New York State Court of Claims

New York State Court of Claims

DOMINION INS. V. THE STATE OF NEW YORK, #2002-001-031, Claim No. 98352, Motion No. M-64725


Synopsis


Claimants' motion to reargue the Decision and Order on Motion Nos. M-62954 and CM-63117 filed December 2001 is denied. Claimants specifically argue that the Court misapplied the anti-subrogation rule and misapprehended matters of fact related to their several and individual, as opposed to joint, obligations under the excess and umbrella policies. The Court contends that "any misapprehension here is not about what the facts are, but about what they mean in the context of this case."

Case Information

UID:
2002-001-031
Claimant(s):
DOMINION INSURANCE COMPANY LTD., CNA REINSURANCE CO., LTD., UNIONAMERICA INS. CO., LTD., ST. KATHERINE'S INS. CO. (UK)LTD., YASUDA FIRE & MARINE INS. CO. (UK) LTD., WINTERTHUR SWISS INSURANCE CO. (UK), and ASSICURAZIONI GENERALI S.p.A. (UK), severally, and AS SUBROGEES OF DR. ARTHUR L. ROSE
Claimant short name:
DOMINION INS.
Footnote (claimant name) :

Defendant(s):
THE STATE OF NEW YORK
Footnote (defendant name) :

Third-party claimant(s):

Third-party defendant(s):

Claim number(s):
98352
Motion number(s):
M-64725
Cross-motion number(s):

Judge:
SUSAN PHILLIPS READ
Claimant's attorney:
Mendes & Mount, LLPBy: Robert J. Brown, Esq., Of Counsel
Defendant's attorney:
Hon. Eliot Spitzer, NYS Attorney GeneralBy: Reuben Goldwaser, Esq., Assistant Attorney General, Of Counsel
Third-party defendant's attorney:

Signature date:
August 6, 2002
City:
Albany
Comments:

Official citation:

Appellate results:

See also (multicaptioned case)



Decision

The following papers have been read and considered on claimants' motion to reargue: Notice of Motion for Leave to Reargue, dated January 25 and filed February 14, 2002; Affirmation of Robert J. Brown, dated January 25 and filed February 14, 2002, with annexed Exhibit A; Memorandum of Law in Support of Motion for Leave to Reargue, dated January 25 and received February 14, 2002; letter from Reuben Goldwaser, AAG, dated January 29 and received January 31, 2002; letter from the Court to the parties, dated February 19, 2002; letter to the Court from Robert J. Brown, dated and received March 14, 2002, with its attachments; letter to the Court from Robert J. Brown, dated March 14 and received March 15, 2002, with its annexed Exhibits A (primary insurance policy underwritten by Great Atlantic Insurance Company), B (subscription slip for 1977 excess malpractice liability policy) and C (umbrella policy); letter from Robert J. Brown, dated April 5 and received April 8, 2002, with its attachments, Affidavit of Barton M. Archibald, sworn to March 15, 2002, with its annexed Exhibit A (PSAC Collective Policy), Supplemental Affidavit of Derrick Heath, sworn to March 26, 2002, with its annexed Exhibits A (Companies Collective Policy), B (Umbrella Policy [London 1971]) and C (PSAC Collective Policy) and Second Supplemental Affidavit of Derrick Heath, sworn to March 26 and received April 8, 2002, with its annexed Exhibits A-D; and all the papers submitted by the parties on the original motion.

Claimants Dominion Insurance Company LTD; CNA Reinsurance Company LTD; Unionamerica Insurance Company LTD; St. Katherine's Insurance Company (UK) LTD; Yasuda Fire & Marine Insurance Company (UK) LTD; Winterthur Swiss Insurance Company (UK); and Assicurazioni Generali S.p.A. (UK) (collectively, "claimants"), who underwrote excess and umbrella "London market subscription" insurance policies for the State University of New York's Downstate Medical Center ("SUNY Downstate"), brought this claim to seek indemnification from the State of New York ("the State" or "defendant") pursuant to Public Officers Law § 17 for certain amounts paid to settle a medical malpractice lawsuit brought against Dr. Arthur L. Rose ("Rose"), who was covered as an additional insured under these policies for alleged acts of malpractice in connection with SUNY Downstate's clinical practice plan. Claimants, the only solvent subscribers to the excess and umbrella policies, settled the medical malpractice litigation on behalf of Rose for $2 million[1] in order to protect him from the perceived risk of a much larger judgment, and now seek reimbursement of $1,238,231.58, or so much of their actual settlement payment ($1,948,086)[2] as exceeded their collective individual and several proportionate shares for a $2 million settlement under the terms of the excess and umbrella policies ($709,854.42), which had per occurrence and aggregate limits of $500,000 and $5 million respectively (Second Supplemental Affidavit of Derrick Heath, sworn to March 26 and received April 8, 2002, Exh. D).

