RISK MANAGEMENT:
WHAT IS THE EXPOSURE?
UNDERSTANDING DAMAGES
by
Marc S. Blubaugh
Benesch, Friedlander, Coplan, & Aronoff LLP
AGENDA
• What Types of Damages Might Be
Recoverable?
• What Can Be Done To Protect
Against Those Risks?
• What Remedies Exist Against Insurer?
TYPES OF DAMAGES
• The type of damages turn on the
type of claim being asserted:
• Breach of Contract (Expectation)
• Tort (Foreseeable / Punitive)
• Statutory (Defined)
Breach of Contract
• Contract damages are ordinarily based
upon the injured party’s “expectation
interest”
• The damages are intended to give a
party the benefit of its bargain by
awarding a sum of money that will, to the
extent possible, put that party in as good
a position as the party would have been
in had the contract been performed.
• Expectation interest damages can be
either “direct” damages or “indirect”
damages.
Direct Damages
• “Direct damages” are those that
flow naturally and necessarily from
the breach.
• Example: Out-of-pocket expenses,
amounts necessary to “cover” for
the breach, etc. (repairs, substitute
goods, expedited delivery)
Indirect Damages
• “Indirect” or “Consequential damages” are
those which result naturally, but not necessarily,
from the breach
• Example: Lost Profits, Lost Customers,
Contractual Penalties Imposed by Third Parties
• Hadley v. Baxendale (156 Eng. Rep. 145) (1854)
(only recoverable if foreseeable / within
reasonable contemplation of parties)
• BUT -- no bright line exists between what
constitutes a direct damage and what
constitutes an indirect damage (i.e., not all lost
profits, lost revenue, etc. are necessarily
“indirect” damages).
LOST PROFITS -- EXAMPLE
• A manufacturer issues an RFP to identify a new
3PL to provide warehousing and transportation
brokerage services
• The manufacturer selects the 3PL and the parties
sign a contract containing a waiver of
consequential damages “including lost profits.”
• 3PL prepares to begin providing services
• Manufacturer issues notice stating that it has
reconsidered decision to outsource and will start
providing the services in-house through no fault
of the 3PL who won the bid
Conventional “Direct Damages”
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Undertook significant recruitment efforts including, but not limited to,
advertising for employment candidates, participating in job fairs,
reviewing resumes, conducting first and second interviews of multiple
candidates in order to fill the various hourly and salaried positions
necessary to support the Agreement;
Designed an operational layout for the facility and necessary equipment;
Negotiated at length with suppliers for equipment and other necessary
supplies;
Designed all administrative support functions necessary for
implementation of the Agreement, including appropriate forms,
standards, and information collection methods;
Spent considerable resources internally (and with outside counsel)
reviewing and negotiating the Agreement
Set-up and tested a new information technology system;
Prepared for internal and external weekly start-up status meetings;
Extensive, internal planning to support implementation of the Agreement;
Extensive, external planning to support implementation of the
Agreement; and
Secured various, required financial arrangements necessary to
implement the Agreement.
LOST PROFITS – DIRECT OR INDIRECT?
• 3PL spent roughly $160,000 out-of-pocket
• BUT lost profits would arguably be $2,000,000
• Manufacturer claims that lost profits are not
recoverable due to the waiver of consequential
damages
• 3PL argues these lost profits are in fact “direct”
damages (i.e., the damages arose within the
scope of the transaction between the two
parties to the contract and did not stem from
losses incurred by the non-breaching party in its
dealings with third parties).
• Relied on a variety of authorities:
Spinal Concepts, Inc. v. Curasan, AG,
2006 WL 2577820 (N.D. Tex. 2006)
• A manufacturer of a surgical product entered into a five-year
agreement with a distributor for the distributor to market, sell, and
distribute the medical product for use in spinal surgeries
throughout the United States.
• However, the distributor then breached the distributorship
agreement by failing to purchase the surgical product in
question. The parties proceeded to arbitration, where the
arbitrator awarded $2,000,000.00 in lost profits to the
manufacturer.
• On appeal, the breaching party argued, among other things,
that the manufacturer was not entitled to recover these lost
profits because the distributorship agreement contained a
waiver of consequential damages, which read:
• . . . in no event shall either party hereto be liable to the other
party for costs of procurement of substitute goods, lost profits, or
any other special, consequential, incidental, or indirect
damages.
