New York Business Lawyer Blog

How to succeed in negotiations is open to debate. It depends in large part on what you mean by success. Business owners, in New York and elsewhere, often think it means they have to win, and their negotiating partner, who they often view as their opponent, has to lose. Hardball, to them, is the key; power is what counts. Most business owners want to gain the upper-hand, and, once they have it, use it for all it's worth. Lawyers often act in this same way, especially once litigation begins. The take-no-prisoners approach may be tempting, and it certainly does look good in the movies, but it often doesn't get you what you bargained for.

The word "tense" always seems to come first whenever negotiations make the news. Normally up against a deadline, each party strongly believes that its cause is just and that the other side is pig-headed, if not downright evil, in opposing it. If the negotiations fail, each side is ready and willing to heap scorn upon the other.

Think of what happened to Hostess Brands. It closed down in November of 2012 because one of its unions went on strike. Hostess made Twinkies, Ho-Ho's, and even Wonder Bread. Just about everyone has tried some of their foods at one point or another; my favorite was the Coffee Cakes. Well, the familiar story goes, Hostess ran out of money, declared bankruptcy to try to survive, and attempted to negotiate new contracts with its various unions. Some went along; the Teamsters did. Some refused. The Bakery, Confectionery, Tobacco Workers and Grain Millers, which represented 5000 Hostess employees, went on strike because they opposed the give-backs the bankruptcy judge imposed. When they wouldn't go back to work, at least not enough of them anyway, Hostess decided to close its doors and sell off its assets. All of its major brands eventually were sold and, hopefully all will re-appear on store shelves. Many of its former employees, however, probably won't be hired by the new owners.

Hostess, reportedly, didn't just collapse overnight. It had filed for bankruptcy the first time only a few years before and, at that time, had gotten major concessions from its unions, including the Bakers. The leaders of the Bakers' union evidently blamed the company management for running Hostess into the ground. The Teamsters, who did not go on strike, blamed the Bakers for costing everyone their jobs. The management closed its factories and distribution centers and had to liquidate, reportedly for significantly less than the company owed; and, presumably, the company's unsecured creditors took a loss. Not a happy ending for anyone involved. Maybe, though, it did not have to end this way. A lot depends on the approach the parties take to negotiations.

Though we don't know all of the details, it seems clear from the news reports that the strikers were angry. Most people would say what they did was irrational. They didn't have much bargaining power. Their refusal to accept pay-cuts cost them their jobs. Isn't it better to take less pay than no pay? Maybe what their actions really show, however, is the danger of playing hard ball in negotiations.

Backlash is one of the biggest dangers of going on a power trip when you hold the upper-hand in negotiations. According to an article written by the editors of Negotiation, the monthly newsletter published by the Program On Negotiation of Harvard Law School, when one party is lorded over in negotiations, without being given a way to save-face or at least claim a partial victory, it often will act irrationally just to exert whatever power it can. The negotiator with the power often will over-play his hand and underestimate the other side. As a result, he'll often face unexpected, and even irrational, consequences. Based on the news reports, the strikers apparently felt that Hostess abused them by wringing concessions from them the first time it filed for bankruptcy and they simply were not going to allow it to happen again. Maybe they would get re-hired by new owners if Hostess was forced to sell, and maybe they would not; what seemed to matter most, however, was that they not give in, again.

According to the news reports, the strikers complained about the ineptitude of the management; of how Hostess still should have been a profitable, viable company, if it had been run better. That, perhaps, is where the solution lies. Though we do not know for certain, money, as in wages and benefits, seems to have been the main focus of the dispute, but what if it was the wrong thing to focus on? Hostess evidently didn't have enough money to go around; that's why they filed for bankruptcy.

One of the strikers' main concerns was that the company was badly run. What if they had been given a say in how the company was run, possibly given a seat on the board of directors, in return for wage and salary concessions? At least then they could have some control over their situation. The strikers also seemed to be upset about having to take further cuts in pay and benefits only a short time after they made similar concessions. What if the strikers not only were given a say in how the company was run, but a more direct stake in its success? Perhaps they would have conceded to the cuts in wages and benefits if management had agreed to escalation clauses based on the company's profitability; the higher Hostess' profits, the higher its employees' wages. Maybe this could have worked things out; we'll never know.

We don't know everything that went into the negotiations between Hostess and the Bakers. They had a long history and it seems like there is more than enough blame to go around. Negotiations, though, shouldn't be about blame. Blame normally doesn't fix the problem. Keeping the company open and finding creative ways to do it, should have been at the forefront of the negotiations. Whether it was or not, may never be known. What we do know is that a whole lot of people were tossed out of work, many lives were disrupted, and a company that made things we all knew and loved went out of business. Sometimes negotiations aren't a win-lose proposition, even when you want them to be; sometimes, like with Hostess, everyone loses, and that's a shame.

Technology is not the only thing you need to investigate insurance fraud. Technology might tell you who to question, but someone still has to do the questioning. Analysis of big data might give you a lot to talk about, but someone, preferably with a little training and experience, is going to have to have that conversation. Technology might be able to sort through a tremendous amount of otherwise indecipherable data in order to identify, or obtain, clues about possible fraud. No matter how good the technology, no matter how vast the meta-data, no matter how many computers parse the data, a skilled investigator still has to connect the dots, and, eventually, a lawyer still has to convince a jury that those dots create a clear, unmistakable picture of fraud.

The interview, where one real person talks to another, is necessary in all fact-finding, whether it be a fraud investigation, a deposition in litigation, or a criminal prosecution. How to obtain information from people, however, is an art, not a science. There might be rules to follow and methods to learn but, by themselves, they are not enough.

An article in the June 1-2, 2013 Weekend Edition of the Wall Street Journal points out the art, and skill, involved in obtaining information from people who may be reluctant to provide it. The author, Jason Matthews, is an ex-CIA agent with more than 30 years of experience, who worked in what now is known as the National Clandestine Service. He talks about what it takes to convince people to spy against their own country. The key, he argues, is to find out what motivates a person. He describes four basic motivational factors, common to all people, that he used. Known by the acronym MICE, they are: money, ideology, conscience, and ego. According to the author:

Money is the most straightforward motivational factor. It's a business deal: the spy gives you useful information, you give him money. Greed may not be good, but it evidently can get you what you want.

Ideology, or the sudden loss of it, is the most potent factor of all, according to Matthews. The example he uses to prove his point, however, really proves another: sometimes, the most motivated person is the one driven by revenge against someone they trusted who hurt them or their family. Matthews describes one of the best assets in CIA history, Dmitri Polyakov. He was a Soviet military officer stationed in the United States, whose son became fatally ill. Moscow refused to allow his son to be treated by an American doctor. He became one of the best spies in CIA history. Simple.