In moving for summary judgment, claimants contended that they were contractually bound to pay only their respective several proportionate shares of the $2 million settlement and that the State, as Rose's "co-insurer" and under certain precedents established in the Frontier litigation (see, e.g., Frontier Ins. Co. [Angtuaco] v State of New York, 146 Misc 2d 237, affd 172 AD2d 13; Frontier Ins. Co. [Scalea] v State of New York, 197 AD2d 177, affd 87 NY2d 864), was required to make up the shortfall created by the insolvency of several of the other companies subscribing to the excess and umbrella policies. The State opposed claimants' motion and cross-moved for summary judgment, arguing that claimants were unable to satisfy their burden of proving that Rose was acting within the scope of his State employment for purposes of Public Officers Law § 17 because he admittedly could not recall whether any medical students were present when he committed the alleged act of medical malpractice (a failure to diagnose a brain tumor); and citing Travelers Ins. Co. v Nory Constr. Co., Inc. (184 Misc 2d 366) for the proposition that the so-called volunteer doctrine precluded claimants from recovering any amounts paid in excess of their contractual obligations.

By Decision and Order dated December 13 and filed December 19, 2001 ("the December decision"), the Court held that claimants were barred by the anti-subrogation rule from recovering from their insured, the State, for amounts paid to settle the medical malpractice litigation against the additional insured, Rose, in the facts of this case; and so denied claimants' motion and granted the State's cross motion for summary judgment and dismissed the claim. Because claimants paid out less than their collective maximum several and individual proportionate shares under the excess and umbrella policies ($2,144,405; i.e., $125,000 on the excess policy + $2,019,405 on the umbrella policy), the Court viewed them as no different from any insurer that settles a case within bargained-for policy limits. The Court then added parenthetically that "[i]n any event" as the First Department had observed in Chrysler Leasing Corp. v Public Adm'r, New York County (85 AD2d 410), an insurer could not recover in a subrogation action from its own insured even for amounts paid in excess of contractual coverage limits (which is how claimants portrayed what they had paid); and further referred to Travelers, the case advanced by the State to support the proposition that the volunteer doctrine generally bars an insurer from recovering amounts paid in excess of policy limits or outside covered risks.

Finally, the Court in the December decision remarked that the situation presented was not analogous to the Frontier litigation, which involved a claimant insurer's right to indemnification from the State pursuant to Public Officers Law § 17 as an equitable subrogee of physicians whom the claimant insurer had defended and indemnified under medical malpractice policies purchased by and issued to the physicians alone. In light of the disposition of the motion and cross motion, the Court did not comment at all on whether Rose was acting within the scope of his State employment for purposes of section 17 when he committed the alleged act of medical malpractice or whether triable issues of fact remained on this score,[3] the dispute to which both parties had devoted the bulk of their attention on the motion and cross motion.

Claimants have now moved pursuant to CPLR 2221 to reargue the December decision. Claimants specifically contend that the Court misapplied the anti-subrogation rule, principally by relying on dictum in Chrysler Leasing Corp. v Public Adm'r, New York County (85 AD2d 410, appeals withdrawn 57 NY2d 682) rather than the First Department's holding in Valentin v City of New York (187 AD2d 343, affd sub nom. North Star Reins. Corp. v Continental Ins. Co., 82 NY2d 281) (Brown Aff., ¶¶ 7-10); and misreading Travelers as an anti-subrogation case rather than one that "merely holds that . . . payments for which the insurer is under no obligation to make are voluntary" (Brown Aff., ¶ 11). Claimants argue further that the portion of the settlement payment made by claimants which they seek to recover from the State was not voluntarily made (Brown Aff., ¶¶ 12-13); that the anti-subrogation rule does not bar an insurer from recovering from its insured any monies paid "outside the risk" covered by the policy (Brown Aff., ¶ 14), or "in excess of policy coverage" (id., ¶ 15); that the Court has disregarded the exception to the anti-subrogation rule "for a breach of a duty to provide insurance for a co-insured" (id., ¶¶ 25-26); and that the equities lie with them (id., ¶¶ 27-31).

