ANTI-SUBROGATION RULE BARS CLAIM AGAINST ADDITIONAL INSURED

May 12, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

Focusing on the fine print in an insurance policy while sorting through a complex series of subrogation cases, the Illinois Appellate Court concluded that the anti-subrogation rule barred an insurance company from suing a negligent subcontractor that was an named as additional insured.

Public policy did not require a different result. Chubb Insurance Co. v. DeChambre, 2004 WL 583198 (1st Dist., March 24).

Chubb Insurance Co. filed a complaint alleging that Brian DeChambre, an employee of Prairie Material Sales Inc., negligently backed a cement truck into a support column at a construction site.

Opus North Corp. -- the general contractor and owner of the damaged building -- was insured by Chubb. After reimbursing Opus for $105,000 in damage, Chubb filed a subrogation claim against DeChambre and Prairie Material. But an endorsement of the Chubb policy listed "contractors and subcontractors" as additional insureds.
Granting a defense motion for summary judgment, Cook County Circuit Judge Kathy M. Flanagan concluded that the anti-subrogation rule barred Chubb's complaint. Agreeing with Flanagan, the Appellate Court affirmed.

Here are some highlights of Justice Shelvin Louise Marie Hall's opinion (with various omissions not noted in the quoted text):
"The doctrine of subrogation is a creature of chancery and is a method whereby one who has involuntarily paid a debt or claim of another succeeds to the rights of the other with respect to the claim or debt paid. Dix Mutual Insurance Co. v. LaFramboise, 149 Ill.2d 314 (1992).

"The right of subrogation is an equitable right and remedy which rests on the principle that substantial justice should be attained by placing ultimate responsibility for the loss upon the one against whom in good conscience it ought to fall.

"Subrogation is allowed to prevent injustice and unjust enrichment but will not be allowed where it would be inequitable to do so. There is no general rule that can be laid down to determine whether a right of subrogation exists since this right depends upon the equities of each particular case.

"However, it is well-settled that an insurer may not subrogate against its own insured or any person or entity who has the status of a co-insured under the insurance policy. In Dix Mutual, the court held that a tenant, by the payment of rent, had contributed to the payment of the insurance premium, thereby gaining the status of a co-insured.

"Since the landlord and the tenant intended for the insurance policy to cover any fire damage to the premises, regardless of who caused it, the insurance company could not maintain an action against the tenant.

"Chubb contends that the anti-subrogation rule does not apply in this case because the defendants did not attain the status of additional insureds. Chubb maintains that for the anti-subrogation rule to bar its claim in this case, all of the following must be true: (1) premiums must have been paid to include the defendants as additional insureds; (2) there must have been a contract between Opus and the defendants; (3) the insurance policy must entitle the defendants to coverage for damage to their truck or for damage done by the defendants to the primary insured's property; and (4) the extent of the damages must exceed the defendants' coverage under their primary insurance.

"Chubb argues that there is no evidence that any premiums were paid by Opus to provide additional coverage to the defendants. See American Country Insurance Co. v. Cline, 309 Ill.App.3d 501 (1999) (it would be inequitable to allow an additional insured to avoid responsibility for its own conduct and seek full coverage where the insurer has not been fully compensated); see also Benge v. State Farm Mutual Automobile Insurance Co., 297 Ill.App.3d 1062 (1998) (courts have applied the anti-subrogation rule to prevent an insurance carrier from transferring a loss back to the party who has paid for protection from the same loss).

"Chubb further argues that there is no evidence of any contract or agreement between Opus and the defendants to include the defendants as additional insureds."

Rejecting Chubb's arguments, Hall noted that:

"Pursuant to endorsement No. 9, the defendants, as subcontractors, were additional named insureds under Opus's policy. In its answer to the request to admit facts, Chubb admitted that endorsement No. 9 provided that contractors 'and subcontractors of every tier' were additional named insureds.

