December 29, 2014

Reviewed and updated by Barry Zalma, Esq., CFE

Summary: The subrogation provision is common in insurance policies. Essentially, subrogation is a means by which the insurer “steps into the shoes” of the insured, collecting from an entity responsible for a loss the money it has paid to an insured.

It has long been an insurance axiom that an insurer cannot subrogate against its own insured. However, there are instances where this practice has been allowed. How does the subrogation provision comport with a hold-harmless agreement? It is a common practice when two parties are involved in a project that each agrees to insure its own interest and waive any action it might have against the other party. Does the subrogation provision effect the hold-harmless agreement? Which takes precedence?

In the following article, we discuss these and other issues relating to subrogation, and review several legal opinions on the topic.

Topics covered:
Introduction
Essential elements
Subrogation in whose name?
Public policy and subrogation
No subrogation clause
Waiver of subrogation
Subrogation against own insured?
Who is entitled to any additional amount recovered?
Subrogation and Salvage Agreement and Assignment of Claim

Introduction

According to Black's Law Dictionary, Fifth Edition, “subrogation” is

[T]he substitution of one person in the place of another with reference to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other in relation to the debt of claim, and its rights, remedies, or securities…Insurance companies, guarantors and bonding companies generally have the right to step into the shoes of the party whom they compensate and sue any party whom the compensated party could have sued.

Subrogation is a way for equity to ultimately discharge the debt by one who ought to pay it and relieve one whom none but the creditor could ask to pay. (Couch on Insurance Third Edition § 222:24).

The equitable doctrine of subrogation places the subrogee in the precise position of the one whose rights are subrogated. Wimer v. Pennsylvania. Employees Benefit Trust Fund, 939 A.2d 843 (Pa. 2007); Chow ex. rel. Chow v. Rosen, 812 A.2d 587 (Pa. 2002); Pennsylvania Mfrs. Ass'n Ins. Co. v. Wolfe, 626 A.2d 522 (Pa. 1993); see also Paxton Nat. Ins. Co. v. Brickajlik, 522 A.2d 531 (Pa. 1987). Subrogation is the remedy called into existence for the purpose of enabling a party secondarily liable, but who has paid the debt, to reap the benefit of any securities the creditor may hold against the principal debtor, and by the use of which the party paying may thus be made whole. Ario v. Reliance Ins. Co., 980 A.2d 588 (Pa. 2009).

Texas law recognizes three sources of subrogation rights: equitable, contractual, and statutory. Fortis Benefits v. Cantu, 234 S.W.3d 642 (Tex. 2007).

In 1748, the House of Lords in England decided in Randall v. Cochran, where an insurer for an English ship that was taken by the Spanish was permitted to bring suit in the name of its insured against the administrators of a public prize fund, compiled by the British government from the sale of captured Spanish ships. The Lord Chancellor, quoted in an article by John J. O'Brien, said, “The plaintiffs had the plainest equity that could be. The person originally sustaining the loss was the owner; but after satisfaction made to him, the insurer … the assured stands as trustee for the insurer, in proportion for what he paid. ” (John J. O'Brien, J.D., CLU, CPCU, “The Origins of Subrogation,” Property/Casualty Insurance, January/February 2005.)

The earliest master of insurance law in England was Lord Mansfield, who addressed subrogation in a case called Mason v. Sainsbury in 1782. Rioters had ransacked Mason's house and his insurance company paid the claim. The Riot Act of 1714 provided a means to recover damages against the local administrative district. The insurance company pursued a recovery action against the administrator in the name of its insured.

Traditionally, an insurer that pays its insured's claim is entitled to recover the payment from the third party who caused the insured's covered loss. This concept is called subrogation and can arise by contract, statute, or equitable principle.

As early as 1888, the United States Supreme Court found that equitable subrogation was a well-recognized doctrine. Aetna Life Ins. Co. v. Town of Middleport, 124 U.S. 534 (1888).The Supreme Court stated the following historical rule:

The Equitable assignee of a chose in action has the right to go into a court of equity to have his interest therein established; and when so established he will have the right to complete relief in the same action by decree of specific performance of the contract.

Regardless, the Supreme Court found that the insurer acted as a volunteer and ruled against its right of subrogation.

