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O’Brien & Hennessy Educational Series by John J. O’Brien JD, CLU, CPCU
Volume I Subject 2
Distinct Subrogation Issues: Pandora’s Box
Conventional and Equitable (Legal) Subrogation
“The principle of subrogation was begotten of a union between equity and her beloved—
the natural justice of placing the burden of bearing a loss where it ought to be. Being so
sired this child of justice is without the form of a rigid rule of law. On the contrary it is a
fluid concept depending upon the particular facts and circumstances of a given case for
its applicability. To some facts subrogation will adhere—to others it will not.” Home
Owners’ Loan Corporation v. Parker, 181 Okl. 234, 73 P. 2d 170 (1937)
Substitution
Subrogation means substitution. It is the subrogatio n 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 or claim, and its rights and remedies. In
the insurance context, the insurance carrier is placed in the shoes of its insured and asserts
any rights its insured has against the tortfeasor/defendant.
Equitable Subrogation
Equitable subrogation exists by operation of law. Because it arises by operation of law, it
is sometimes referred to as ―legal‖ subrogation. It is to be distinguished from
conventional subrogation, which arises by virtue of the contract between the parties or by
statute. 44 American Jurisprudence 2d (1982) 782, Insurance, Section 1794 Subrogation
can arise by statute, by contract, or through equity. Daily v. Secura Ins. Co. 164 Wis. 2d
624, 476 N.W. 2d 299 (Wis. Ct. App. 1991). Conventional subrogation on the other hand
arises by contract or by statute and is typically part of the parties contract. In contrast,
legal or equitable subrogation is implied subrogation that arises by operation of law and
has its foundation in common law.
The Doctrine of Subrogation
Subrogation goes hand and hand with the doctrine of insurance as a contract of indemnity
and the doctrine of unjust enrichment. An insured under a contract of insurance should be
fully indemnified but should not be more than fully indemnified.
Consequently, in those situations where an insured has the opportunity to recover against
another insurer or third party, the insured will not be permitted to make a double
recovery. This would amount to unjust enrichment.
Unjust Enrichme nt and Equitable Subrogation
Unjust enrichment is a quasi-contract action. It dates back at least to the sixth century
with the publication of the Corpus Juris Civilis where Emperor Justinian created the
category of obligations known as obligationibus quasi ex contractu.. The theory found
favor in English and American courts of equity. Equity is made up of a body of rules
stemming from notions of fairness and natural justice. Equity courts declare that someone
will not be permitted to suffer a wrong without a remedy so long as he comes into court
with clean hands and so long as the remedy is fair to all concern. These equity courts
reasoned that to permit an insured to recover against both a third party and his insurance
company would be unjust enrichment of the insured at the expense of the insurance
company. Even without a provision written in the insurance contract providing for
subrogation, courts of equity have held that the right of an insurance company to
subrogate was implied in equity and out of these early holdings the principle of equitable
or legal subrogation developed.
Equitable subrogation has come to the forefront in recent years with the multi state
tobacco litigation. States through their attorney generals and working in concert with
private attorneys have sued and recovered billions of dollars against the tobacco industry
to recover the medical costs incurred by the states in caring for citizens that have
contacted deceases because of their tobacco addiction. The theory of recovery supporting
these multi-billion dollar cases is equitable subrogation.
Equitable Subrogation is not available to a volunteer. Equitable subrogation is a simple
concept. A non- volunteer who is required to pay a debt that is primarily owed by a third
person is equitably subrogated to the rights of the subrogee. Equitable subrogation is not
available to a mere volunteer or stranger who without any duty or obligation pays the
debt of another.
― A volunteer, stranger, or intermeddler is one who thrusts himself into a situation on his
own initiative, and not one who becomes a party to a transaction upon the urgent petition
of a person who is vitally interested, and whose rights would be sacrificed did he not
respond to the importunate appeal.‖ Jeffrey Mort; Pamela Mort; Fred Strefling; Jeffrey
Tobian, Plaintiffs-Appellants v. United States of America, Defendant-Appellee., United
States Court of Appeals for the Ninth Circuit, 86 F. 3d 890; 1996 U.S. App. Lexis
14611.(1996)
In insurance subrogation practice the claim that the insurance company that paid the
claim acted as a volunteer arises often. The case of Empire Fire and Marine Insurance
Company, Appellant, v. Michigan Mutual Insurance Company, Appellee, Nebraska Court
of Appeals, 1993 Neb. App. Lexis 491, December 28, 1993 is illustrative of this situation.
Empire Fire and Marine Insurance issued a non-trucking commercial automobile
insurance policy to Gordon Halsell of Detroit, Michigan. Michigan Mutual had issued
A trucking insurance policy to Ginns Transportation which was a company owned by
Gordon Halsell. While operating his tractor/trailer under a lease agreement with Ginns
Transportation, Halsell negligently injured three people. Empire investigated the claim
but concluded that the injuries arose out of the trucking activities of Ginns Transportation
so Empire repeatedly tendered the defense and indemnity obligations to Michigan Mutual
as the truck insurance carrier. Michigan Mutual did not accept the defense and indemnity
tendered to it by Empire. Empire then elected to settle all of the injured parties claims and
filed a law suit against Michigan Mutual claiming that Empire‘s insurance policy did not
cover these claims because it was not a trucking policy but that Michigan Mutuals did
because it was a trucking policy so Michigan Mutual should have paid these claims
instead of Empire paying them.
Michigan Mutual simply demurred to the claim which essentially means they put up no
argument but rather Michigan Mutual agreed with Empire that since Empire‘s policy had
an exclusion for business use that Empire had no obligation to pay these claims so
Empire has no right to equitable subrogation because they acted as a mere volunteer:
―Accepting the facts alleged in the petition as true, we find that Empire
had no obligation to settle the claims under the insurance policy issued
to Halsell. Further, Empire alleged no other facts indicating that its payment
of Halsell‘s claims was anything other than voluntary. Rather, plaintiff pled
that it did, does, and continues to believe that it had no duty to defend or
interest to protect. Therefore, being a volunteer, it obtained no subrogation
rights. We must conclude, as did the district court, that Empire failed to
state a cause of action in equitable subrogation.‖ P. 504
It would appear that Empire might have been hoisted on its own petard here. Perhaps, a
better approach for Empire in drafting its complaint in this situation would be to claim
that Michigan Mutual was the primary carrier and at best that Empire was excess.
