Insurer loses $255,000 subrogation claim over modified excavator

AIG Insurance Company lost a $255,275 subrogation claim Tuesday on behalf of its insured, a forest management and logging company, because the insured could not prove a fire to an excavator it bought from Volvo didn’t start because of an equipment modification.

A manufacturer’s warranty at issue applied only if the 2016 Volvo excavator was used for the purpose it was intended, which was excavation work and not forestry work.

Quebec’s Superior Court heard that Mécano Mobile obtained the excavator from Strongco, the distributor and warranty service provider for goods sold by the excavator’s manufacturer, Volvo, and installed a special ‘boom’ or ‘arrow’ arm and a Kesla brand multifunctional head.

The modification allowed the digging shovel to become a piece of equipment used to cut trees at ground level, delimb them, and then cut them into sections according to the desired length.

Mécano then sold the modified excavator to Groupement Forestier Chaudière (GFC), a forestry management and logging company, through a GFC subcontractor. Volvo was not aware of the intent to modify the excavator for use as a piece of forestry equipment. Strongco knew of Mécano’s intent to modify the excavator, but did not tell Volvo.

GFC received the modified excavator on June 21, 2016. Between June 2016 when the excavator was delivered, and the date of the fire, Strongco carried out about 16 or 17 onsite warranty repairs. A fire destroyed the excavator on Jan. 25, 2018, and the digging shovel was a total loss.

AIG, which insured GFC, sued Mécano in a subrogation lawsuit. It claimed the fire was caused by a defect in the product sold. The court noted that a latent defect can be presumed, except in situations when the equipment is used for an unintended purpose.

“In the event of sale by a professional seller, the existence of a defect at the time of the sale is presumed, when the malfunction of the good or its deterioration occurs prematurely compared to identical goods or goods of the same species,” Quebec’s Superior Court ruled in a decision released Tuesday. “This presumption is rejected if the defect is due to improper use of the goods by the buyer.”

What ultimately sunk AIG’s subrogation claim was that the cause of the fire was undetermined. Multiple experts, including the insurer’s expert, opined on what might have caused the fire. AIG’s expert, which had access to the equipment right after the fire, concluded:

“Based on the information obtained, the circumstances, the location of the area of origin as well as the single trace of short circuit observed directly in the area of origin, we are of the opinion that the cause of the fire is likely related to a failure of the vehicle’s primary electrical system. This failure would be the result of mechanical wear of the protective sheath of the electrical wiring of the alternator. Poor routing, or direct or indirect damage during repairs, for example, could explain its wear.

“In conclusion, the most probable cause of this fire would be related to a failure of the vehicle’s intrinsic electrical system, namely the alternator power wiring.”

But after hearing other expert testimony, the court found it could not rule out the fact that the fire could have been caused by “either the presence of forest residues on the very hot surfaces of the machinery or the presence of flammable liquid. [Experts for the other parties] cannot rule out the presence of a short circuit, but consider it possible and not probable.”