Yasuda Fire & Marine Ins. v. Lake Shore Elec.

• Decision Date: 31 July 1990
• Docket Number: No. IP89-847-C.,IP89-847-C.
• Citation: 744 F. Supp. 864
• Parties: YASUDA FIRE & MARINE INSURANCE COMPANY OF AMERICA, Plaintiff, v. LAKE SHORE ELECTRIC CORP., and Westinghouse Electric Corp., Defendants.
• Court: U.S. District Court — Southern District of Indiana

744 F. Supp. 864

YASUDA FIRE & MARINE INSURANCE COMPANY OF AMERICA, Plaintiff, v. LAKE SHORE ELECTRIC CORP., and Westinghouse Electric Corp., Defendants.

No. IP89-847-C.

United States District Court, S.D. Indiana, Indianapolis Division.

July 31, 1990.

John M. Choplin, III, Norris Choplin & Johnson, Indianapolis, Ind., for plaintiff.

Richard E. Aikman, Jr., William N. Ivers, Stewart & Irwin, Indianapolis, Ind., for defendant Lake Shore Elec. Corp.

James R. Fisher, Ice Miller Donadio & Ryan, Indianapolis, Ind., for defendant Westinghouse Elec. Corp.

ORDER ON MOTIONS TO DISMISS

McKINNEY, District Judge.

This products liability action comes before the Court on the motions to dismiss filed by defendants Lake Shore Electric and Westinghouse Electric. The issues raised have been briefed and are ready for resolution. For the reasons set forth below, the Court DENIES the motion.

I. Factual and Procedural Background¹

Plaintiff Yasuda Fire & Marine Insurance filed this subrogation action in August of 1989, seeking to recover sums paid to its insured for property damage caused by the malfunction of an electrical device at a chicken farm. In its Amended Complaint, Yasuda charges that a "Trans-O-Matic" switch designed, manufactured, and sold by Lake Shore Electric, which contained "components" made by Westinghouse, malfunctioned and caused a loss of power to ventilation fans in a poultry house. Numerous chickens suffocated causing property damage to the insured.

Yasuda paid more than $70,000 to the insured for these losses, and in this action now seeks to recover from the defendants for selling "the switch and components in a defective condition unreasonably dangerous to Yasuda's insured...." Yasuda grounds its diversity action solely under the Indiana products liability statute.

Both defendants have moved to dismiss the action, raising three different arguments. First, defendants assert that Yasuda cannot recover because it lacks privity with them. Second, they argue that Yasuda is not a "user or consumer" under the Act. Finally, defendants contend that Yasuda has failed to allege the requisite personal injury or sudden property damage necessary for recovery under the Act. As is discussed below, none of these arguments carries the day at this juncture.

II. Discussion

A. Privity

Defendants argue that there is no privity between them and Yasuda. Relying on Citizens Gas & Coke Utility v. American Economy Insurance Co., 486 N.E.2d 998 (Ind.1985), they assert that without such privity, Yasuda cannot recover against them in this pure property damage claim.

It takes little analysis, however, to demonstrate that this argument is without merit. The Products Liability Act clearly and unambiguously dispenses with the privity requirement in Ind.Code § 33-1-1.5-3(b)(2), which provides that liability for defective products exists even though "the user or consumer has not bought the product from or entered into any contractual relation with the seller." This section obviously removes privity from the relevant inquiry in a products case.

Indeed, the Indiana Court of Appeals confirmed just last year that this provision of the Act means what it says. Specifically, in General Electric Co. v. Drake, 535 N.E.2d 156, 159 (Ind.App.1989), the court held that "I.C. 33-1-1.5-3(b)(2) obviates the need to show privity." The Drake court added that this section "does not admit of any other interpretation." Id. at 159.

Moreover, the Drake panel made clear that the Citizens Gas decision upon which defendants rely in this case is inapplicable to products actions brought under the current version of the Act. The Drake court's discussion is better quoted at length than paraphrased, and reads as follows:

We acknowledge that in Citizens Gas as here the sole issue ... was ... privity of contract.... There, however, resolution of the issue depended upon the common law and not the Product Liability Act because the plaintiff alleged, not a defective water heater, but the negligent installation of an otherwise sound water heater. The court in Citizens Gas therefore had no reason to consider the applicability of the Product Liability Act and did not do so.

