Early Notice to Adverse Parties in Subrogation

1.To Avoid Spoliation of Evidence 

Defense counsel are often aggressive in arguing spoliation of evidence.  The consequences of spoliation will vary with the facts and jurisdiction.

In Puritan Ins. Co. v. Superior Court, 171 Cal. App. 3d 877 (1985), the plaintiff’s expert tested and photographed the conveyer belt drive shaft that failed in the incident.  Plaintiff’s expert then lost the shaft before the opposing party’s expert had an opportunity to test it.  As an evidentiary sanction, the trial court barred evidence of (1) the shaft itself and any expert testimony derived from the shaft, and (2) photographs of the shaft and any expert testimony derived therefrom.  The appellate court found that if the plaintiff were allowed to present expert testimony derived from the shaft itself the plaintiff would be enjoying “an unwarranted advantage.”  The court upheld the bar of expert testimony derived from the shaft itself as “appropriate to the dereliction” since it removed that advantage.  The court held, however, that the exclusion of the photographs and expert testimony derived from the photographs went beyond what was needed to remove the unwarranted advantage, and that it put the defendant in a better position than if the evidence had not been lost.

Unlike many failed products or components, which often can reasonably be preserved after the incident, loss sites often need to be cleaned up quickly for purposes of mitigating damages.  The commercial insured and first-party property adjuster are understandably interested in returning the business to full operation.  These concerns are important.  It is therefore important for subrogation professionals to move quickly in arranging for appropriate expert consultants of their own, and to notify potential adverse parties of opportunity to inspect the loss site before it is altered.  The early involvement of subrogation counsel in this process may increase the insurer’s ability to avoid spoliation of evidence, while also creating a protective privilege over the work of consultants who act under the direction of counsel.

2. To Satisfy Breach of Warranty Notice Requirement

A breach of express warranty claim may provide significant legal advantages over other subrogation theories of liability.  In some jurisdictions, it may be the law that “comparative negligence is not a defense to a breach of express warranty action.”  Shaffer v. Debbas, 17 Cal. App. 4th 33, 42 (1993).  In such jurisdictions, and in cases where the insured-subrogor is substantially at fault but an adverse party’s breach of express warranty also contributed to the loss, the ability to pursue a breach of warranty claim may make a significant difference in the ultimate outcome.

Depending on the circumstances, early notice to the adverse party may be a prerequisite for pursuit of a breach of warranty claim.  California and other jurisdictions have adopted the Uniform Commercial Code.  California Commercial Code Section 2607(3)(A) requires that notice of breach of warranty be given within a reasonable time after the buyer “discovers or should have discovered any breach.”

This may raise the question of when the insurer-subrogee received sufficient information for it to have discovered a breach of warranty and become obligated to provide notice of breach.  Along these lines, the court in Whitfield v. Jessup, 31 Cal. 2d 826, 832 (1948), observed “What constitutes a reasonable time where the goods sold [contain] latent defects . . . presents a different question than does the ordinary sale where the article is subject to examination and use which will reveal its defect.  For all these reasons little light is shed upon the issue by an examination of the cases deciding that certain periods of time were or were not reasonable.  The case must be controlled by its special circumstances.”  The Whitfield court indicated that it would be reasonable to construe the time of discovery of the latent defect as the point of receipt of expert [a physician’s] advice.

Early notice to the potentially-adverse party of a possible breach of warranty, or of the simple fact that a loss has occurred, could put the insurer-subrogee in a better light when it comes time to decide whether reasonable notice was given.  A subsequent, more conclusive notice, in the event that expert consultation reveals that there was in fact a breach, might later become necessary or helpful in order to satisfy the Commercial Code’s notice of breach requirement.

3. To Facilitate The Subrogation Claim 

Pre-litigation settlement overtures are sometimes ignored in subrogation matters.  Nevertheless, when an adverse party and its liability carrier first receive notice of a claim upon service of a lawsuit, inability to resolve the claim before litigation becomes assured.  This is another reason for early notice to the adverse party.  Even in matters where resolution without a lawsuit is not realistic, a judge, jury, or opposing professional may look favorably on the fact that early notice was given.

To learn more about the benefits of early notice to adverse parties or other subrogation topics, please contact Jay Harker at jharker@clausen.com.