The Anti-Subrogation Rule
On May 5, 2016, the New York Court of Appeals in Millennium Holdings LLC v. Glidden Co., addressed the extension of the New York Anti-subrogation rule to third parties who are not covered by the insurance policy. In rejecting the extension in this case, based on a lead paint claim, the Court stated: “If we were to extend application of the anti-subrogation rule to all non-covered third parties, an insurer who fulfills its obligation to pay on the risks insured by the relevant policy would essentially be foreclosed from the ability to subrogate. For this reason it is essential, absent a policy reason supporting application of the anti-subrogation rule, that the third party against whom the insurer seeks to exercise its right of subrogation is not covered by the relevant insurance policy.”
Subrogation may arise either contractually or under the doctrine of equitable subrogation. The purpose of subrogation is to “allocate[ ] responsibility for the loss to the person who in equity and good conscience ought to pay it, in the interest of avoiding absolution of a wrongdoer from liability simply because the insured had the foresight to procure insurance coverage” (North Star Reins. Corp. v. Continental Ins. Co., 82 N.Y.2d 281, 294  ).
Equitable subrogation ” ‘entitles an insurer to stand in the shoes of its insured to seek indemnification from third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse’ ” (ELRAC, Inc. v. Ward, 96 N.Y.2d 58, 75 , quoting North Star Reins. Corp., 82 N.Y.2d 281, 294 ). Subrogation rights may also be preserved by the parties to a contract, including an insurance contract. However, the anti-subrogation rule is an exception to the right of subrogation, “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 … even where the insured has expressly agreed to indemnify the party from whom the insurer’s rights are derived” In effect, “an insurer may not step into the shoes of its insured to sue a third-party tortfeasor … for damages arising from the same risk covered by the policy even where there is an express subrogation agreement (see Jefferson Ins. Co. of N.Y. v. Travelers Indem. Co., 92 N.Y.2d 363, 373  ). The two primary purposes of the anti-subrogation rule are to avoid “a conflict of interest that would undercut the insurer’s incentive to provide an insured with a vigorous defense” and “to prohibit an insurer from passing its loss to its own insured” Millennium Holdings LLC v. Glidden Co., No. 38, 2016 WL 2350158 (N.Y. May 5, 2016)
Insurers are barred under the anti-subrogation rule from seeking subrogation from a named insured or additional insureds (see Pennsylvania Gen. Ins. Co., 68 N.Y.2d at 471, 510 N.Y.S.2d 67, 502 N.E.2d 982). Conversely, subrogation is typically permissible where the third party is not a named or additional insured. The anti-subrogation rule, therefore, requires a showing that the party the insurer is seeking to enforce its right of subrogation against is its insured, an additional insured, or a party who is intended to be covered by the insurance policy in some other way. The essential element of the anti-subrogation rule is that the party to which the insurer seeks to subrogate is covered by the relevant insurance policy. The rule also requires that the insurer seek to enforce its right of subrogation against that covered party on a risk insured by the policy (see Pennsylvania Gen. Ins. Co., 68 N.Y.2d at 468, 510 N.Y.S.2d 67, 502 N.E.2d 982).
Read the decision here.