A federal judge in Florence, considering the first-impression issue of whether punitive damages can be sought in a subrogation claim in South Carolina, predicted May 19 that the state Supreme Court would follow the “general rule” that recovery is limited to the amount paid out.
U.S. District Judge R. Bryan Harwell wrote in the court’s order that while severance, as requested by defendant Electrolux Home Products, Inc., is not warranted, plaintiff Allstate Insurance would likely not be in good hands should it try to recover punitive damages.
“Generally, one who pays for damages for which a third-party is liable is subrogated to the extent of the payment made against the third party,” Harwell wrote, quoting language in South Carolina Jurisprudence that is consistent with cases from other jurisdictions.
According to court documents, Allstate insured five property owners across the state who suffered damages from fires allegedly caused by a defective design in Electrolux clothes dryers.
Hoping to stand in the subrogors’ shoes, Allstate filed suit, alleging strict liability and negligence, seeking actual and punitive damages.
The plaintiffs alleged that Electrolux’s “ball-hitch” style dryers once contained steel components before moving to combustible plastic ones that caught on fire during testing. Reportedly, the fire began in the dryer cabinet and spread to the plastic trap duct. Further testing showed that a fire starting in the dryer cabinet could spread to the blower housing and trap duct, melting the plastic components and spreading the fire.
Electrolux also received consumer complaints and warranty claims about dryer fires, and an Electrolux product engineer, during an investigation by the Japanese government, acknowledged potential issues.
The Japanese issued a recall of these dryers in 2005, but Electrolux issued no such recall in the U.S., nor did it inform the Consumer Product Safety Commission of the fire risks.
These dryers, the plaintiffs claim, ignited and caused significant damage — ranging from just under $13,000 to more than $220,000 — to each of their five insureds, all of whom filed claims that were paid by Allstate.
In turn, Allstate brought the subrogation action against Electrolux, which moved to sever, to dismiss, and to transfer divisions.
Electrolux argued that Allstate could not sue for punitive damages because a subrogee’s recovery is limited to the amount it paid its insureds.
Allstate’s position was that they could step into the insureds’ shoes and “assert any legal right possessed by [their] insured[s] arising from the covered
loss.”
Without a South Carolina case on point, Harwell noted, the court needed to predict how the high court would rule on the issue.
Under state law, the court wrote, quoting 1960’s Supreme Court ruling in Calvert Fire Ins. Co. v. James, when an insurer pays its insured for a loss resulting from the tortious conduct of a third party, the insurer is “subrogated to the rights of its insured against the third party.”
According to Calvert, “Where the tortious conduct of a third person is the cause of a loss covered by an insurance policy, the insurer, upon payment of the loss, becomes subrogated pro tanto by operation of law to whatever rights the insured may have against the wrongdoer.”
The court, with some help from Black’s Law Dictionary, defined “pro tanto” as “[t]o that extent; for so much; as far as it goes.”
The Calvert court decided that once it paid its insured’s loss, which was covered by a collision policy, it became subrogated to the extent of the payment “to whatever rights” the plaintiff had against the tortfeasor.
And in Pringle v. Atlantic Coast Line, the Supreme Court held that “the Insurance Company is subrogated to the rights of the insured, to the extent of the indemnity paid.”
Along with the language in South Carolina Jurisprudence, the court leaned on guidance from Couch on Insurance (“It is often said that punitive damages are unavailable in claims brought by subrogation.”), American Jurisprudence (“The general rule is that a subrogee is entitled to indemnity to the extent only of the money actually paid by him to discharge the obligation or the value of the property applied for that purpose. Thus, a subrogee cannot sue for punitive damages.”), and several cases from outside jurisdictions in finding that punitive damages are not available to a subrogee.
“In sum, the purpose of subrogation is to reimburse or indemnify, and an insurer-subrogee’s recovery is limited to the monetary amount actually paid,” Howell wrote. “Subrogation is generally a restitutionary measure, not a mechanism for a possible windfall or profit.”
Local counsel for Allstate, Brian Duffy of Duffy & Young in Charleston, did not immediately return a message seeking comment.
Regarding the severance of claims, Electrolux argued — as it has in similar cases in other courts — that the claims were improperly consolidated and should be severed to avoid unfairness, prejudice, and jury confusion.
But the court found — as have all the others (save one still pending) — that severance is not warranted.
Splitting five claims involving the same alleged design defect “does not promote judicial economy,” Harwell wrote, and Electrolux’s concerns regarding jury confusion and unfair prejudice are premature at this point, and more appropriately addressed after discovery.
The 12-page decision is Allstate Insurance Co. v. Electrolux Home Products, Inc. (Lawyers Weekly No. 002-139-17). An opinion digest is available online at sclawyersweekly.com.
Follow Heath Hamacher on Twitter @SCLWHamacher