Contractual vs. Equitable Subrogation in Virginia

virginia subrogation attorneysEquitable Subrogation in Virginia

Subrogation is the legal process in which an insurer can step into the shoes of their policyholder to recover damages from the third party responsible for the loss.  Equitable subrogation is based on equity, or fairness, as defined by the Virginia Supreme Court in Xl Specialty Ins. Co. v. Dept. of Transp., 611 S.E.2d 356, 269 Va. 362 (Va, 2005):

Equitable subrogation is subrogation that arises by operation of law. It is not based on contract or privity of parties, but is “purely equitable in nature, dependent on the facts and circumstances of each particular case.” Centreville Car Care, Inc. v. North Am. Mortgage, 263 Va. 339, 345, 559 S.E.2d 870, 872 (2002) (quoting Federal Land Bank of Baltimore v. Joynes,179 Va. 394, 402, 18 S.E.2d 917, 920 (1942)). When a principal defaults on a contract guaranteed by a performance or payment bond and the surety performs on the bond, principles of surety law and the doctrine of equitable subrogation impose certain rights and duties running between the surety, principal, and obligor, and allow the surety to enforce such rights and duties. See Dickenson v. Charles, 173 Va. 393, 400, 4 S.E.2d 351, 353 (1939) (quoting Kendrick v. Forney, 63 Va. (22 Gratt.) 748, 749-50 (1872)); Fulkerson v. Taylor, 100 Va. 426, 432,41 S.E. 863, 865 (1902); Restatement (Third) of Suretyship and Guaranty § 27 (1996).

Equitable subrogation arises from the common law and can work against the insurer conducting business in Virginia.  For instance, where the Virginia policyholder has uninsured losses and recovers a judgment against the tortfeasor that does not equal the amount of total loss suffered by the insured, then the insurer cannot recover against the third party.

Contractual Subrogation in Virginia

The key difference in Virginia between equitable subrogation and contractual subrogation is that judges ultimately decide the outcome of an equitable subrogation action, while the language and intent of the parties control the outcome in a contractual subrogation case.  It is imperative for the parties to a subrogation case to understand the language of the insurance contract and how it affects subrogation rights.  For instance, insurance contracts can be written to give the insurer first right of subrogation, which cuts off most equitable subrogation worries.  Virginia subrogation attorneys would be wise to discuss contract provisions with clients operating in Virginia.
Editor:
Justin McLeod, Esq.
Associate
Chaplin & Gonet

Aggregation and Water Supply Losses

The flexible hoses that feed our toilets, sinks and other plumbing fixtures can lead to catastrophic plumbing failures through poor design and manufacturing processes.  Before delving into the legal aspects of these losses and the aggregation of the subrogation claims it is necessary to trace the development of the plumbing fixtures in question.
Like most building materials, flexible supply lines have moved from metal to plastic over time.  Early designs consisted of copper/nickel-plated brass coupling nut that could screw on to a toilet’s fill valve.  Though reliable, manufacturers could not resist the lower cost of plastic tubing material, and eventually began to transition to thinner plastic tubes in the 1990s and 2000s.  These new designs incorporated a thin plastic tube covered with a braided metal sheath, which you can still find in hardware stores today.  Manufacturers opted for thinner tubing and compensated with the metal sheaths, believing it would provide any necessary reinforcement.  However, these sheaths were very susceptible to chlorinated water which would cause erosion, and eventually rupture.
In addition to the weak hoses, manufacturers also began using acetal plastic coupling nuts to connect tubing to toilet float valves.  Acetal plastic becomes brittle when cut at right angles, so when nuts were cut the right angles were weak and prone to cracking.  This coupled with the weak tubing has led to multitudinous claims  of supply-line failures.  Insurance companies often neglect to pursue manufacturers on individual claims due to a cost/benefit analysis, however, as Robert Stutman, Daniel Hogan & Sherief Ibrahim, have posited in their latest article “Recovering on Water Supply Line Losses Through Aggregation”, insurance companies can benefit from aggregating these types of claims together.
The reasons for aggregation are many.  First, it solves the cost-prohibitive approach of prosecuting individual claims.  Second, the risk of inconsistent prosecution strategies or inconsistent verdicts is minimized.  As the authors noted in their article:

“By grouping and investigating the claims as a mass tort, carriers can develop an investigation and litigation plan that is predicated upon uniformity and strength in numbers.  The aggregation plan can implement procedures to insure that legal teams and experts are properly vetted, physical evidence is properly secured and preserved and theories of liability are substantively refined and applied in a consistent manner to all supply line claims.”

Stuteman, Hogan and Ibrahim’s method of approach can serve as a model for many types of defective manufacturing claims plaguing insurers.  When many similar small claims arise that present similar facts insurers would be wise to discuss with their subrogation counsel whether aggregation would be appropriate.
If your company faces subrogation needs in the state of Virginia contact Chaplin & Gonet to discuss how our firm can help your company’s bottom line.