A van owned by A Drive Corp., the lessor, and driven by an employee of Continental Copy Products Ltd., the lessee, was involved in an accident with a pedestrian. The pedestrian sued A Drive and the driver of the van, but not Continental Copy. A Drive had primary insurance coverage from Reliance Insurance Company and excess insurance coverage from Jefferson Insurance Company. Continental Copy had a comprehensive coverage policy with Travelers Indemnity Company. An endorsement to the Travelers policy named A Drive as one "who is insured," and another endorsement which stated that "HIRED OR NON OWNED COVERAGE IS APPLICABLE." In settlement of the suit against A Drive, Reliance paid the $500,000 limit on A Drive's policy and Jefferson paid $400,000 in excess coverage.
Jefferson then brought a declaratory judgment action against Travelers. On cross motions for summary judgment, the lower courts held Travelers liable under its general/contractual liability policy for the entire settlement amount minus $10,000 that was Reliance's exposure based on a "step down" endorsement in its policy. The Court of Appeals modified the order of the Appellate Division and concluded: (1) Travelers was liable to Jefferson and Reliance as a primary co-insurer of A Drive under its $500,000 business auto policy based on the terms of the applicable insurance contract; and (2) the antisubrogation rule barred an indemnity claim against Travelers as insurer of Continental Copy.
As the Court of Appeals held that Travelers and Reliance were primary co-insurers, both Travelers and Reliance were equally liable for the underlying claim. Therefore, Travelers must reimburse Jefferson, the excess carrier, for the amount it paid for the underlying claim.
1. Whether under the terms of the lessee's general/contractual liability policy, its bodily injury policy, and/or its business auto policy the lessor is an insured entity.
2. Whether the antisubrogation rule promulgated in Pennsylvania General Insurance Co. v. Austin Powder Co. (68 N.Y.2d 465 (N.Y. 1986)) bars a claim of indemnity by an excess and primary carrier of insurance purchased by the owner of a leased van against the lessee's carrier.
1. Yes. Under the terms of the contract at issue, an ordinary business entity could reasonably expect that the lessor was covered under the endorsements to the business auto policy at issue. Given the insurer's failure to timely disclaim any purported exclusion, the terms of the contract must be construed against the insurer.
2. Yes. The antisubrogation rule promulgated in Pennsylvania General Insurance Co. v. Austin Powder Co. (68 N.Y.2d 465 (N.Y. 1986)) bars a claim of indemnity by an excess and primary carrier of insurance purchased by the owner of a leased van against the lessee's carrier.
Ordinarily, an insurer is free to subrogate against a tortfeasor to recover monies paid to a claimant. See Federal Ins. Co. v. Arthur Anderson & Co., 75 N.Y.2d 366 (N.Y. 1990). However, an insurer is not allowed to subrogate against its own insured for a claim arising from the very risk that the insurer has contracted to cover. See North Star Reinsurance Corp. v. Continental Ins. Co., 82 N.Y.2d 281 (N.Y. 1993). This is a rule based on public policy, for if an insurer could recover its losses by subrogating against its own insured, it would have little incentive to mount a vigorous defense. Fearing conflicts of interest that could interfere with an insurer's duty to defend, the court ruled in Pennsylvania General Insurance Co. v. Austin Powder Co., 68 N.Y.2d 465 (N.Y. 1986), that the antisubrogation doctrine extends to lessees, even where the lessee had agreed to indemnify the lessor against loss. However, the court refused to allow subrogation because the lessor's insurer should have expected to pay losses caused by the lessee, an additional insured. See id.
First, the Court of Appeals decided that, given Traveler's failure to timely disclaim, the language of the lessee's policy made Traveler's a primary carrier with respect to A Drive, the lessor. The Court stated that "the Travelers' interpretation that the endorsement does not provide any business auto coverage . . . fails to give the provision meaning and courts cannot read policy provisions to be meaningless." Jefferson, at para. 10. Although the Court of Appeals suggested that the terms of the policy were ambiguous, it concluded that the inclusion of A Drive in one of the additional insured endorsements to the policy established A drive as an insured. Id. The Court stated that "Travelers' efforts at avoiding coverage [were] . . . weakened by its failure to disclaim coverage after it received notice of the claim," and further indicated that "where some ambiguity is present regarding the extent of coverage or any possible exclusions, the insurer must timely disclaim." Id. at para. 11.