"Further, on appeal Chubb concedes that, in its response to the motion for summary judgment, it acknowledged that Prairie was named as an additional insured under Opus's builder's risk policy. However, Chubb argues that it never intended to admit that the defendants had satisfied the requisite conditions to actually be additional insureds.

"Regardless of its intentions, by its answer to the request to admit facts and its response to the motion for summary judgment, Chubb has admitted that the defendants were additional insureds.

"Chubb's reliance on United States Fire Insurance Co. v. Hartford Insurance Co., 312 Ill.App.3d 153 (2000), is misplaced. In that case, this court held that since the policy of insurance required a written agreement in order for a party to be named as an additional insured, an oral agreement to be named as an additional insured would not be enforceable.

"In the present case, endorsement No. 9 was part of the contract and by its terms included Prairie as an additional insured. See also West American Insurance Co. v. J.R. Construction Co., 334 Ill.App.3d 75 (2002) (the reviewing court distinguished United States Fire on the basis that, unlike that case where the only written evidence conferring additional insured status was issued after the accident, corporate practice and written documents in the record confirmed the defendant's status as an additional insured).

"We conclude that the defendants were additional insureds under the terms of the policy.

"Next, Chubb maintains that even if the defendants were additional insureds, the anti-subrogation rule does not apply where the policy does not provide coverage to the defendants for the harm at issue.

"The anti-subrogation rule is intended to prevent an insurer from recovering from its insured that loss or damage the risk of which the insured had passed along to the insurer under the policy.

" 'The anti-subrogation rule is supported by two public policy considerations. First, the insurer should not be able to pass its loss to its own insured, thus avoiding coverage which its insured has purchased and paid in the forms of premiums....

" 'The second public policy concern is that the insurer should not be placed in a situation where there exists a potential conflict of interest, thereby possibly affecting the insurer's incentive to provide a vigorous defense for one of its insureds.' 16 Couch on Insurance 3d, section 224.3, at 18-19.

"Chubb relies on an exception to the anti-subrogation rule that allows an insurer to subrogate against its own insured where the risk is not covered by the insurance policy."

Yet, Hall noted, the Chubb policy provided coverage for damage to "property of others for which the insured may be legally liable."
"The term 'others' is not limited in any way. Thus, Opus' building was 'property of others,' and the damage to Opus' building was a loss covered by the policy for which the defendants were legally liable.

"Finally, Chubb maintains that its policy is excess coverage and therefore not available to the defendants since they were adequately covered by their own primary insurance.
"In their answers to interrogatories, the defendants acknowledged that they were being afforded a defense and coverage by Transportation Insurance Co. under a policy with limits of $1 million."

The "Other Insurance" section of the Chubb policy provided: "If at the time of loss or damage there is any other insurance, whether such other insurance be in the name of the insured or any third party, which would apply in the absence of this policy, the insurance under this policy shall only apply as excess insurance over such other insurance."

But, Hall explained, the clause did not defeat the anti-subrogation rule.

"The purpose of excess insurance is to protect the insured from a loss in excess of the coverage provided by the underlying insurance. Excess insurance is not available until the primary insurance has been exhausted.

"Chubb points out that the damages in this case were $105,022, an amount substantially less than the $1 million coverage afforded the defendants under their policy with Transportation.

"It has been held that the anti-subrogation rule does not apply where the exclusions in the policy render it inapplicable to the loss. North Star Reinsurance Corp. v. Continental Insurance Co., 82 N.Y.2d 281, 296, 624 N.E.2d 647, 654 (1993) (general contractors' liability policy was subject to several exclusions, an excess insurance policy and a workers' compensation policy).

"The fact that the defendants had primary coverage through the Transportation policy is not an exclusion of coverage under the policy in this case."

In deciding that the anti-subrogation rule barred Chubb's complaint, Hall pointed to Pennsylvania General Insurance Co. v. Austin Powder Co., 68 N.Y.2d 465, 502 N.E.2d 982 (1986), where the New York high court explained:

"The insurer's right of subrogation, long recognized as a matter of equity has traditionally been applied to claims against third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse. A third party, by definition, is one to whom the insurer owes no duty under the insurance policy through which its loss was incurred.

