Chapter 8 Subrogation and Antisubrogation

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 8 Subrogation and Antisubrogation

Mirna M. Santiago

I. Subrogation versus Antisubrogation

A. Subrogation

Subrogation is the principle that when one person has been compelled to pay a debt that ought to have been paid by another, he becomes entitled to exercise all the remedies that the creditor possessed against that other person.¹

In its most general form, subrogation is the right of one who has paid an obligation that another should have paid to be indemnified by the other.² Subrogation serves to promote essential justice between the parties.³ Subrogation may be based on a contract, known as conventional subrogation, or it may arise by operation of law, that is, legal subrogation.⁴

In the context of insurance, the doctrine of subrogation, which is recognized as a matter of equity, entitles an insurer to stand in the shoes of its insured to seek indemnification from a party whose wrongdoing has caused the loss for which the insurer is bound to provide coverage.⁵ Because the insurer is standing in the shoes of the insured, it is also limited to the rights available to the insured and is likewise subject to all defenses that could have been asserted directly against the insured.⁶

Traditionally, at least four reasons have been advanced to support subrogation: "(1) that the person who in good faith pays the debt or obligation of another has equitably purchased (quasi-contractually), or is at least entitled to, the obligation owed by the debtor or tortfeasor; (2) that the wrongdoer (tortfeasor) is not entitled to a windfall release from his obligation simply because the injured party had the foresight to obtain insurance; (3) public policy is served by allowing insurers to recover and thus reduce insurance rates generally."⁷ The fourth reason is that (4) under principles of equity, an insurer is entitled to subrogation when the insured has received, or would receive, a double payment by virtue of an insured's recovering payment of all or part of those same damages from the tortfeasor.⁸

An insurer's right of subrogation arises only after it has made a payment on a loss to or on behalf of the insured.⁹ In addition, an insurer should not recover sums received by the insured from the tort source until the insured has been fully indem-nified.¹⁰ With respect to the insurer's subrogation rights, a "subrogee acquires no greater rights than those possessed by its subrogor and is subject to all limitations applicable to the original claim of the subrogor."¹¹

An insurer's right of subrogation against a third party who has caused the loss paid by the insurer "does not rest upon any relation of contract or privity between the insurer and such third persons, but arises out of the contract of insurance and is derived from the insured alone."¹²

Subrogation is allowed to prevent injustice and unjust enrichment, but it will not be allowed where it would be inequitable to do so.¹³

B. Antisubrogation

Boiled down to its essence, the antisubrogation doctrine states that an insurer has no right of subrogation against its own insured for a claim arising from the very risk for which the insured is covered.¹⁴ Indeed, an "insurer should not [be] surprised to pay claims that it covered."¹⁵

The anti-subrogation 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, even where there is an express subrogation agreement. The two primary purposes of the anti-subrogation rule are to avoid a conflict of interest that would undercut the insurer's incentive to provide an insured with a vigorous defense and to prohibit an insurer from passing its loss to its own insured.¹⁶

Thus, no right of subrogation can exist where the wrongdoer is also an insured under the same policy.¹⁷ This may be true even where the additional insured has been independently negligent.¹⁸

The fact that an accident is not attributable to the named insured's negligence is irrelevant when an additional insured endorsement does not purport to allocate or restrict coverage according to fault. Insurance companies are free to, and commonly have, issued additional insured endorsements that specifically limit coverage to situations in which the additional insured is faced with vicarious liability for negligent conduct by the named insured. When an insurer chooses not to use such clearly limited language in an additional insured clause, but instead grants coverage for liability arising out of the named insured's work, the additional insured is covered without regard to whether injury was caused by the named insured or the additional insured.¹⁹

The antisubrogation rule is implicated not only when an insurer has a duty to indemnify its insured, but also when it has a broader duty to defend its insured.²⁰

The purpose of the rule is to prevent prejudice to the insured. As one court has said, in the absence of the antisubrogation rule, a carrier's interests would always be "at considerable variance to those of its other insured" and would result in a conflict of interest since it would have to defend one insured on the same claim it would assert on behalf of the other.²¹

The antisubrogation doctrine also applies to both primary and excess policies.²² Further, some jurisdictions have held that antisubrogation also applies where the same carrier has issued separate/unrelated policies to the parties in the dispute. For instance, the United States Court of Appeals for the Ninth District, applying California law, prohibited an insurer that had paid a loss under a builder's risk policy from seeking recovery from another policyholder whom the insurer alleged negligently designed the pipeline at issue.²³

Similarly, the United States District Court for the Eastern District of Pennsylvania opined that it made no sense for an insurer to pursue subrogation where it insures both parties, as it would simply be transferring funds from one "pool" of money to another.²⁴

Some courts subscribe to the notion that to permit the insurer to sue its own insured—under any policy—would violate sound public policy, as such actions would: (1) allow the insurer to expend premiums collected from the insured to secure a judgment against the same insured on a risk insured against; (2) give judicial sanction to the breach of the insurance policy by the insurer; (3) permit the insurer to secure information from its insured under the guise of policy provisions that would be available for use later in a subrogation action against that insured; (4) allow the insurer to take advantage of its conflict of interest with its insured; and (5) constitute judicial approval of a breach of the insurer's relationship with its own insured.²⁵

Likewise, some courts have proclaimed that allowing subrogation where a carrier covers two separate insureds under separate policies would give rise to the possibility that the insurer "might play favorites between its insureds."²⁶ Thus, "the conflict of interest is readily apparent," since any effort by one party who is insured by the same carrier to seek reimbursement from another insured "is essentially a subrogation action by [the insurance company] against its own insured, which is barred by the antisubrogation rule."²⁷

II. Waiver of Subrogation

"Waiver occurs when there is an existing right, a knowledge of its existence and an actual intention to relinquish it. . . ."²⁸ Thus, parties to a contract that includes a waiver of subrogation are held to have willingly relinquished a known right. The insurer is deemed to be complicit in this voluntary relinquishment in that the risk to the insurer that it may not be able to recover from a wrongdoer is presumably reflected in the insurance premium.²⁹

A waiver of subrogation clause may be included in a contract to minimize claims and/or lawsuits among the contracting parties. However, a waiver of subrogation may also be included in a settlement document or release. Under most insurance policies, a waiver of subrogation will be effective if it is entered into prior to the payment of the loss by the insurer, and it operates to bar the insurer's right of subrogation against the tortfeasor.

A typical waiver of subrogation provision in a contract may provide:

The Owner and Contractor waive all rights against each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and the architect, if any, for damages caused by fire or other causes of loss to the extent covered by insurance obtained pursuant to the terms of this contract or any other insurance applicable to the Work. Any policies obtained shall contain waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insur-able interest in any property damaged.

Some states have concluded that it is inequitable to bind an insurer to an agreement it did not join, and thus require notice or consent of the insurer. These states generally view subrogation as a right of the insurer, a right which can only be waived knowingly. Other states view the right to subrogation as dependent entirely on the viability of the insured's cause of action against the third-party tortfeasor, and thus hold that where any such cause of action has been waived, the insurer's ability to bring a subrogation claim is waived as well, regardless of notice or consent.³⁰ However, most courts are eager to enforce...