Not nice to subrogate against your own insured
Watch the full video at https://rumble.com/v1ktd3f-new-york-court-slaps-insurers-who-subrogated-against-their-own-insureds.html and at https://youtu.be/YEpi5Yi8GBY
Zurich American Insurance Company (“Zurich American”) and American Zurich Insurance Company (“Zurich”) sued Defendants Certain Underwriters at Lloyd’s, London, underwriting policy number B12630308616 (“Lloyd’s”) and Arch Insurance Company (“Arch”) coverage dispute as arising from a personal injury lawsuit. Zurich moved for summary judgment against Lloyd’s and sought a declaration that the anti-subrogation rule precludes Lloyd’s from bringing a claim for damages or contributions against the Skanska-Walsh Joint Venture (“Skanska”).
IN Zurich American Insurance Company and American Zurich Insurance Company v. Certain Underwriters of Lloyd’s of London Subscribing to Policy Number B12630308616 and Arch Insurance CompanyNo. 21-CV-6755 (JPO), United States District Court, SD New York (September 12, 2022), the USDC applied New York’s anti-subrogation law.
The Port Authority of New York and New Jersey (“Port Authority”) operates LaGuardia Airport and engaged LaGuardia Gateway Partners LLC (“LGA”) as the developer of a construction project at LaGuardia (the “LGA Project”). In April 2017, LGA entered into a subcontract with Skanska (the “Contract”) to perform work on the LGA project. Section 20.1 of the Agreement requires LGA to obtain commercial general liability insurance under which Skanska would be the first named insured and LGA would be a named insured. The contract required Skanska to “indemnify, defend and hold harmless [LGA] for any losses or costs incurred [LGA] . . . to the extent caused by . . . any third party claims for bodily injury. . . arises from (1) [Skanska’s] negligent performance. . . or (2) any violation of [the Contract] by someone [Skanska] party or any breach thereof by [LGA] directly caused by the acts or omissions of anyone [Skanska] party.” The contract contains a similar clause requiring Skanska to reimburse the port authority for its losses.
Skanska and LGA obtained a Contractors Controlled Insurance Program (“CCIP”) for the LGA project, which provided $300 million in commercial general liability insurance to Skanska, LGA and the Port Authority. Zurich American issued the primary commercial general liability policy in the CCIP tower with a $5 million limit (“Zurich American Policy”), Arch issued the first excess policy with a $5 million limit (“Arch Policy”) and Lloyd’s issued a second excess inventory policy with a limit of $20 million (“Lloyd’s Policy”). American Zurich also issued workers’ compensation and employers’ liability claims to Skanska.
On January 21, 2018, Quentin Mayo, a Skanska employee, was working on the LGA project when he was injured..) As a result, he filed a lawsuit against the Port Authority and LGA. The Port Authority and LGA then requested coverage under the Zurich American Policy, which Zurich American agreed to provide.
Fabiani Cohen & Hall (“FCH”) was retained as defense counsel for LGA and the Port Authority. In March 2021 Lloyd’s emailed FCH asking why it had not brought a third party action against Skanska for common law damages as Mayo was employed by Skanska. Following discussions between Lloyd’s, Zurich and FCH, Zurich American filed this action for declaratory judgment.
Zurich sought a declaratory judgment from the USDC that any claims Lloyd’s potentially brought against Skanska for common law indemnity or contribution were barred by New York’s anti-subrogation doctrine. The only issue before the USDC was whether the anti-subrogation rule precludes Lloyd’s from having its insureds, LGA and the Port Authority, sue its other named insured, Skanska, for common law or contributory damages.
Under New York law, the antisubrogation rule provides that “[a]n insurer…has no right of subrogation against its own insured for a claim arising out of the very risk for which the insured was covered.” N. Star Reins. corp. v. Continental Ins. Co82 NY2d 281, 294 (1993).
The rule was established in part to prevent the insurer from passing on a loss to its own insured and to reduce the possibility of a conflict of interest between the insurer and the insured that might otherwise affect the insurer’s incentive to provide defense for the insured.
The USDC agreed with Zurich that the anti-subrogation rule applies here because the two essential elements are met.
First, Lloyd’s seeks to subrogate its named insured, Skanska.
Second, the risk of injury to Skanska’s employees is covered by Lloyd’s Policy. Lloyd’s Policy provides for an exemption from employer’s liability and an insured termination of contract, which means that all contractual claims for damages asserted by the LGA or the port authority against Skanska are covered.
In summary, while the theoretical possibility exists for a contractual damages claim in practice, the application is blunted by the clauses that immediately follow. Lloyd’s argued that a claim for indemnification or contribution against Skanska is not a covered risk and, in the absence of a viable claim, there is no conflict of interest that the anti-subrogation rule is intended to guard against.
But the decision in ACE American Insurance Company v. American Guarantee & Liability Insurance Company, 257 F.Supp.3d 596 (SDNY 2017) ACE American Insurance Company and American Guarantee & Liability Insurance Company were in a dispute over which insurance company was responsible for funding a $5 million share of a personal injury lawsuit settlement. ACE had issued workers’ compensation and employers’ liability policies to a company called Wager Contracting, while American Guarantee had issued a commercial umbrella liability policy. American Guarantee sought to bring a tort claim as subrogation of one of its insureds against another of its insureds. The court concluded that the antisubrogation rule barred American Guarantee from bringing such a claim.
Zurich’s motion for summary judgment was granted because the USDC, pursuant to New York law, declared that the anti-subrogation rule precludes Lloyd’s from bringing a claim for common law indemnification or contribution against Skanska, its insured.
The covenant of good faith and fair dealing requires that an insurer shall do nothing to deprive an insured of the benefits of the policy. Instructing an agent to sue an insured on behalf of another insured is to deprive an insured of the benefits promised by the insurer to the sued insured. No prudent insurer will sue its own insureds. It’s pointless, not nice, and a waste of time and effort.
(c) 2022 Barry Zalma & ClaimSchool, Inc.
Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and firstname.lastname@example.org.
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