The most potentially dangerous, is the spy motivated by conscience, especially if he is out to save, or to atone for the sins of, the world. In many ways this could describe the NSA leaker, Edward Snowden. If you read his coming out story in the Guardian newspaper, he justifies his leaks by claiming the American public must be told of the NSA's programs because they simply have gotten too big, with too much room for abuse. He describes how he is a champion of internet freedom and does not want to live in a world in which there is no privacy, where the government knows your every move. He doesn't seem to have been motivated by money since he reportedly earned $200,000 per year as a defense analyst and, as he pointed out, did not sell his secrets. He seemingly wasn't motivated by ego, either, since, according to the Guardian's reports, he was a former staffer for the CIA and had a fairly important job with a contractor within the NSA. In other words, he leaked classified information to atone, in his mind, for what he alleges are the sins of his government.

Ego is a tricky tool to use. If a normally meek person has his ego properly stroked, he'll overcome his fears to provide what he is made to believe is crucial information. Once convinced that he's important, that people depend on him, however, he'll always need to be re-assured.

Importantly, blackmailing potential agents, threatening to expose their sexual or other misconduct, doesn't work too well. The agent you get will be unreliable, and the information he gives won't be much better.

What makes the article interesting is that most everyone likes a good spy novel, and sometimes real life is stranger, and better than, fiction. Learning about how the spy world operates always is intriguing, and enlightening.

What makes the article useful is that it demonstrates some of what goes into the art of persuasion. The same thing does not work with everyone; scripts are no good. You have to pay attention to the person. In many ways it's more difficult to read a person than to read a book, and it requires a lot more thought and experience. In many ways, though, it's the same; the true meaning isn't just in what the words say.

An average person, who, right or wrong, feels stuck in the rut of his everyday life, may jump at the chance to tell what he knows about the accident he witnessed, especially when he finds out that five people claimed they were hurt while in the car in which he saw only two people. The single mother, trying to make ends meet in her low-paying job at the local clinic, may be able to put up with the lies and the cheating; she won't risk her children's welfare just to stop fraudulent billing. She will, however, reluctantly tell what she knows in order to make sure that no one else gets hurt by being put under for a medical procedure they didn't even need. Even the arsonist will tell you, if you'll only understand, that he really thought he could put out the fire, he wanted to be the hero, except that the fire just spread too fast.

The author, Jason Matthews, says that a bond of trust needs to be established. In a way he's right. There has to be a reason the witness wants to give you the information; often you can see it, staring right there at you. It doesn't have to be anything big; nothing grand. You can hear it, if you listen; it may be faint, but it's there. Every person has a different story to tell and a different reason for telling it. You'll never know what it is unless you listen. Listening and trust often go together; maybe they are even the same thing. One thing seems pretty certain, though: you can't have one without the other; and that is a good lesson for every interviewer to learn.

Negotiations are an important part of everyday existence for all businesses, whether big, medium, or small, whether they are located in New York, around the country, or anywhere in the world. Every time businesses buy and sell goods and services, they negotiate. Business owners want to buy low and sell high. They want to break into a market either by undercutting their competition or by charging a premium for their product to convince buyers of its superior quality. Business negotiations impact the lives of everyday people, too. Everyone knows what a Kindle is, what an iPad is, and what e-books are. Many either have, or know someone who has, at least one of them. In the last few years it's become common for people to walk around with their nose in their tablet, either reading an e-book or surfing the web. Business negotiations played a big part in making this happen.

A good negotiator is a hard person to find. She's someone no one else wants to go up against, but everyone wants, and needs, on their side. Whether you can become one is open to debate, but there are a few things every business owner, corporate officer, or attorney, i.e., anyone involved in negotiations on a regular basis, can do to increase their chances of success. Perhaps the most important thing is knowing what you want. Recent news stories point this out.

The United States Department of Justice has sued Apple over its alleged role in price-fixing the retail cost of e-books; the trial started this past Monday, June 3, 2013, in the United States District Court for the Southern District of New York. According to news reports, Apple is charged with conspiring with publishers to raise the price of e-books in 2009 when it sought to enter the e-book market with its iPad. At that time Amazon.com was selling 90% of all e-books, some at a loss, in order to support its e-reader, the Kindle, which it introduced two years earlier. Apple was looking for a way into the market, and the publishers reportedly were looking for a way to increase prices, and presumably profits. Allegedly Apple, at the suggestion of two of the publishers, agreed to a different pricing model than Amazon.com. The agency-model, as it was called, let the publishers set the price for the e-books and set Apple's compensation as a fixed percentage of the sales price. According to published reports, the Department of Justice alleges that Apple's entry into the market gave the publishers what they had been looking for: a way to increase the price of e-books. Apple is the sole remaining defendant in the case; the publishers have settled.

What makes the Apple trial interesting is the way it demonstrates the stakes, and strategies, involved in business negotiations. Even Apple, the maker of personal electronics that can be found everywhere, had to negotiate its way into a market that was dominated by its competitor. Its apparent decision to accept a compensation agreement favorable to its suppliers, whether that was because the suppliers had the upper hand or because it presented a win-win situation, had ramifications not only for itself and its suppliers, but for the whole consumer marketplace. The Justice Department has challenged even the one type of the provision cited in news reports that explicitly benefitted Apple, the so-called most-favored-nation clauses. These permitted Apple to lower the sales price of an e-book if one of its competitors sold it for less. The thinking probably was that Apple did not want to be undersold, and therefore lose potential customers. How could they effectively compete if their competitors consistently sold the same product for less? If this bit of self-preservation is determined to be unenforceable, what impact will it have on the music and television industries where most-favored-nation clauses reportedly are common?

There is a negotiation strategy, referred to as the added-value, or win-win, strategy, which might explain the pricing plan Apple agreed to with the publishers. It says that a good way to get what you want is to offer as close to a win-win situation as you can. If you make the pie bigger, show the other side how you both can benefit from an on-going, mutually rewarding relationship, you often can achieve more of what you want than if you view negotiations as purely an adversarial, zero-sum game in which one side wins and one side loses. The agency plan clearly benefitted the publishers, who now could set, and therefore raise, the price of e-books. Apple might have believed that it was more beneficial to increase the number of e-books it could, and did, sell, than increase the percentage profit it made on each e-book.

We do not know how Apple's compensation under the agency plan was arrived at. News reports said that Apple was to receive 30% of the sales price of each e-book it sold. There is a way Apple might have been able to increase its compensation, if it had wanted to. New research has found that a negotiator can gain the upper hand when she sets a specific, precise dollar figure, instead of a rounded-off, approximate figure, during negotiations. The research, conducted at the Columbia Business School, by Professors Malia Mason and Daniel Ames and doctoral students Alice Lee and Elizabeth Wiley, found that those offering the precise dollar figure were perceived to be better informed about the true value of the offer they were negotiating. As a result, they received more of what they wanted in the negotiation because the person they were negotiating with believed there was less room to maneuver.

No matter what strategy you use, it is always a good idea to have a game plan before you enter into negotiations. Knowing what you want, and having a plan on how to get there, are more than half the battle.