The Court stated the basic rule of subrogation as follows:

Hence it has often been ruled that an insurer, who has paid a loss, may use the name of the assured in an action to obtain redress from the carrier whose failure of duty caused the loss. Hall & Long v. Railroad Companies, 13 Wall. 367, 369 … But it is equally well settled that the right, by way of subrogation, of an insurer, upon paying for a total loss of the goods insured, to recover over against the carrier, is only that right which the assured has, and that accordingly when a bill of lading provides that the carrier, when liable for the loss, shall have the full benefit of any insurance that may have been effected upon the goods, this provision is valid, as between the carrier and the shipper; and that, therefore, such provision limits the right of subrogation of the insurer, upon paying the shipper the loss, to recover over against the carrier. Phoenix Ins. Co. v. Erie & Western Transportation Co.,117 U.S. 312 (1886); Railway v. Commercial Union Insurance Co., 139 U.S. 223 (1891); Hodge v. Kirkpatrick Development, Inc., 130 Cal.App.4th 540, 548 (2005); Sapiano v. Williamsburg Nat. Ins. Co., 28 Cal. App.4th 533, 537-538 & fn. 1 (1994); Travelers Indem. Co. v. Ingebretsen 38 Cal.App.3d 858, 864.(1974).

Subrogation has its genesis in the principle of indemnity. Although an insured is entitled to indemnity from its insurer pursuant to coverage provided under a policy of insurance, the insured is entitled only to be made whole, not more than whole. Subrogation prevents an insured from obtaining one recovery from the insurer under its contractual obligations and a second recovery from the tortfeasor under general tort principles. The subrogation doctrine also advances an important policy rationale underlying the tort system. It forces a wrongdoer who has caused a loss to bear the burden of reimbursing the insurer for indemnity payments made to its insured as a result of the wrongdoer's acts and omissions.

Insurance policies often contain a contract condition allowing them to subrogate in the name of the insured adding to the contract terms the equitable remedy of subrogation.

Where the subrogation rights of insured and insurer are not addressed by the terms of the policy, the rules of equitable subrogation apply. In any event, an insurer can take only the rights of its insured and no more. In situations where recovery from a wrongdoer is insufficient to make the injured insured whole, equitable principles of subrogation apply. For example, an insured is a victim in an auto accident. The recovery amount from the wrongdoer is insufficient to make the injured insured whole. This prevents the insurer from asserting its rights to subrogation until the insured has been made whole, even though contractual language exists that is more favorable to the insurer than what would apply under the principles of equitable subrogation.

Conversely, some jurisdictions take the opposite view and state that where the insurer's right to subrogation is clearly stated in a policy, the policy language governs rather than the equitable rules of subrogation.

The “made-whole” rule is a common law exception to an insurer's subrogation right. Barnes v. Independent Auto. Dealers Ass'n of California Health and Welfare Benefit Plan, 64 F.3d 1389 (9th Cir. 1995). As applied in California, the rule generally precludes an insurer from recovering any third-party funds unless and until the insured has been made whole for the loss. The applicability of the doctrine generally depends on whether the insured has been completely compensated for all the elements of damages, not merely those for which the insurer has indemnified the insured. Chase v. National Indem. Co., 129 Cal. App.2d 853 (1954). In many jurisdictions, including California, courts hold that parties may avoid the made-whole exception by contract. California courts have recognized that the made-whole exception does not apply if the insurer participated in prosecuting the claim against the third party. Travelers Indem. Co. v. Ingebretsen, 38 Cal. App.3d 858 (1974); see Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App.4th 263 (2005). A separate and independent limitation on the subrogation and reimbursement right provides that an insurer's reimbursement from its insured is subject to the insurer bearing a pro rata portion of the insured's attorney fees and costs incurred to obtain the recovery from the third party. Progressive West, 135 Cal.App.4th (2005); Hartford Accident & Indemnity Co. v. Gropman ,163 Cal. App.3d Supp. 33 (1984).

Finally, there is statutory subrogation, which is a right created by statute. Often, this takes the shape of statutes governing the scope of the subrogation process. For example, the California's Insurance Code states, “The insurer paying a claim under an uninsured motorist endorsement or coverage shall be entitled to be subrogated to the rights of the insured to whom the claim was paid against any person legally liable for the injury or death to the extent that payment was made. The action may be brought within three years from the date that payment was made hereunder (West's Ann. Cal. Ins. Code § 11580.2(g)).” So, in West American Ins. Co. v. Chalk, 213 Cal. App. 3d 825 (1989), the court said the special period of limitations applicable solely to subrogation claims against uninsured motorists by insurers that had paid their insureds' claims took precedence over the statute of limitations applicable to any personal injury claims of the insureds. So, in this instance, the suit brought within three years against the tortfeasor was allowable, though a personal injury claim would have been limited by the one-year statute of limitations.

The New York standard fire insurance policy adopted in every state, including California, says, “This company may require from the insured an assignment of all right of recovery against any party for loss to the extent that payment therefor is made by this company.” California Insurance Code § 2071.

Subrogation may also be precluded by statute or by case law, as when a court determines that subrogation against an entity might violate public policy (see Public Policy and Subrogation).

Essential Elements

Certain elements are required before an insurer can be subrogated to its insured's claim against another party. These elements are as follows:

·Insured suffered a loss for which a third party is liable, either as the wrongdoer or because the defendant is legally responsible to the insured for the loss caused by the wrongdoer.