Following this approach along with an allegation that Michigan Mutual was not
prejudiced because they have always been on notice and provided the opportunity to
defend, it is not likely that the court would have sent Empire Fire and Marine home
empty handed.
Rights of the insurance company rise no higher than the insured. In addition to the
volunteer principle equitable subrogation is also subject to the principle that the rights of
the subrogated insurance company can rise no higher than the rights of its subrogor. The
insurance company stands exactly in the shoes of its insured. This principle was
discussed in greater detail in chapter three dealing with real party in interest, the make
whole doctrine and releases.
Conventional Subrogation
Conventional subrogation can be distinguished from equitable subrogation primarily
because it is a right to subrogation that is established by the language of the insurance
contract.
In the case of National Union Fire Insurance Company of Pittsburgh, Appellant, vs.
Riggs National Bank of Washington D.C., Appellee 320 US App D.C. 222; 93 F.3d 885,
over $500,000 of fraudulent checks were drawn upon an insured‘s bank account at Riggs
National Bank. The insured asked Riggs National Bank to indemnify it for the fraudulent
checks but the bank refused. The insured then submitted its claim to its insurance
company National Union Fire Insurance Company of Pittsburgh. National Union paid the
claim and then sought to subrogate against Riggs National Bank. The insurance policy
issued by National Union provided as follows:
―In the event of any payment under this policy, the Company shall be
subrogated to all the insured‘s rights of recovery therefore against any
person or organization and the insured shall execute and deliver instruments
and papers and do whatever is necessary to secure such rights.‖
The court in this case drew a distinction between equitable and conventional subrogation
and commented that equitable subrogation requires a balancing of the equities when the
insurance policy does not contain an explicit subrogation provision and the insurance
company must bring suit as an equitable subrogeee. In contrast to equitable subrogation,
a conventional subrogee does not have the burden of proving superior equities in himself
as plaintiff to justify a recovery.
Conventional Subrogation and Prohibition Against Assignments
Under the common law there is a prohibition against the assignment of a cause of action
for personal injuries. Consequently, in those situations where an insurance company is
attempting to subrogate for medical payments it has made to an insured, it might be faced
with this defense especially if it is basing its claim upon an assignment of this r ight from
its insured. Unless in these situations there is a statute abrogating the common law
prohibition against assignment of personal injury claims, the insurance company may not
be successful.
In the Arizona case of Preferred Risk Mutual Insurance Company v. Vargas 157 Ariz. 17;
745 P. 2d 346; 1988 Ariz. App. LEXIS 130, (1988) Preferred Risk had paid its insured
$20,000 in uninsured motorist benefits. The claim was fought in part on the basis that it
was an unlawful assignment of a personal injury claim since the insurance companies
claim was derivative from the claim of its insured.
The language of the court is worth repeating here as it gives us a good analysis of the
creation of personal injury subrogation rights by statute as being in reality an abrogation
of the common law.
― Preferred Risk‘s reasoning in support of its bid for reversal proceeds as follows. It has
long been settled in Arizona case law that a right of action for a tort causing personal
injuries is not assignable. Harleysville Mutual. Ins. Co. v. Lea, 2 Ariz. App. 538, 410
P.2d 495 (1966). Further, the Arizona Supreme Court has held that subrogation to
another‘s rights in a personal injury claim amounts to assignment of the claim and is
therefore void. Allstate Ins. Co. v. Druke, 118 Ariz. 301, 576 P.2D 489 (1978); State
Farm Fire and Casualty Co. v. Knapp, 107 Ariz. 301, 484 P.2d 180 (1971). See State
Farm Mutual. Auto Ins. Co. v Janssen, 154 Ariz. 386, 742 P.2d 1372 (App. 1987).
However, the Arizona legislature has, to a limited extent, abrogated the common law
prohibition against subrogation to the rights of another in a personal injury claim. A.R.S.
@20-259.01 provides in part:
―G. Insurers who make payments for damages to insureds under the uninsured
requirements of this section may subrogate and sue for reimbursement of the total amount
of said payments in the name of the insured against any uninsured motorist responsible
for the damages to the insured.
H. Any common law prohibition against assignments of causes of action for
personal injuries is abrogated to the extent provided in subsection G of this section.‖
So when and where does subrogation exist? It exists where it is fair and equitable to
permit it so long as the subrogation action is not viewed as a prohibited by the common
law assignment of a personal injury claim. Even when it may be an assignment of a
personal injury claim it exists where it is created by statute where it is said that the statute
abrogates the common law prohibition against assignments of personal injury claims.
And, lastly, it exists where the language of the contract between the parties creates it so
long as this right to subrogation is not contrary to either the common law or statutory law.
Whether contractual or equitable, subrogation is justified because it is in accord with
principles of indemnity that a policyholder should not recover more than his actual loss
and that subrogation furthers the goals of accountability by requiring tortfeasors to be
responsible for the financial consequences of their negligence.
Those in opposition to both equitable and conventional subrogation argue that the
problem is not that the insured receives a windfall when he recovers both from his
insurance company and the third party. The problem they say is that the insurer receives
a windfall when the insurer recovers its loss from the third party and also keeps the
premium paid by the insured. They argue that subrogation should either be eliminated or
that the insurance company should take a back seat to the insured in recovering against a
third party and should not receive anything until the insured has been made absolutely
whole for his injuries.
Some critics of subrogation endorse it only if the premium charged insureds somehow
reflects subrogation recoveries. Benchmarking of subrogation recoveries should allow
these critics to learn if the savings gained through subrogation are indeed passed on to the
insured. We think this element of savings to the insured; subrogation is viewed by these
critics as pure windfall to the insurance company.
This point of view has been acknowledged by courts and authors:
―Admittedly, subrogation has been a two edged sword. Unfortunately, it has
frequently become a source of windfall to insurers in that the anticipated recoveries under
subrogation rights are generally not reflected in the computation of premium rates. See
Patterson, Essentials of Insurance Law, 33 (2nd Ed 1957). This however, is a legislative
or administrative problem rather than one that bears on the inherent validity of such a
clause.‖ DeCespedes et al. v. Providence Mutual Casualty Company of Chicago, Illinois
193SO22224; 1966 Fla Ap. Lexis 4743, (1966).