There has been a lot of discussion recently about the advantages of technology when it comes to fighting fraud in general and insurance fraud in particular. The analysis of large amounts of digital information in a relatively short time can lead to better, more informed, decisions by businesses large and small, and provide a better means to ascertain, and prevent, fraudulent behavior. The increased use of digital information leaves a bigger trail. Social media, emails, digital photos, all leave noticeable footprints with more information than the creator may know, or may have intended. It can be used to track fraud, but it also can be used to track the tracker.

There were two recently published articles that relate to this problem; one from a business, and one from a scientific, point of view.

The first article, published in the June 1-2 Weekend Edition of the Wall Street Journal and written by Justin Baer, William Launder, and Matthias Rieker, concerned the dispute Goldman Sachs Group Inc. and J.P. Morgan Chase & Co., have had with Bloomberg LP over the sharing of customer data. Both Goldman Sachs and J.P. Morgan Chase subscribe to Bloomberg's financial terminals, found on trading floors, which provide real-time financial data and analytical tools, as well as news and a messaging function that allows traders to chat in real-time with other traders logged onto the terminals. According to the article, Bloomberg allowed reporters in its news division to access the subscriber usage data for the terminals, which let them see which individual subscribers were logged on at any given time, when a subscriber was last logged on, and how often he accessed certain functions. The Bloomberg reporters used this customer data as a basis to question Goldman Sachs and J.P. Morgan Chase on major news events regarding each. For example, in 2012, J.P. Morgan Chase suffered big trading losses in its London office. Bloomberg reporters used the fact that some employees involved in the losses had not logged on to the Bloomberg terminals, as a basis to question J.P. Morgan about whether those employees had left the company. Similarly, a Bloomberg reporter called Goldman Sachs' Hong Kong Office this past April to ask about a partner at the firm that had not recently logged on to the Bloomberg Terminal. As a result of the disputes, J.P. Morgan reportedly removed some of the data terminals from its trading floors, though Goldman Sachs has not done so.

The second article, published on May 30, 2013 by the University of Pittsburgh, entitled "When Friends Create Enemies," concerned a study led by James Joshi, an associate professor of information security and assurance in University of Pittsburgh's School of Information Sciences, which was published in the journal Computers and Security. It showed that, for users of social networking sites such as Facebook, information they intend to keep private, can still be accessed through other, publicly available information. Even when a user has tried to protect certain information from public view, such as by making the identities of her friends private, a hacker still can obtain that information; all that is needed is the ability to identify mutual friends. Common to social networks such as Facebook or Linked In, the mutual-friends feature encourages, and facilitates, a user to expand her network of friends by allowing her to search for mutual friends among those she already is connected to. Using just the mutual-friends feature, the study's authors were able to identify 60% of a user's private friends. Being able to see a user's mutual friends, according to the authors, could allow someone to determine the user's political affiliation or obtain socially embarrassing information; when combined with other background information, it could allow someone to create a fake identity that is, in many ways, more realistic than the person whose identity was stolen. Importantly, the study's authors used a Facebook data set, of more than 63,000 users with more than one million friends, that was publicly available.

Whether you are a multinational financial institution, a Facebook user, or an insurance company, it is hard to ensure that all of your information is truly as safe as you think. Data breaches are hard to guard against. There are privacy laws, laws against hacking, and even laws against hacking-back, but they are not always enough. Businesses and individuals have to be aware of the digital footprint we all leave behind and remember that, to a very large extent, they are responsible for ensuring the privacy of their information; if they do not want to make information public then they should take reasonable steps to make, and keep, that information private. Once public, the information will always be there, to be seen, and used, by any and all who just think to look for it. It is hard to un-ring a bell.

The amount of readily available public information is large enough, in both scope and quantity, to aid fraud investigations if used in the right way. Simple pieces of information can answer important questions. Look at what usage data allowed the Bloomberg reporters to surmise and then confirm. Look at the information the researchers in the Facebook study were able to determine; and always remember that they used publicly available information to conduct their study. Public information can tell you much about whether and how fraud was committed and technology does make this public information more accessible. Technology will prove more beneficial than not to fraud investigators as long as they remember this and the limits on such investigations.

There is no shortage of trial attorneys in New York, or around the country. What makes a good trial attorney, however, is open to debate. How to become one is even more difficult to define. Is it something you can master through hard work and perseverance; is it something you have to have a natural aptitude for; or is it some combination of both? As we previously discussed, there is a lot of practice involved in trial practice. It is important to practice and to do it in the right way; but is it enough?

People believe they know a good trial attorney when they see one and often even when they don't. Most people base their opinion, in large part, on results. Many believe that a good trial attorney is the lawyer who wins huge verdicts, defeats frivolous lawsuits, repeatedly gets his indicted clients off with not guilty verdicts or hung juries (Bruce Cutler comes to mind), or a prosecutor who finally does send the bad guy away for an extended prison stay (Andrew J. Maloney and John Gleeson sound familiar). Judging trial attorneys based on results alone is at least somewhat misleading. It ignores the fact that lawyers can only play the hand they're dealt; it's what they do with that hand that's important. Would anyone argue that Johnnie Cochrane was a better trial attorney than Clarence Darrow, even though Darrow lost one of the most famous trials in modern history?

Even if the characteristics of a great trial attorney are hard to define, there most certainly are a large number of lawyers who would like to be one, and no shortage of qualified consultants to help them achieve success in any given case. The question is, can this be done and who, if anyone, can do it?

We all grew up with the idea that you can be anything you want if you put your nose to the grindstone; through hard work and perseverance you can achieve your dream. Decide what you want to do, practice long and hard enough, and you can become great; except that maybe you can't. New research, led by Zach Hambrick, associate professor of psychology at Michigan State University, concludes that practice alone, no matter how much, is not enough to make one great; it is necessary, but you need something more.

Hambrick and his colleagues tried to determine what influence practice had on an individual's performance in areas requiring a high level of skill. They reviewed 14 studies of chess players and musicians, to determine how practice related to differences in performance. The amount of practice, they found, accounted for only one third of the difference in an individual's skill level. Even then, some individuals achieved elite status without a large amount of practice and others did not master their skill even with copious amounts of practice.

The remaining differences in performance, the researchers theorize, can be accounted for by a person's innate ability or her working memory capacity, which is closely related to general intelligence. Working memory capacity basically is the ability to store and process information, either visually or verbally, to keep it in mind, while using it to complete a task. Hambrick's prior research found that individuals with higher working memory capacity performed complex tasks, such as piano sight reading, better than ones with lower working memory capacity, even when those with the lower working memory capacity had extensive experience and knowledge in the task at hand.

This research bears out the truth behind the adage that it is not just what you know but how you use it that makes all the difference. Having specialized knowledge is not enough. In order to be great, you have to be able to draw on that knowledge, to use it while performing your task, in order to master your skill. And that is what great trial attorneys do. They draw on their experience and knowledge, while presenting the case to the jury. They think on their feet; anticipate problems and how to overcome them; pick up on things others might miss, not because of any magical skill, but because they learn from their practice, their experience, their prior trials, what is important to a jury. They plan ahead, prioritize, remember what the jurors in the last trial said after the verdict and figure out a way to use it to their advantage this time. They bring everything they learned from their past successes, and their mistakes, to the here and now, the present, in order to make their presentation better, more compelling, and more convincing.

