Subrogation is the legal doctrine which allows one party, usually an insurance company, that pays a loss by its insured which was caused by a third party, to take over the rights of its insured against the third party and recover its claim payments. It wouldn’t make much sense if, after paying a first-party insurance claim that its insured was partly responsible for, an insurance company could sue its insured to get their money back. It would defeat the purpose of insurance. Preventing precisely that sort of inequitable scenario is the purpose of the anti-subrogation rule (ASR). Sometimes known as the “suing your own insured” defense, the ASR was originally developed based on the logical premise that because the carrier stands in the shoes of it’s insured, it would essentially be suing itself. Therefore, no right of subrogation can arise in favor of an insurance company against its own insured. Wager v. Providence Ins. Co., 150 U.S. 99 (1893); The John Russell, 68 F.2d 901 (2nd Cir. 1934); Sherwood Trucking, Inc. v. Carolina Cas. Ins. Co., 552 F.2d 568 (4th Cir. 1977); Peavey Co. v. M/V ANPA, 971 F.2d 1168 (5th Cir. 1992) (insured or additional assured); Prestige Cas. Co. v. Michigan Mut. Ins. Co., 99 F.3d 1340 (6th Cir. 1996).
Anti-Subrogation Rule Generally
The public policy behind the ASR is two-fold: (1) the insurer should not be able to pass its loss on to its own insured, avoiding coverage which the insured has paid for; and (2) the insurance company should not be placed in a situation where there is a potential conflict of interest. However, this seemingly simple concept has many tentacles and each state has developed their own body of law with regard to how and when the ASR will be applied, setting forth numerous exceptions and rules regarding its application. Understanding and being able to navigate around the ASR and its exceptions remains a key skill necessary for an effective subrogation program. The ASR in each state is established either by case law or by statute.
The application of the ASR can depend heavily on the facts of the case, the status and legal identity of each of the parties involved, and the terms, conditions, or exclusions of the insurance policy involved and any other written or oral agreements which may be involved. The identity of the insured as a co-insured, an additional insured, an indemnitor, an implied co-insured, or as a person or entity having some kind of a relationship with or duty to the insured, may play a role in determining whether the ASR is to be applied in a particular case. The ASR may prohibit subrogation against an entity which is considered to be an “additional insured” or “co-insured”, either by terms of the insurance policy, case law, or by statute. It may involve a situation where a separate agreement requires the insured to carry insurance for the benefit of a third party. The application of the ASR is complicated, but the result is simple: the carrier either can or cannot seek recovery of its claim payments from an insured.
Paramount in the understanding of any ASR situation is the legal status of the tortfeasor. A parent corporation, subsidiary, affiliate, or partner of an insured might be considered a close enough relationship to prohibit subrogation by application of the ASR defense. It varies by state. The ASR prohibits actions by an insurer against its insured for recovery of a claim payment under the policy, but will sometimes not prohibit an insurance company’s claim for reimbursement from the insured after the insured recovers from a third party who happens to also be insured by the same insurer. In states which do not prohibit subrogation under these circumstances, public policy does not prohibit reimbursement where the tortfeasor is insured under a separate policy.
Economic Waste Doctrine
In some jurisdictions, the ASR is considered “to protect against the same risk of loss.” An example is Connecticut, where the Connecticut Supreme Court in a case where the landlord’s insurer tried to subrogate against a tenant has held that where a lease did “not remotely inform the defendant that they would be liable to their landlord’s insurer” for fire damages to the landlord’s building, nor did it inform the defendant of the need to obtain fire insurance “to cover the value of the entire multi-unit apartment building”, the tenant would be considered to be an “implied co-insured” and could not be subrogated against due to the ASR. One of the reasons for establishing this “default” rule was to avoid the economic waste of forcing each individual tenant in a multi-unit apartment to insure the whole building.
Implied Co-Insured Doctrine
The ability of a landlord’s property insurer to subrogate against a tenant for property damage caused by the negligence of the tenant depends on which state the loss occurs in and the nature and language of the lease involved. There are generally three different approaches:
(1) A minority of courts hold that, absent a clear contractual expression to the contrary, the insurance carrier will be permitted to sue a tenant in subrogation.