My halfway tongue in cheek view of the issue of benchmarking and return of subrogation
recoveries in the form of premium reductions was expressed in the following article ―The
First Thing We Do is Kill the Benchmarkers‖ published in The Subrogator, the magazine
of the National Association of Subrogation Professionals. That article expressed a
concern that benchmarking may result in regulated premium reduction and possibly cause
the elimination of subrogation.
In reality it is in keeping with good insurance practice and the ―mutual‖ perspective of
insurance that is the seed of the insurance industry in this country that subrogation
recoveries eventually find themselves, at least partially in, to the pocketbook of the
insured in the form of reduced premiums.
―One author counsel‘s courts to not enforce insurance contract subrogation clauses,
invoking images from Greek mythology of an unforeseen ‗evil‘ loosed from a box of
troubles on an unsuspecting world by a carelessly curious first woman, Pandora...‖
F. Joseph Du Bray, A Response to the Anti-Subrogation Argument: What Really Emerged
from Pandora’s Box.
Several issues that escaped from Pandora‘s box are visited only briefly but,
hopefully, succinctly enough to be of benefit to the reader. These are issues that a new
subrogation examiner will encounter during the first six months of his career and are
issues that are well known to the experienced subrogation examiner. They are addressed
for the first time in this text here and will appear again and again throughout this
education series.
Subrogation does have its critics. Many times these critics are the insureds themselves.
Insureds reason that since they are paying a premium for insurance coverage that they
should be entitled to the insurance proceeds as well recovering the damages against the
third party who caused the injuries or damages. Many people view an insurance claim as
a windfall.
Insurance policies contain clauses that provide that the insured will cooperate with the
insurance company in bringing the subrogation action. A typical subrogation clause states
―that in the event of any payment under this policy, the Company shall be subrogated to
all the insured‘s rights of recovery therefore against any person or organization and the
insured shall execute and deliver instruments and papers and do whatever is necessary to
secure such rights.‖ Theoretically, the remedy for failure of the insured to cooperate is
that the insurance company can refuse to pay benefits or may sue to have the insured pay
back the benefits that the insured has received. Many times the insurance companies
subrogation action proceeds separately from the insured‘s personal injury action often
with one not knowing what the other is doing. It is not an ideal world and often the
insured or the insurer may do something unintentionally or intentionally to jeopardize the
rights of the other. Within this framework, we meet the issues of real party in interest,
subrogation receipts and releases, res judicata, collateral estoppel, the deductible, and the
statute of limitations.
The Real Party in Interest
Who is the real party in interest in a subrogation suit? Under most insurance policies and
subrogation receipts, the insurance company is given the right to file suit in the name of
the insured. Traditional subrogation lawyers will tell you never to name the insurance
company as the plaintiff. The theory behind this position is that judges and juries will
look less favorably on an insurance company as a plaintiff than they will on an individual
plaintiff.
This public relations argument meshed well with the common law where it was generally
held that when an insurer paid money to its insured in satisfaction of an insurance claim,
the subrogee (insurer) could not bring suit in its own name against a third party tortfeasor
liable to its insured. Under the equitable doctrine of subrogation an insurer was allowed
to bring suit on its insured‘s claim against the wrongdoer in the name of the insured.
Although bound by contract to cooperate with the insurance company, the individual
insured‘s cooperation in a subrogation suit varies far and wide. It is not inaccurate to say
that the cooperation of the individual insured is directly related to the extent of the
financial interest of the insured in the recovery amount being sought. As a general
practice if the insured has a deductible the insurance company includes the amount of the
deductible in the subrogation suit as a courtesy to its insured. How much of that
deductible is actually paid to the insured varies. In the case of a small deductible of $100
or $250 when a recovery is made some companies actually pay the full amount of the
deductible to their insured without any deduction for attorney fees. Subrogation
assignments that are made to outside counsel are typically made on the basis of court
costs and a contingent fee of one third. If there was a $2,000 claim and a $2,000
subrogation recovery, the insured would receive his deductible of say $100, the attorney
would receive one-third of $2,000 and the balance of the recovery will go to the
insurance company in this situation. Most insurance companies however charge the
contingent fee of the attorney on the deductible so the insured only receives two thirds of
his $100 deductible. As can be imagined it is difficult to convince the insured to take a
day or two off work and come to court in the chance he might receive sixty six dollars.
Let‘s assume that we have a cooperative insured and an insurance company prepared to
go forward in its subrogation pursuit in the form of a lawsuit. The insured has a $1,000
deductible and it is a $20,000 fire loss. Should the lawsuit be filed in the name of the
insured, the insurance company or both?
As pointed out in the early days of subrogation this type of lawsuit was always brought in
the name of the insured because the insurance company preferred to keep a low profile.
Some defense attorneys would successfully argue that the case should be dismissed under
a theory that the real party in interest was not the insured since the insured‘s interest was
only in the deductible. Courts would tend to agree with the defense attorneys and throw
out the claim of the insurance company. Many times this was done after the statute of
limitations had run and this would preclude the insurance company from re- filing its
claim.
Today most states as well as the federal court system have adopted rules or statutes,
which require that all actions be brought in the name of the real party in interest. Rule 17
A of the Federal Rules of Civil Procedure provides that every action shall be prosecuted
in the name of the real party in interest. The rule does permit liberal amendment or
substitution to bring in the real party in interest rather than dismissal of the law suit.
The federal rule provides in part:
(a) Real Party in Interest. Every action shall be prosecuted in the name of the
real party in interest. Am executor, administrator, guardian, bailee, trustee of an
express trust, a party with whom or in whose name a contract has been made for
the benefit of another, or a party authorized by statute may sue in his own name
without joining with him the party for whose benefit the action is brought; and
when a statute of the United States so provides, an action for the use or benefit of
another shall be brought in the name of the United States. No action shall be
dismissed on the ground that it is not prosecuted in the name of the real party in
interest until a reasonable time has been allowed after objection for ratification of
the commencement of the action by, or joinder or substitution of, the rea l party in
interest; and such ratification, joinder, or substitution shall have the same effect as
if the action has been commenced in the name of the real party in interest.
