The “Anti-Subrogation Rule”: An Insurer’s Right of Subrogation Against Its Own Insured

“Subrogation” is the legal doctrine which allows one party to take over the rights or remedies of another party against a third party. In other words, subrogation allows one party to “step into the shoes” of another.

In most cases, the subrogation issue arises because an insurance company pays its insured client for injuries and/or property damage caused by a third party, then sues the third party to recover the amount it paid to the insured client. Consider the following:

Example 1: An independent contractor is negligent in repairing some heavy machinery, causing the machinery to catch fire and burn down a nearby oil refinery. The owner of the oil refinery has insurance, which covers the cost of rebuilding the oil refinery. If the oil refinery’s insurance policy has a “subrogation clause,” the insurance company will likely sue the independent contractor to recover any money it paid to rebuild the oil refinery.

An insurance company’s right of subrogation (i.e., ability to sue the independent contractor, above) may be limited by other circumstances. The largest constraint in this regard is the “anti-subrogation rule,” which provides that 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. In other words, an insurer may not “step into the shoes” of its insured to sue a third party, if that third party also qualifies as an insured under the same policy, but note, there is an exception to this rule in specific circumstances that involve multiple insurers participating in the first property insurance policy and the defendants have multiple insurers on their CGL policy. Consider “Example 1” from above, but with additional facts:

Example 2: An independent contractor is negligent in repairing some heavy machinery, causing the machinery to catch fire and burn down a nearby oil refinery. The oil refinery and independent contractor are both insured under the same insurance policy (i.e. they are co-insured). As a result, the insurance company must pay to rebuild the oil refinery, but will likely be unable to sue the independent contractor to recover any money it paid for the rebuild because of the “anti-subrogation rule.”

The rationale for 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 form of premiums. Second, the insurer should not be placed in a situation where there exists a potential conflict of interest.

Not surprisingly, several exceptions to the anti-subrogation rule have emerged. For example, while it is well-settled the anti-subrogation rule applies if multiple insureds are covered under the same policy, the situation is less certain when insureds are covered under separate policies issued by the same insurer. In the latter scenario, application of the anti-subrogation rule varies by state (and sometimes within the state). Consider “Example 1” and “Example 2” from above, but with additional facts:

Example 3: An independent contractor is negligent in repairing some heavy machinery, causing the machinery to catch fire and burn down a nearby oil refinery. The oil refinery and independent contractor are both insured by the same insurance company, but under separate policies (i.e. they are not co-insured). If the oil refinery’s insurance company pays to rebuild the oil refinery, it may be able to sue the independent contractor to recover any money it paid for the rebuild, depending on the jurisdiction of the lawsuit (since the “anti-subrogation rule” may no longer apply).

In addition to the exception stated above, there are various other instances where the courts have declined to apply the anti-subrogation rule, including:

  • An insurer’s subrogation against its own insured where the risk is not covered by the insurance policy. State Farm Mut. Auto. Ins. Co. v. Perkins, 216 S.W.3d 396, 398 (Tex. App.—Eastland 2006, no pet.).
  • An insurer’s equitable subrogation against its insured where the insurer has paid a third-party claim involuntarily, in good faith, and under a reasonable belief that the payment is necessary to its protection. Keck, Mahin & Cate v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 20 S.W.3d 692 (Tex. 2000).
  • Subrogation action of an excess insurer against a primary insurer and defense counsel for mishandling claim. Am. Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex. 1992).
  • In specific circumstances that involve multiple insurers participating in the first property insurance policy and the defendants have multiple insurers on their CGL policy.

Even though an exception to the anti-subrogation rule may apply, the insurance company might ultimately decide not to sue its insured, especially if the policy otherwise renders the insurance company liable for the loss. For instance, in “Example 3”, the insurance company should sue the independent contractor if, and only if, the independent contractor’s policy does not provide sufficient coverage for rebuilding the oil refinery. If the policy does provide sufficient coverage for the rebuild, the insurance company would essentially be suing itself, since the insurance company would ultimately be liable to pay for the independent contractor’s negligence under the policy. If the policy does not provide sufficient coverage for the rebuild, the insurance company would likely sue the independent contractor to recover the amount, in excess of the coverage under the independent contractor’s policy, which it paid to rebuild the oil refinery.

As illustrated above, the anti-subrogation rule is not a complete defense for an insured against claims brought against it by its own insurer. Indeed, for those attorneys that fully understand the policies and principles behind the anti-subrogation rule, it may be wielded as a defense to various subrogation claims or rendered inapplicable by other argument. In either situation, the anti-subrogation rule creates a unique opportunity for practitioners to identify circumstances in which the rule may or may not be applied.

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