Fire loss claims hold a special place in the world of subrogation, in part because the dollar value of fire loss claims tends to be high relative to other types of subrogated claims, but also because fire loss claims can be particularly challenging to investigate. Often, the very subject matter of the claim has been severely damaged or even completely destroyed in the fire, making it difficult to identify at-fault third parties and gather the necessary information that will allow a subrogating insurer to successfully resolve the claim either through negotiation or litigation. An understanding of best practices and the applicable Canadian common law can help insurers maximize recoveries in their fire loss claims.
- Early involvement by subrogation professionals
When a fire loss claim is reported to an insurer, often the insurer will mobilize resources quickly and will assign a claims examiner and appoint an independent adjuster and a fire cause and origin investigator who can be at the scene sometimes within hours of the fire. This initial investigation is typically focussed on confirming coverage for the first party claim, and then once coverage is confirmed, the focus moving forward is on adjustment of the first party claim. This approach of responding to a fire loss claim runs the risk of subrogation being a secondary consideration during the crucial early time period after a loss when evidence and memories of witnesses are still fresh. To maximize subrogation potential, a preferred practice is for an insurer, at the outset of the claim, to simultaneously assign one or more of the following subrogation professionals:
- Subrogation claim examiner should be assigned to monitor the adjustment of the first party claim, and guide any necessary investigation that is specific to subrogation;
- Subrogation legal counsel can help identify what are the possible legal issues and what evidence may be needed, and can assess if further expert investigation is needed;
- Subrogation adjuster: A common practice in the adjustment of first party claims is that the independent adjuster will include a section about subrogation in their reports. With this approach, there is a risk that if the subrogated claim ever proceeds to litigation, privilege will be lost and the adjuster’s entire reports including information about the subrogation investigation may need to be produced to the opposing parties. To guard against this risk, a preferred approach is for the insurer to appoint a separate independent adjuster to conduct the subrogation investigation and ideally have this adjuster report to subrogation legal counsel. If one adjuster is used to conduct the first party adjustment and the subrogation investigation, that adjuster should be instructed to prepare separate reports for the first party claim and for the subrogation investigation.
- Early communication with the Insured about the subrogation process
Involvement and cooperation of the insured is critical to a successful fire loss subrogation recovery. Often, the insured will have key information and documentation that will be needed to prove a claim against a third party. Engaging with the insured, explaining the subrogation process and securing the insured’s information and documents early on will help the insurer to assess the merits of its subrogated claim and help guide the claim going forward.
Provincial insurance legislation in Canada provides that upon making any payment or assuming liability under a contract of insurance, the insurer becomes subrogated to all rights of recovery and may bring an action in the name of the insured (see for example, section 36 of the B.C. Insurance Act, RSBC 2012, c. 1). What this means is that if the subrogated claim proceeds to litigation, the insured will be named as the plaintiff. The practical effect of this is that the insured’s cooperation is needed throughout the conduct of the claim, and in particular, the insured’s cooperation may be needed at the conclusion of a claim to sign settlement documentation so that the claim can be finalized.
In Canada, the insurance policy gives rise to a contractual duty of good faith that is owed between the insurer and the insured. The duty goes both ways. In the case of the insured, in addition to any contractual provisions in the insurance policy that require the insured’s cooperation, the duty of good faith arguably obligates the insured to assist the insurer with a subrogation investigation which can include providing information, documents and giving evidence if there is litigation. In the case of the insurer, the duty of good faith arguably obligates the insurer to enquire about the existence of uninsured losses and include those uninsured losses in any claim, litigated or not, that is advanced against a third party. Provincial insurance legislation provides that if the net amount recovered after deducting the costs of recovery is not sufficient to provide a complete indemnity for the loss or damage suffered, that amount must be divided between the insurer and the insured in the proportions in which the loss or damage has been borne by them respectively.
- Early use of freedom of information requests
In Canada, emergency personnel that attend a fire scene are almost always from a governmental entity and thus subject to producing documents pursuant to a request under freedom of information legislation, such as the B.C. Freedom of Information and Protection of Privacy Act, RSBC 1996, c. 165 of the federal Access to Information Act, R.S.C., 1985, c. A-1. Documents produced pursuant to freedom of information legislation are sometimes incomplete, as they can be redacted or information can be withheld, nevertheless, an early “FOI request” can significantly help to focus the subrogation investigation. Common sources for FOI requests include:
(a) Fire Department: A fire department’s records will typically include an incident report summarizing the response to a fire and this may comment on causation. In some instances, a fire department may have its own personnel conduct a cause and origin investigation post-loss and this may result in a more detailed report. Fire department records often will include photographs of the scene and in some cases, recordings of radio communications among fire department personnel during fire fighting activities may be available. In the case of commercial structures, fire department records will sometimes include information about prior fire inspections.