Second, the Court of Appeals rejected Jefferson's indemnity claim against Travelers by extending its ruling in Pennsylvania General (68 N.Y.2d 465 (N.Y. 1986)) to apply to permissive users not specifically mentioned in an insurance policy by name. The antisubrogation rule applies not only to an additional insured, as decided in Pennsylvania General, but also to permissive users. The Court indicated that the distinction between a named insured like the one at issue in Pennsylvania General, and a permissive user, such as the one at issue in the instant case, was "immaterial." For these reasons, the Court of Appeals refused to entertain Jefferson's alternative indemnity claim against Travelers.
The Court of Appeals does not indicate whether the contract terms at issue would have been interpreted in another way if Traveler's had timely disclaimed after receiving notice of the accident. The exclusions advanced by Traveler's may be successful in future litigation if Traveler's were to timely disclaim. If the Court were to find that A Drive was not a covered entity, then perhaps the antisubrogation rule would not have applied, and Jefferson's indemnity claim might have been successful.
"Subrogation is an equitable doctrine that allows one who is compelled to pay the debt or obligation of another to step into the debtor's shoes with respect to the claim or debt so paid. Subrogation allows an insurer to recoup a loss for which it indemnified its insured from the tortfeasor whose negligence caused the loss. Because subrogation is an equitable doctrine, however, whether there is a right of subrogation depends on the facts, circumstances, and equities of the particular case. An insurer generally has no right of subrogation against its own insured arising from a risk for which the insured is covered." Douglas R. Richmond , The Additional Problems of Additional Insureds, 33 Tort & Ins. L.J. 945 (1998) (footnotes omitted) (citing Atlas Assur. Co. of Am. v. Mistic, 822 P.2d 897, 902 (Alaska 1991); Jos. A. Bank Clothiers, Inc. v. Brodsky, 950 S.W.2d 297, 303 (Mo. Ct. App. 1997); Jindra v. Clayton, 529 N.W.2d 523, 526 (Neb. 1995); State ex rel. Regents of New Mexico State Univ. v. Siplast, Inc., 877 P.2d 38, 41-42 (N.M. 1994); North Star Reinsurance Corp. v. Continental Ins. Co., 624 N.E.2d 647, 653 (N.Y. 1993); Remy v. Michael D's Carpet Outlets, 571 A.2d 446, 452 (Pa. Super. Ct. 1990), aff'd sub nom. Kimco Dev. Corp. v. Michael D's Carpet Outlets, 637 A.2d 603 (Pa. 1993)).
Whether the antisubrogation rule applies often turns on the interpretation of underlying insurance contracts. For example, Douglas Richmond has indicated that:
"Broad though the antisubrogation doctrine may be, neither insurers nor insureds should take its operation for granted. For example, a party initially thought to be an additional insured or automatic insured may not be (often because the party does not fit the policy definition of who is an insured), thereby making the antisubrogation doctrine inapplicable. A policy exclusion may deprive an insured of coverage for a particular claim, such that the doctrine does not apply. Depending on the jurisdiction, the doctrine's usual application may depend on whether the subrogating insurer provided common law liability coverage or whether a so-called contractual policy is at issue. Even where the doctrine is held to bar both contractual and common law indemnity claims, it may not be a complete bar. A court might permit a contribution or indemnity action to recover amounts in excess of the available insurance coverage." See Douglas R. Richmond, The Additional Problems of Additional Insureds, 33 Tort & Ins. L.J. 945 (1998) (footnotes omitted).
In Insurance Company of North America v. Avis Rent-a-Car System, Inc., 348 So.2d 1149 (Fla. 1977), the Florida Supreme Court allowed an indemnity suit against the insurance carrier of the driver of a leased vehicle after the insurance company seeking indemnity received all the insurance money from the carrier named in the rental agreement. Relying on Florida's dangerous instrumentalities doctrine, the court held that the parties could contract amongst themselves once the minimum insurance provided in the rental agreement had been payed. The policy behind this decision was that consumers had to be adequately covered under rental agreements because rental fees reflected the insurance premiums payed by rental agencies. Thus, an insurance provider named in a rental agreement had to pay its limit before other insurance companies could be subject to indemnity suits.