However, the court soundly rejected that
analysis:
“On its face, the limitation of liability provision
unambiguously prohibits recovery of any special,
consequential, incidental, or indirect damages, including
procurement of substitute goods or lost profits. In other
words, it states that to the extent that lost profits are
considered direct damages and not special,
consequential, incidental, or indirect damages, they are
excepted from this provision. To interpret the Agreement
otherwise would defy logic. Both Parties entered into this
Agreement with the intention of making a profit—it is
unreasonable to believe that they would agree to forego
lost profits directly arising from the other party’s breach of
the Agreement, as [the breaching party] suggests.”
CASE SETTLED
PRACTICAL POINTS
• Carefully evaluate types of contractual
damages theoretically available when
claims arise (consider all types of direct
and indirect damages)
• Good contracts can chill tenuous claims
• Draft clear waivers of Consequential
Damages (including illustrations of the
types of damages encompassed within):
EXAMPLE OF WAIVER
• UNDER NO CIRCUMSTANCES SHALL EITHER PARTY
BE LIABLE TO THE OTHER PARTY OR ANY THIRD
PARTY FOR ANY INCIDENTAL, CONSEQUENTIAL,
SPECIAL, OR INDIRECT DAMAGES OF ANY KIND
(INCLUDING,
WITHOUT
LIMITATION,
LOST
REVENUE, LOST PROFITS, OR OTHER LOST INCOME
OR COMMERCIAL LOSS) RELATING TO OR
ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT OR THE SERVICES, WHETHER BASED
IN OR ARISING UNDER CONTRACT, WARRANTY,
INDEMNITY, TORT (INCLUDING NEGLIGENCE AND
STRICT LIABILITY), STATUTE OR OTHERWISE.
TORT CLAIMS
• Tort claims are often used to
circumvent contractual limitations
• Consider whether “Economic Loss
Doctrine” applies to eliminate a tort
claim when based on same facts as
a contract claim
ECONOMIC LOSS DOCTRINE
• Where a contract spells out the parties’
respective rights, the contract and not
common-law negligence governs any
dispute
• When the only injury is the economic loss
to the subject of a contract itself, the
action sounds in contract alone
• Exception exists when duty is owed
independent of any contract
EXAMPLE
• Applies: Breach of a Distributor
Agreement (because most states do not
impose duties independent of contract
upon distributors of general commodities)
• Does Not Apply: Breach of a Motor
Carrier Agreement (because duties exist
independent of contract)
What Are Damages in a Tort Claim?
• Compensatory damages are limited to
those injuries or losses which are the
natural, proximate, and probable (i.e.,
foreseeable) consequences of the wrong
allegedly committed
• Punitive Damages generally arise from
malice and are intended to punish to
some extent
How Do These Differ From Contract
Damages?
• Punitives not available for contract
• Waiver of Consequential Damages
is not always effective to limit claims
arising in tort
• Distinction is not between direct and
indirect damages but between
reasonable/probable damages and
remote/speculative damages
EXAMPLES
• Other’s Truck collides with your truck
• Possible range of tort damages:
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Repair to truck
Towing of Truck
Storage of Truck
Actual damages to freight on board
Lost Profit associated with Truck
Lost Profit associated with Driver
Increased premiums for insurance
Increase in workers’ compensation premiums
Deductibles
Michigan Millers Mut. Ins. Co. v. Christian
(2003), 153 Ohio App.3d 299
• Traffic accident between two
commercial motor vehicles (sprayer and
dumptruck)
• Sprayer’s insurer subrogated and sued
owner of dumptruck in tort for a variety of
damages, including lost profits
• Trial Court awarded lost profits
• Defendant appealed on basis that “lost
profits do not reflect the measure of
damages for a motor vehicle collision”
COURT’S HOLDING
• "[a] plaintiff may recover profits lost as a result of a
defendant's tortious conduct if such damages may
naturally be expected to follow from the wrongful act and
if the damages are reasonably ascertainable.“
• Accordingly, lost profits resulting from an motor vehicle
accident “caused by another's negligence are certainly
cognizable damages.”
• “[l]ost profits may be established with reasonable certainty
either directly or through an expert witness. Proof with
mathematical precision is not required, nor need the proof
be clear and irrefutable, but profit loss cannot be left to
mere conjecture and must be capable of measurement
based upon known reliable factors without undue
speculation. “
PRACTICAL POINTS
• Try to waive certain tort remedies (such as
punitive damages) in any applicable
contract
• Try to secure indemnification from other
parties for claims “arising out of” services
they provide
• Purchase your own insurance to address
third-party tort claims
• Become an “Additional Insured” on
another’s policy where appropriate
STATUTORY CLAIMS
• Statutory claims are often used to circumvent
contractual limitations
• EXAMPLES: Carmack Amendment, COGSA,
Deceptive Trade Practices
• Measure of Damages:
Varied and Defined by Statute (compensatory,
double damages, treble damages, undefined
punitive, disgorgement, attorneys’ fees, etc.)
