How International Subrogation Can Mitigate an Insurer’s Loss
Some may be surprised to learn that the United States imports almost 50% of the products it sells or uses in manufacturing – everything from cell phones and computers to cars, machines, drugs, gems, pharmaceuticals, furniture and oil. US imports totaled $2.309 trillion in 2015 – or $7,240 for every American. The biggest exporters to the US? In order of most exports: Canada, China, Mexico and Japan.
Not all of these imported products prove to be 100 percent safe — many are defective and can result in user injury. In fact, almost 80% of all product recalls in the US are for products manufactured abroad.
What Happens When an Imported Product is Defective?
Often when someone is harmed by a defective product an insurance company will cover the victim’s losses. The insurance company will then turn around and seek reimbursement of payment from the manufacturer for the victim’s claim. The insurer puts itself in the place of the insured victim, thus subrogating the victim’s right to payments from the manufacturer. This is known as international subrogation.
International subrogation should not be overlooked by insurers as a source for recovering their own losses. Even when a loss is caused by an “Act of God,” insurers are wise to consider how third parties may have contributed to the resulting damages.
For example, LLS served dozens of third-party complaints upon the Chinese company who manufactured and sold toxic drywall to US home-builders from about 2004 – 2007. Many homes had been rebuilt following catastrophic hurricanes. Home-builders were sued when residents discovered the drywall was corrosive and toxic. Insurance companies paid to rebuild and then sought to recover their losses against the Chinese manufacturer and its German parent company.
When the manufacturer is located overseas, as in the case of the Chinese drywall company, what barriers does the insurer face in recovering its money?
Hurdles to Overcome in International Subrogation
The first action in subrogation can be traced back to the late 18th century. (Mason v. Sainsbury and Another (1782) 3 Doug. 61.) Since that time, three potential barriers to the successful subrogation of a claim against an overseas manufacturer presented themselves:
- Determining whether there is jurisdiction over the foreign defendant in a US court
- Determining whether a US judgment will be enforceable overseas
- Knowing who the foreign defendant is and how to serve it
Jurisdiction concerns in subrogation derive from two sources. First, from state law, where rules concerning jurisdiction vary tremendously. Second, from the US Supreme Court (SCOTUS), which has narrowed jurisdiction based on the stream-of-commerce doctrine.
In 2011, SCOTUS heard J. McIntyre Machinery v. Nicastro, 131 S. Ct. 2780, 564 US 1058, 180 L. Ed. 2d 765 (2011). This case concerned a worker who was trying to recover damages sustained while operating a machine manufactured in the United Kingdom by J. McIntyre Machinery. In a plurality decision, SCOTUS observed that a state’s stream-of-commerce jurisdiction was valid only when the manufacturer specifically targeted the state for sales of its products and not when the defendant “might have predicted that its goods will reach the forum State.”
When is a US Judgment Enforceable Overseas?
A number of factors determine whether a US judgment will be enforceable overseas. These factors include (but are not limited to):
- Whether jurisdiction and service of process are proper
- Whether judgment was based on the merits (i.e., not a default judgement), public policy (especially with respect to punitive damages), and reciprocity.
On the other hand, whether a subrogation judgment is enforceable upon an overseas manufacturer may not matter if the foreign manufacturer has substantial assets in the US. In that case, the litigant just executes on US assets.
Further, enforceability ceases to be an issue if a settlement is reached with the manufacturer. LLS has observed that, frequently, when a subrogation claim is properly filed and served on an overseas manufacturer, a settlement follows. Thus, filing an international subrogation claim has the potential to return millions of dollars to the insurer.
Service of Process Considerations
The home country of a manufacturer determines which method of service is proper. The Hague Service Convention governs service in Hague member countries. Litigants must follow the provisions of the Hague Convention to properly effect service.
Some Central and South American countries are members of yet a different treaty, the Inter-American Convention on Letters Rogatory and Additional Protocol. Adherence to the provisions of the Inter-American Convention is required if the litigant intends to enforce an ensuing US judgment abroad. If not, service may be effected pursuant to US rules only.
Finally, in countries party to neither the Hague Service Convention nor the Inter-American Convention, service by letter rogatory may be the only option. LLS has decades of experience with international service of process and will be happy to discuss your case with you in more detail. Please contact us at 800.755.5775 for further information.
The Bottom Line
For insurers, the bottom line is this: When an insurance company covers a loss, it is worthwhile to consider how a third-party manufacturer’s poorly-made product contributed to total damages. Even if the manufacturer is located overseas, the insurer’s loss may be mitigated by filing a subrogation action against the manufacturer.