USA - Viewpoint: Subrogating Against God
The devastation of Hurricane Ian reminds us that the opportunity for property subrogation success is often disguised as an Act of God.
The claims history of most domestic insurance carriers is littered with billion dollar claims as a result of catastrophic losses caused by natural disasters. When God sends a hurricane, tornado, flood, or naturally occurring fire, the resulting losses can be enough to put many insurance companies into receivership. With no third parties or obvious subrogation potential, these mammoth claim payments often disappear permanently.
Acts of God such as these reveal a celestial tortfeasor who is both judgment proof and beyond reach by summons and subpoenas. However, rather than throwing in the towel, these losses present tremendous recovery potential for the proactive claims professional. It is said that opportunity is missed by most because it is dressed in overalls, carries a lunch pail, and is disguised as hard work. Nowhere is that adage truer than when it comes to subrogating natural disasters. If a carrier is willing to invest the time and effort necessary to investigate third-party potential in the face of disaster, it is possible to turn tragedy into triumph.
Great Flood of 1993
Such appeared to be the case with the Great Flood of 1993 in the Midwest and along the Mississippi River. This naturally occurring flood costed an estimated $21 billion, covered parts of nine states and lasted three months. As the floodwaters rose, 1,369 brand-new Subaru automobiles, ready for distribution and valued at more than $17 million, were being stored by the Chicago & Northwestern Railroad (now Union Pacific) for Subaru of America Inc. (“Subaru”) at an old American Motors outdoor storage facility in Kenosha, Wisconsin, which the railroad had leased for this purpose. Lloyds of London and its lead underwriter, Commercial Union Insurance Co., ultimately paid more than $11 million on this claim. The claim also resulted in Lloyds canceling Subaru’s policy. Lloyds’ claims office looked into subrogation but quickly dismissed that option. It was, after all, the storm of the century. Who could one possibly blame for that?
As subrogation counsel for Lloyds’ claims office, I had routinely performed quarterly subrogation reviews at their office on Lime Street. During a routine file review, I came across the Subaru claim file in their closed file area with the words “No Subrogation” stamped across the top of the file. Noticing that there had been a similar flood in this area earlier, I convinced the lead underwriter to invest $50,000 to do a hydrological study and produce a HEC-2 computer simulation of the flood, which, together with a historical survey of the area, revealed that many of the vehicles may have been stored on a 100-year flood plain. That was enough to file suit. Subaru and Lloyds sued Chicago & Northwestern Railroad, Wackenhut Security, and several other purported owners of the property.
Discovery was excruciating with many of the depositions taking three days or more. Ultimately, an old lease agreement between Chicago & Northwestern Railroad and Subaru was produced, which required Chicago & Northwestern Railroad to maintain certain minimum standards, including drainage that would prevent more than two inches of water to accumulate. I put an ad in a local paper seeking anecdotal stories about previous floods in this area and received favorable responses. Still, the defendants strenuously claimed the flood was an act of God.
Faced with the hydrological evidence and the existence of a flood plain, however, they ultimately had to admit that parking $17 million worth of automobiles on a flood plain was not prudent. After several Motions for Summary Judgment, two trial settings, and three-day mediation, the defendants ultimately paid more than $7 million. It was $7 million Lloyds never thought they would see. After the recovery, I set up a meeting between Subaru and Lloyds, which resulted in Lloyds reissuing coverage to Subaru. This was a happy ending for Lloyds and it proved the adage that when you have catastrophic losses, you have subrogation potential.