Articles Tagged with Subrogation

The last two articles discussed the rules behind the equitable doctrine of subrogation in New York and how they all boil down to an application of the basic idea of fairness. Someone who damages another’s property should not be able to avoid liability merely because he was lucky enough to harm a business or person who had the foresight to purchase an insurance policy that fully insured, and reimbursed the insured for, the loss. Subrogation, in effect, holds the wrongdoer to account. Even if the insurer has paid the insured for the property loss, the wrongdoer still has to pay the insurer.

Subrogation claims come in all shapes and sizes, at least for commercial insurance policies which protect against property damage and business interruption. Recently, Lloyd’s of London made the news by bringing a subrogation action against a New Hampshire utility to recover the money it paid its insured as a result of a fire. According to news reports, a fire engulfed a block of businesses in Hampton Beach, New Hampshire, in February 2010. One of those stores, Decalomania, was insured by Lloyd’s of London. The water used to put out the fire allegedly damaged Decalomania’s property and, pursuant to the policy of insurance it issued to Decalomania, Lloyd’s of London paid Decalomania $33,000.00 as reimbursement for that property damage. Lloyd’s of London has brought suit against the local electrical utility, Unitil, to recover the $33,000.00 it paid Decalomania. It alleges that the fire started due to a fault in an electrical feeder line owned by Unitil and that Unitil failed to use reasonable care when maintaining the line, which was under its exclusive control.

Whether or not Lloyd’s of London will be successful in recovering, from Unitil, any of the $33,000.00 it paid to Decalomania, will depend on a number of factors. If the subrogation action had been brought in New York, rather than New Hampshire, Unitil first would be able to challenge whether the policy required Lloyd’s of London to pay Decalomania for the loss. If the policy did not provide coverage for Decalomania for the loss, then Lloyd’s of London made a voluntary payment for which it could not maintain a subrogation action. See Fid. & Cas. Co. of N.Y. v. Finch, 3 A.D.2d 141, 145, 159 N.Y.S.2d 391, 396 (3rd Dept. 1957).
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In our last article, we discussed subrogation, a legal concept that plays a large role in commercial property insurance coverage in New York. It is the equitable doctrine that allows an insurer, once it has paid its insured for a covered loss under its insurance policy, to try to recoup the money it paid from the party that caused the loss.

Once an insurer pays its insured for a covered loss, it stands in the insured’s shoes, at least up to the amount of the payment. If the insured can sue someone for causing the loss, so, too, can the insurer, to try to get its money back. The insurer does not even always have to name itself in the subrogation action. If the insured properly assigns its rights to recover for the loss to the insurer, for example by signing a subrogation receipt, the insurer can name the insured as the only Plaintiff, even though the real party in interest is the insurer. See CPLR 1004.

When the insurer tries to recover its money, it does not do it alone; the insured has a duty under the policy to cooperate with the subrogation action. Basically, the money the insured receives for the loss from the insurer comes with strings attached; the insured has to try to help the insurer get its money back from the party that has caused the loss. Most policies, however, allow the insured to waive subrogation, as long as the agreement to do so is in place before the loss occurs. This means the insured can waive the right of its insurer, which pays it for a covered loss, to recover in subrogation from the party which has caused the loss. A common example is found in a lease, in which the tenant and the landlord each give up the right of its insurer to recover from the other for a covered loss, such as a fire loss, that it might suffer due to the negligence of the other. See Kaf-Kaf, Inc. v. Rodless Decorations, Inc., 90 N.Y.2d 654, 660, 687 N.E.2d 1330, 1332-33 (1997).
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There are many terms, related both to insurance and business, which seem too intimidating for most people even to want to try to understand. Subrogation is one such term. It sounds like an impressively dense legal concept that only can be understood through the use of skilled professionals pouring over thick stacks of documents trying to decipher obtuse language to discern some hidden meaning or obtain some pearl of wisdom. Well, so much for fantasy. It really is a straightforward legal concept that every New York business and insurance adjuster should become familiar with, because it can affect the business’ recovery after a property or casualty loss.

Subrogation is an equitable doctrine that allows an insurer, which has paid its insured for a covered loss, to stand in the shoes of its insured to try to recover the money it paid, from the party that caused the loss in the first place. See Kaf-Kaf, Inc. v. Rodless Decorations, Inc., 90 N.Y.2d 654, 660, 687 N.E.2d 1330, 1332-33 (1997).

The easiest way to think of subrogation is in terms of an insurance policy that provides coverage for property damage. Just about every New York business has one. For the most part, every insurance policy protects the insured, to one degree or another, from responsibility, or liability, for its own negligence. Homeowners’ policies, and many business owners’ policies, also known as “BOP” policies, often also provide property coverage. That is, the policies require that the insurer pay the insured for the loss or damage to the insured’s real or personal property when the loss or damage results from a cause of loss covered under the policy. When the insured makes a claim to recover under its own policy for damage caused to its own property, called a first-party property claim, the insurer will evaluate, or adjust, the claim. If the damage was caused by a covered cause of loss, the insurer will pay the insured either the value of the property at the time of the loss, including depreciation, or the cost to repair or replace the property if the repair or replacement is done within a certain amount of time after the loss.

Once the insurer pays the insured’s first-party property claim, the insurer can try to recover the money it paid to its insured, from the person or entity that caused the damage in the first place. This is subrogation. By paying the insured’s claim, the insurer becomes subrogated to the insured’s right to recover from the party that caused the damage, to the full amount it paid the insured under the policy. The insurer can sue in the insured’s name, even when trying to recover the insured’s uninsured loss, when the insured assigns all its rights to recovery to the insurer, which it often does in a subrogation receipt. See CPLR 1004, and CNA Ins. Co. v. Carl R. Cacioppo Elec. Contractors, Inc., 206 A.D.2d 399, 400, 616 N.Y.S.2d 187 (2nd Dept. 1994).
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