Anti-Subrogation Rule Misapplied
The equitable right of subrogation is a profit center available to, and often ignored by, many insurers. When a right of subrogation is available to allow an insurer to obtain its payments for defense and indemnity of its insureds, the insurer should seek the funds from the tortfeasor or person(s) who agreed to indemnify the insured, contracutally, with vigor.
In Millennium Holdings LLC, et al v. The Glidden Company, & c., et al, Court of Appeals of New York, — N.E.3d —- 2016 WL 2350158 (May 5, 2016) a group of insurers who paid claims against insureds as a result of claims of injury from the manufacture and use of lead paint. In this action, appellants insurance companies seek to be subrogated to the right of their insured, plaintiff Millennium Holdings LLC (Millennium), to indemnification against respondents, the Glidden Company, now known as Akzo Nobel Paints LLC, following the insurance companies’ satisfaction of Millennium’s obligations pursuant to monetary settlements reached in certain lead paint related cases. The courts below, applying the antisubrogation rule, held that the insurance companies could not subrogate.
The Glidden company, incorporated in Ohio in 1917, made, marketed and sold lead paint, including, until 1958, lead pigment. A number of the policies issued between 1963 and 1968 provide the Insurers with a right to subrogation, whereby, after paying a claim on behalf of its insured, an insurer may seek to enforce the insured’s rights against another entity to recover its loss.
As relevant to this appeal, the critical moment in the corporate history of the parties occurred in 1986, various purchase and sale agreements were entered into with successors to Glidden.
Under section 9.3 of the 1986 Purchase Agreement, ICI American Holdings agreed to indemnify HSCM–20 after 1994. Through a series of corporate transactions, HSCM–20 became plaintiff Millennium, and ICI American Holdings assigned HSCM–6 to an entity that became Akzo Nobel Paints (ANP). Accordingly, based on the 1986 Purchase Agreement, Millennium and its predecessors were required to indemnify ANP and its predecessors from 1986 to 1994. In turn, ANP and its predecessors were required to indemnify Millennium and its predecessors from 1994 onward.
Commencing in 1987, a number of lawsuits were filed across the nation against the predecessors of Millennium and ANP, alleging either personal injury or property damage from the lead paint they produced, or that the lead paint was a public nuisance requiring abatement (hereinafter the Lead Cases).
During pendency of the 1994 litigation, the London Insurers agreed to pay the defense costs of both Millennium and ANP under an Interim Defense Agreement. However, the London Insurers terminated that funding agreement in 2000, and sought a declaration in Ohio state court that they were not required to provide ANP with a defense and indemnification in the Lead Cases, based on the subject policies. In 2006, the Ohio Supreme Court (trial court) held that ANP was not covered under the relevant policies “by operation of law or by contract,” as it was not a named insured on any of the relevant policies and, additionally, its subsequent purchase of HSCM–6 included an assumption of liabilities.
The London Insurers sought a declaration that they were entitled to subrogate (both equitably and contractually) to Millennium’s indemnification rights in the 1986 Purchase Agreement and, as a result, recover from ANP amounts that were paid by the London Insurers on behalf of Millennium in connection with the Lead Cases.
Specifically, as relevant here, ANP argued, and the courts below agreed, that the Insurers’ subrogation claim was barred by the exception to subrogation—the antisubrogation rule. Although the trial court determined that under the 1986 Purchase Agreement ANP was not an insured, it concluded that because the Insurers sought to recover for the very risk they insured, the antisubrogation rule would prohibit the Insurers’ right of subrogation.
Subrogation, generally, may arise either contractually or under the doctrine of equitable subrogation. However, the antisubrogation rule is an exception to the right of subrogation. Under that rule, “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 … even where the insured has expressly agreed to indemnify the party from whom the insurer’s rights are derived.’” In effect, “an insurer may not step into the shoes of its insured to sue a third-party tortfeasor … for damages arising from the same risk covered by the policy”
Insurers are barred under the antisubrogation rule from seeking subrogation from a named insured or additional insureds.
Conversely, subrogation is typically permissible where the third party is not a named or additional insured. The antisubrogation rule, therefore, requires a showing that the party the insurer is seeking to enforce its right of subrogation against is its insured, an additional insured, or a party who is intended to be covered by the insurance policy in some other way.
Here, as recognized by the courts below, ANP and its predecessor were not insured under the relevant insurance policies. When SCM transferred the assets and liabilities of its paints business to HSCM–6 (ANP’s predecessor), the insurance policies that had applied to SCM were specifically excluded from that distribution. The insurance policies were placed in HSCM–20, a predecessor of Millennium.
ANP was never insured by the Insurers. Thus, the principal element for application of the antisubrogation rule—that the insurer seeks to enforce its right of subrogation against its own insured, additional insured, or a party intended to be covered by the insurance policy—is absent.
The essential element of the antisubrogation rule is that the party to which the insurer seeks to subrogate is covered by the relevant insurance policy. The rule also requires that the insurer seek to enforce its right of subrogation against that covered party on a risk insured by the policy.
Here, however, the policy concerns underpinning the antisubrogation rule are not implicated as no conflict of interest arises. Since ANP is not an insured, there is no risk that the Insurers will shirk their obligation to one insured in favor of the other. There is no reason to apply the antisubrogation rule under these facts, and the courts below erred in granting ANP’s motion for summary judgment on that basis.
Accordingly, the order of the Appellate Division should be reversed, with costs, ANP’s motion for summary judgment on its antisubrogation defense is denied, and the case remitted to the Appellate Division for consideration of issues raised but not determined on the appeal to that court.
If courts extend application of the antisubrogation rule to all non-covered third parties, an insurer who fulfills its obligation to pay on the risks insured by the relevant policy would essentially be foreclosed from the ability to subrogate. It is improper for a court to rewrite a policy of insurance to remove from it the contractual right of subrogation.
Barry Zalma, Esq., CFE, practiced law in California for more than 49 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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