Not Nice to Subrogate Against Your Own Insured
Zurich American Insurance Company (“Zurich American”) and American Zurich Insurance Company (“Zurich”) sued Defendants Certain Underwriters at Lloyd’s, London Subscribing to Policy Number B12630308616 (“Lloyd’s”) and Arch Insurance Company (“Arch”) over an insurance coverage dispute arising from a personal injury lawsuit. Zurich moved for summary judgment against Lloyd’s seeking a declaration that the anti-subrogation rule precludes Lloyd’s from commencing a claim for common law indemnification or contribution against Skanska-Walsh Joint Venture (“Skanska”).
In Zurich American Insurance Company and American Zurich Insurance Company v. Certain Underwriters At Lloyd’s Of London Subscribing To Policy Number B12630308616 and Arch Insurance Company, No. 21-CV-6755 (JPO), United States District Court, S.D. 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 hired LaGuardia Gateway Partners LLC (“LGA”) as the developer of a construction project at LaGuardia (“LGA Project”). In April 2017, LGA entered into a sub-contract with Skanska (the “Contract”) to perform work on the LGA Project. Section 20.1 of the Contract requires LGA to procure a commercial general liability policy, 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 suffered or costs incurred by [LGA] . . . to the extent caused by . . . any third-party claims for bodily injury . . . arising out of (1) [Skanska’s] negligent performance . . . or (2) any breach of [the Contract] by any [Skanska] party or any breach thereof by [LGA] directly caused by the acts or omissions of any [Skanska] party.” The Contract contains a similar clause requiring Skanska to indemnify Port Authority for its losses.
Skanska and LGA obtained a Contractors Controlled Insurance Program (“CCIP”) for the LGA Project, which afforded $300 million in commercial general liability insurance coverage to Skanska, LGA, and 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 layer excess policy with a $5 million limit (“Arch Policy”), and Lloyd’s issued a second layer excess policy with a $20 million limit (“Lloyd’s Policy”). American Zurich also issued workers’ compensation and employer’s liability to Skanska.
On January 21, 2018, Quentin Mayo, a Skanska employee, was working at the LGA Project when he was injured..) As a result, he filed a lawsuit against Port Authority and LGA. Port Authority and LGA then requested coverage under the Zurich American Policy, which Zurich American agreed to provide.
Fabiani Cohen & Hall (“FCH”) was hired as defense counsel for LGA and Port Authority. In March 2021, Lloyd’s emailed FCH and asked why it had not instituted a third-party action against Skanska for common law indemnity because Mayo was employed by Skanska. Following discussions among Lloyd’s, Zurich, and FCH, Zurich American filed this suit for declaratory judgment.
Zurich sought a declaratory judgment from the USDC that any claim potentially brought by Lloyd’s against Skanska for common law indemnification or contribution was barred by the anti-subrogation doctrine of New York. The sole issue before the USDC was whether the anti-subrogation rule bars Lloyd’s from causing its insureds, LGA and Port Authority, to sue its other named insured, Skanska, for common law indemnification or contribution.
Under New York law, the anti-subrogation rule provides that that “[a]n insurer… has no right of subrogation against its own insured for a claim arising from the very risk for which the insured was covered.” N. Star Reins. Corp. v. Continental Ins. Co, 82 N.Y.2d 281, 294 (1993).
The rule was established both to prevent the insurer from passing along a loss to its own insured and to diminish the possibility of a conflict of interest between the insurer and insured that may otherwise affect the insurer’s incentive to provide a 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 is seeking to subrogate against its named insured, Skanska.
Second, the risk of injury to Skanska employees is covered by the Lloyd’s Policy. The Lloyd’s Policy provides for an Employer’s Liability exclusion and an insured contract carveout, meaning that any contractual indemnity claim asserted by LGA or Port Authority against Skanska is covered.
In sum, while the theoretical possibility exists for a contractual indemnity claim in practice its application is blunted by the paragraphs which immediately follow. Lloyd’s contended that a claim for indemnification or contribution against Skanska is not a covered risk and if there is no viable claim, there is no conflict of interest for which the anti-subrogation rule is meant to guard against.
However, the decision in ACE American Insurance Company v. American Guarantee & Liability Insurance Company, 257 F.Supp.3d 596 (S.D.N.Y. 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 settlement for a personal injury lawsuit. ACE had issued workers’ compensation and employers’ liability policy to a company called Wager Contracting, while American Guarantee had issued to it a commercial umbrella liability policy. American Guarantee sought to bring an indemnity claim as the subrogee of one of its insureds against another one of its insureds. The court concluded that the antisubrogation rule prohibited American Guarantee from bringing such a claim.
Zurich’s motion for summary judgment was granted because the USDC declared, as a matter of New York law, that the anti-subrogation rule precludes Lloyd’s from commencing a claim for common law indemnification or contribution against Skanska, its insured.
The covenant of good faith and fair dealing requires that an insurer should do nothing to deprive an insured of the benefits of the policy. Instructing counsel to sue an insured on behalf of another insured is depriving an insured of the benefits promised by the insurer to the insured sued. No prudent insurer will sue its own insured. It makes no sense, is not nice, and is a waste of time and effort.
(c) 2022 Barry Zalma & ClaimSchool, Inc.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, 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 handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
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