·Claimed loss must be one for which the third party, not the insurer, was primarily liable.

·Insurer has compensated the insured in whole or in part for the same loss for which the third party is liable.

·Insurer must have been obliged to make this payment in order to protect its own interest and not as a volunteer.

·Insured must have an existing cause of action against the third party that the insured could have asserted had it not been for the compensation for the loss by the insurer.

·The action must relate to the same loss for which the insurer paid the insured.

·Justice requires that the loss be entirely shifted from the insurer to the responsible third party.

Beyond these basic elements, there are three considerations needed in order to determine the dollar amount of recovery for the insurer.

·The amount of the insurer's payment is the limit on the insurer's recovery.

·Whether the insured is required to contribute to the costs of recovering the funds from the third party.

·Whether the insured is entitled to be made “whole” in the sense of recovering all damages suffered before the insurer is allowed to recover funds. (Couch on Insurance, Third Edition, §223:1).

Once these elements and considerations have been reviewed, the amount of subrogation recovery the insurer may recover can be determined.

An insurer can take nothing by subrogation but the rights of its insured and is subrogated to only such rights as the insured possesses. Orselet v. DeMatteo, 539 A.2d 95 (Conn. 1988).

Subrogation in Whose Name?

Although, as noted, the insurer “steps into the shoes of” the insured, the insurer can, by reason of a contractually required assignment, subrogate in its own name or to protect against anti-insurer prejudice, in the name of the insured. In Liberty Mut. Ins. Co. v. Clark, 299 S.E.2d 76 (Ga. App. 1983) an auto insurer paid its insured for personal injuries and property damage caused by an uninsured motorist in Georgia. The court stated that the statute that provided for an insurer paying a claim on a policy issued or delivered in Georgia to be subrogated to the rights of the insured did not give the right of subrogation to an insurer paying a claim on a policy issued or delivered outside the state. As a result the insurer did not have the statutory right of subrogation. However, the insurer did have another right of subrogation; in this case, conventional or contractual.

The insurer had brought suit in its own name and not that of its insured. In this instance, the court held that the subrogation agreement entitled the insurer to a right of recovery and not to the insured's right of action against the wrongdoer. Therefore, because suit against the wrongdoer had not been brought in the insured's name, the case was dismissed. The court pointed out (in a footnote) that “the insurer can nevertheless be the operative plaintiff, so long as the insured is the named plaintiff.”

Furthermore, the Nevada Supreme Court in Valley Power Co. v. Toiyabe Supply Co., 396 P.2d.137 (Nev. 1964), ruled that the insurer who has paid for the entire loss is subrogated as a matter of law to the rights its insured may have had against the defendant. Thus, in a case of total subrogation, the insurer is the sole party in interest and may assert a claim against those thought to be liable.

Reinforcement of this point was made in State Farm Mut. Auto Ins. Co. v. Cox, 515 S.E.2d 832 (Ga. 1999). In circumstances similar to Clark (except, this time, the policy was issued in Georgia), State Farm brought a subrogation action against Cox to recover uninsured motorists payments it had made to its insured, Jacobs. State Farm argued that the court had misinterpreted the statute in Clark and that it was entitled to bring suit in its own name. No, said the court, the statute was clear in that although an insurer had the right of subrogation, the statute did not authorize the insurer to bring suit in its own name. The court pointed out that no determination of the alleged tortfeasor's (Cox's) liability had been made. Adjudication of the insurer's suit would require resolution of Cox's liability, which would of necessity involve Jacobs, the insured. Therefore, State Farm could not recover. Of course, if State Farm had obtained an assignment of its insured's claim it could have filed in the insured's name as its assignee and would have avoided the problem. Most insurers have standard subrogation agreements or assignments of claim.

This is by no means a hard and fast rule, however. For example, an insurer bringing action against its own insured will do so in its own name. (For more on this topic, see Subrogation Against Own Insured?) But in the case of partial subrogation (that is, when both the insured and insurer retain an interest in the claim), there are two views: one being that a partially subrogated insurer is not the real party in interest. Opposing that the partially subrogated insurer is the real party in interest, some jurisdictions take the position that an insurer “which pays less than all of an insured's loss is not a real party in interest, and the right of action against a wrongdoer who caused the loss rests in the insured” (Couch on Insurance, Third Edition, § 241:36); that is, unless the insured has settled with the wrongdoer out of court and refuses to bring action or where there is no possibility of action. If the insured releases the tortfeasor to the detriment of the insurer the insured may be found in breach of the subrogation condition. For example, in California, the court of appeal in Liberty Mut. Ins. Co. v. Altfillisch Constr. Co., 70 Cal.App.3d 789 (1977), held that an insured was required to return to the insurer the money paid because it released the responsible party without permission and deprived the insurer of its right of subrogation. Similarly, in Stolaruk Corp. v. Central Nat. Ins. Co. of Omaha, 522 N.W.2d 670 (Mich. App. 1994), an insured was barred from recovery under an insurance policy if it extinguished the insurer's right of subrogation by releasing a tortfeasor. In addition, the Michigan Court of Appeal held, “As a general rule, an insured who deprives an insurer, by settlement and release, of its right of subrogation against a wrongdoer, thereby provides the insurer with a complete defense to an action on the policy.” Poynter v. Aetna Cas. & Sur. Co., 163 N.W.2d 716, (Mich. App. 1968), and 16 Couch On Insurance, 224:136.