"To allow the insurer's subrogation right to extend beyond third parties and to reach its own insured would permit an insurer, in effect, to pass the incidence of the loss from itself to its own insured and thus avoid the coverage which its insured purchased."

According to Austin Powder, the anti-subrogation rule applied because the insurance company (Liberty Mutual) had a conflict of interest in dealing with the indemnitor (Austin Powder) and indemnitee (Bison Ford), since both were insureds under its insurance policy. As the Court of Appeals explained:

"The rule against allowing subrogation claims against an insured is based, in part, on the potential for conflict of interest that is inherent in these situations. Here, for example, the interests of the insured indemnitor, Austin Powder, can only be fully protected through the vigorous defense of the indemnitee, Bison Ford. Yet, if indemnification from Austin Powder could be had for losses sustained on Bison Ford's behalf, Liberty Mutual would have less incentive to defend Bison Ford from claims made against it.
"As a consequence, allowing indemnification might sanction an indirect breach of the insurer's obligation to defend its insured, Austin Powder. Furthermore, it would sanction a direct breach of the primary obligation the insurer undertook -- the obligation to indemnify Austin Powder from loss."

"However," Hall continued in the Chubb case, "in Benge, the [Illinois appeals] court held that the anti-subrogation rule did not apply where the defendant-insurer insured both parties but under separate policies, and the policy provided that, if the insurer paid the plaintiffs' losses, it would obtain the plaintiffs' rights to recover against a third party. The policy did not limit the transfer of rights to those against third parties not insured by the defendant-insurer. Benge, 297 Ill.App.3d at 1071.

"The court in Benge found no conflict of interest which would prevent a subrogation claim by the insurance company.
"Unlike the situation in Benge," Hall recounted, "there is no indemnification agreement. Moreover, under the facts of the case before us, a conflict of interest does arise.

"Here, the policy provides that, like Opus, Prairie would not be covered under the policy if it had other insurance covering the loss, which Prairie admitted it had. Chubb settled with its insured, Opus. Chubb then initiated the present action against its other insured, Prairie, because Prairie had additional insurance coverage.

"This presents a conflict of interest because it gives Chubb the incentive to pursue its own insured for a risk covered in the policy and for which Prairie has paid the premium, if perhaps indirectly.
"As we stated earlier, the goal of subrogation is to place the ultimate responsibility for the loss upon the one against whom in good conscience it ought to fall.

"In this case, Opus and Prairie were insured for the same risks under the same policy. Therefore, the loss in this case should fall on Chubb pursuant to its policy of insurance.

"We conclude that Chubb's claim against the defendants was barred by the anti- subrogation rule," Hall wrote.

"Chubb contends that, if the anti-subrogation rule applies in this case, the effect would be that a subcontractor would never have to purchase its own insurance since the general contractor would be responsible for providing coverage for all of its subcontractors and that such effect is clearly violative of public policy.

"While courts will not enforce an agreement that is contrary to public policy, a contract should not be deemed illegal unless it is expressly contrary to the law or public policy. The laws and public policy of the State of Illinois permit freedom of contracting between competent parties.

"In addition, construction of a contact that renders the agreement enforceable rather than void is preferred. As a result, the issue as to whether a contract is contrary to public policy depends on the facts and circumstances of the case."

Concluding that Chubb's reliance on American Country Insurance Co. v. Cline, 309 Ill.App.3d 501 (1999), is "misplaced," the Appellate Court concluded that applying the anti-subrogation rule was not against public policy.

"Contrary to Chubb's argument, since the parties were free to restrict the insurance coverage by contract, applying the anti-subrogation rule in this case will not require general contractors to provide insurance in every case to subcontractors and therefore does not violate public policy."

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