Some states while requiring that an action be brought in the name of the real party in
interest provide an exception where a subrogee is the real party in interest. Pennsylvania
Rules of Civil Procedure requires that all actions be brought in the name of the real party
in interest and then provides that this rule shall not be mandatory where a subrogee is the
real party in interest. PA. R. CIV. P. 2002 (a), (c).
The reason that we have a real party in interest rule is that the courts essentially want to
avoid a multiplicity of actions against a defendant arising out of a single action.
The defendant is entitled to raise all of his defenses at one time against all the parties that
have an interest in the possible proceeds of the litigation and to assure finality of the
judgment.
So the general rule today in those cases where the insured has been made whole and has
not sustained any uninsured loss is that the insurer subrogee is the real party in interest
and in the federal court system and those states that follow the real party in interest rule,
the subrogation action should be brought in the name of the insurance company although
the insurance company can be named as subrogee of its insured.
In those instances where the insured has only been partially compensated as in our
example where there was a twenty thousand dollar loss and a thousand dollar deductible,
most courts will find that both the insured and the insurance company are the real parties
in interest to the extent of their interests.
Joinder of a Party
Although it would not be a mandatory joinder, if the defendant were to file a motion in
either a separate action brought by an insurance company for its loss or in an action
brought by the insured for its loss to have an absent party joined in an action, the court
would, if it could obtain jurisdiction over the missing party, require that party to become
a party to the action so that all claims arising from the transaction can be resolved with
finality and without splitting causes of action.
In federal court this joinder action would be brought under Rule 19 (a) of the Federal
Rules of Civil Procedure. The Federal Rules permit such joinder if the following exists:
1) in the party‘s absence, complete relief cannot be afforded to those already parties
or
2) the absent party claims an interest relating to the subject of the actio n and his
absence may impair or impede his ability to protect that interest or
3) the party‘s absence would subject persons who are already parties to the risk of
multiple or otherwise inconsistent obligations.
As pointed out subrogated insurers have attempted to avoid appearance as plaintiffs under
a belief that courts and juries will not look favorably on asset heavy insurance companies
attempting to seek restitution against individuals who typically are not financially stable
and/or uninsured. Companies in order to avoid having to be named as party plaintiffs
have at times resorted to a devise know as a loan receipt?
Loan Receipts
Typically, when an insurance company pays a claim and they ask the insured to
cooperate in the recovery of money from a third party, the insurance company will ask
the insured to sign a subrogation receipt that contains loan type language.
Under this language the payment paid under the insurance policy is characterized as a
loan. The loan is repayable only from amounts recovered against a third party tortfeasor
by the insured and the insurance company agrees to conduct the lawsuit in the name of
the insured.
Generally courts have looked upon these loan receipts favorably; however, the problem is
that now that there appears to be a universal requirement that an action be brought in the
name of the real party in interest, will the insurance company still be able to hide behind
its insured and a loan receipt.
None other than Justice Brandeis himself had given his seal of app roval to loan receipts.
In the early United States Supreme Court case of Luckenbach v. W.J. McCahan Sugar
Refining Co. 248 U.S. 139 (1918) a cargo of sugar from Puerto Rico to Philadelphia was
damaged and Federal Insurance Co. paid the loss despite the fact that insurance policy
contained a clause saying that the company did not have to pay until the carrier‘s
responsibility was determined. The insurance company paid none the less and employed
a loan receipt:
―Received from the Federal Insurance Company, ( $2,304.16), as a loan and
repayable only to the extent of any recovery we may make from any carrier on
account of any loss to our property due to damage on S/S Julia Luckenbach and
we agree to enter and prosecute suit against said carrier on said claim with all due
diligence at the expense and under the exclusive direction and control of the said
Federal Insurance Company.‖
The Court held that the payments made by the insurance company were legitimate loans
rather than payments of insurance. Justice Brandeis praised the ingenuity of
businesspersons in devising an arrangement ―which is consonant both with the needs of
commerce and of the demands of justice.‖ 248 U.S. 139, 149 (1918).
So where do we stand today with earlier cases giving their approval to loan receipts and
with modern federal rules of civil procedure requiring the insurance company to disclose
itself as the real party of interest once a payment has been made. We are living in an age
of full disclosure. Traditionally, courts are aware that juries may be prejudiced against
insurance companies. In most court arenas it is grounds for a mistrial for insurance to
even be mentioned. However, today‘s juries are more sophisticated and usually
understand insurance and may even understand subrogation.
Rule 17 (a) requires that the action be brought in the name of the real party in interest and
a good argument can be made that loan receipts are not loans at all since no payment is
required to be made unless recovery is made against the third party tortfeasor. Some
courts have actually been critical of insurance companies who attempt to hide behind
their insureds and express the view that the purpose of the insurance company to remain
anonymous is not a good reason to avoid the federal rule that an ac tion be brought in the
name of the real party in interest.
The Growing Modern Approach/ Real Party in Inte rest
The case of Executive Jet Aviation, Inc. et al., Appellants, v. United States of America ,
507 F. 2d 508; 1974 U.S. App. Lexis 5671; 19 Fed. R. Serv 2d (Callahan) 1274,
December 12, 1974 seems to better capture the modern approach.
On July 28, 1968, one of Executive Jet‘s aircraft crashed on takeoff from the Cleveland,
Ohio, airport after its engines had ingested a large number of seagulls that had been
roosting on the runway. A group of British insurance companies paid Executive Jet
$1,300,000 under a loan receipt in which the insured was obligated to repay only if
recovery was made against a third party – in this case the city air controllers who failed to
warn the pilot about the seagulls sitting on the runway. Suit was filed by the insurance
companies in the name of Executive Jet.
Of course as you can see and as will be discussed further on, cases like this present
problems with the statute of limitations because if you haven‘t filed suit by the right party
before the statute of limitations runs then you may not be able to pursue the action at all.
Executive Jet and it‘ s insurer relied upon the precedent of Justice Brandeis and
Luckenbach but the court was not convinced and found that Luckenbach is
distinguishable because of its unusual factual setting:
― In that case the insurer was liable only contingently—it would have incurred
liability to the insurer shipper only after it had been established that recovery
against the carrier for the lost cargo was impossible. Furthermore, if the insurer
had paid the shipper outright before the carrier‘s liability had been determined,
the carrier would have become liable to no one. Therefore, the loan receipt
devise was used so that the insured would not be deprived of the use of the
money for which either the insurer or the carrier eventually would incur
liability.‖
It would certainly seem that the modern view is that the insurance company in the
subrogation action is the real party in interest. Consequently, modern courts will not be
so ready to look with favor upon the loan receipt.