In other jurisdictions the courts have stated that “in the case of partial indemnification, the insurer is entitled to bring an action against the tortfeasor in its own name and the insured cannot bring the action in his or her own name, nor is it required that suit be brought in the name of the insured for his or her own use and for the use of the insurer” (Couch on Insurance, Third Edition, § 241.35).

There may also be two parties in interest, as when an insurer satisfies its liability to the insured, but the insured sues and recovers the entire original loss, which may be much greater than the amount received from the insurer. In this case courts have said that “the insurer, by partial subrogation, owns that portion of the substantive right [that is, the amount it paid], and insured owns the remainder, so that there are two real parties in interest.” (See Poteet v. Sauter, 766 A.2d 150 (Md. App. 2001.)

To further complicate matters, in some jurisdictions it depends upon the given facts. For example, Oklahoma courts have said that “where an insured suffers a loss occasioned by the wrong of a third party and the insured stands fully compensated for the value of the loss by the insurer, the fully subrogated insurer as the real party in interest may bring an action in its own named to recover to the extent of its payment for the loss.” Courts have also said that “where the insured does not stand fully compensated for the value of the loss by insurer, Oklahoma decisions hold the insured, as a real party in interest, may properly bring an action in his own name and/or as trustee for the partially subrogated insurer.” The decisions also recognize that the insured and the subrogated insurer may join as co-plaintiffs in the same action against the defendant to recover for the entire loss. Muskogee Title Co. v. First Nat. Bank & Trust Co. of Muskogee, 894 P.2d 1148 (Okla. App. Div. 1 1995).

In Erie Ins. Co. v. George, 681 N.E.2d 183 (Ind. 1997), the court ruled that an auto insurer that had paid its insured's medical payments could not sue independently to enforce a personal injury claim absent an agreement with its insured. By bringing a separate subrogation suit against the tortfeasor, before the insured had resolved his suit against the tortfeasor, the insurer had “impermissibly split the insured's personal injury claim.” The court said that “one estoppel-like exception exists to rule that insurers take their insureds' rights as they find them: insurers can protect their subrogation rights by providing notice to tortfeasor or its insurer, after payment to insured, of right to subrogation or reimbursement; where debtor has notice of such right, subrogee's interest cannot be defeated by release negotiated with subrogor alone.” Had the insurer paid the entire loss and been assigned the right to pursue any and all causes of action, then, said the court, the insurer would have had the right to sue in its own name.

If one thing stands out, it is that whoever is engaged in carrying out a subrogation action must carefully check the subrogation agreement, any statute, or any case law that might proscribe the various parties' rights.

Public Policy and Subrogation

Although it is common practice for an insurer to “step into the shoes” of the insured and recoup the amount it paid to an insured, based on the presumption that the party responsible for causing the loss should be the one to pay for it, a court could decide that the party responsible for the loss should not be held liable as a matter of public policy. This was an issue the court wrestled with in Beacon Bowl, Inc. v. Wisconsin Electric Power Company, 501 N.W.2d 788 (Wis. 1993). Here, the insurers paid the insured, Beacon Bowl, for a fire at the bowling alley and brought action as subrogees against the electric utility and electrical wiring company. (The bowling alley caught fire when trees across the street from the alley contacted a feeder line, which in turn caused high voltage transients to be transmitted into the alley's electric distribution box. The extremely high voltage caused the insulation to fail, allowing for arcing and the ensuing fire.) The jury found that the power company was 85 percent negligent with respect to inspecting and trimming trees near power lines; the company that had installed electrical service to the alley was 10 percent negligent, and the city of New Berlin was 5 percent negligent in its inspection. The court awarded the insurer treble damages. (Note, this award would contravene the insurer “stepping into the insured's shoes” since the insured did not receive triple damages. This part of the ruling was overturned.)

