Subrogation Must be Fair

Insurer May Never Subrogate Against its own Insured

Zurich American Insurance et al sued their coinsurers - Appellant Certain Underwriters at Lloyd's, London Subscribing to Policy Number B12630308616 (Lloyd's) and Defendant Arch Insurance Company (Arch) - seeking a declaratory judgment that Lloyd's is barred under New York law from bringing a common law indemnification or contribution claim against a party insured by Zurich, Arch, and Lloyd's.

The district court granted Zurich's motion for summary judgment, holding that New York's anti-subrogation rule precludes Lloyd's from bringing that claim.

In Zurich American Insurance Company, American Zurich Insurance Company v. Certain Underwriters at Lloyd's of London Subscribing to Policy Number B12630308616, Arch Insurance Company, No. 22-2697, United States Court of Appeals, Second Circuit (December 12, 2023) the Second Circuit resolved the dispute.

Many Layers of Insurance

This dispute arose from a large construction project at LaGuardia Airport. Pursuant to the contract, Skanska and LGA obtained a Contractors Controlled Insurance Program for the project, which included a "tower" of general liability insurance with $300 million of coverage in three layers. Zurich underwrote the base layer of coverage, Arch provided a first layer of excess coverage, and then Lloyd's provided a second excess policy, i.e. a third layer of coverage on top of Arch's.

Each layer of coverage, including Lloyd's, contains a standard employer's liability exclusion.  Zurich agreed that the general liability insurance policy provided coverage for the suit and arranged for counsel to represent Port Authority and LGA beginning in August 2018. Roughly three years later, Lloyd's contacted that counsel and requested that LGA and Port Authority commence a third-party claim for common law indemnification or contribution against Skanska. Counsel analyzed the feasibility of such a claim but concluded that New York's anti-subrogation rule would bar it. After continued disputes between Lloyd's, Zurich, and counsel for each, Zurich commenced this action, seeking a declaratory judgment that the anti-subrogation rule would indeed bar the indemnification or contribution claim against Skanska.

The Anti-Subrogation Rule

New York courts have established an anti-subrogation rule that is an exception to an insurer's usual right of subrogation against third parties. It provides that an insurer has no right of subrogation against its own insured for a claim arising from the very risk for which the insured was covered.

The anti-subrogation rule is needed both to prevent the insurer from passing the incidence of loss to its own insured and to guard against the potential for conflict of interest that may affect the insurer's incentive to provide a vigorous defense for its insured.

The anti-subrogation rule appropriately prevents an insurer from recouping losses from its insured even where the insured has expressly agreed to indemnify the party from whom the insurer's rights are derived and has procured separate insurance covering the same risk. The important public policies served by the rule means that the rule takes precedence over the parties' private contractual arrangements.

Since Lloyd's insures Skanska under the general liability policy that policy, through the insured contract provision, covers Skanska for the obligation it assumed in the contract to indemnify LGA and Port Authority for losses resulting from third-party claims for bodily injury like the one underlying the present action.

In conclusion the Second Circuit concluded that Lloyd's cannot subrogate against Skanska -- its own insured -- for losses arising from the underlying suit that is exactly the risk for which Lloyd's insured Skanska.

What Lloyd's proposed is precisely what the anti-subrogation rule prohibits. As a result, straightforward application of the rule bars the claim.

ZALMA OPINION

Subrogation is an equitable remedy where, when an insurer pays a debt owed by its insured, fairness requires the insured to provide the insurer with the insured's rights against third parties to recoup its payment on behalf of the insured. Regardless, it is unfair for an insurer to seek damages from its own insured because doing so violates the public policy of the state of New York and is, on its face, unfair. When two people are in a simple auto accident but are insured by the same insurer, they will both be paid regardless of who is at fault since the insurer can't subrogate against its own insured.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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