In the context of insurance, “subrogation” is when an insurance company files a claim to recover from a party causing a loss, after the insurance company has paid the policyholder for the covered loss. The insurance company steps into the shoes of the insured policyholder and gets the benefit of whatever rights the policyholder may have had against the third-party causing the covered loss. For example, a fire loss occurs, resulting in a payment by the homeowners’ insurance company. After payment, the insurance company brings an action against the party deemed responsible for causing the fire.
Some insurance companies bring the subrogation action in the name of the insurance company, identifying in the filed pleading that the insurance company is asserting the claim as the subrogee of the insured, policyholder. This is the more straightforward way of proceeding and best alerts the parties involved to the “real party in interest.”
However, under certain circumstances, some insurance companies choose to bring the action in the name of the insured policyholder, thus creating confusion regarding the nature of the claim and the identity of the “real party in interest.” While this ordinarily may not present a problem, there are circumstances under which it can.
For example, assume the following facts: the policyholder is a common interest condominium or homeowners association and a covered loss occurs involving the roof on the association’s high-rise condominium building. The first party insurance company pays out $100,000 to the Association to repair the roof after a windstorm. The insurance company then files a subrogation action against the roofer and original developer for bad workmanship contributing to the loss, arising from the windstorm.
Assume the Association has other claims against the developer or roofer, unrelated to the storm related roof repair. If the insurance company files the subrogation action in the name of the Association, rather than in its own name, as subrogee, the Association may not even be aware of the filing of the lawsuit. If the lawsuit continues and is ultimately resolved, resulting in a release to the roofer and developer, questions arise regarding whether this release, given in the name of the Association, can serve as an impediment to claims later brought by the Association in its own name, and as the real party in interest.
While most courts can be relied upon to examine the situation on its facts and make a fair ruling that the equities would not bar a subsequent action by the Association, it is best if the Association is aware of the ongoing action, and can make its presence known to the court, securing necessary protections to toll any statute of limitations or guard against any waiver as result of the entire controversy doctrine. This doctrine requires parties to assert, in one action, all known claims, to avoid multiple litigation filed regarding the same factual circumstances.
Parties receiving a settlement from their insurance carrier are advised to notify the insurance carrier in writing, upon payment, demanding notice of any future subrogation action. This is intended to preserve the insured’s rights. This way, the insured has the option of moving to intervene in the subrogation action. Ideally, the insurance company, by providing notice of its intent to file a subrogation action, before actually filing the complaint, can negotiate with the insured’s general counsel regarding how best to protect both the rights of the insurance carrier and its insured. For example, tolling agreements can be entered into, with consent, preserving future claims. An important goal is to identify and protect the insured’s rights to monetary damages above and beyond the proceeds received through payment under its insurance policy.
Questions arise where the damages suffered by the policyholder go beyond the amount paid by the insurance carrier to the policyholder. Most courts hold that the insured, policyholder, should control the claim, where the policyholder’s actual loss exceeds the amount paid by the subrogee, insurance carrier.
Many of these issues are determined by the policy language, any agreements entered into between the policyholder in the insurance company surrounding a loss and subsequent payment under the policy, and by applicable case law.
Of course, every case is distinguishable by its facts and no conclusions should be drawn from this brief article. The reader is cautioned to consult with an attorney under any circumstances which may involve the issues discussed above. This article is not intended to be relied upon for any purpose, but is merely illustrative of certain problems that may arise where the interests of the doctrine of subrogation and entire controversy, may be in conflict.
Stark & Stark can provide valuable assistance in these situations, counseling the policyholder and taking necessary measures to ensure that the policyholder’s rights are fully preserved and protected.
Thomas Pryor is a Shareholder in Stark & Stark's Lawrenceville, New Jersey office concentrating his practice in Insurance Coverage & Liability issues. For questions, or additional information, please contact Mr. Pryor: tpryor@stark-stark.com.