Clearly, in an ideal world, for reasons of practicality and judicial economy, the ideal case
would have the names of both the insured and the insurance company each claiming their
individual damages. If the insured has a claim for pain and suffering, loss wages, a
deductible or other expenses not covered by his insurance, these all can be included in the
action. This approach avoids splitting causes of action and permits the court to have all
damages and claims before it so relief can be given once and for all and the defendant
will not be subject to subsequent claims. It also enables the plaintiffs to cooperate with
each other and prepare and present their case only once rather than on at lease two
separate occasions. This approach is becoming fairly standard in the worker‘s
compensation third party action where the lien holder intervenes in the claimant law suit.
No doubt it will spread to other areas and types of subrogation law suits.
Relationship of the Insured and Insure r
As pointed out earlier this treatise is meant to be an overview of the relationship between
the insurance company and the insured, the Pandora‘s Box of insurance subrogation. The
cooperation of the insured does not always come very easily. Often times the insured has
recovered from the insurance company and is now seeking to recover from the party that
caused the injuries or damages. Some insureds reason that they are paying premium for
the insurance coverage they have and therefore they should receive the insurance benefits
as well as any damages they recover against the negligent third party.
Although bound by contract to cooperate with the insurance company the actual
operation of the insured varies. Typically, the larger the deductible the more the insured
cooperates. However, some insureds are found to cooperate fully and pursue subrogation
with their insurance company with full vengeance. This behavior can be motivated by
appreciation of duty, a desire to have justice done, or by a peculiar motivation to
participate in the litigation process with an attorney paid for by the insurance company.
The rights of the insurance company can rise no higher than the rights of the insured:
―An insurer who has paid to an insured whom it is required to indemnify is subrogated to
its insured‘s right to indemnity from a third party who has contributed to the loss suffered
by the insured. An insurer‘s subrogated right is to be put in the position of its insured for
the loss which the insurer has both insured and paid. In other words, the insurer as
subrogee stands in the same position as does an assignee- in the shoes of the subrogor or
assignor.‖ Avemco Insurance Company, Plaintiff- Appellant, and Lynn V. Goodfellow,
Plaintiff v. Cessna Aircraft Company, Defendant- Appellee. US. C of A., 112.3d998;
1993 U.S. App. lexis 32623.
When standing in the insured‘s shoes, the insurance company has no greater rights than
it‘s insured. Consequently, any defense that would be effective against the insured is also
effective against the insurance company.
A common mistake made by novice subrogation professionals is to believe that the
statute of limitations on a claim runs from the date of payment of the claim. This is not
the case. The statute of limitations on the subrogation claim begins to run at the same
time as the insured‘s original cause of action.
There are times when an insured has collected either its deductible or a greater amount
than that from a negligent third party prior to the insured contacting his insurance
company. Generally when this happens the third party has requested that he receive a
release of liability from the insured. This is usually a written document signed by the
insured which for all times releases the third party from any and all liability including
liability that the third party may owe to the insurance company.
When the insured has given the wrongdoer a release before or after the loss since the
insurance company stands in the shoes of their insured, the wrongdoer may assert that
release in a subrogation action filed against the wrongdoer. However, that release is
ineffective when the wrongdoer knew of the subrogating insurer‘s rights at the time the
release was executed. This is why it is so important for a subrogation professional to
give early notice of his company‘s subrogation claim to the third party.
There are also those situations where an insured has deductible or has money over and
above the amount that he has received from his insurance company that is due from a
negligent third party. Sometimes in these instances an insurance company may have
brought a subrogation action in the name of its insured and either given a release or had a
final determination by the court as to liability. Under the circumstances in the subsequent
action where the insured attempts to recover the losses which were not compensated by
insurance the insured may not be able to recover because of the release or because of the
doctrine of res judicata. A release may be given before or after judgment.
The doctrine of res judicata requires some type of final determination by a court of
competent jurisdiction. ―Res judicata is appropriate if: 1) the parties to both actions are
identical (or at least in privity); (2) the judgment in the first action is rendered by a court
of competent jurisdiction; (3) the first action concluded with a final judgment on the
merits and (4) the same claim or cause of action is involved in both suites.‖ Deborah
Ellis Plaintiff- Appleant versus Amex Life Insurance Company et al, Defendants, Life
Insurance Company of North America, Defendant-Appelate. United States Court of
Appeal for the Fifth Circuit 2112. 3d 935; 2000 U.S. App 10998.
In the case of Westfield Insurance Company and Terry L. and Renee J. McMillen,
Plaintiff Appelants vs. Angela Clark Defendant- Appellate Case no. 9-93-61, Court of
Appeals of Ohio, 1994 Ohio Ap 2825. Renee J. McMillen filed a complaint against
Clark for negligence arising from an automobile accident. An agreed judgment was
entered by the court specifying that Clark owed Ms. McMillen a debt totaling $1,450.00.
This agreed judgment was entered on May 21, 1990.
On July 17, 1991 McMillen‘s insurance carrier Westfield Insurance Co. settled the
uninsured motorist claims of the McMillens for $23,00.00 and became subrogated against
Clark and filed an action against Clark for the $23,000. Clark filed a motion for
summary judgment claiming that the action was subject to res judicata because of the
earlier final judgment. The trial court granted summary judgment. The appellate court
reversed. Reviewing the four criteria for res judicata, the court found that a subrogated
insurer is in privity with its insured so res judicata would apply to both the insured and its
insurer, that the final agreement was entered by a court of competent jurisdiction, that the
agreed judgment was a final judgment, that the agreed judgment was a final judgment on
the merits and that the same cause of action was involved in both suits.
The insurance company argued that its underinsured/uninsured payment had not taken
place yet when the agreed judgment was entered, that they had no notice of the prior
action and that defendant Clark should have joined them as a party.
