: Insurer Subrogation Against Product Manufacturers
When an insurance company pays a first-party claim, it ordinarily is thought to succeed to the insured’s rights as against others who may be responsible for the loss. This is known as subrogation, and virtually all policies expressly provide in the insurance contract that the insured’s rights are transferred to the insurance company. (This is legal subrogation; a claim for subrogation may be found by dint of the insurer’s payment even in the absence of a contract provision, which is called equitable subrogation.)
That an insurance company later might bring a subrogation claim is important for a product manufacturer to understand. If a manufacturer settles with tort claimant who provides a complete release of all claims for damages and reimbursement, it still is possible that the claimant's insurer may still be able to bring a claim against the manufacturer for reimbursement of costs it has paid (such as for medical expenses it covered), where the manufacturer knows that an insurance company is involved in the matter prior to the settlement. In this way, subrogation is different from the commonly held notion that subrogation is just the insurance company “standing in the shoes” of its insured; the insurance company is in a better position than is its insured in these circumstances because facially the insured/tort-victim has provided a complete release favoring the manufacturer.
A recent New York case held that an insurer pursuing a subrogation claim is in fact worse off than is its insured/tort-victim. In this case, an insured submitted a first-party claim to its auto insurer which paid the claim and then pursued subrogation against the car manufacturer on a product-liability theory. The Nassau County District Court held that, though the insured himself might have been able to bring a product-liability claim, the insurer was not permitted to do so. Progressive Ins. Co. v. Ford Motor Co., 6 Misc. 3d 568 (Dist. Ct. Nassau Cty. 2004). The fire damage at issue was caused by a defective part in the car, but the court ruled that an insurer in subrogation was too remote a victim to permit tort recovery. The court found that the insurance company in effect was a remote purchaser. Conceptually, the insurance policy effected the compulsory sale of the damaged vehicle to the insurance company (though at a high price (i.e., the pre-damaged value)), and thus the insurance company took ownership with the manifested damage already in place. Similarly, the court found that the insurance company had been paid to assume this risk already, so that permitting recovery would be a windfall. “The [insurer] accepted premiums in consideration of an assumption of risk that the vehicle might be destroyed by a variety of factors.” Even if one offers the rejoinder that in at least some circumstances there may be a tortfeasor against whom the insurer could pursue a claim (as opposed to where the fire is caused by a lighting strike), an insurer is unlikely to have significantly figured in the possibility of a subrogation recovery in pricing its assumption of risk. Even where there is a theoretical subrogation claim, there may be an unidentified or impecunious tortfeasor. Accordingly, at least in the absence of evidence to the contrary, the court reasoned that the insurer was seeking a windfall and denied recovery (and thus took a category of claims out of the courts).
One might suggest that cutting off subrogation creates a disincentive for an insurer to pay the insured’s claim to begin with. On reflection, however, that does not seem to be true: the insurer has a contractual obligation to indemnify, and therefore it is duty-bound to pay (regardless of any potential subrogation recovery). By barring subrogation, the court may have successfully limited a category of cases on its dockets, and it is hardly uncommon for auto insurance companies to bring subrogation actions against the automakers. From the policyholder’s perspective, the peace of mind of prompt indemnification following a casualty however caused is a sine qua non of the insurance transaction. Insurance companies could respond to cutting off subrogation claims by writing in a new type of “escape clause,” saying in effect that if there is a tort claim the insured must first exhaust its tort claims before turning to its insurer. Whether such a policy would be purchased (let alone approved by insurance commissioners) is doubtful; moreover, as a litigation matter, such a provision (if enforceable at all) would likely be considered to be a condition subsequent, meaning that the insurer would need to prove the existence of the condition in order to refuse to perform, which would have the practical consequence of negating the efficacy of the provision since the insurance company could not refuse to pay in the first instance by pointing to a potential tort recovery.
View Original Article