The utility company appealed, contending that as a matter of public policy the insurer's complaint should be dismissed. The Wisconsin Supreme Court disagreed. The factors upon which liability could be denied as against public policy included the following: the injury was too remote from the negligence; the injury was too wholly out of proportion to the culpability of the negligent tortfeasor (in other words, the injury was so great it probably could not have been caused by the tortfeasor's negligence); in retrospect it appeared too highly extraordinary that the negligence should have brought about the harm; allowance of recovery would place too unreasonable a burden on the negligent tortfeasor; the allowance of recovery would be too likely to open the door for fraudulent claims; or allowance of recovery would enter a field that has no sensible or just stopping point. None of those reasons for dismissing the suit applied. The court found that the jury had correctly concluded that the electricity supplied by the utility had been a cause of the fire. However, concluded the court, the insurer was not entitled to triple damages.

Subrogation exists to ensure that the loss is ultimately placed upon the wrongdoer and to prevent the subrogor from being unjustly enriched through a double recovery, such as a recovery from the subrogated party and the liable third party. Paulson v. Allstate Ins. Co., 665 N.W.2d 744 (Wis. 2003).

No Subrogation Clause

The rationale behind denying equitable subrogation in the personal insurance context is that subrogation rights are common under policies of property and casualty insurance, wherein the insured sustains a fixed financial loss, and the purpose is to place that loss ultimately on the wrongdoer. To permit the insured in such instances to recover from both the insurer and the wrongdoer would permit him to profit unduly thereby. In personal insurance contracts, however, the exact loss is never capable of ascertainment. Life and death, health, physical well-being, and such matters are incapable of exact financial estimation. There are, accordingly, not the same reasons militating against a double recovery. The general rule is that the insurer is not subrogated to the insured's rights or to the beneficiary's rights under contracts of personal insurance, at least in the absence of a policy provision so providing.

Generally, the courts do not look with favor upon subrogation when the particular policy in question does not contain a subrogation clause, even though, as earlier noted, the doctrine of equitable (or legal) subrogation, which is not dependent upon the contract, would generally appear to apply. This was the situation in Shumpert v. Time Ins. Co., 496 S.E.2d 653 (S.C. App. 1998). Richard Shumpert purchased a health insurance policy from Time Insurance Company. He was seriously injured in an auto accident caused by another driver, and Time paid the medical bills. The Shumperts initiated a civil action against the at-fault driver, and their attorney received a letter from Time advising it had a right of subrogation. The Shumperts' attorney advised Time the Shumperts had reached a settlement with the at-fault driver but added he did not believe equitable subrogation applied in a health insurance context. The circuit court concluded that Time was entitled to equitable subrogation.

The appellate court disagreed and said that although the doctrine of equitable subrogation was invoked in property and casualty insurance, it was not universally applied to health insurance. Thus, absent a subrogation provision in the health insurance policy, the insurer was not entitled to a portion of the settlement. In reaching this conclusion, the court looked to Frost v. Porter Leasing Corp., 436 N.E.2d 387 (Mass. 1982). Here, the court noted that the “reason for implied subrogation in insurance contracts is to prevent an unwarranted windfall to the insured. Subrogation returns any excess to the insurer, which can then recycle it in the form of lower insurance costs.” But, added the Frost court, the right of implied subrogation did not arise automatically under any contract of insurance, saying, “If medical expenses are isolated from the other consequences of an accident, excess compensation of an insured accident victim may appear definite and quantifiable.” The courts in both Shumpert and Frost recognized that recovery for medical insurance and tort damages did not necessarily produce a windfall for the insured. Medical expenses could be accurately measured, but loss of wages, earning capacity, pain and suffering, and intangible losses could not, and thus equitable subrogation did not exist with respect to medical expense payments. (Note this decision is with respect to health insurance. Subrogation of medical expense payments as a part of auto insurance is a different matter.)

To entitle one to subrogation, his equity must be strong and his case clear, since it will not be enforced when the equities are equal, the rights are not clear, or where it will prejudice the legal or equitable rights of others. Puente v. Beneficial Mortg. Co. of Indiana
9 N.E.3d 208 (Ind. App. 2014).

An early case from New York dealt with a fire policy that contained no subrogation clause. Here, the insured had two fire policies covering, respectively, a truck and a trailer. Each had a lienholder. The insured did not pay the premium, and the insurer sent notice but neglected to send it to the lienholder. The insurer paid the remaining balance on the outstanding loan but did not pay anything to the policyholder. The lienholder assigned its rights to the insurer.

