Protecting Your Client's Business When Catastrophe Strikes
December 2000
Reprinted with permission from the December 2000 issue of The Metropolitan Corporate Counsel.
© Copyright 2000
When catastrophe strikes a client's business, counsel plays a vital role and must respond promptly with a decisive and comprehensive plan of action. Catastrophic business losses by their very size are unlike any other type of loss. As such, they present unique and challenging opportunities for creative problem solving. Traditional solutions may be ineffective and, therefore, innovation and creativity are essential.
Identifying Parties And Legal Issues
Counsel's first step is to identify the key players in the event. If you cannot tell the "good guys" (presumably the plaintiffs), from the "bad guys" (presumably the defendants), you will not understand the dynamics of a catastrophic property damage case. You must also identify the ultimate decision makers (the insurers), for they normally bear the heaviest financial burden.
Once you have identified the players, you must quickly identify theories of liability and potential defenses. For example, if the catastrophic loss is a fire, you need to consider such issues as who caused the fire, who did or did not report it, who did or did not put it out, and whether someone did something to make it worse. At this point, you should consider the broadest range of theories and defenses. They will be narrowed later.
Once you have organized the universe of theories and defenses, you must consider any potential limitations to those theories or defenses. Are there any state or federal statutes which might create immunities? If so, are those limitations applicable to your client? If not, are they applicable to other parties and does that increase or decrease the fund which might be available to satisfy a judgment?
In addition to statutory immunities, you need to know if there are any contractual limitations. If your client has a contract with one of the principal players, is there anything in the written or oral agreement which limits recovery? If your client is one of the potential defendants, can you claim the benefit of someone else's limitation even though it is not in your contract? Are there any contractual provisions which limit damages or deal with economic loss? Finally, who insures whom, for how much, and for what?
These are issues which you must quickly identify and resolve. This will enable you to competently evaluate the situation and make intelligent decisions about the economics of prosecuting or defending the claim. For instance, if you do not know whether you will prevail against a solvent defendant, you must carefully consider the pros and cons of going forward. Similarly, if the costs and expenses outweigh the benefits, you may be unable to recommend pursuit of the matter. Finally, from the defendant's perspective, you need to know how you can limit if not totally eliminate exposure and whether there are other defendants who should contribute to the loss.
As you identify the parties and define the issues, you will also realize that technical expertise will be required to develop those issues. Counsel should be in charge of the investigative activities and ensure that those activities are directed into the right channels. In addition, counsel must take responsibility for ensuring that the cost of the investigative activities is commensurate with the risks facing the client.
In most catastrophies, some person or organization emerges as the "Lead Investigator." If the lead investigator is under your direct control, then the investigative responsibilities are substantial. However, in most instances the lead investigator is an independent person or organization who typically belongs to a public agency. If so, you must realize that there are certain risks when the lead investigator is a public official.
Whether your client is a plaintiff or a defendant, you will need expertise on liability and damages issues. As a defendant, it is advantageous to get out in front on this issue and have a consultant review any property damage and loss of income claims. It may be possible at an early stage for a defendant to negotiate a very favorable settlement by aggressively attacking damages.
If multiple parties are involved, those parties should collaborate to reach a consensus on theories of liability. It can be fatal when plaintiffs have mutually exclusive theories of liability. For example, if one party's expert believes that an explosion occurred in the basement while another believes that it occurred on the third story, the two theories clearly contradict each other. Since plaintiffs have the burden of proof, a jury faced with this dilemma might conclude that no party had a credible theory of liability.
Counsel's role in selecting experts is critical, but counsel must remember that the situation is dynamic and requires constant oversight. Not only should the investigative activities be under your direction, but they must also be under your control. Experts should submit budgets and cost projections for their work. This will enable you to control costs to ensure that the expense to your client is reasonable.
Dealing With Investigative Issues
Having crossed the Rubicon in the case of a plaintiff, or been pushed into it in the case of a defendant, you must address the typical investigative issues present in every major property damage incident. This discussion is not an exclusive list of issues, but a fairly representative sampling of things you will see.
Normally when a catastrophe occurs, public officials become involved. Someone must put out the fire, someone must report the accident, someone must issue the ticket. Of course, in the case of a catastrophic loss, the level of official participation increases in direct proportion to the severity of the catastrophe. At the scene of a catastrophic loss, it is not unusual to see officials from agencies such as the FBI, ATF, NTSB, FEMA, OSHA, and even the IRS. From your perspective, it is critical to identify the key investigative agencies, and determine if and how the official investigation can benefit your client.
