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A New York federal district court dismissed an insurer’s claim seeking reimbursement for settlement payments from another insurer, finding that the claim is barred by the anti-subrogation doctrine.  Ace American Ins. Co. v. American Guarantee & Liab. Ins. Co., 2017 WL 2840286 (S.D.N.Y. July 2, 2017).

The dispute arose out of an employment-related injury.  The underlying defendants (a school district and a contractor) were both insured under various liability and excess policies, some of which were issued by the same insurers.  American Guarantee issued policies to Pelham School District and Wager Contracting, while ACE issued a policy only to Wager.  The parties ultimately reached a settlement and an interim funding agreement under which American Guarantee contributed $1.5 million and ACE paid $3.5 million.  Thereafter, ACE sued American Guarantee, alleging that it was responsible for the entire $5 million.  Ruling on the parties’ cross motions for summary judgment, the court ruled that American Guarantee was responsible for the full settlement amount. 

Under New York’s anti-subrogation doctrine, 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.”  The court ruled that the anti-subrogation rule prevents American Guarantee from bringing an indemnity claim as the subrogee of its insured (Pelham) against another of its insureds (Wager) in order to access Wager’s coverage under ACE’s policy.  The court explained that the only way that American Guarantee could shift its share of the settlement to ACE is via a subrogation claim on behalf of Pelham against Wager.  But because American Guarantee also insures Wager for at least one of the underlying claims resolved by the settlement, the anti-subrogation rule applies.

The court rejected American Guarantee’s attempt to frame the issue as a coverage priority dispute (i.e., that American Guarantee’s policy is excess to ACE’s policy), explaining:

It is [ ] a mistake to focus solely on coverage priority as to Wager Contracting, because American Guarantee can only reach that entity (and its other insurance coverage) through an indemnity claim on behalf of one insured, Pelham, against another insured, Wager Contracting – which is the exact route blocked by the anti-subrogation rule.

The court also rejected American Guarantee’s argument that the anti-subrogation rule does not apply because the policy justifications underlying the rule (avoiding conflicts of interest and improperly passing losses back to the insured) were not implicated.  The court held that the rule applies regardless of policy implications and that in any event, American Guarantee was, in fact, attempting to shift liability to a policyholder that it insured for that very risk (albeit ultimately to another insurer).