The insured then sued the insurer, claiming that the policy had been in force and he should have been paid as well as the lienholder for the interest he had in the truck and trailer. This was based on the provision that any loss would be paid to the insured and lienholder “as their interests might appear.” The insurer counterclaimed for the money it had expended on his behalf. (A discussion of suing one's own insured appears later in this article.) The court agreed with the insured that the policy's wording operated so that the debt to the lienholder was paid but that did not give the insurer the right to be reimbursed by its insured. The provision granting the insurer “from the assured an assignment of all right of recovery against any party for loss or damage” was an assignment of a claim against some third party responsible for the damage. It was not a subrogation clause. The court also considered the principle of equitable subrogation but said the insurer “satisfied its own obligation under a contract…. As to the equities of the situation, it was the insurer's own delinquency in failing to notify the vendor of the vendee's failure to pay the premium that was the proximate cause of the insurer's difficulties.” Fields v. Western Mut. Fire Ins. Co., 48 N.E. 2d 489 (1943).

Waiver of Subrogation

Most, but not all, insurance policies authorize an insured to waive subrogation before a loss to anyone the insured chooses and after a loss to certain categories of people like tenants and landlords.

In State Farm Ins. Co. v. J.P. Spano Constr., Inc., 55 A.D.3d 824 (2d Dept. 2008), defendants moved for summary judgment seeking to enforce a waiver-of-subrogation provision contained within the pertinent contract and dismiss plaintiff's subrogation action. On appeal, the Second Department affirmed the trial court's decision and held that defendants did not waive the defense of waiver-of-subrogation. The Second Department further held that defendants need not plead the defense since the plaintiff's complaint was based, in part, on the very contract in which the waiver-of-subrogation provision appeared. The court stated that “the policy of insurance issued by the plaintiff to its insureds 'acknowledged the right of the insured[s] to waive the insurer's subrogation rights.'” The court reasoned that the “plaintiff cannot claim to be surprised that the defendants would use it as a defense.”

In Gap v. Red Apple Cos., 282 A.D.2d 119 (1st Dept. Div. 2001), a Supreme Court of New York Appellate Division case, the court held that where a party is seeking to recover a loss not covered by property insurance—uninsured losses—that “this uninsured segment of loss falls outside the ambit of 'risk insured against' for purposes of inclusion in the waiver of subrogation clause.” Two tenants, Gap and Rite-Aid, initiated an action to recover uninsured property losses resulting from a fire, which they alleged were not encompassed by the waiver of subrogation provision in their individual leases that precluded recovery for covered losses. The court found such action cognizable since each lessee was entitled to recover that portion of the fire loss equal to their individual deductibles. The court stated:

While the parties to a commercial transaction are free to allocate the risk of liability to third parties through insurance and deployment of a waiver of subrogation clause, under the leases at issue the tenants were free to undertake the uninsured risk they did by assuming a substantial deductible. Having done so, there is no legal impediment to the tenants' seeking recourse for their uninsured loss from the landlord, assuming they can show liability therefor. Carlson Restaurants Worldwide, Inc. v. Designline Construction Services, Inc., No. A-0506-07T3, 2009 WL 2833259 (N. J. Super. App. Div. Sept. 4, 2009).

The waiver usually covers only those things insured. If not insured, if there is a large deductible or self-insured retention, the waiver may not apply unless specifically and clearly stated to include both insured and uninsured losses.

The ISO homeowners forms contain a waiver of subrogation provision in the conditions applicable to both sections I and II, which states:

An “insured” may waive in writing before a loss all rights of recovery against any person. If not waived, we may ["may" in this usage means "have permission to," not "might or might not"] require an assignment of rights of recovery for a loss to the extent that payment is made by us. If an assignment is sought, an “insured” must sign and deliver all related papers and cooperate with us.

To see how this might work, say an insured leaves his belongings in a club locker when he goes out to play golf. While out, the locker is robbed. The insured is reasonably sure a club employee was the thief but does not wish to make trouble for the club. He turns in a claim for the theft but asks that the insurer not pursue the thief. By so doing the insured is breaching two policy conditions: one, the requirement of a police report in event of a crime, and two, the insurer's right of subrogation if the thief is caught. The only way to circumvent the second condition is to furnish the insurer with a signed waiver prior to a loss occurring—possibly at the start of the policy period—or to have signed a hold-harmless contract with the club. The provision does not say that the insured must notify the insurer in writing prior to a loss that subrogation has been waived. Perhaps when the insured first joined the club as part of the membership application he agreed to hold the club harmless for any and all events that might cause or contribute to any loss or bodily injury. The waiver of subrogation is a part of that agreement; the insurer would not even be aware of the contract until after a loss had occurred.

Couch on Insurance, Third Edition § 224:87 states that

the fact that pre-loss contractual waivers are drafted in broad language, necessitated by the fact that the original drafting is done in the abstract, at a time when the circumstances surrounding the loss are unknown, makes it even more important for the intent of the clause to be clear. For a contract to be given the effect of a pre-loss waiver of claim which bars an insurer's subrogation rights, a preexisting contract between the insured and the third party must clearly provide that the insurance was for the benefit of both parties or that there was an enforceable hold-harmless agreement.