Claimants further fault the Court for misapprehending "matters of fact concerning the [claimants'] several, as opposed to joint, subscription to the insurance policies purchased by the State University of New York, Downstate Medical Center. . . ." (id., ¶ 3; see also, id., ¶¶ 17-24). At the Court's request, claimants provided (or, in some instances, confirmed that they had already provided) as full and complete a copy of each of the insurance policies as still exists[4] as well as answers to specific questions seeking additional facts or posing hypothetical questions intended to assure the Court's fullest understanding of the operation and interrelationship of these policies (letter from the Court to the parties dated February 19, 2002; letter to the Court from Robert J. Brown, dated and received March 14, 2002, with its attachments; and letter to the Court from Robert J. Brown, dated March 14 and received March 15, 2002, with its annexed Exhibits A, B and C).
  1. Discussion
  1. Whether claimants, in fact, merely settled within policy limits
This claim presents the following basic question: Did these insurers (claimants) in the circumstances presented have an obligation to pay on behalf of their insureds only their collective several and individual proportionate shares of the $2 million settlement (i.e., $709,854.42) or up to their collective several and individual proportionate shares of the excess and umbrella policies' combined per occurrence and aggregate limits of $5.5 million (i.e., $2,144,405)? Claimants answer the former ($709,854.42); the Court, the latter ($2,144,405), which undergirds its conclusion that claimants are barred by the anti-subrogation rule from recovering from their insured, the State,[5] the amount sought by the claim ($1,238,231.58, the difference between claimants' actual settlement payment of $1,948,086 [see, n 1, supra] and $709,854.42), which they paid on behalf of their additional insured, Rose. Although claimants fault the Court for misapprehending matters of fact related to their several and individual, as opposed to joint, obligations under the excess and umbrella policies, any misapprehension here is not about what the facts are, but about what they mean in the context of this case.

Claimants stress that under the terms of these London subscription policies, "each subscribing insurer is responsible only for its several proportionate share of any claim made on the policy, covering only a certain percentage of each dollar of each claim. Insolvent shares of a policy mean that a portion of each dollar of coverage under the policy is uncollectible and beyond the risk for which the remaining solvent insurers contracted to provide coverage" (emphasis added) (Mem. of Law, pp 7-8). Specifically, claimants Dominion and Unionamerica contracted for 25% of each dollar to be paid out under the excess policy and claimants collectively contracted for 40.3881% of each dollar to be paid out under the umbrella policy; therefore, they explain, Rose was responsible for $1,238,231.58 of the $2 million settlement (i.e., $375,000 [75% of each dollar, representing the uncollectible shares of insolvent insurers subscribing to the excess policy] + $863,231.58 [roughly 59.6% of each dollar, representing the uncollectible shares of insolvent insurers subscribing to the umbrella policy] = $1,238,231.58) (id., pp 5-9; Brown Aff., ¶¶ 21-24). As a consequence, claimants argue that they paid outside the policies' risks or beyond their limits because they paid more than their proportionate share of this $2 million settlement; and that the Court is simply wrong to suggest that, in fact, they paid within the policies' risks or limits because they paid less than they were contractually obligated to pay for a 100% policy loss (id., ¶¶ 18, 20).

An insurer has a duty of good faith in defending[6] and settling claims on behalf of its insured, which may require the insurer to offer its policy limits. Here, the insurers settled for less than their maximum limits under the policies (by which the Court means $2,144,405, their collective proportionate shares of the excess and umbrella policies' combined per occurrence and aggregate limit of $5.5 million). Thus, the Court failed (and still fails) to discern how claimants' situation differs materially from that of any other insurer called upon to tender up to its policy limits to protect its insured from a risk covered under the policy.[7] Nor does this result strike the Court as either unfair or inconsistent with the public policy considerations informing the anti-subrogation rule, which are principally "to prevent the insurer from passing the incidence of loss to its own insured and to guard against the potential for conflict of interest that may affect the insurer's incentive to provide a vigorous defense for its insured" (North Star Reins. Corp. v Continental Ins. Co., 82 NY2d at 294-295).[8]

Claimants protest that what the Court has decided is unfair because "invocation of the anti-subrogation rule results in unjust enrichment to the State" (Mem. of Law, p 12) and "the greater equities lie with the Claimants who contracted to pay only a certain percentage of risk and achieved an overall settlement which benefited the State" (id.). As the Court pointed out in the December decision, the State paid these claimants hefty premiums totaling $336,079 in 1977-1978 to purchase a maximum of $2,144,405 in coverage for a one-year period; and in 1997--twenty years later--claimants paid out $1,948,086 under the policies. Again, the Court wonders how the State may be said to have experienced a windfall when claimants were merely called upon to tender something less than their maximum limits under the excess and umbrella policies to discharge the duty of good faith that they owed to their insureds. Claimants are, in fact, trying to recoup from their insured, the State, amounts paid within policy limits on behalf of the additional insured, Rose, and thus to avoid responsibility for the full extent of the coverage purchased from them by the State.