To a large degree, a great trial attorney is no different than a great jazz musician who first learns the scales and the chords, until they are almost second nature, before he uses them to improvise magical riffs; or a great quarterback who uses his vast knowledge of his playbook and the opposing defenses, in order to call an audible that results in a huge gain. The same way the jazz musician uses his knowledge to react to what the other players are doing on stage, or the quarterback reacts to the defensive package no matter how well it is camouflaged, a great trial attorney draws on his knowledge, skill, and experience to react to what the opposing party actually says and does during the course of a trial. When he asks a question he actually listens, and reacts, to the answer, and improvises additional questions along the way. He can take a witness down a winding, segmented path, and never lose a step when he calls the witness back to a particular telling statement or contradictory remark. The musician, the quarterback, and the trial attorney each has to know the basics, gain the specialized knowledge, practice until it becomes second nature, and then be able to draw upon it to achieve his goal. No one is a great trial attorney the first time out; even the best lose some along the way; but you do know them when you see them, and they are fun to watch.

In our last article, we began a discussion about insurance fraud. It comes in many shapes and sizes, infects many different types of claims, and is hard to eradicate. Like the Hydra of Greek mythology, every time you prevent a fraudulent claim from being paid, many more raise their ugly heads.

The extent of the problem is illustrated by the complex fraud rings that have made the news recently. A multi-year, multi-agency investigation, named Operation Sledgehammer, in Dade and Palm Beach counties in Florida, just led to the arrests of 26 people in an insurance fraud ring. The defendants allegedly staged accidents to collect personal injury protection benefits which would be split among the recruiters, those allegedly injured, the medical professionals who allegedly treated them, and the owners of the clinics where they were treated. According to news reports, those arrested were charged with having billed more than $20 million to insurance companies in the scheme. Earlier this month, Allstate Insurance Company filed its third insurance fraud lawsuit of 2013. This one, filed in the United States District Court for the Eastern District of New York, seeks to recover $3.8 million from five medical professional corporations and six physicians for allegedly fraudulent medical billing related to no-fault claims. It alleges that the defendants submitted bills for examinations and testing that were not performed, not necessary, or not designed to benefit the patients who allegedly were treated.

In order to fight insurance fraud, insurers need to be as flexible and adaptable as the perpetrators. One way to do this is through the effective use of the vast amounts of information already within the carrier's control.

The term "Big Data" has been used a lot recently, within both the scientific and business communities. It's defined as a huge amount of digital information, so big and complex that normal database technology cannot process it. Computers can handle large amounts of information, much more than any single person could analyze; Big Data is many times bigger. Think of the well-publicized human genome project, in which scientists mapped human DNA. They first had to identify each piece of information before they could try to figure out what each part is used for and how it affects the others. Or consider the case of retailers who now analyze customer data to decide on the types and amounts of inventory they need to stock and the price points or sales they need to run in order to sell it. They need to gather, and integrate, the data regarding their customers from myriad sources, before they can analyze and make intelligent decisions based on it.

Identifying information is hard enough, even if you already have it. Figuring out what each piece of information means can be daunting, especially when there are so many to sift through. There is a lot of information to work with: Of all the data that currently exists in the world, 90% has been created in the last two years. How that data can be, and is, used is the key.

Insurance carriers have a lot of information at their disposal. How many claims does a large insurer handle a year and how much information is gathered on each? Should that information be kept isolated, or should it be integrated to help make intelligent decisions about fraud investigations?

A September, 2012 study, entitled "The State of Insurance Fraud Technology," which was conducted by the Coalition Against Insurance Fraud, with technical assistance from SAS Institute, found that most insurers now use technology to assist them in determining which claims to investigate:

When it comes to technology, most insurers' anti-fraud efforts begin with rules-based systems. These systems test and score each claim against a predefined set of business rules and report the results to the SIU teams that look suspicious due to their aggregate scores or relation to threshold value.

Continue reading "WHAT CAN BE DONE TO FIGHT INSURANCE FRAUD? THE USE OF TECHNOLOGY" »

Insurance fraud is a widespread problem, in New York, throughout the United States, and around the world. It involves many different types of insurance claims. Insurance fraud can be found in first-party claims, where the insured is seeking to recover more than he otherwise would be entitled to under his own policy, be it a homeowner's, business owner's or other commercial lines policy, or an automobile policy. It also can be found in third-party claims, where claimants seek to recover from the insured's liability carrier for loss or damage that did not occur, which the insured did not cause, or for exaggerated or pre-existing damage or injuries. Its impact is well known: Insurance carriers incur higher costs, including expenses to investigate and defend against fraudulent claims, higher claims payments and lower premium income. The Coalition Against Insurance Fraud estimates that insurance fraud schemes steal approximately $80 billion a year. Policyholders are forced to subsidize, through higher premium payments, the claimants who collect on fraudulent and/or exaggerated claims. The National Crimes Bureau estimates that insurance fraud adds $200-$300 per year to an individual's insurance premium. The fraud is attempted through everything from complex schemes to mundane lies. What makes it important is not so much how it's done, but its prevalence.

Sometimes the insurance fraud schemes are ingenious. In March 2013 an upstate New York man was arrested because he was found in possession of a tilt bed truck and vehicle identification number, both of which were stolen. Even though he was caught and arrested, the man still could be considered clever: The truck he was found with actually was built from two other, stolen trucks.

Sometimes the insurance fraud schemes are mundane. In March 2013 an Oneida County, New York, man was arrested for insurance fraud. He made a claim under his homeowner's policy with Liberty Mutual Insurance Company to recover $11,779 for water damage to his residence, and submitted a sworn statement in proof of loss in support of the claim. It turned out, however, that there was substantial evidence that the water damage he tried to recover for was actually pre-existing damage; it was there before the date of the claimed loss. As it turns out, that was neither clever nor effective.

Sometimes the insurance fraud schemes are brazen. A Nassau County, New York, woman recently was arrested for insurance fraud in the 3rd degree and for offering a false written statement. She filed a homeowner's claim to recover for fire damage to her house. Hartford Insurance Company issued a check, for $33,596, to pay the claim. The check, however, was made payable to the woman's ex-husband, who still was the named insured on the policy. The woman notified Hartford that she did not receive the check, so it sent her a duplicate, which, like the first, named her ex-husband as the payee. An investigation turned up evidence that the homeowner received both checks, gave each to her son who, because he had the same name as his father, the woman's ex-husband, was able to deposit each into his personal account. The woman then was able to withdraw the funds from her son's bank account using an ATM card. For the same reason, it was both clever, since the right name was endorsed on the two checks, and not well-thought out, since there were two checks on which the right name was endorsed and a clear record that each had been cashed.