So, in Home Ins. Co. v. Bauman, 684 N.E.2d 828 (Ill. App. 1997), the court found for Bauman and not the insurer, Home Insurance Company. The homeowners had signed a construction contract for a new addition with a contractor that contained a waiver agreement. The agreement said that the homeowners and the contractor each waived their rights to the extent that the perils were covered by insurance, namely, open perils coverage on the home including the work at the site. The contractor was required to obtain similar waivers from the subcontractors. When a subcontractor negligently started a fire that destroyed much of the home, the insurer as subrogee of the insured filed a complaint based on the subcontractor's negligence. In ruling for the contractor, the court noted that the contract obligated the homeowners to obtain insurance on the work that included the interest of the subcontractor. The plain language demonstrated that the intent of the parties was to “place the risk of loss regarding the Work on insurance… Section 17.3 also clearly demonstrates that the contracting parties intended to confer this benefit directly upon nonparty subcontractors.” Therefore, the homeowners subrogee could not recover.

A hold-harmless agreement, though, will not always survive the scrutiny of the court, which may find an entirely different outcome than could have been predicted at first glance. The court in Hanover Ins. Co. v. Honeywell, Inc., 200 F.Supp.2d 1305 (N.D. Ok. 2002) reviewed a case in which the insurer for the lessor of a warehouse sued the lessee to recover for losses sustained by the lessor when the warehouse was destroyed by fire. Wolf Point Industrial Warehouse owned a warehouse, which it leased to Circle International, Inc.. Under the terms of the lease, Wolf Point was to insure the premises for fire. The lease contained an indemnity provision whereby Circle agreed to defend, indemnity, and hold Wolf Point harmless from any loss, cost, or expense resulting from personal injury, loss or life, or property; likewise, Wolf Point agreed to defend, indemnify, and hold its tenant harmless from any loss resulting from personal injury or loss of life or property.

Wolf Point's policy contained a subrogation provision. When a fire destroyed the warehouse, Wolf Point's insurer paid its insured for the loss and then attempted to subrogate against Circle. The federal court applied Oklahoma law, and said that the fire insurance for the property protected the property interests of both parties. In other words, Circle was a coinsured even though it was not expressly identified as such. Similarly, in Morris Zeligson Properties, LLC v. South East Auto Trim, Inc. 99 P.3d 744 (Ok. Civ. App. 2004),the court upheld the right of subrogation against the defendants, even if their negligence caused the fire, unless there is an express provision between the parties that South East would provide fire insurance. Clearly, the lease placed the burden of obtaining such insurance, and the defendants were entitled to a judgment as a matter of law.

Subrogation against Own Insured?

As noted in Hanover, it is commonly held that an insurer cannot subrogate against its own insured. To do so would seem to negate the very reason an insured buys insurance—to protect him or herself from the possibility of loss. In the case of National Union Fire Ins. Co. of Pittsburgh, Pa. v. Engineering-Science, Inc., 673 F. Supp. 380 (N.D. Cal. 1987), the insurer paid a claim on behalf of its insured, a contractor, under a builders risk policy. Engineering-Science, which designed the project, also was insured by National Union under an errors and omissions policy.

Following the loss, National Union attempted to subrogate against
Engineering-Science, alleging faulty design. In finding for Engineering-Science, the court agreed that there would be a possible windfall for Engineering-Science's excess insurers if subrogation were prohibited. It also agreed that a prohibition against subrogating against one's own insured could indirectly adversely affect the contractor's loss experience. But the insured could also be adversely affected through future premium increases. The court concluded that the insurer had insured Engineering-Science against the “very liability for which it seeks recovery in its complaint in an amount in excess of the policy limits. As a matter of law, public policy concerns prohibit such a suit.”

Sometimes a case may turn on whether the person being subrogated against is an insured, and, as such, safe from subrogation. In Reeder v. Reeder, 348 N.W.2d 832 (Neb. 1984), the brother of the insured, his wife, and daughter occupied the insured's home after he moved to another city. The insured told his brother he would leave the insurance policy he had on the home while he was there. The court found that the insurance was for the benefit of the guests to the same extent as it was for the insured, and the insurer had no right of subrogation against them for fire damage to the house. The reasoning underlying denial of subrogation in a landlord-tenant case was even more compelling “when the relationship is that of host and guest, especially when the host has assured the guest that there is insurance coverage.”

But in Wasko v. Manella, 865 A.2d 1223 (Conn. App. 2005), the insured brought action against a houseguest who accidentally burned down their vacation home.

The antisubrogation rule is based upon the basic definition of subrogation as a right that arises only with respect to rights of the insured against third parties to whom the insurer owes no duty. It follows, then, that no right of subrogation can arise in favor of an insurer against its own insured. The public policy underlying this rule is two-fold: an insurer should not be allowed to pass on a loss to its insured that the insured has paid premiums to cover and to avoid a conflict of interest in which an insurer lacks the incentive to provide a vigorous defense to its insured.

