Canada: Subrogation: Recommendations For Early Investigation

Immediate Response

At the outset of a loss, it is most critical to begin preserving evidence and investigating the cause of the loss. This is beneficial both to preserve future subrogation potential, but also to determine whether there may be any issues that may affect coverage under the policy.

As soon as access is provided to a scene, the first person to enter, along with the adjuster, should be a forensic engineer. For fire losses, it is well understood that a review of the scene, prior to the commencement of repair efforts, is critical to determining the origin and cause of the fire. However, it is common for this approach to be ignored with other types of losses.

For example, in the cause of a failure of plumbing components, there is a tendency for a contractor to remove the part that they consider to be the point of failure, to be provided to an engineer at a later time. This can potentially destroy evidence of the condition of the scene, and also creates issues with the chain of custody.

Nuisance and the rule in Rylands v Fletcher

The preferred response is for the engineer to review the scene prior to any repairs being performed. If the area of failure can be determined easily, it may be possible to commence clean up in other areas, but if there is any uncertainty, the scene should be left fully alone. Ultimately, it should be left to the investigating engineer to determine what evidence should be collected and preserved.

Example: Plumbing Failure

In the case of water damage arising from a failed plumbing fitting, such as a flex hose, it may be easy to identify where the leak originates. Specifically, if you can see which section of pipe or fitting is leaking or spraying water, the source is evident. In that case, the contractor can safely turn the water off, but emergency work should only begin in other areas of the property. Preserve the area of the failure until the expert has reviewed it all.

In some cases, the section of pipe or the particular fitting can be removed for inspection later. However, sometimes the defect arises with the particular installation of a pipe or fitting, rather than the pipe or fitting itself. Removal of the item can remove evidence of the method of installation.

 

Example: Dryer Fire

Determining the origin and cause of a fire is often more complicated than with a plumbing failure. As always, the best practice is to have the engineer review the scene prior to emergency work. However, in the case of a dryer fire, the origin is typically evident. Despite this, we regularly see cases where an expert determines the origin of the fire to be a dryer, and only the dryer itself is preserved. This is a potential loss of subrogation potential.

Dryer fires are often caused by the ignition of lint in or around the dryer. While the heating element of the dryer is typically the point of ignition, liability will often rest with the buildup of lint rather than the ignition point. As such, a fulsome review of the installation and maintenance of the dryer and the vent at the scene will likely indicate where the lint was building up, and whether it was due to any defect in the installation or the maintenance thereof.

Chain of Custody

For any evidence that is removed from a scene to be preserved, it is critical to be able to establish a proper chain of custody for them. If evidence is unaccounted for during any period of time, the opposing party may be able to undermine any conclusions drawn from a later inspection of the item. The reason for this is that without a documented chain of custody, the argument can be made, and inferences can be drawn, that the evidence was altered from the time of its collection, such that any inspection of it does not reflect how it was prior to the loss.

In practical terms, the easiest way to accomplish this is to have the engineer retain all important evidence. This establishes a clean chain of custody, but it also ensures that the evidence is not lost, as all forensic engineers have well-documented procedures for the storage of evidence. For larger items, it may be necessary for the emergency or restoration contractor to transport the evidence to the engineer's facility. In those cases, it is ideal to have the delivery done as soon as possible, so as to minimize the time that the evidence is in the hands of the contractor.

The restoration contractors certainly do not wish to destroy evidence, but they do not often have the same focus on preserving evidence as that of the engineer, or the specific procedures to demonstrate that a proper chain of custody has been preserved. In our experience, the longer an item is left with the contractor, the more likely it is to be lost.

Document Gathering

In order to advance a subrogated claim, it will be necessary to obtain and produce any documentation relating to the item or area that was the origin of the loss, not just those relating to the cause. As such, even if an engineer identifies a specific cause for the loss, any other potential causes of the loss will likely become issues in the litigation. Obtaining any such documents at an early stage will save time and effort later. Further, they assist counsel in developing the most comprehensive opinion possible. If there are reasons to cast doubt upon the opinion of the expert, it is more advantageous for counsel to have that information, so that the opinion reflects it. The discovery of such issues later in the litigation can cause counsel to revise their opinion on liability.

Example: Electrical Fire

In the case of a fire originating from some portion of the electrical system in a home, any installation, revisions, maintenance, etc. to that area of the electrical system will become suspect. It will, therefore, be necessary to identify who constructed the home, who installed the electrical system, who made modifications or changes to the electrical system, who performed other work in the area, and who else beyond the insureds may have used that area of the electrical systems.

From there, one should gather all documentation relating to those relationships, including contracts, estimates, invoices, correspondence, building permits, reports, etc. It may also be beneficial to make a Freedom of Information request to the Electrical Safety Authority, which would disclose permits and inspection records relating to the installation or alteration of the system.

It is not feasible to limit the information request to a specific time, as electrical fires can occur many years after the creation of the defect. For example, where a poor connection is made between wires, it may take years for them to loosen sufficiently that a high-resistance connection occurs between them. Likewise, where a defect in construction causes wire insulation to chafe or wear off, this can take a number of years before there is sufficient damage to permit arcing.

Supporting the Claim

In order to successfully advance a subrogated claim, it is necessary to prove the total of the damages incurred. This means that the insurer must stand in the place of the insured, and establish to the court the total value of the loss suffered by the insured. It is inconsequential how much or little the insured was entitled to be paid by the insurer. It only matters how much damage he suffered on an objective level.

In practical terms, this means that it is not enough to show that the insurer paid a specific amount to the insured. Instead, it is necessary to show the precise cost incurred to put the insured back into the position he was in prior to the loss. This can sometimes be contrary to the manner in which the insurer would operate, and can create some inefficiencies.

For example, if the insured wishes to enter into a cash settlement with the insurer, and both can agree to a reasonable figure, this is beneficial for both as it reduces the time spent adjusting the claim. However, without documentation supporting the value of the loss, this can impact the ability to recover these losses.

It is not necessary to actually repair any damage in order to establish its value, or in order to make any recovery. The value of the loss can be established by estimates rather than invoices. As such, it is critical to obtain documentation to support the value of the loss paid, even if the insured wishes to settle with the insurer.

For damage to a building, one should have one or two contractors attend and prepare estimates as to the repair cost. The contractor should also estimate the time required for the repair, as this will ground a claim for Alternative Living Expenses. Likewise, for damage to contents, there needs to be some evidence as to the contents that are actually damaged and their value. This can be obtained by way of cleaning estimates from commercial cleaners, repair estimates from appropriate contractors, or even from web pages showing the price of items lost.

For Alternative Living Expenses, it is most important to document the estimated cost of accommodation, as estimates can more easily be made as to meals and other ancillary expenses. It may be necessary to contact a local real estate agent to provide some listings for local homes and condominiums for rental to support the value claimed for a rental property during the reconstruction period.

Conclusion

The more information and documentation that can be gathered and preserved at the early stages of a claim, the more likely it will be that subrogation can be successfully pursued. More importantly, without the inspection, collection, and preservation of the loss scene, evidence necessary in order to successfully recover from third parties can be permanently lost. This includes information related to both liability and damages, both of which are necessary to prove in order to successfully recover funds for the insurer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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