This article is a companion piece to this video

What happens when heavy equipment gets damaged in the course of a rental contract? Who is on the hook for the damages caused? This is a common dilemma encountered in the legal realm of subrogation, but like most things in this field of insurance law, there is no one clear answer. In the above episode of On Subrogation: Damage to Rental Equipment, Jason Sullivan discusses two types of cause that may arise in these situations.

Big Equipment, Big Costs: Subrogation for Damaged Rental Equipment

Property subrogation becomes more complex when you add in a rental agreement, because now you are dealing with non-owned property. Heavy equipment – anything from a bobcat to an industrial crane – is expensive, and damage to a single piece can cause hundreds of thousands of dollars. As a carrier, paying out those claims without attempting to pursue subrogation recovery at every opportunity results in hemorrhaging that hurts your bottom line, customer service, and viability in the marketplace.

When investigating the subrogation potential of loss caused by an incident that occurred during the course of an equipment lease, there are two avenues to explore:

1. Mutual Bailment

In insurance, bailment is a legal framework that defines borrowing relationships. Bailment is where the owner of a piece of property (bailor) gives possession of said property to another party (bailee) without transferring ownership. There are three types of bailment, which you can find an in-depth discussion on in another episode: On Subrogation: Bailment.

In the context of a rental agreement, mutual bailment applies, which is where the relationship benefits both the bailor (equipment rental company) and the bailee (renting party). This means that when assessing liability for a loss, standard negligence applies: What would a reasonable person have done in the situation? 

If mutual bailment is the framework of your subrogation demand for the property damage to the equipment, subrogation management has a challenge ahead of them to prove exactly what happened to cause the incident, and further, that the main cause of the damage was negligence. Outsourcing difficult claims like these to a subrogation law firm is the best course of action to maximize recovery.

2. Breach of Contract

More often than not, you will have a rental agreement between the two parties that defines liability in case of damage to the rented equipment. Generally, these agreements put almost-to-all of the liability on the renting party regardless of why or how the property was damaged in the course of the lease. 

However, there may also be a loss damage waiver, which the renter pays for. A loss damage waiver is an agreement that the rental company will pay the damages if the equipment is returned damaged. Unfortunately or fortunately for the party pursuing subrogation recovery, rental agreements make the viability of a potential claim easier to evaluate in these situations.

Applying Subrogation Theory to the Reality of Rental Liability

Jason posits an example to provide subrogation professionals a jumping off point when they encounter these types of claims. Say someone rented a bobcat to move lumber and ended up accidentally driving it into a pond, functionally destroying it. As the rental company seeking recovery for the loss of a $50000+ piece of equipment?

First, look at the two prongs discussed:

1. Bailment: Was the incident caused by operator negligence? For instance, was the operator certified, in good state of mind, and followed proper safety protocol?

2. Breach: Is the renter clearly liable for damage via contract language? If there was a waiver, there may exist a limit on the rental company’s liability that they can pursue the renter for.

Then, consider the logistical reality of the situation:

1. Look for what insurance coverage the renter has that may cover damage liability. Is there a carrier to pursue? Normal business policies often do not cover non-owned equipment.

2. If there is no insurance, then look to pursue the renter directly. Do they have assets to pursue? Is there a long-term relationship between the two parties that will be damaged by an insurance dispute?

These questions will help a lawyer managing this type of property subrogation case to determine the viability of a claim and achieving recovery that was worth the cost of pursuit.Rathbone Group is committed to providing free educational resources for professionals in the subrogation insurance industry. If you would like to learn more about subrogation topics, process and theory, check out our YouTube channel and podcast library for more On Subrogation. If you have a question or suggestion for a new subject we haven’t yet covered, reach out at [email protected] or [email protected] to see it featured in a future episode.