O Brien Hennessy Educational Series by John by sanmelody


									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)


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


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


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

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


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


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


   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


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

―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


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


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.


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.


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.

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

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