(b) RCMP or municipal police: Police records produced pursuant to an FOI request are often heavily redacted, but sometimes provide useful information.
(c) 911 calls: Names and identifying information of witnesses will be redacted, but 911 recordings can sometimes be used to help determine a time-line.
(d) Electrical or gas safety inspectors: In some instances, a property will have had prior safety inspections in regards to electrical or gas utilities. Also, in some provinces, a fire with suspected involvement of gas or electrical may also result in a safety inspection being conducted. For example, in British Columbia, investigators from Technical Safety BC will often attend the scene of a structure fire to conduct an investigation regarding the case of the fire.
(e) Building permit and inspection records: These documents are often available from the municipality or Regional District where the property is located and can be particularly useful in trying to identify names of third party contractors and design professionals.
- Examination and preservation of evidence
In many subrogated claims, and in particular those involving product defects, successful recovery often hinges on identifying the relevant physical evidence that is central to the claim, having that evidence examined and documented by an appropriate expert, and finally preserving that evidence in the event it is needed later on for further examination or purposes of litigation.
The specific process for preserving evidence should be addressed on a case by case basis. For example, a small piece of electrical wiring or a plumbing valve may be able to be stored in a box in one’s office, but different arrangements would likely need to be made for something larger such as a piece of heavy machinery. If the physical evidence is to be stored outdoors, a subrogating insurer should consult with an expert to determine if exposure to the elements would alter the evidence, and if so, consideration should be given to protecting the evidence from the elements. At all times, the chain of custody of the evidence should be known, and anyone having access to the physical evidence should be instructed to keep the evidence safe and not dispose of it, alter it or perform any destructive testing on it.
In Canada, failure to preserve relevant physical evidence can give rise to a defendant in a subrogated claim raising a defence of spoliation of evidence. The law in Canada does not yet recognize spoliation of evidence being used as a cause of action, but it can be raised as a defence. The general premise of the defence is that where a plaintiff has altered, destroyed or lost physical evidence after a loss, and a defendant has been deprived of the opportunity to inspect the evidence, then that defendant should be permitted to argue that the court should draw an adverse inference that the physical evidence did not support the plaintiff’s claim. For a detailed discussion about spoliation of evidence in Canada see Triple 3 Holdings Ltd. v. Paccar Inc., 2014 SKQB 427.
- Identify potential legal claims
As early on in the subrogation investigation as possible, identifying the potential causes of action for a subrogated claim will help an insurer focus its time and resources. Often, consulting with legal counsel can help to identify the cause of action applicable in a given case. It is not practical to list all possible causes of action for subrogated claims, but causes of action that are most common include:
- Breach of contract.
- Negligence (this is a very broad cause of action and, to name a few, can include various sub-categories such as negligent design, negligent workmanship or negligent failure to warn).
- Nuisance: This is a tort that relates to the unreasonable interference with one’s property. When applicable, nuisance can be a powerful claim for a subrogating insurer because a defendant will have fewer defences to a claim in nuisance than it will have to a claim in negligence.
- Breach of implied warranty under Sale of Goods Act In Canada, each province has some version of Sale of Goods Act legislation which can impose strict liability on the seller of a product for breach of an implied warranty of fitness, durability or merchantability.
- Understanding the legal burden of proof and how a court will evaluate evidence
A plaintiff always has the onus of proving a subrogated claim on a balance of probabilities. The Latin maxim res ipsa loquitur (the facts speak for themselves) is not applicable under current Canadian law, however a court can draw inferences of fact from appropriate evidence. The extent of that evidence will depend upon the particular case at hand, but there must be sufficient evidence upon which a court can fairly infer, not simply guess, at what caused the fire.
- Choosing the right expert
Choosing the right expert and obtaining a definitive report from that expert is often the difference between success and failure of a subrogation claim. A strong expert report will provide a clear and definitive opinion on the probablecause of the loss. A report that only states what is the possible cause of the loss, or that provides an opinion of multiple causes of the loss, runs the risk of not satisfying the evidentiary burden of proving the claim on a balance of probabilities.
Often as part of the initial first party claim response, an insurer will arrange for a fire cause and origin investigator to attend the scene and prepare a preliminary report that will opine on the fire’s area of origin, its point of origin, and on fire causation. The insurer should make sure that its chosen fire investigator follows NFPA 921, which is the National Fire Protection Association’s Guide for Fire and Explosion Investigations. While NFPA is a US based organization, the NFPA 921 standard is widely followed in Canada.
The initial fire investigation will often reveal that a more detailed and specialized investigation is needed by another expert. To take one example, if the initial investigation suggests that a fire resulted from a failed lithium-ion battery, a subrogating insurer should consider retaining an expert who specializes in failure analysis of lithium-ion batteries.