(2) Seeking to avoid a per se rule, in some states the ability to subrogate must be assessed on a case-by-case basis and governed by the intent and reasonable expectations of the parties under the terms of the lease and the facts of case.
(3) Known as the “Sutton Rule”, some states hold that, absent a clearly expressed agreement to the contrary, the tenant is presumed to be a co-insured on the landlord’s insurance policy and, therefore, the landlord’s insurance carrier has no right of subrogation against the negligent tenant.
The rule of subrogation known as the “Sutton Rule” states that a tenant and landlord are automatically considered “co-insureds” under a fire insurance policy as a matter of law and, therefore, the insurer of the landlord who pays for the fire damage caused by the negligence of a tenant may not sue the tenant in subrogation because it would be tantamount to suing its own insured. The subject of when and under what circumstances a landlord’s property insurer can subrogate against a tenant is not covered in this chart, but is covered thoroughly in another chart that can be found HERE.
Origins of the Anti-Subrogation Rule
The origins of common law subrogation lie in equity – the body of law which was developed in the English Court of Chancery that traditionally supplemented the common law where the application of the common law would have operated too harshly. This was done to achieve what is sometimes referred to as natural justice, or more simply speaking, fairness. Subrogation seeks to impose the ultimate responsibility for a wrong or loss on the party who, in equity and good conscience, ought to bear it. The equitable considerations that are the underpinnings of subrogation are (1) that the insured should not recover twice for a single injury, and (2) that the insurer should be reimbursed for payments it made that, in fairness, should be borne by the wrongdoer. Powell v. Blue Cross & Blue Shield of Alabama, 581 So.2d 772, 774 (Ala. 1990), overruled on other grounds by Ex parte State Farm Fire & Cas. Co., 764 So.2d 543 (Ala. 2000); see also Aetna & Cas. Sur. Co. v. Turner, 662 So.2d 237 (Ala. 1995); Star Freight, Inc. v. Sheffield, 587 So.2d 946 (Ala. 1991). The same equitable principles which gave birth to subrogation were eventually developed into a rule which prohibits an insurer from asserting a right of subrogation against its own insured if the defendant is the insured, a co-insured, or an additional insured under the subrogating insurer’s policy. Allowing subrogation in these cases would compromise the special relationship between the insured and the insurer.
Purpose and Application of the Anti-Subrogation Rule
There are five (5) fundamental reasons for the ASR:
(1) An insurer who seeks subrogation stands in the shoes of the insured and can take nothing by subrogation but the rights of the insured. Because a person cannot sue himself for damages, that person’s insurer, who stands in the person’s shoes for subrogation purposes, cannot sue the person either.
(2) Public policy. An insurer that has accepted premiums to cover certain risks should not be allowed to pass the same risks back to its insured in a subrogation action. Otherwise, the insurer would be allowed to avoid the coverage that the insured has purchased.
(3) The relationship between an insurer and its insured are fraught with conflicting interests.
(4) There is a possibility that, if insurers were permitted to sue their insureds for subrogation, the insurers would be able to obtain information from their insureds under the guise of policy provisions for later use in a subrogation action.
(5) An insurer’s right to sue its insured could be interpreted by the insurer as a judicial sanction to breach the insurance policy. Stafford Metal Works, Inc. v. Cook Paint & Varnish Co., 418 F. Supp. 56 (N.D. Tex. 1976).
To permit the insurer to sue its own insured for a liability covered by the insurance policy would violate basic equity principles, as well as violate sound public policy. Such action, if permitted, would (1) allow the insurer to expend premiums collected from its insured to secure a judgment against the same insured on a risk insured against; (2) give judicial sanction to the breach of the insurance policy by the insurer; (3) permit the insurer to secure information from its insured under the guise of policy provisions available for later use in the insurer’s subrogation action against its own insured; (4) allow the insurer to take advantage of its conduct and conflict of interest with its insured; and (5) constitute judicial approval of a breach of the insurer’s relationship with its own insured. Home Insurance Company v. Pinski Brothers, 500 P.2d 945, 949 (Mont. 1972). The ASR, therefore, serves two purposes: (1) it prevents the insurer from passing the loss back to its insured, an act that would avoid the coverage that the insured had purchased; and (2) it guards against conflicts of interest that might affect the insurer’s incentive to provide a vigorous defense for its insured. N. Star Reinsurance Corp. v. Cont’l Ins. Co., 624 N.E.2d 647, 653-54 (N.Y. 1993).
