PROVING GROSS TO OVERCOME LIMITATIONS OF LIABILITY

written by: Scott D. Nader, Esq. COZEN O’CONNOR 2300 BankOne Center 1717 Main Street Dallas, TX 75201-7335 (214) 462-3000 (800) 448-1207 [email protected]

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*Affiliated with Law Offices of J. Goldberg & D. Grossman. These materials are intended to generally educate the participants on current legal issues. They are not intended to provide legal advice. Accordingly, these materials should not be relied upon without seeking specific legal advice on matters discussed herein.

Copyright © 2002 Cozen O’Connor. ALL RIGHTS RESERVED. PROVING GROSS NEGLIGENCE TO insureds do not negotiate these tariffs, they OVERCOME LIMITATIONS OF LIABILITY may nevertheless limit the liability of potentially responsible parties. SCOTT D. NADER Gross Negligence Exception In today’s business climate, limitation of liability clauses abound. In Many jurisdictions will enforce these making purchases or ordering services, the limitations of liability clauses unless the chances are good that you have agreed to party at fault is grossly negligent. In these limit someone’s liability in a transaction. Of cases, protecting the public from egregious course, when something goes wrong these misconduct is deemed more important than seemingly innocuous -- or camouflaged -- protecting the parties’ right to clauses can come back to haunt us. This is freely. especially true in the subrogation and recovery field. Many of us have The problem is that many encountered claims with waivers of jurisdictions define gross negligence subrogation or other limitation of liability differently. Thus, when attempting to prove clauses which can enable the responsible gross negligence to avoid limitations of party to evade liability. liability, you must know the legal standard. These standards are occasionally set forth in Common Limitation of Liability Clauses statutes, but most are created by case law.

Limitation of liability clauses are Defining Gross Negligence common in transactions involving the sale of goods. The fine print at the bottom (or Along the spectrum of bad acts, back) of the invoice/receipt often contains gross negligence falls somewhere between language limiting the injured buyer’s ordinary negligence and intentional . remedy to the cost of the goods. Where ordinary negligence is generally defined as the failure to use ordinary care, Service also may contain intentional torts (such as or ) limitation of liability clauses. Alarm require proof of a subjective intent to do monitoring contracts, for example, typically harm. contain language limiting the monitoring company’s liability to a nominal sum. Between failing to use ordinary care and actually intending to do harm is the Many leases or contracts between person who knows that an act is substantially sophisticated entities contain waiver of certain to cause harm, yet proceeds to act subrogation clauses. The construction anyway. In most jurisdictions, this is gross industry, for example, frequently uses negligence. It requires an objective inquiry standard AIA forms containing these into the degree of risk and a subjective waivers. inquiry into the actor’s real or supposed state of mind. In addition, many jurisdictions have statutes, or tariffs, limiting the liability of Many jurisdictions lump “gross public utilities for a service interruption or negligence” together with “willful,” power surges/spikes. Although your “wanton,” and “reckless” conduct. These

2 jurisdictions do not distinguish between the One final concern is that successfully level of the actor’s knowledge and treat each pleading and proving gross negligence may as an aggravated form of negligence, effectively remove part of the claim from differing in quality -- rather than degree -- liability insurance coverage. Most from ordinary negligence. This approach Comprehensive General Liability policies can create proof and coverage issues for the provide coverage for bodily injury or subrogating attorney or adjuster. property damage caused by an “occurrence.” An occurrence is generally defined as: Proof Issues an accident, including continuous or How does one prove grossly repeated exposure to conditions negligent conduct? Because the subjective which results in bodily injury or element is rarely admitted, it must usually be property damage neither expected proven by circumstantial . nor intended from the standpoint of Violating a code, ordinance or statute is the insured. generally not sufficient evidence of culpability to distinguish it from ordinary COUCH ON INSURANCE 3d, §201:18 (West negligence. Neither is simply proving a 1999). Under these policies, coverage may defective design or failure to maintain be excluded for the insured’s intentional equipment. Most courts distinguish gross acts. negligence from mere thoughtlessness, inadvertence or errors in judgment. The problem for the subrogating Inattention will not prove grossly negligent insurer or recovery representative is that conduct, nor will mistakes due to proof of gross negligence often requires inexperience, excitement or confusion. proof of the defendant’s subjective mental state. In jurisdictions without a nuanced Objectively, the tortfeasor’s conduct definition of gross negligence, any must involve an extreme degree of risk. negligence so gross as to amount to a This is essentially a visceral value judgment, willful, deliberate and intentional wrong and may be shown using relevant guidelines, could trigger a denial of coverage. codes or other standards of care. The objective prong is generally easier to prove Conclusion than the tortfeasor’s mental state. The subrogation professional may be The plaintiff must prove actual able to plead and prove gross negligence to knowledge of the likelihood of harm from overcome contractual limitations of liability. the defendant’s conduct. In practice, this is Care must be taken, however, to ensure that very difficult and one’s success often the evidence presented does not eclipse the depends upon the quality of the objective liability policy providing indemnification to proof. The actor’s knowledge must relate the target defendant. Knowing the both to the seriousness of the risk created, as jurisdiction’s definition and interpretation of well as the relative ease with which the risk gross negligence will help in addressing could be reduced or eliminated. these issues.

Coverage Issues

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