There are times, though, that an insurer can indeed subrogate against its own insured, notably when the insurer makes a payment it otherwise would not make. In Travelers Ins. Co. v. Nory Construction Co., Inc., 184 Misc.2d 366 (N.Y.S. 2000), an employee of Nory Construction was injured while working on a bridge reconstruction project. Nory had obtained an owners and contractors protective policy, which covered the state (the bridge's owner) for bodily injury claims. Nory also had a CGL for $1 million and an umbrella for $5 million. All of these policies were with Travelers. The employee sued the state, and Travelers defended. The court found for the employee; Travelers paid under the owners, contractors, and protective policy but paid more than the $1 million limit of liability.

Travelers brought action against Nory for the additional amount it had paid the state. The court said that generally the anti-subrogation rule (against one's own insured) would apply, but if an exclusion in the policy applied and the insurer paid a claim for protection of its own interests, then the insurer could subrogate. But in this instance, the court concerned itself only with the additional payment the insurer had made, and found that voluntary payments could not be recovered.

Two cases indicate that other courts follow the reasoning of Travelers in that subrogation against an insured is allowable if payment is made where the policy does not cover the risk. The first is LaSalle Nat. Bank v. Massachusetts Bay Ins. Co., 958 F.Supp. 384 (N.D. Ill. 1997). The court applied Illinois law, stating that the anti-subrogation rule did not bar the homeowners insurer from claiming against the insured husband to recoup payments made to the coinsured wife. The insurer alleged the husband had intentionally set the fire, and the policy expressly excluded loss caused by intentional acts. The court acknowledged that the law would forbid such an action if it were found that the husband had negligently, rather than intentionally, caused the fire.

And, in Allstate Ins. Co. v. LaRandeau, 622 N.W.2d 646 (2001), the court said the insurer had a right to subrogate against its named insured, who committed arson, when it made a payment to the innocent coinsured spouse.

The insurer may also subrogate against its own insured when it denies its insured's claim but makes payment to the mortgagee. See, for example, Parasco v. Pacific Indem. Co., 920 F.Supp. 647 (E.D. Pa. 1996). On the other hand, in Whitten v. State, 110 P.3d 892 (Wy. 2005), the victim, not the victim's insurer, was entitled to receive the proceeds of a criminal restitution order arising from a defendant's arson conviction because there was no evidence regarding the insurer's subrogation rights. Had the insurer appeared and presented evidence concerning its payments to the criminal court it could have shared in the restitution order.

Who Is Entitled to Any Additional Amount Recovered?

Remember that the principle governing subrogation is that the insurer steps into the shoes of its insured for the amount it paid on behalf of its insured. The insurer's rights are derivative from that of the insured, and it cannot recover any amount beyond what it paid.

To allow the insurer to do so would be unjust enrichment, something of which the courts take a dim view. Commercial Union Ins. Co. v. Minnesota School Bd. Ass'n., 600 N.W.2d 475 (Minn. 1999) turned on whether a health insurer could collect an amount not paid to the insured under that insured's underinsured motorist coverage. The court ruled that because the insured had waived her right to the additional underinsured motorist benefit available, the health insurer, as her subrogee, could not pursue the remaining amount.

Both the subrogee (insurer) and the subrogor (insured) have a right of action against the tortfeasor. Basin Construction Corp. v. Department of Water & Power, 199 Cal. App.3d 819 (1988).

The California Fair Claims Practices Regulations deals with the right and obligation to sue for an insured's noncompensated loss. Section 2695.7 (j) provides as follows:

Every insurer that makes a subrogation demand shall include in every demand the first party claimant's deductible. Every insurer shall share subrogation recoveries on a proportionate basis with the first party claimant, unless the first party claimant has otherwise recovered the whole deductible amount. No insurer shall deduct legal or other expenses from the recovery of the deductible unless the insurer has retained an outside attorney or collection agency to collect that recovery. The deduction may only be for a pro rata share of the allocated loss adjustment expense.

The regulation does not, however, as the court found, create standing to sue for the insured's uncompensated loss. The regulation governs the conduct of insurers in the settlement of claims, not the pursuit of litigation.

Since the lawsuit did not name the uncompensated insured as a party, the insurer had no standing to seek damages incurred solely by the insured. It could have avoided the problems and the appeal by using the rights provided to it by the policy by obtaining an assignment of the insured's claim and then filing suit in both the name of the insurer and the insured so that any recovery could be easily allocated.

Subrogation and Salvage Agreement and Assignment of Claim

The following is a form that can be used to secure an insurer's right of subrogation and salvage and avoid some of the arguments using common-law equitable rights of subrogation: