crimes to happen again, and has the exclusive power to take preventive action, it does not seem unfair to place upon the landlord a duty to take those steps which are within his power to minimize the predictable risk to his tenants. 68 N.J. 368, 374 citing Kline v. 1500 Massachusetts Ave. Apartment Corp., 141 U.S. App. D.C. 370, 439 F. 2d 477 (D.C. Cir 1970).”
Intentional Torts
In addition to negligent torts, the law provides a remedy for intentional torts which
include assault and battery, false imprisonment, intentional infliction of emotional stress, defamation, invasion of privacy, fraud, outrage or bad faith, interference with relationship between others, misuse of legal process, intentional torts against property and nuisance. Clearly, in the case of an intentional tort that results in a subrogation claim, there is a remedy. The problem typically is not the issue of liability but the problem of recoverability. Most insurance policies in force do not provide proceeds for intentional acts of insureds and most criminal defendants are both without insurance and without resources. Consequently, intentional torts are not treated in this chapter as a separate entity but are discussed throughout when applicable such as under the standard auto or homeowner’s insurance policy.
Conclusion
This concludes the chapter on the negligence subrogation claim. Such actions place subrogation professionals in a wide area of the law. Knowledge of the nuances and precedents that prevail in this arena cannot help making us more effective in the work that we are performing each day.
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Cases
Bobbitt v. Ruyman, No 91 AP- 1423 Court of Appeals, Ohio (1992).
Bosley v. Alexander, 114 N.C. App. 470.
Braitman v. Overlook Terrace, 68 N.J. 368, 346, A.2d 76 (1975).
Britton v. Wooten, 817 S.W. 2d 443 (1991).
Burdette v. Burdette, 147 W.Va. 313; 127 S.E. 2d 249 (1962).
Carrier v. City of Huntington, 202 W.Va 30; 501 S.E. ad 466(1998).
Coble v. Knight, 130 N.C. App. 652; Swicegood v. Cooper, 341 N.C. 178.
Cole v. Fairchild, 198 W.Va. 736, 482 S.E. 2d 913 (1996).
Collier v. Citizens Coach Co., 231 Ark 489, 330 S.W. ad 74.
De La Concha v. Pinero ,104 So. 2d 25, 28 (Fla. 1958).
Fowler v. Harper, Fleming James, Jr. and Oscar S. Gray, 4 Law of Torts Sec. 22.1 (2nd ed. 1986 and Cum. Supp. 1993).
Hamilton v. Brown, 157 W. Va. 910, 207 S.E. 2d 923 (1974).
Hatsock v. Forsgren, Inc., 236 Ark 167, 365 S.W. ad 117 (1963).
Hau v. Gill, 1999 Ohio App. 3258 (1999).
Huffman v. Appalachian Power Company, 187 W. Va. 1, 415 S.E. 2d 145 (1991).
James v. Williams 177 La. 1033; 150 So. 9 ( 1933).
Kline v. 1500 Massachusetts Ave. Apartment Corporation, 141 U.S. App. D.C. 370, 439 F. 2d 477 (D.C. Cir 1970).
Leppke v. Segura, 632 P.2d 1057, 1059 (Colo. App. 1981).
Mahoney v. Beatman, 110 Conn. 184, 147 A. 762 (1929).
Markowitz v. Arizona Parks Bd., 146 Ariz 352, 354-59, 706 P.2d 364, 366-71 (1985).
Mathis v. IBP, Inc., 2001 Iowa App 342.
McLeod v. American Motors Corp., 723 F.2d 830 (1984).
Morrison v. Cornelius, 63 N.C. 346 (1869).
Pope & Talbot, Inc. v. Hawn, 346 U.S. 406, 409, 98 L.Ed. 143, 150, 74 S. Ct. 202 (1953).
Roberts v. Weber and Sons, Co. 248 Neb. 243; 533 N.W. ad 664 (June 23, 1995).
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Washewich v. LaFave, 248 So. 2d 670, 672 (Fla. App. 1971).
Wesleyan College v. Weber,238 Ga. App 90; 517 S.E. ad 813 (1999).
Wise v. Carter, 119 So. 2d 2d 40 ( Fla. App. 1960).
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