In some instances, where an expert’s investigation has been inconclusive, a subrogating insurer may wish to consider retaining a second expert, especially if the subject matter of the investigation is highly specialized and the second expert has more specific qualifications. This approach does have its risks. First, if the first expert’s report is disclosed to the third party, it could weaken the subrogating insurer’s case. Second, if the first expert’s report is not disclosed, and if litigation proceeds, there is a risk that the defendant could argue that because the first expert’s report was not disclosed, that the court should draw an adverse inference that the opinion of the first expert was not favourable to the subrogating insurer’s case.
Subrogating insurers should also be mindful that in Canada, at some point in the litigation process it may become necessary to disclose to a defendant your expert’s entire file, including all draft reports, notes, communications with the subrogating insurer and with subrogation legal counsel. For this reason, it is advisable, to the extent possible, to communicate with your expert by phone or in=person rather than in writing. For example, in British Columbia, once an expert report is formally served on a defendant, the defendant may request production of the expert’s entire file within 14 days of the trial (See BC Supreme Court Civil Rules, Rule 11-6).
- Understanding when subrogation may be barred
Subrogated claims can be barred for a variety of reasons. One is that a statutory or contractual limitation period may bar an action. Two is that, prior to a loss occurring, an insured through its ordinary business dealings may have provided a contractual release to another party. A third scenario is where the relationship between the parties falls within a category where the case law, or legislation have recognized that a waiver of subrogation typically applies. In Canada, waiver of subrogation often arises, and thus an insurer’s subrogated claim will typically be barred, in the following scenarios:
- Subrogated claim by insurer of commercial landlord against a commercial tenant. See the trilogy of Supreme Court of Canada cases Agnew Surpass Shoe Stores Ltd. v. Cummer Yonge Investments Ltd. (1975), 55 D.L.R. (3d) 676 (S.C.C.), Ross Southward Tire Ltd. v. Pyrotech Products Ltd. (1975), 57 D.L.R. (3d) 248 (S.C.C.) and Eaton Co. v. Smith (1977), 92 D.L.R. (3d) 425 (S.C.C.).
- Subrogated claim by a builder’s risk insurer against a contractor, sub-contractor or material supplier in regards to a loss to property while it is in the course of construction. See Commonwealth Construction Co. v. Imperial Oil Limited (1976), 69 D.L.R. (3d) 558 (S.C.C.), Medicine Hat College v. Starks Plumbing & Heating Ltd., 2007 ABQB 691 and Yukon Energy Corp. v. Narrow Gauge Contracting Ltd., 2010 YKSC 38.
- Subrogated claim by insurer of a strata or condominium corporation against a unit owner or a tenant of a unit owner. See for example Strata Property Act, S.B.C. 1998, c. 43, s. 155 and Strata Corp. VR 2673 v. Commssiona, [2000] BCJ 1681 (QL) (BCSC).
- Understanding when there are recovery issues
Obtaining a judgment in a subrogated action can be a pyrrhic victory if the defendant does not have liability insurance or assets to pay the judgment. Identifying recovery issues early on can assist a subrogating insurer to decide whether to abandon a claim or continue to pursue recovery, and if the latter, how best to proceed.
Determining if a potential defendant has liability insurance is often a deciding factor in whether to pursue a subrogated action. Outside of the litigation process, it is typically not possible to compel a potentilla defendant to disclose its liability insurance policy, although sometimes a polite request for this information will result in the information being provided. In most Canadian jurisdictions, once litigation is underway, a subrogating plaintiff can compel a defendant to produce its liability insurance policy as part of the discovery process. For example, in British Columbia, see Supreme Court Civil Rules, Rules 7-1(3) and 7-2(21).
A subrogated recovery can also be compromised where there are multiple competing claims against one defendant who does not have sufficient liability insurance policy limits to satisfy all of the claims. In non-motor vehicle related claims, the principle of “first past the post” applies, meaning that the first claimant to obtain a judgment against a defendant will be the first to recover on that judgment, and any subsequent claimants could be at risk of the defendant no longer having sufficient policy limits to pay the claim. This “first past the post” approach was approved by the court in the case Re: Aviva, 2006 BCSC 1578 on the rationale that it encourages early settlement which lessens the burden on the courts and because it rewards those claimants who diligently move their claims forward.
In practical terms, where there are multiple claimants and a defendant with insufficient policy limits, the defendant may be reluctant to pay one claim and not another, but rather, the defendant may choose to deal with all of the claims on some form of proportional basis. In such a case, a defendant may choose to wait until the expiry of a limitation period, and then identify all of the claims and deal with them all together. In such a case, it is typically to the advantage of a subrogating insurer to work with the other claimants/insurers to coordinate their claims and strategy, and to verify the amount of one another’s claims to ensure that no claimant receives an unfair pro-rata apportionment of the defendant’s policy limit.