The courts analysis, although lengthy, is worth repeating here because it deals with
subrogation issues that most subrogation professionals will face on an ongoing basis in
their careers particularly in making a distinction between subrogation claims that a
tortfeasor has notice of when a settlement is made with an insured:
―This court recognizes the importance of res judicata in preventing repetitive
litigation of the same issues and its applicability to other interested parties. However, this
general view becomes more complex when applied to subrogation actions. The Supreme
Court of Ohio in Nationwide Ins. Co. v. Steigerwalt (1970), 21 Ohio St.2d 87, 255
N.E.2d 570, paragraph two of the syllabus, held that for the limited purpose of
prosecution of a claim under a policy of automobile insurance, a single cause of action
may be divided to the extent that the insurer, subrogated to a part of a claim assigned by
the insured, may prosecute its claim in a separate action against the tortfeasor.‖
―In Nationwide, the insurer became subrogated to the insured upon payment under a
subrogation agreement. The insured then sued the tortfeasor for personal injuries and the
deductible part of the property damage. Subsequently, the insurer sued the tortfeasor in
the same court for the amount it paid its insured for property damage. As stated in the
above mentioned syllabus, the Supreme Court of Ohio allowed the separate cause of
action; however, the case was primarily based on the tortfeasor‘s knowledge of the
subrogation claim. The court stated that the tortfeasor‘s failure to joint the parties
resulted in a waiver ―to a judgment on the pleadings based either upon the theory that
Nationwide is barred from prosecuting this action, or is estopped from relitigating the
issues [previously] litigated. Id. at 93.‖
―The cases that parallel Nationwide also focus on the issue of the tortfeasor‘s knowledge
of the assignment of a claim to the insurer. Kettler v. Gordon, (Mar. 7, 1984), Hamilton
App. No. C-830367, unreported; Hoosier Casualty Co. V. Davis, (1961), 172 Ohio St. 5,
173 N.E.2d 349. In Hoosier, the court concluded where, by virtue of a prior contact of
indemnity and subrogation, an insurer pays its insured for property damage sustained and
becomes thereby subrogated to the rights of its insured to the amount of such payment,
such insurer may prosecute a separate action against the party causing such injury. Id. at
9-10.‖
―Furthermore, Civ.R. 19(A) states, in pertinent part, that ‗[a] person who is subject to
service of process shall be joined as a party in the action if he has an interest relating to
the subject of the action as an assignor, assignee, subrogor, or subrogee.‘ ‗The rule
further states that ‘if the defense is not timely asserted, waiver is applicable.‘ The staff
notes clearly indicate that these provision were added to eradicate some of the difficulties
regarding res judicata and the splitting of independent rights. However, the specific
example in the staff notes illustrates that an insurer should be joined when a subrogation
right stems from payment to the insured prior to the insured filing a suit.‖
―The problem with applying the above rationale to the case at bar is that at the time of the
first lawsuit, Westfield had not yet made any payment to McMillens; therefore, they
could claim no ownership in the cause of action. Clark‘s failure to join Westfield as a
party anytime prior to the creation of the subrogation claim is inconsequential. [*9] This
conclusion is in accord with the discussion, in Harris v. Kyle (Dec. 12, 1988), Holmes
App. No. 87CVF80, unreported, which noted that the Nationwide case was merely a
waiver case and did not constitute an exception to the res judicata doctrine.
The distinguishable facts of the case sub judice require the doctrine of res judicata to be
employed. Because Mrs. McMillen pursued a cause of action for only property damages
in the initial suit, res judicata and Civ.R. 18(A) bar her from bringing a second suit.
However, Westfield claims it was not a party not in privity, with regard to the previous
suits, and thus, should be allowed to litigate the subrogation claim. Westfield‘s
contention that it lacks privity with its own insured is mistaken.‖
―As a general rule, privity constitutes ‗a succession of interest or relationship to the same
thing.‘ 63 Ohio Jurisprudence 3d (1985), Judgments, Section 464. Furthermore, ‗a privy
is a person so identified in interest with another that he represents the same legal right.‘
Id. Clearly, a payment, invoking a subrogation claim, constitutes privity between an
insurer and insured. Westfield, at the time of the subrogation [*10] suit, stepped into the
shoes of their insured and acquired the same rights as the McMillens.‖
―59 Ohio Jurisprudence 3d (1985), Insurance, Section 1207 discusses this general rule of
law regarding subrogation rights of the insured. When an insured suffers a loss due to
negligence of a third party, the insurer, upon payment for the loss, is subrogated to the
rights of the insured. Id. This allows the insured to recover any payments made to the
insured from a third party. The rights of the insured, are, however, limited. Id. The
insurer attains ‗no greater [rights] than those of the insured, and if the insured could not
recover from the tortfeasor, the insurer is likewise barred.‘ Id.‖
―Westfield has acquired the McMillens‘ interest in any cause of action against Cla rk.
Since the splitting of a cause of action is barred, the prior judgment between McMillen
and Clark is determinative as to any claims which are now being litigated between
McMillen and Clark.‖
―Westfield‘s claim of notice regarding the previous suits is misdirected. In American
States Ins. Co. v. Fletcher (1990), 69 OhioApp.3d 598, 601, 591 N.E.2d 320, this Court
held that the appellee- insurer [*11] herein was entitled to recover sums it had paid to its
insured on the grounds that the insured had, in violation of a policy of insurance and
subrogation agreement, and without the knowledge or participation of the insurer, entered
into a settlement agreement and executed a general release with the tortfeasor.‖
―In Fletcher, this Court found that the tortfeasor‘s actions had ‗destroyed the insurer‘s
rights of subrogation against the tortfeasor.‘ Id.‖
―In the instant case, McMillen and Clark entered into an agreed judgment entry resolving
the initial complaint allegedly without the knowledge and without the participation of
Westfield. Although there is no record of a general release in the instant case, the agreed
judgment entry and McMillens‘ actions in splitting their claims was ―acquired‖ by
Westfield. As a result, Westfield can no longer pursue a subro gation claim against
Clark.‖
Recovery Against Insured When Rights of Insurer are Destroyed
When an insured settles with or releases a third party from liability for a loss that the
third-party has caused, the insurer‘s subrogation right against such party may be
destroyed. 6A Appleman, Insurance Law and Practice, @4092 (1972). Where a release of
liability given by the insured to a third party destroys the insurer‘s right to t subrogation,
such a release bars the insured‘s right of action on the policy, and, if the insurer has
already indemnified the insured, the insurer has a right to recover from the insured the
amount paid on the policy, Id., @@ 4093, 4094; see also Home Insurance v. Bernstein,
172 Misc. 763, 765, 16 N.Y.S. 2d 45, 49 (Mun. Ct. 1939). However, if the insurer has not
been prejudiced, it may not deny recovery nor may it recover any amount paid on the
policy because of a release or settlement. See Chapman v. Hoage, 296 U.S. 526, 530-32,
80 L. Ed. 370, 56 S.Ct. 333 (1936) (release of worthless claim); 6A Appleman, supra,
@4093; 16 Couch on Insurance, @61:200 (Rev. ed. 1983). The burden rests on the
insured to show that in effecting a settlement and executing a release he did not prejudice
the subrogation rights of the insurer. See Weinberg v Transamerica Insurance Co., 62
N.Y. 2d 379, 381-84, 477 N.Y.S. 2d 99, 100-102, 465 N.E. 2d 819 (1984). Caryl A.
Vaughn Gibbs et al v. Hawaiian Eugenia Corporation, 966 F. 2d 101; 1992 U.S. App.
13322, June 8, 1992.
Release And Waive rs
In respect to releases of liability, courts will not allow them to prevent an insurer from a
recovery when the wrongdoer knew of the subrogation interest when he obtained the
release from the insured.
The general rule was stated by the Maryland Court of Appeals in the case of Cleveland v.
Chesapeake & Potomac Telephone Company, 169 A. 2d 446 :
―The cases and text writers generally take the position that where third parties, who may
be liable to an insured for a loss, effect a settlement with the latter and obtain a release
from all liability with knowledge of the fact that an insurer has already paid the amount
of its liability to an insured, the settlement and release will not bar the assertion of the
insurer‘s right of subrogation. The reasoning seems to be that such release is a fraud on
the insurer and constitutes no defense against it in an action to enforce its right of
subrogation.‖
Release Prior To Loss
Because an insurer‘s right of subrogation attaches at the time of loss a release or waiver
given prior to a loss is good against the insurer.
In the case of Kaf-Kaf, Inc. Appellant, v. Rodless Decvorations, Inc., Respondent , Court
Court of Appeals of New York, 90 N.Y. 2d 654; 687 N.E. 2d 1330, October 16, 1997,
pursuant to a Standard Form Loft Lease, commonly used throughout New York state, the
tenant Kaf-Kaf, Inc. rented two floors from the owner Rodless Decorators, Inc. and a fire
of unknown origin damaged both the landlord‘s and tenant‘s property. Each party‘s
insurance company sought subrogation against the other; however, the court found that
there was no subrogation because of this language contained in the lease. ― Paragraph (
(e) of the lease sets forth a waiver of subrogation provision applicable to ‗any claim
against the other party for recovery for loss or damage resulting from fire or other
casualty. We conclude that this broad, plainly stated provision encompasses not only
Rodless‘s claims for damages to the ‗demised premises‘ and loss of rent but also Kaf-
Kaf‘s claims for personal property damages and business interruption losses.‖ 90 N.Y.2d
654, at 660
This educational series includes a separate treatment of waivers of subrogation.
The Make Whole Doctrine
This treatise touches upon the make whole doctrine. It is also treated in other areas of this
educational series in particular under the health insurance lien and worker‘s
compensation section.
Initially, it should be pointed out that battles between the insured and the insurance
company as to which one is entitled to the spoils of a successful subrogation pursuit can
be avoided by specificity in the language of the policy or the subrogation receipt.
Where the parties have contracted regarding how recoveries are apportioned between an
insurer and an insured, courts usually honor the arrangement. Both by contract and by
court decision the most common arrangements are: 1. reimbursement first to the insurer,
with the policyholder receiving funds after the insurer has been compensated, 2. pro-rata
reimbursement, 3. reimbursement first to the policyholder for the uninsured loss, with the
insurer receiving funds after the policyholder has been fully compensated.
Without contrary language in the contract courts will favor the make whole doctrine
because it resembles the traditional equitable subrogation doctrine that the subrogee pay
the subrogor‘s loss in full before subrogation is permitted.
Following this logic the Tennessee Supreme Court found that seriously injured plaintiffs
who recovered a limited tort recovery against a government entity were not required to
reimburse their health insurer. York v. Sevier County Ambulance Authority, 8 S.W. 3d
616 (Tenn. 1999). The court acknowledged that an injured insured who recovers from the
party that caused the injury must reimburse the insurer for payments it made on account
of the injury; however, when the insured is not made whole, neither subrogation nor
reimbursement rights apply – even when required by the terms of an insurance policy.
Generally speaking an insured will be hard pressed to defeat an insurer‘s s ubrogation
rights on the basis that he has not been made whole when he has accepted less than the
policy limits from the tortfeasors insurance carrier. See Liberty Mutual Ins. Co. v. Tripp,
974 P. 2d 899 (Wash. App. Div.1 1999). Ploen v. Union Ins. Co., 573 N.W. 2d 436 (Neb.
1998).
Co-Insureds- the Anti Subrogation Rule
The anti-subrogation rule stands for the proposition that an insurance company cannot
subrogate against its own insured. Consequently, under an automobile policy if a family
member insured causes injuries to another family member for which the insurance
company pays medical bills, the insurance company cannot then subrogate against it‘s
own insured.
The definition of who is an insured extends to co- insured and who is a co- insured by case
law extends very far. For example many jurisdictions extend a landlord‘s insurance
policy to be for the mutual benefit of both the landlord and his tenants so an insurance
company may not subrogate against a negligent tenant because the tenant is considered to
be a co-insured under the landlord‘s insurance policy. See Joseph A. Bank Clothiers, Inc.
v. Brodsky, 950 S.W. 2d 297 (Mo. App. E.D. 1997).
Florida also has held that the landlord‘s insurer could not obtain subrogation against the
tenant, absent an agreement or lease provision establishing the tenant‘s liability, because
the tenant was considered a co- insured of the landlord for the purpose of preventing
subrogation. Continental Ins. Co. v. Kennerson, 661 So. 2d 325 (Fla. App. 1st Dist. 1995).
Generally, if an agreement or contract requires one party to carry insurance for the
benefit of another usually as an additional insured then both parties are considered as co-
insureds and there is no subrogation permitted.