EXAMPLE
Carmack Amendment
• Most courts agree that the Carmack
Amendment preserved the common law
rule that special damages could be
recoverable if foreseeable.
• But that does not usually answer the
question. Paper Magic Group, Inc. v. J.B.
Hunt Transport, Inc., 318 F.3d 458 (3rd Cir.
2003) (holding that diminution in value of
delayed Christmas cards was a general
rather than special damage).
PRACTICAL POINTS
• Understand how certain statutory
remedies can be waived (i.e., 49 U.S.C.
14101(b)(1) waiver) and draft contracts
accordingly
• Become “Additional Insured” where
appropriate
• Don’t unduly rely upon Certificates of
Insurance (keep in mind exclusions, etc.)
• Purchase insurance products that may
protect against statutory claims
EXAMPLE -- Broker Insurance Products
How to Protect Against Claims
• Shipper’s Interest / All Risk:
• Encourage your customer to purchase this (or
you purchase it on behalf of your customer)
• Shipper is the insured
• Narrower exclusions (i.e., no exclusion for Act
of God but may have exclusion for nuclear
damage)
• First Party / Dollar coverage (no need to wait
for “other insurance” to pay first)
EXAMPLE -- Broker Insurance Products
How to Protect Against Claims
• Contingent Cargo:
• Broker is insured
• Many different types (some “follow form”,
some only apply when insurer insolvent, some
only apply if trucker’s policy was forged or
voided, some only pay expenses of handling
or storing damaged cargo, etc.)
• Ideally, broker wants a policy that covers any
loss if trucking company and its insurer fails to
pay a claim
EXAMPLE -- Broker Insurance Products
How to Protect Against Claims
• Contingent Auto:
• Schramm (negligent selection)
• Jones (negligent selection)
• Sperl (vicarious liability / control)
• Heyl (negligent selection)
• Hoffman (joint venture)
EXAMPLE -- Broker Insurance Products
How to Protect Against Claims
• Errors & Omissions
• Protects against failure to perform professional
services
• Examples: Failing to follow shipper’s
instructions, internal delay, negligent selection
(maybe), incorrect document preparation,
failure to insure, etc.
• Some policies are purely indemnity (reimburse
but won’t front attorneys’ fees, costs, claims
expenses, etc.)
OTHER INSURANCE PRODUCTS
TO CONSIDER
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Crime Policies
Pollution Policies
Fiduciary Liability Policies
Warehouse Legal Liability Policies
Commercial General Liability Policies
Directors and Officers’ Liability Policies
Employment Practices Liability Policies
Umbrella / Excess Policies
THINK ABOUT ENDORSEMENTS
What Remedies Exist
Against A Third-Party Insurer?
• Strategies Regarding a Third Party’s
Insurer (i.e., Motor Truck Cargo)
• Obtain an assignment of claim from
actual claimant if necessary
• Obtain a judgment against a motor
carrier
• Cajole and reason – letters, calls, etc.
• Commence a Third-Party Direct Action
against Insurer (some states permit)
What Remedies Exist For Insured
Against An Insurer?
• Commence Timely Claims Process
• Provide timely notices internally and externally
• Use proper means to notify (provide details in
writing)
• Be cautious incurring expense without written
consent
• Avoid settling or compromising without
insurer’s consent
• Cooperate with insurer (provide statements,
background facts, etc.)
• Don’t forget the basics: Pay premium!
What Remedies Exist For Insured
Against An Insurer?
• Phone Call / Letter Writing Campaign
• Insurance Broker Leverage
• Business Leverage
• Outside Counsel Leverage
• Complaints to State Department of
Insurance (Usually Ineffectual)
• Ultimately, you may need to sue
• Declaratory Judgment (coverage)
• Breach of Contract (denials, delay)
• Bad Faith (denials, delay, wrongful settlement
resulting in increased premiums?)
THANK YOU
Marc S. Blubaugh
Benesch, Friedlander, Coplan & Aronoff LLP
41 S. High Street, Suite 2600
Columbus, Ohio 43215
Telephone: (614) 223-9382
Facsimile: (614) 223-9330
E-mail: mblubaugh@beneschlaw.com