Sometimes the fraud schemes simply do not add up. A man was arrested in March 2013 for falsely reporting that his 2008 Honda had been stolen. He claimed that he last saw the car when he parked it on a Queens, New York, street at approximately 0120 hours on February 8, 2013, and that he had all the keys to it. The Mount Vernon, New York, police, however, recovered the car, after it already had been burned, more than a full day before the man claimed he last saw it.

As insurance fraud continues to proliferate, involving disparate claims, means, and methods of execution, carriers' tools also need to expand. A good example is the use of "Big Data," i.e., the large amount of information, in digital form, readily available to insurers on their vast number of claims. Using it, rather than ignoring it, has the potential to lead to more well-informed decisions on who, what, and how to investigate a potentially fraudulent claim. Combined with the intuitive judgements and experiences of their SIU representatives, the use of Big Data through tools like text mining, has the potential to enhance carrier's anti-fraud efforts, which will be to everyone's benefit. The use of Big Data will be the subject of subsequent articles.

Did you ever wonder what makes a trial attorney? Trials are strange, unique things that everyone seems to have an opinion on: An opinion on the outcome, the evidence, the witnesses, the jurors, and the lawyers; especially the lawyers. They did a good job; they did a bad job; can you believe they asked that question? How could the lawyer let that witness testify? What was he thinking? Everyone has heard the criticism, the Monday morning quarterbacking. Has anyone really thought about what goes into actually conducting a trial; the planning; the execution? Watching and learning from what others do, how they do it, what they do right and what they do wrong, all help you become a better trial attorney; but in the end it's up to you and you alone. That's what makes it great.

Being a trial attorney is something you either love or hate. If there is one word that sums it up, that word is intense. It's nothing if not intense. You are the one calling the shots, executing the game plan, calling the audibles trying to anticipate the defense. Everyone is looking at you, looking to you, during the entire process. There's pressure: What happens if you make a mistake, flub a direct examination, or go too far in your opening? What if you don't listen closely enough during the direct examination of your opponent? What if you miss something during your cross-examination of the same witness, and mistakenly give him a pass on a point crucial to your case? These can keep you awake at night, both in the days leading up to the trial and, most definitely, in the nights during the trial. It's not always easy to relax during the trial. When you're on trial, it's not easy thinking of anything else.

But what if you get it right, nail the cross of your adversary's main witness and blow his case out of the water? What if you pick up something that the other side said inadvertently and use that little opening to wedge through your main point? What happens if all of your preparation and hard work allow you to improvise and react seamlessly, gain the respect of the jury, get them to listen, not just hear, what you're saying and win them over? What happens if you actually do your job well, do it right, and win? When all the eyes are upon you, when everyone is waiting for you to make a mistake, what if you actually come through in the clutch? That is something you remember, always.

If you can take the pressure, give it your best shot, and want to do it again, you are a trial attorney. It's time-consuming, physically demanding and draining. It is as close to pure concentration as you will ever get. Time absolutely flies. During preparation, while scripting out a cross-examination of a key witness or drafting an opening statement, there will be pages and pages of writing; but, when you're done, you'll be surprised about how much time actually has passed. You may think it took an hour but when you look up it actually took three. Sometimes, you'll find yourself so heavily involved that you'll have to remind yourself to do the little things, like eat.

During the trial, you won't care what else is going on. You might pay attention to the weather, at least to know whether it will be raining on the way to the courthouse. You probably won't know much, however, about what happens out in the real world. What made the morning paper, the evening news, the top story on your local patch, what everyone is commenting about on Facebook or tweeting about on Twitter, or even the current viral video; none of these will be on your radar. What you will know are the intricate details of the parts, the contract, the accident, the insurance claim, or whatever it is that you are fighting about. You'll know the intimate details of the proposed jury charges and how your case will fit smoothly into them. You'll know what exhibit you'll need to have admitted into evidence in order to let the jury see your point, and the rightness of your case. If you're fighting about a part in a products liability case or commercial transaction dispute, you'll know what it does, what it was supposed to do, how to use it, and how it actually was used. You will know why it performed the way it did, and why it would have been fine if only the plaintiff had put it into a proper application, within its specs. If you're defending an insurance company against an arson claim, you will know how, where, and when the fire started; whether an accelerant was used or whether all of the possible accidental causes of the fire were ruled out; who had access to the point of origin and whether or not there were signs of forced entry; where the insured was, and where he said he was, when the fire started; and whether the insured had a financial motive to have the fire intentionally set. In other words, no matter what your case is about, you'll know it as well as your client does; live it, breathe it, for the duration.

During the trial you may not get to know what the latest flash mob is, but you will know what the evidence in your case is; what the witnesses said before the trial and what they say during the trial; what you intend to prove during the trial and, by the end, what you actually have established at trial. You will know it all so well that you will be able to orchestrate it so that it comes together as one big, logical, explainable picture. Like a good jazz musician, you will be able to improvise through the inevitable unforeseen problems; the witnesses who don't show up or whose memories fade; your client who too easily lets words get put into his mouth by the plaintiff's attorney on cross examination; or your expert who seemingly does not have the courage of his convictions.

When the trial's over, there still will be current events to catch up on. You'll have time to figure out why Julie Andrews was singing, in English, in a Belgium train station at Christmas time, and why even the dancers looked surprised until they started dancing. And your trial will be over, win or lose, with you left hoping to get back in front of a jury as quickly as possible because that's what you are: A trial attorney.

When an insurance company provides liability coverage, in New York or elsewhere, it most often provides an attorney to defend its insured against lawsuits for risks covered under the policy it issued. This is true whether the insured is covered by an automobile policy, homeowner's policy, business-owner's or BOP policy, or title insurance policy; if the allegations against the insured are covered by the policy, the insurer will retain counsel to defend the insured against those same claims. The attorney can be in-house counsel or outside counsel retained by the insurance company on a case by case basis. Who this counsel, often called "retained counsel" or "assigned counsel" represents, may surprise you. The answer is something every carrier, claims adjuster, and policyholder in New York should remember: The insured. In assigning counsel to defend an insured, the insurance company should be careful to select one that knows, and follows, this rule.

The case law in New York is clear. The Court of Appeals, in Feliberty v. Damon, 72 N.Y.2d 112, 120, 527 N.E.2d 261, 265 (1988), stated it best:

First, the duty to defend an insured is by its very nature delegable, as all the parties must know from the outset, for in New York--as in California--an insurance company is in fact prohibited from the practice of law (Judiciary Law § 495). Accordingly, the insurer necessarily must rely on independent counsel to conduct the litigation. Second, the paramount interest independent counsel represents is that of the insured, not the insurer. The insurer is precluded from interference with counsel's independent professional judgments in the conduct of the litigation on behalf of its client (Trieber v. Hopson, 27 A.D.2d 151, 153, 277 N.Y.S.2d 241; American Employers Ins. Co. v. Goble Aircraft Specialties, 205 Misc. 1066, 1075, 131 N.Y.S.2d 393; see also, Code of Professional Responsibility EC 5-17, 5-21, 5-23).