Exceptions to the Anti-Subrogation Rule
As with almost any rule, the ASR has its exceptions. The application of the ASR usually prevents inequitable results in cases involving a single insurance policy. An insurer who has paid a loss to its insured under a policy should not be allowed to sue that insured or a co-insured under the same policy to recover that same loss.
Every state is different and some states have, over time, developed various exceptions to the application of the ASR. For example, if an insurer pays on behalf of one insured for damage caused by a second insured, under a policy that does not cover the second insured for the loss, the insurer might be allowed to subrogate against the second insured, an exception referred to as the “no-coverage exception.” Chubb Ins. Co. v. DeChambre, 808 N.E.2d 37 (Ill. App. 2004); Rosato v. Karl Koch Erecting Co., 865 F. Supp. 104 (E.D. N.Y. 1994). An insurer might also be able to subrogate for damage caused by a subcontractor’s negligence where the insured general contractor’s policy covered the subcontractor for property damage, but not liability. Employers’ Fire Ins. Co. v. Behunin, 275 F. Supp. 399 (D. Colo. 1967). Another exception is where an insured has impaired the subrogation rights of the insurer. The insurer may be able to proceed against the insured or payee under the policy without the ASR being an impediment. Maynard v. State Farm Mut. Auto. Ins. Co., 902 P.2d 1328 (Alaska 1995).
Texas has a rather well-developed body of ASR law. While it is well-settled in Texas that the ASR applies if multiple insureds are covered under the same policy, the situation is less certain when insureds are covered under multiple policies issued by the same insurer. In that instance, the application of the ASR varies by state. As an example, if an independent contractor negligently repairs equipment, resulting in damage to the equipment and the destruction of the premises where the equipment is located, and the owner of the premises and the independent contractor are both insured by the same insurance company, but under different policies, the insurer for the owner may still be able to pursue the independent contractor even though it is technically the insurer’s “insured.” Texas exceptions to the ASR include:
- When the risk is not covered by the insurance policy. State Farm Mut. Auto. Ins. Co. v. Perkins, 216 S.W.3d 396 (Tex. App. 2006).
- The insurance company has paid a third-party claim involuntarily, in good faith, and under a reasonable belief that the payment is necessary to its protection. Keck, Mahin & Cate v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 20 S.W.3d 692 (Tex. 2000).
- Subrogation action of an excess insurer against a primary insurer and defense counsel for mishandling claim. Am. Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex. 1992).
- Other circumstances that involve multiple insurers participating in the first property insurance policy and the defendants have multiple insurers on their CGL policy.
The ASR may be applicable in any case in which the tortfeasor has liability insurance with an insurer who is related to or the same as the subrogated carrier. The public policy underlying the ASR, the stated purposes for its application, and the exceptions to its application, must all be understood thoroughly in order to effectively subrogate and to avoid the elimination of subrogation in cases that it otherwise could have been avoided. Chinese walls can and should be erected to avoid the inadvertent sharing of information by an insurer at the expense of its insured. If an insurer is not the same, but they have some sort of corporate relationship, the ASR should be carefully scrutinized. If there is a large deductible, an excess insurer, or a large SIR involved, then some part of the subrogated claim may be barred by the ASR while other parts are not. Knowing which is which can make the difference between a large subrogation recovery and no recovery at all.
A 50-state chart which provides an overview of the ASR and sets forth the exceptions to and nuances of its application in each state can be found HERE.
Gary Wickert is an insurance trial lawyer and a partner with Matthiesen, Wickert & Lehrer, S.C., and is regarded as one of the world’s leading experts on insurance subrogation. He is the author of several subrogation books and legal treatises and is a national and international speaker and lecturer on subrogation and motivational topics. He can be reached at email@example.com.
Jacob Coz, co-author and summer legal intern at Matthiesen, Wickert & Lehrer, S.C.
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