At major industrial catastrophes, federal agencies usually send a team of investigators and experts. If the loss involves a fire or explosion and has criminal implications, the Federal Bureau of Investigation (FBI) and the Bureau of Alcohol, Tobacco & Firearms (ATF) might investigate. However, a catastrophic loss need not involve a criminal act to implicate the jurisdiction of a federal agency. For example, the National Transportation Safety Board (NTSB) is empowered to investigate aircraft accidents, highway accidents, railroad accidents, pipeline accidents, and some major marine accidents. Other federal agencies have similar broad grants of investigative responsibility.
Public authorities jealously guard their jurisdiction but may allow some degree of private participation in their investigations. For example, investigators retained by private parties might be allowed to work with the public officials at the scene. They may be given key information and allowed to participate in witness interviews. The public agency may even allow interested parties to appear and present evidence at hearings.
However, while the public official may invite participation, you should not assume that you will inevitably be allowed to acquire and use the public official's final work product. Obviously, an official report favorable to your client would be Exhibit A in a civil action. Unfortunately, just because a report is official does not mean it is admissible. For example, there is a provision in the U.S. Code which provides that NTSB Board reports are not admissible in civil actions. See 49 U.S.C. § 1154(b). The cases considering this provision generally hold that it prevents a private party from using any portion of a report of the NTSB in a civil action. See In Re Air Crash Disaster at Sioux City, Iowa, 780 F. Supp. 1207 (N.D. Ill. 1991). Therefore, when a catastrophic loss has been investigated by a public agency, you must ascertain if there are any limitations on the use of its reports.
You may attempt to avoid this problem with a subpoena to the public official. On its face, this end-run strategy appears to defeat the statute and have the added benefit of saving the cost of hiring an independent expert. The problem with this strategy is that it does not take into account 5 U.S.C. § 301 which allows federal agencies to adopt certain "housekeeping rules." Those housekeeping rules govern how agency information is disclosed. The enabling act provides that the head of an executive department can adopt regulations regarding the conduct of employees and the use of department papers and property.
Section 301 allows every federal agency to regulate disclosures of information by employees. For example, the Bureau of Alcohol, Tobacco & Firearms has a regulation that gives the head of that agency sole authority to determine whether records or testimony may be obtained from employees. See 27 C.F.R. § 71.1. Courts reviewing such regulations have said that federal agencies can order employees to disregard subpoenas. For example, in Tholen Supply Company v. Continental Casualty Company, 859 F. Supp. 467 (D. Kan. 1994), the court said that a party who was pursuing a fire insurance claim could not compel agents of the Bureau of Alcohol, Tobacco & Firearms to appear for depositions. While the plaintiff could subpoena the Director of ATF, the actual investigators could not be questioned. Thus, counsel who had intended to rely on the facts developed by these investigators would have to find other means to establish the case.
These statutory restrictions on public officials highlight the fact that exclusive reliance on their testimony is risky. Just because a public official is providing information and assisting you does not mean that that official will be your witness. This is especially true if the official belongs to an agency whose policy concerning testimony is restrictive.
As the parties proceed with their investigations, there is always a danger that valuable evidence will be lost, damaged or stolen. Therefore, at an early stage in the investigation, all participants should enter into an agreement which will protect evidence, maintain the status quo, and give the parties equal access to evidence.
To accomplish this, you should enter into an agreement which will allow interested parties to participate in the investigation and discuss critical evidentiary issues as they arise. In such an agreement, all parties agree that no one will unilaterally remove, test or destroy any physical evidence. They also agree that all requests to remove evidence will be directed to one individual to coordinate evidence retrieval. Finally, the agreement should provide for testing protocols, payment of testing costs, and payment of any storage fees. Sometimes it may not be possible to get an agreement from all parties. In those situations, you may need to unilaterally seek judicial relief and obtain a TRO to enjoin all parties from removing, destroying or testing any physical evidence. Since this is a drastic form of relief, it is used in those rare instances where the parties either cannot reach an agreement on evidence preservation or when delay will prejudice a party's rights.
Conclusion
Representing a client who has experienced a catastrophic property damage incident is a true test of counsel's imagination and creativity. In most instances, the objective is clear, but the course is uncharted. No one has yet written the "Cookbook" for this situation and it is unlikely that there will ever be such a treatise. However, skilled counsel will use the tools available, apply a common sense approach, and will not be hesitant to innovate. If counsel follows this recipe, he or she will find that catastrophic property damage claims are challenging but manageable events.
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