[Emphasis supplied]

See also Fed. Ins. Co. v. N. Am. Specialty Ins. Co., 47 A.D.3d 52, 59-60, 847 N.Y.S.2d 7, 12 (1st Dept. 2007)[Assigned counsel's duty is to insured and where there is a conflict between insured and insurer, it cannot represent both].

There is more, however, than just case law. The ethical rules with which all New York attorneys must comply, say the same thing: Retained defense counsel has one client, the insured, not the insurance company. That the insurance company pays the legal fees for the defense is unimportant; the key is who the lawyer is defending. Rule of Professional Conduct 5.4 (c) states that retained counsel cannot let the insurance company interfere with his representation of the insured/defendant:

Rule 5.4: Professional independence of a lawyer. * * * (c) Unless authorized by law, a lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal service for another to direct or regulate the lawyer's professional judgment in rendering such legal services or to cause the lawyer to compromise the lawyer's duty to maintain the confidential information of the client under Rule 1.6.

The most important lesson to take from this is that the retained defense counsel owes its duty of loyalty to the insured and, once it has been retained to represent the insured, it cannot help the insurance company decide coverage issues involving the same insured.

Whether the insurer owes the insured a defense and/or indemnification against the particular allegations involved in a given case, is something that the carrier should decide before it retains defense counsel. Often, if there is any doubt, the insurer will issue a reservation of rights letter to the insured before defending him, outlining the possible coverage defenses which may later be found to apply. Many times, facts will be developed which will show that those coverage defenses do apply, such as when the allegations in the complaint are clarified through discovery to show that they do not fall within the risks covered by the terms of the insured's policy. When the carrier needs to make a decision as to whether or not to continue to defend and/or indemnify the insured, however, it should not look to retained defense counsel for any guidance, and that retained defense counsel should refrain from offering any. Instead, the carrier should refer coverage questions to coverage counsel; i.e., other counsel who can represent the insurer's interests in the matter without conflict.

Whenever an attorney is retained by a carrier, he has to be certain in what capacity he has been retained, and be careful to stay within that role. If the insurer has assigned him to defend the insured, then his client is the insured, and he cannot provide coverage analysis of the terms of the insurance policy pursuant to which he has been retained, because to do so would be to the possible detriment of his client. Retained defense counsel should continue to defend the insured in the underlying claim to the best of his ability unless and until a court allows him to withdraw and he cannot argue issues of coverage in requesting to withdraw. To do anything less would be a disservice to the insured and the insurance company.

At the same time, the insurance company's adjuster handling the claim should not want retained defense counsel's coverage opinion; it only will jeopardize whatever coverage determination the adjuster ultimately makes by opening it up to collateral attack. The adjuster's determination will be on much more solid ground if he obtains a coverage opinion from separate, coverage counsel, retained specifically for that purpose.

This does not mean that an attorney, or a firm, can be retained only to defend insureds or retained only as coverage counsel. They can do both, just most often not for the same insured, and definitely not on the same claim, as long as there is no conflict. Knowing the difference between the two roles benefits everyone. Every adjuster should keep this in mind when assigning and retaining counsel; it will do much to ensure a successful outcome of the case, and that, after all, is the goal.

Trial practice is well-named; it involves a large amount of practice. How you practice and prepare, though, is often just as important as whether you do so at all.

As any trial attorney will tell you, preparation is important. A trial attorney will map out what he wants to say and how he wants to say it; all the while trying to figure out the best way to win over the jury. He will prepare his opening statement, the direct examinations of his witnesses, the exhibits he wants to get admitted into evidence through them, the cross-examination of his adversary's witnesses, and his closing argument. Even after he prepares them, after he writes numerous drafts of each until he is completely comfortable with them, the trial attorney often will say them; learn them; memorize them; i.e., he will do a dry run of each. His colleagues may get annoyed; even if he closes the door to his office, they can still hear him. His family may not want to listen to one more rendition of his closing argument; no matter how eloquently he sums up, they just are not interested in all the reasons why the insureds intentionally set fire to their house to collect on their homeowner's policy of insurance and stop foreclosure. As the trial attorney drives to the courthouse, talking and gesturing to himself as he rehearses his opening statement one last time, the people in the cars around him probably think he's a crazy person arguing with himself.

A recent scientific study published in the peer-reviewed online journal Behavioral and Brain Functions, suggests that adding movement to "dry run" rehearsals in disciplines where such rehearsals are routinely used, significantly improves performance. The study involved a group of 12 high jumpers and compared the performance of those who only pictured themselves going through a high jump, with those who added certain "dry run" or limited physical movements to their mental rehearsal. In this case, the high jumpers, though standing still, added arm movements while imagining themselves executing a high jump. The study was based, at least in part, on the fact that picturing yourself performing a task, i.e., mentally executing it without any physical movement, can improve your ability to perform that task, and that such imaging uses a similar part of the brain as actual physical practice. The study found that mental rehearsal alone increased performance by 35%, but adding simple physical "dry run" movements to the mental rehearsal, increased performance by 45%.

These findings seem to confirm the idea that you should practice under conditions as similar as possible to those under which you actually will perform. Trial attorneys are not necessarily athletes, but when you try a case you do put on a performance; one with a good amount of physical movement. If you rehearse your closing argument by yourself, sitting down, you might have a difficult time confidently striding around the courtroom, swaying the jury with your convincing summation.

Though you may not have everything you need to fully simulate a trial, since a mock jury is not always within reach, there are things you can do. Getting up and walking around the room, using hand gestures and body language to emphasize your points, picking up exhibits when you refer to them, just as you would when you actually give your closing, might allow you to execute the whole thing better. It might make you more comfortable in front of the jury or it might give you the added sense of security found in routine; having done it before, under similar circumstances, you can do it again without having to sweat the little things, like where you should stand or how you should walk.

No matter what the reason, mimicking at least some of the physical movement involved in giving a trial presentation can only help, not hinder, your actual performance in front of a jury. Those crazy animated hand gestures while sitting alone in the car on the way out to the courthouse, maybe aren't so crazy after all; at least I'd like to think so.

In our last article, we spoke about expert witnesses and how they play an important, if often misunderstood, role in trials in New York. Their main function is to provide opinion evidence about important issues that may be beyond the understanding of the average person, because of the specialized skill or training involved. Scientists, engineers, forensic accountants, and doctors, each can be expert witnesses under the right circumstances. They will not be able to testify as expert witnesses merely because of their title or because of their superior knowledge. The jury actually has to need them to shed some light on an issue important to the case that is simply beyond the knowledge and experience of the average juror. Many times, if a jury can figure it out on their own, the trial court will let them do just that and prevent an expert from testifying on the given subject.

A few interesting cases clearly show the limits of expert testimony in New York. In Ferguson v. Hubbell, 97 N.Y. 507 (1884), the main issue was whether the defendant was liable for two fires that had been intentionally set to clear brush and vegetation off his land. The fires had spread, after the wind kicked up, to plaintiff's land and destroyed plaintiff's house and barn. The plaintiff claimed that the fires should not have been set because it was too dry and too windy to control them. At trial, the defendant established all the facts the jury needed in order to decide whether the fires had been properly, and safely, set. He and his witnesses testified about the weather conditions, the speed of the wind, and the condition of the land at the time of the fires. The defendant, however, evidently succumbed to the urge to overplay his hand. He and his witnesses offered their opinion that it was proper to set the fires when they did. This was based on their supposed superior knowledge and experience in clearing land as farmers. The defendant won at trial; the jury ruled in his favor. The verdict, however, was overturned on appeal. The court held that no one should have been allowed to offer their opinion as to whether the fires had been properly set; that was the central issue the jury had to decide. According to the court, the jury had the common knowledge and experience with fire, brush, and timber, necessary to determine, based on the evidence presented at trial, whether the fires had been properly set. The important thing was not that the defendant and his witnesses had superior knowledge; it was that there was no need for their superior knowledge. The jury had a sufficient understanding of the issue to allow it to make a rational, reasonable, and just decision, without the help of expert opinions.

The much more recent case of Christoforatos v. City of New York, 90 A.D.3d 970, 935 N.Y.S.2d 641 (2nd Dept. 2011), dealt with a situation which is more common today than the burning of a fallow field: The plaintiff slipped and fell when he was entering a portable restroom in a New York City park. He claimed that he slipped on a bare patch of ground that had become slippery in front of the entrance to the restroom. The plaintiff sought to offer expert testimony about whether it was proper to place the portable restroom on grass, rather than pavement, where people walking to and from the restroom could cause a bare spot that could become slippery when wet. The appellate court upheld the decision of the trial court to exclude the offered expert testimony because it was unnecessary; bare spots being caused by large numbers of people walking on grass and those bare spots becoming slippery when wet, was something well within the knowledge and experience of most jurors. It did not matter that the plaintiff's expert might have superior knowledge regarding the propensity of grass to wear out and die when trampled upon by a sufficiently large number of people or of the particular viscosity of the resultant bare ground when it became wet and turned to mud. What mattered most was that just about everyone has seen bare spots on grass, be it a self-made walking trail across a field in a park or a worn out section of a baseball field; everyone understands that the bare spots become slippery when wet; and jurors do not need an expert to tell them what this means or what can happen as a result.

As you can see, expert witnesses are not always necessary. You cannot use one at trial simply because you want to, even if she is the most well-qualified, knowledgeable witness there is on a particular subject. If a jury needs an expert's opinion, then you can use an expert at trial; if they do not need one, then you cannot use one.

Trials are fascinating. People love to watch them. Crime dramas, police stories, and shows that feature the ins and outs of a law firm, and the lawyers that make it work, have filled prime time TV for generations. Just about everyone has their favorite. Trials, which form a big part of each, are just as interesting from the inside. In New York, there are intricate rules of evidence; the subtleness of persuasion without overt argument, as in a finely hewn opening statement; the art of insightful cross examination; and the passion of a good closing argument. But one of the most often misunderstood aspects of the trial is the expert witness, and the role she plays in persuading a jury and winning the case.

Every trial has witnesses. Some give live testimony. You get to hear what they say as they say it; watch their facial expressions and their body language as they testify; actually see how they react to tough questions. Others merely have their deposition testimony read. You get to hear a lawyer read what the witness testified to when she was deposed, when the attorneys questioned her before the trial even began; not exciting, but often necessary. Witnesses most often testify about facts, about what they saw, what they heard, or what they did. The reason for this is fairly simple: When witnesses testify falsely about facts, it is much easier to show they are lying, and to punish them accordingly, than if they testify falsely about their opinion. See Ferguson v. Hubbell 97 NY 507 (1884). It is one thing to show that an opinion is wrong; it is much more difficult to demonstrate that the person who gives an opinion does not really believe it.

Sometimes witnesses can testify as to their opinions. An expert witness can offer her opinion about why certain things happened. When a case involves an important matter involving art, science, or technical knowledge that requires special skill or knowledge that the average person does not normally have, an expert is allowed to give her opinion to help enlighten the court and the jury. An expert will not be permitted to offer her opinion at trial merely because she has greater knowledge or experience in a given area than the average juror. Her opinion also has to help clarify an important issue which is beyond the understanding of the average juror. See De Long v. Erie Cnty., 60 N.Y.2d 296, 307, 457 N.E.2d 717, 722 (1983). In other words, it's not enough that an expert is an expert; the jurors must need her opinion in order to be able to make informed judgements upon something that is beyond their knowledge and understanding.

Many cases in New York point out an obvious, and well-placed, bias toward allowing jurors to make up their own minds, to draw their own conclusions if possible, on the evidence before them, without the opinions of experts. J. Erie, a long time ago, speaking for the Court of Appeals in Ferguson v. Hubbell, 97 N.Y. 507, 513-514 (1884), said it best:

Better results will generally be reached by taking the impartial, unbiased judgments of twelve jurors of common sense and common experience than can be obtained by taking the opinions of experts, if not generally hired, at least friendly, whose opinions cannot fail generally to be warped by a desire to promote the cause in which they are enlisted.

There is a lot of truth in those words. It is easy to look at an expert as nothing more than a hired hand, who gives an opinion not because she believes it but because she thinks it will get her hired the next time; that is a common line of cross examination.

Sometimes, however, jurors will need expert testimony to fully understand how and why something happened. The expert testimony of a forensic accountant might be very helpful to a jury trying to figure out where the money went in a Ponzi scheme, or whether a business that made a fidelity claim because an employee allegedly stole money, actual had money taken from it. A jury trying to determine whether an insured intentionally set fire to his house or business to collect the proceeds of his homeowner's, landlord's, or business owner's policy of property insurance, first has to decide whether the fire was intentionally set; it's difficult to intentionally set an accidental fire. The testimony of a cause and origin expert, about what caused the fire, whether an accelerant was used, whether all accidental causes of the fire had been ruled out, or even where the fire actually started, probably would greatly aid that jury.

Even when an expert is allowed to testify, because her special knowledge and understanding is needed, a New York jury is not bound to accept the expert's conclusions; it can disagree with her findings. Allowing the jury to watch and listen to the expert as she gives her opinion, how it was reached and what it was based on, and having the jurors compare it to all the other evidence presented at the trial, allows them to use their common sense and experience to make up their own minds. Perhaps that's the best approach. After all, an expert is not right just because she is an expert, but neither is she inherently wrong merely because she is an expert. Her opinion should be judged, just as all the other evidence in the trial is, by the jury.

We are going to pick up where we left off in our last article on subrogation in New York. We were talking about a subrogation case I had that showed how to overcome an exculpatory clause in a contract that absolved one of the parties from liability for its own negligence. In my case, it was an alarm company that monitored a warehouse that had a break-in in which clothes valued at several hundred thousand dollars were stolen. If the alarm company's actions in responding to the alarms at the warehouse amounted to ordinary negligence, the subrogation action would fail because the insured, who signed the contract, could not recover, and therefore neither could the insurer. There could be a recovery, however, if the alarm company's actions amounted to gross negligence because, at least in New York, a party cannot absolve itself from liability for its own gross negligence. See Sommer v. Fed. Signal Corp., 79 N.Y.2d 540, 554, 593 N.E.2d 1365, 1370-71 (1992).

According to the court, the basic facts were undisputed. The alarm company received alarms that something had happened at the warehouse, and notified the police and the designated representative of the business, as it was supposed to do. The police never arrived. The warehouse representative was told only that the alarms had been received. He thought they might be false alarms, as had happened in the past, and waited approximately a half hour for the alarm company guard to get to the warehouse, investigate, and call him back to let him know whether there had been an actual break in. When he did not get a call back, he went to bed. The alarm company, however, waited until the next shift, approximately three hours after it received the alarms, to have one of its guards respond to the warehouse to investigate, and it never told anyone from the warehouse that it would not be able to respond for so long; both were violations of its own guidelines. It also only had only a small number of guards on duty to respond to calls in a very large, populated area. In order to enter the warehouse the guards first had to travel back to the central station, get the key for the warehouse, and then drive a long distance back to the warehouse. Only then would they be able to investigate the alarms.

The key was not any one thing that the alarm company did wrong with this particular break in. The fact that it waited three hours to have a guard investigate the alarm, when it stated the guard would respond in 15 minutes, was not, by itself, gross negligence. Instead, I argued the evidence of gross negligence was found in a system that inevitably caused such delays: The evidence of the low number of guards on duty; the large area they had to cover; the long distance from the guard station to the warehouse that made it difficult even on a good night to make it to the warehouse in time; and the violation of its own guidelines. This was evidence of the gross disregard for the rights of others, of actions that smack of intentional wrongdoing, which is required to get to trial on claims of gross negligence.

Continue reading "Subrogation In New York V - Teamwork In Action " »

The last few articles have discussed the basic concepts and rules of subrogation in New York. It is the equitable doctrine that allows an insurer that pays a covered claim to its own insured to stand in the shoes of its insured to recover the money from the person or entity that caused the loss.

Subrogation, once you determine that the insurer can bring the claim, at least in claims involving property loss or damage to businesses, is really an exercise in commercial litigation. Whoever the insured could sue to recover for the loss it suffered, the insurance carrier also could sue; whoever the insured could not sue, the insurer also could not sue.

A good example of this is a subrogation claim I had that involved a theft of a few hundred thousand dollars of merchandise from a clothing warehouse. The thieves, who never were caught, were ingenious. They broke into the warehouse and jerry-rigged a conveyor system so that it brought the clothes right to the loading dock door. Once there, the thieves loaded the clothes into a waiting truck and drove off. The whole operation took approximately 2 hours; not bad for a night's work.

The warehouse, which had its own policy of property insurance, made a claim to recover for the value of the clothes, which its insurer paid because theft was a covered cause of loss under the policy. The insurance company then wanted to try to recover the money it paid the insured, from the parties responsible for the loss.

There was nothing that barred the insurance company from bringing a subrogation claim. The loss clearly was covered under the warehouse's own policy of insurance, which protected against losses caused by theft; the insurance company had to pay, it did not make a voluntary payment. The thieves were never found, so they could not be sued. The warehouse, however, had a central station alarm, and there was nothing in the alarm contract that barred a subrogation claim. There was a big obstacle, however, preventing the warehouse from recovering from the alarm company even if the alarm company's actions had caused the loss; and, if the warehouse could not recover, neither could the warehouse's insurer in subrogation. The alarm contract contained an exculpatory clause absolving the alarm company from liability for its own negligence. Unless the alarm company's actions amounted to more than ordinary negligence, there would be no recovery against it.

One way to overcome an exculpatory clause in a contract which absolves a party from liability for its own negligence, is to prove gross negligence. Gross negligence is the failure to use even slight care, or conduct that is so careless as to show complete disregard for the rights and safety of others; it smacks of intentional wrongdoing. At least in New York, a party cannot absolve itself from liability for its own gross negligence and, most often, whether a party's actions amount to gross negligence is an issue of fact to be tried by a jury rather than determined on a motion for summary judgement. See Sommer v. Fed. Signal Corp., 79 N.Y.2d 540, 554, 593 N.E.2d 1365, 1370-71 (1992).

The insured, its representatives, and I worked as a team to obtain evidence that the alarm company was grossly negligent in how it responded to the alarms at the warehouse. The court said this was enough to defeat the alarm company's motion for summary judgement. We'll show how this was done, in our next article.

The last two articles discussed the rules behind the equitable doctrine of subrogation in New York and how they all boil down to an application of the basic idea of fairness. Someone who damages another's property should not be able to avoid liability merely because he was lucky enough to harm a business or person who had the foresight to purchase an insurance policy that fully insured, and reimbursed the insured for, the loss. Subrogation, in effect, holds the wrongdoer to account. Even if the insurer has paid the insured for the property loss, the wrongdoer still has to pay the insurer.

Subrogation claims come in all shapes and sizes, at least for commercial insurance policies which protect against property damage and business interruption. Recently, Lloyd's of London made the news by bringing a subrogation action against a New Hampshire utility to recover the money it paid its insured as a result of a fire. According to news reports, a fire engulfed a block of businesses in Hampton Beach, New Hampshire, in February 2010. One of those stores, Decalomania, was insured by Lloyd's of London. The water used to put out the fire allegedly damaged Decalomania's property and, pursuant to the policy of insurance it issued to Decalomania, Lloyd's of London paid Decalomania $33,000.00 as reimbursement for that property damage. Lloyd's of London has brought suit against the local electrical utility, Unitil, to recover the $33,000.00 it paid Decalomania. It alleges that the fire started due to a fault in an electrical feeder line owned by Unitil and that Unitil failed to use reasonable care when maintaining the line, which was under its exclusive control.

Whether or not Lloyd's of London will be successful in recovering, from Unitil, any of the $33,000.00 it paid to Decalomania, will depend on a number of factors. If the subrogation action had been brought in New York, rather than New Hampshire, Unitil first would be able to challenge whether the policy required Lloyd's of London to pay Decalomania for the loss. If the policy did not provide coverage for Decalomania for the loss, then Lloyd's of London made a voluntary payment for which it could not maintain a subrogation action. See Fid. & Cas. Co. of N.Y. v. Finch, 3 A.D.2d 141, 145, 159 N.Y.S.2d 391, 396 (3rd Dept. 1957).

Continue reading "SUBROGATION III - RECOVERING FOR PROPERTY DAMAGE CLAIMS IN NEW YORK " »