Let me start off by saying that the mid-Winter APA conference was an unqualified success, and it was great getting together with all the members. An interesting issue regarding the doctrine of subrogation arose, and so I thought this would make a fine topic for an article. There are two kinds of subrogation, conventional and legal. Conventional subrogation arises in the context of an express provision to an agreement, whereas legal subrogation arises in the case of sureties.
In the context of insurance policies, subrogation is effected or implied by operation of law; meaning, the law provides a right of subrogation upon the performance of certain acts. Typically, subrogation arises when an insurance carrier pays compensation on a claim submitted by one of its insured pursuant to a policy. Having paid on the claim the insurance carrier is then subrogated to the various causes of action that are available to the insured. This is commonly known as ‘stepping into the shoes of the insured’. Therefore, a valid subrogation creates a shift in the real party status from the subrogor, the party with the claim—the insured, to the subrogee, the party that actually paid the claim—the insurance carrier.
Thus, as a general rule, if the insurance carrier has paid the entire loss suffered by its insured, the insurance carrier then becomes the real party interested in the action for purposes of determining the party liable for the claim and recovering the money the insurance company had paid out. Since the insurance carrier has paid the claim on behalf of its insured, the insured no longer has an incentive to identify the responsible party; at that juncture, the insured’s obligations are typically limited to cooperating with the insurance carrier.
The Uniform Commercial Code (UCC) also permits a party who pays an instrument (e.g., loan) to succeed to the rights of the payee (the party that received the money) to enforce the instrument against any other party who may be liable (e.g., the payor, meaning the party that was obligated to make the payment).
In conclusion, insurance carriers generally have the right to step into the shoes of the party whom they compensate and sue any party whom the compensated party could have sued; guarantors and bonding companies generally have the same entitlement.
The Antisubrogation Rule is a creature of common law; meaning it was created through the process of applying commonly accepted principles of law, rather than through legislative enactment. The rule of subrogation works fine when the insurance carrier proceeds to sue a party that its own insured could have sued, and not at all when the insurance carrier, as subrogee, sues its own insured.
The antisubrogation rule normally arises in the context where the insurance carrier attempts to recover from the party that had purchased the policy, its own insured. This situation frequently occurs where an agreement expressly provides for one party to obtain insurance and name the other party to the agreement as an additional insured under that insurance policy. By doing so, the additional insured may now look to that specific insurance policy in the event that a claim covered by the policy terms is made against the additional insured, and the insurance carrier is obligated to defend the party named as additional insured.
An example may be helpful. A display company subcontracts with a barge operator to furnish four barges, together with a crew, for an open water display. As part of the agreement, the barge operator is required to obtain insurance coverage relating to the operation of the barges, and the barge operator is further required to name the display company as an additional insured under the policy. While the barges are at sea, an employee of the barge operator is injured while crossing the deck of one of the barges. The employee’s recourse as against his employer is limited by worker’s compensation laws. However, the employee sues the display company as well as the manufacturer of the deck, the manufacturer of the deck coating, the contractor that had installed the deck, and the contractor that maintained the deck, all on a theory of negligence. In turn, the display company argues that the claim asserted by plaintiff-employee is covered by the agreement it has with the barge operator to provide insurance coverage and, therefore, the display company tenders its defense of the employee’s claim to the barge operator’s insurance carrier, as a named additional insured. The barge operator’s insurance carrier agrees that the claim is covered by the policy and defends the display company; and, in the course of defending the display company, the insurance carrier asserts claims (known as cross-claims) against the other defendants. In addition to the cross-claims, the insurance carrier commences to sue the barge operator, also claiming negligence on its part. Here, the insurance carrier’s claim (acting as subrogee) as against the barge operator, commenced on behalf of additional insured display company (the subrogor), is barred by the antisubrogation rule, and the claim is subject to dismissal.
In conclusion, the antisubrogation rule is invoked when the insurance carrier looks to its own insured for recovery of the compensation paid pursuant to policy purchased by the insured. Absent fraud on the insured part, it would be improper to seek reimbursement from one’s own insured for a claim that is covered by a policy that the insured paid an insurance premium for. Notwithstanding, instances where insurance carriers attempt to recover from their own insured are commonplace.