A Nebraska couple jointly owned property with their daughter. The couple had a
homeowner‘s policy in their name only and when the daughter‘s child set the house on
fire while playing with matches, the insurance company paid the policy limits and
subrogated against the daughter for negligence. The daughter defended saying she had a
reasonable expectation that her interests would also be protected by the policy since she
was a joint owner. The Supreme Court sided with the daughter saying that no right of
subrogation can arise in favor of an insurer against its own insured. In the case of a joint
tenant, the daughter had a reasonable expectation based on her insurable interest that she
would not be subject to a subrogation action brought on behalf of a joint tenant. Jindra v.
Clayton, 529 N.W. 2d 523 (Neb. 1995).
Government Immunity from Subrogation
Most states have done away with the doctrine of sovereign immunity when it comes to
activities which might result in a subrogation claim against a political subdivision i.e. the
operation of motor vehicles and supplying of public utilities. However, one usually finds
that in doing away with government immunity a state law may provide that subrogation
recoveries are limited. A standard clause in such statutes may read:
―If a claimant receives or is entitled to receive benefits for injuries or loss allegedly
incurred from a policy or policies of insurance or any other source, the benefits shall be
disclosed to the court, and the amount of the benefits shall be deducted from any award
against a political subdivision recovered by the claimant. No insurer or other person is
entitled to bring an action under a subrogation provision with respect to such benefits.‖
The above was the statute upheld in the Ohio case of Grange Mutual Casualty Company
v. City of Columbus, 49 Ohio App. 3d 50; 550 N.E. 2d 524.
This issue is discussed in more detail in the treatise on the negligence subrogation claim.
Conclusion
To sum up as well as conclude this treatise I am going to borrow somewhat from an
article written by Andrew C. Hecker for the American Bar Association entitled
―Subrogation – Potential Defenses.‖ To illustrate just how many evils can be released
from Pandora‘s box by a legitimate subrogation action. Here are the possible defenses he
lists in this article:
a. Real Party in Interest
b. Loan Receipt Agreements
c. Agreements Between the Insured and Wrongdoer
d. Benefit of Insurance Clauses
e. Statutes of Limitations
f. Limitation of Liability
g. Immunity
h. Release
i. Waiver
j. Policy Defenses
k. The Volunteer Defense
l. Factual Defenses
A good subrogation professional should be not only aware of each of these defenses but
also of the information necessary to refute these defenses when applicable. However it is
interesting to note that of these twelve defenses, ten of them touch in someway on the
actions of the insured, the insurer, or the relationship between the insured and the
insurance company- all except for policy defense and the factual defenses. Consequently
subrogation is an area of practice that is replete with situations where problems are
created for the insured or the insurer because of action of one or the other that effect the
others rights. It is an arena that is controlled by the circumstances that subrogation
professionals are keenly aware. The subrogation professional must satisfy his employer,
and the customer and still recover funds against the tortfeasor.
This treatise has opened Pandora‘s Box. But we have had only a glance at the issues
presented in the world of subrogation. It is a complicated field requiring the work of
professionals like yourselves.
Bibliography – Distinct Subrogation Issues: Pandora‘s Box
Abraham, Kenneth, Insurance Law and Regulations 201 (1990).
Baron, Roger M., Subrogation: A Pandora‘s Box Awaiting Closure, South Dakota Law
Review, 41 S.D. L. Rev. 237 (1996).
Du Bray, F. Joseph, A Response to the Anti-Subrogation Argument: What Really
Emerged from Pandora‘s Box, South Dakota Law Review, 41 S.D. L. Rev. 264 (1996)
Edeus, Jr., Keith E., Subrogation of Personal Injury Claims: Toward Ending an
Inequitable Practice, The Northern Illinois University Law Review, 17 N. Ill. U. L. Rev.
509.
Greenblatt, Jeffrey A., Insurance and Subrogation: When the Pie Isn‘t Big Enough, Who
Eats Last? , University of Chicago, 64 U. Chi. L. Rev/ 1337 (1997)
Hecker, Jr., Andrew C., Subrogation—Potential Defenses, American Bar Association, 18
Forum 615, Summer, 1983.
Ingram, John Dwight, ―Priority Between Insurer and Insured in Subrogation Recoveries‖,
Connecticutt Insurance Law Journal, 3 Conn. Ins. L. J. 105 (1996-97)
Rinaldi, Elaine M., ―Apportionment of Recovery Between Insured and Insurer in a
Subrogation Case.‖, American Bar Association, 29 Tort & Ins. L.J. 803, (1994).
Litvinoff, Saul, Subrogation, Louisiana Law Review, 50 La. L. Rev. 1143 (1990).
Maxfield, Gary W. , Subrogation Allowed despite Absence of Expressed Clause. Best‘s
Review- Life and Health Insurance Edition, November 1984, Vol. 85 ; Pg 126.
Veal, Gregory R. Veal, Subrogation: The Duties and Obligations of the Insured and
Rights of the Insurer Revisited, American Bar Association, 28 Tort & Ins. L.J. 69 (1992)
Wonnel, Christopher T., Replacing the Unitary Principle of Unjust Enrichment, Emory
University School of Law, Emory Law Journal, Winter 1996, 45 Emory L.J. 153
Illustrative Cases
Albert A. Martine and Gina Marie Martine v. the Hertz Corporation v. the Hertz
Corporation et al. No 95-2648, No 96-1225, United States Court of Appeals for the
Fourth Circuit, 1996 U.S. App. LEXIS 31214 (December 5, 1996) Statutory Subrogation.
Custom Cortage, Inc. d/b/a Custom Transport v. McTevel Inc. et al. 98 C 5182 United
States District Court for the Northern District of Illinois, Eastern Division, 1999 U.S.
Dist. LEXIS 16462, (October 15, 1999) Volunteer not entitled to subrogation.
Eastern States Health and Welfare Fund et al v. Phillip Morris, Inc. et al, United States
District Court for the Southern District of New York, 11 F. Supp. Ad 384; 1998 U.S.
Dist. LEXIS 9716. Equitable Subrogation
Foremost Life Insurance Co. v. Waters. 88 Mich. App 599; 278 N.W. al 688, February
20, 1979. Conventional Subrogation