We need not concern ourselves here with the applicability of Citizens Gas to a claim of negligence in the design, manufacture or sale of a defective product.... We note however that the Citizens Gas court reasoned, at least in part, from a line of cases involving defective products which ultimately evolved into Indiana's common law doctrine of strict product liability. While at one point in time, we might have been persuaded that the Citizens Gas rule extended to actions premised upon a strict liability theory, in 1983 the legislature made significant changes to the 1978 Product Liability Act, constricting the applicability of common law negligence rules. First, the General Assembly limited the coverage of the Act to actions in which the theory of liability was strict liability in tort, removing negligence and its concomitant interpretive case law from the purview of the Act. Second, the legislature deleted that portion of ... the Act which provided that the Act was a codification and restatement of the common law.

Drake, 535 N.E.2d at 158. (citations omitted).

Thus, lack of privity is no defense in an action such as this that is brought under the Products Liability Act.²

B. User or Consumer—"Bystanders" and The Effect of Subrogation:

Defendants next argue that Yasuda is not a "user or consumer" under the Act. In response, Yasuda asserts it is a "bystander" that is covered by the Act. As discussed below, defendants' argument fails, but primarily for reasons other than that advanced by Yasuda. The most important point is that, Yasuda, as the subrogee of the owner of the chicken farm that sustained the damage, is entitled to bring this action because it is subrogated to the rights of the actual user or consumer who would otherwise have the right to sue under the Act.

1. The statutory requirement that plaintiff be a user or consumer:

This analysis begins with the language of the statute itself. The Act imposes strict liability on anyone

who sells, leases, or otherwise puts into the stream of commerce any product in a defective condition unreasonably dangerous to any user or consumer or to his property ... if that user or consumer is in the class of persons that the seller should reasonably foresee as being subject as being subject to the harm caused by the defective condition....

Ind.Code § 33-1-1.5-3(a) (emphasis added). In the definitional section of the Act, the term "user or consumer" is defined as

a purchaser, any individual who uses or consumers the product, or any other person who, while acting for or on behalf of the injured party, was in possession and control of the product in question, or any bystander injured by the product who would reasonably be expected to be in the vicinity of the product during its reasonably expected use.

Ind.Code § 33-1-1.5-2.

Thus, in summarizing these two provisions, and without more, in order to recover under the Act the plaintiff must be:

(a) either a user, a consumer, an individual in possession and control of the product and acting on behalf of the injured party, or a bystander injured by the product who would reasonably be expected to be in the vicinity of the product; and

(b) in the class of persons that the seller should reasonably foresee as being subject to the harm caused by the defect.

Based on this, it is seen that the defendants raise a legitimate issue as to whether Yasuda can recover under the Act. This is so because Yasuda, which provided insurance for the user/consumer, was not a user or consumer itself, nor was it in possession or control of the product.

However, although not raised by the parties, the Court cannot ignore the common law of subrogation under which Yasuda filed this action in the first place. As discussed below, this doctrine allows Yasuda to stand in the shoes of the actual user or consumer and bring an action under the Act.

2. The effect of subrogation:

The doctrine of subrogation has been well established as a part of Indiana's common law for many years. The Indiana Supreme Court wrote in 1952 that "an insurer, who has paid a loss agreeable with its insurance contract, may be subrogated either by contract or by equity to the rights of the insured for the amount so paid, against the tort-feasor who caused the loss...." Powers v. Ellis, 231 Ind. 273, 108 N.E.2d 132, 135 (1952).

Indiana appellate courts have reaffirmed the existence and propriety of subrogation on many subsequent occasions. See, e.g., Cook v. American States Ins. Co., 150 Ind.App. 88, 275 N.E.2d 832, 840 (1971) ("insurance companies have a legal right to write subrogation agreements in their policies"); Mutual Hospital Ins., Inc. v. MacGregor, 174 Ind.App. 550, 368 N.E.2d 1376, 1379 (1977) ("Indiana courts recognize that insurance companies have a legal right to write subrogation agreements in their policies"). See also A. Windt, Insurance Claims and Disputes § 10.05 (1988) (discussing subrogation and noting that insurers are ordinarily entitled to subrogation on making a payment to or on behalf of the insured); 6A J. Appleman, Insurance Law and Practice § 4051 (1986) (same).

Under this well-entrenched doctrine, "When the insurer is claiming a right through subrogation it stands in the shoes of the insured...." Hockelberg v. Farm Bureau Ins. Co., 407 N.E.2d 1160, 1162 (Ind.App.1980). In short, subrogation is the "lawful substitution of a third party in place of a party having a claim against another party." Black's Law Dictionary 1279 (5th ed. 1979).

In light of this concept, one would expect that Yasuda, as the subrogee of the actual user of the product in question, should be entitled to stand in the shoes of the user and pursue any legal remedies, including a products liability action, that the user might have. Indeed, it seems...