In reviewing a three-year-old property subrogation file for a client recently, we noticed repeated references in the claim notes to the lack of subrogation due to the fact that the insured had agreed to indemnify the tortfeasor for any damages resulting from the relationship between the insured and tortfeasor. Many assume that simply because the insured indemnifies the tortfeasor responsible for a loss, the subrogation claim will fail. This is not always the case, as was made clear in a recent Federal District Court ruling in Pennsylvania.
In USAA Cas. Ins. Co. v. Metro. Edison Co., 2013 WL 2403309 (M.D. Pa. May 31, 2013), USAA insured property owned by Joan Sonnen in Manchester, Pennsylvania. Metro. Edison Co. (“MetEd”) provides electrical service in and around York, Pennsylvania and was Sonnen’s electrical provider. On November 17, 2010, a fire occurred at the property, causing significant damage to both the structure and its contents. Pursuant to its insurance policy, USAA compensated Sonnen for the damage in the amount of $239,559.55, becoming equitably and contractually subrogated to any claim Sonnen may have against MetEd to the extent of USAA’s payments.
USAA brought a subrogation suit in federal court, alleging negligence and gross negligence against MetEd. In its first amended complaint, USAA alleges that the fire was caused by MetEd’s negligent failure to, among other things, properly maintain the electrical equipment in and around the property, train its workmen, and follow applicable standards and regulations. MetEd denied its liability in an answer filed January 24, 2013 and on the same day filed a third-party complaint against Sonnen, alleging that the fire was caused by her negligent failure to maintain the wiring on the premises and to comply with the National Electric Code. MetEd also alleged that Sonnen was jointly and severally liable for the damages, and sought indemnification and contribution from Sonnen based on the contract between MetEd and Sonnen which provided:
The Customer agrees to indemnify and save harmless … [MetEd] from any liability which may arise as a result of the presence or use of the Company’s electric service or property, defects in wiring or devices on the Customer’s premises, or the Customer’s failure to comply with the National Electric Code.
USAA moved to strike MetEd’s third-party complaint, arguing that as subrogee, it is subject to any affirmative defenses that MetEd would have against Sonnen had she been the plaintiff.
The Court granted USAA’s Motion to Dismiss because MetEd’s third-party action failed to state a claim upon which relief could be granted. An insurance company that has paid a claim “stand[s] in the shoes” of its insured, and may assert the insured’s rights against the alleged tortfeasor. Wausau Underwriters Ins. v. Shisler, 1999 WL 529250 (E.D. Pa. 1999). A subrogee is “placed in the precise position of the one to whose rights he has been subrogated” and can recover only to the extent that the subrogor could recover. Brinkley v. Pealer, 491 A.2d 894, 898 (Pa. Super. 1985). The judge held that dismissal of MetEd’s third-party action against Sonnen was appropriate because, as subrogee, USAA was already subject to any defenses that could be asserted against Sonnen.
As for indemnification, MetEd suggested that its third-party complaint against Sonnen be allowed to proceed because it seeks recovery directly from Sonnen as a result of the contractual indemnification agreement that Sonnen entered into with MetEd. However, the Court declared this to be a “non-sequitor” because indemnification presumes an obligation to a third party that triggers the indemnitor’s (Sonnen) obligation to the indemnitee (MetEd). The Court pointed out that USAA is not a “third party” to whom Sonnen could be primarily liable. Rather, the relationship between Sonnen and USAA was that of subrogor and subrogee. The Court announced that the subrogation suit filed by USAA should proceed as though Sonnen were suing MetEd herself. In filing the third-party complaint, MetEd is essentially seeking indemnification from Sonnen for damages done to Sonnen. Any affirmative defense that MetEd has arising out of Sonnen’s conduct or contract must be asserted against USAA rather than against Sonnen. Therefore, the third-party complaint was dismissed and the subrogation suit was allowed to proceed.
All too often confusion between the closely-related legal concepts of indemnity, contribution, and subrogation deters insurance professionals from pursuing valid subrogation potential. But, it shouldn’t. In most insurance settings, indemnity running from the insured to the third-party tortfeasor doesn’t eliminate subrogation potential. Workers’ compensation subrogation provides a few wrinkles in this general rule, but it doesn’t destroy subrogation potential. Understanding the difference between indemnity, contribution, and subrogation is a necessary tool to effective subrogation. Subrogation involves two parties, the subrogee and the subrogor. The subrogee, or the insurer, seeks to enforce the rights of another or the person doing the subrogation. The subrogor, or the insured, is the party whose rights the subrogee is enforcing. Indemnity is a contractual or equitable right whereby the entire loss is shifted from one who is only technically or passively at fault to another who is primarily or actively responsible. It presumes an obligation to a third party that triggers the indemnitor’s obligation to the indemnitee, and doesn’t come into play where only two parties are involved. A third party must make a claim against the indemnitor for which the indemnitor looks to the indemnitee to indemnify it for. And finally, contribution is the right of one who has discharged a common liability to recover from another also liable for a proportion of the loss which he ought to pay or bear. It comes into play when the defendant in a subrogation suit tries to blame a third party for “contributing” to the loss. It has no application in a simple two-party subrogation setting.
Suffice it to say that this case serves as a stark reminder not to automatically close claim files with subrogation potential merely because the insured has indemnified the third-party tortfeasor which caused the loss. Obtain a review of any such files by subrogation counsel. Teddy Roosevelt once said, “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” Don’t let subrogation opportunity and the hard dollars it represents pass you by.
If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at [email protected]