Further, the Court does not agree that "no conflict of interest is present as Claimants had every incentive to reduce the exposure to Dr. Rose and themselves" (Brown Aff., ¶ 30; see also, id., ¶ 29; Mem. of Law, p 13). While both the State (which the medical malpractice plaintiff could have sued for damages in the Court of Claims on a theory of vicarious liability) and Rose had a common interest in completely vindicating the treatment that he rendered or at least in minimizing the amount of any settlement or judgment,[9] the State's interests were constantly in conflict with those of Rose and claimants on the question of section 17's applicability. Moreover, the depleted aggregate of the primary policy, the insolvencies of various insurers and Rose's apparently modest assets projected this conflict into high relief: limited monies were available from the policies (as it turned out, $2,196,319: $51,914, the remainder of the aggregate of the primary policy + $2,144,405 from the excess and umbrella policies, representing the shares underwritten by claimants, the solvent subscribers) and the State's deep pockets were off-limits for the medical malpractice plaintiff, who had not filed a claim against the State in the Court of Claims and who, no doubt as a result of all these considerations, ultimately made the settlement with Rose contingent upon claimants' commitment to pay it in full.

In short, claimants and Rose were at loggerheads with the State throughout the litigation over the question of whether (or to what extent) the State was obligated to defend and indemnify Rose or participate financially in any settlement, and at the same time claimants were in a position to secure information from SUNY Downstate in defense of Rose which might assist the subsequent prosecution of a section 17 claim against the State. As the Court of Appeals has recognized, "the potential for conflict of interest . . . is inherent" in situations that pit an insurer against its own insured (Pennsylvania Gen. Ins. Co. v Austin Powder Co., 68 NY2d 465, 472; see also, Ham, Nuances Bedevil Antisubrogation, NYLJ, Jan. 12, 1998, at 7, col 1 ["Unstated but underlying many of these concerns (about potential conflicts of interest), is the power of the insurer, under the typical ‘cooperation clause' included in every liability policy . . . to demand information and candor incompatible with its position as one with an adversarial interest"]).
  1. Whether claimants may recover assuming that they, in fact, settled outside the policies' risks or limits
Having concluded that claimants, in fact, merely settled within policy limits here, the Court in the December decision adverted to two decisions indicating that claimants could not recover even if this were not the case: Chrysler and Travelers. As previously noted, claimants argue that the Court should have instead looked to the First Department's holding in Valentin), a construction site accident case that was consolidated with two other cases presenting similar fact patterns (North Star Reins. Corp. v Continental Ins. Co., 185 AD2d 187 and Prince v City of New York, 189 AD2d 33) and affirmed by the Court of Appeals (North Star Reins. Corp. v Continental Ins. Co., 82 NY2d 281, supra); and question its grasp of Chrysler and Travelers.
  1. Valentin
In Valentin, a contractor's employee died from injuries that he suffered in a fall off the roof of a school building; and his administratrix subsequently sued the City of New York and the New York City Board of Education, the building's owner and operator respectively, for wrongful death. The City and the Board then impleaded the contractor for common-law indemnification as well as for contribution on the basis that the contractor's negligence had been the sole cause of its employee's death.

As required by its contract with the Board for this construction and repair work, the contractor had purchased owners' contractors' protective ("OCP") insurance naming the City and the Board as insureds, which provided coverage for bodily injury in the amount of $3 million per occurrence (North Star, 82 NY2d at 288). The contractor had also purchased separate general contractors' liability ("GCL") insurance for itself from the same insurer, which provided coverage for bodily injury of $1 million per occurrence, as well as an excess policy from another insurer and workers' compensation coverage from the State Insurance Fund (id.). The contract between the Board and the contractor specifically reserved the Board's and the City's rights to common-law indemnification (id.).

The contractor moved for summary judgment dismissing the third-party action on the ground that the City and the Board were not entitled to indemnification/contribution because of the OCP policy. In effect, the contractor argued that it had "preindemnified" the City and the Board for any possible liability by purchasing the OCP policy, the existence of which barred the City and the Board from seeking indemnification. The trial court granted the motion without prejudice to the commencement of a new action for indemnification/contribution in the event that the City and the Board were subsequently found liable in the wrongful death action in an amount in excess of $3 million, the OCP policy's per occurrence limit.

The First Department reinstated the claim to the extent that any judgment exceeded the $3 million per occurrence policy limit, relying on its earlier decision in Michalak v Consolidated Edison Co. (166 AD2d 213, lv dismissed 77 NY2d 989) for the proposition that "by requiring the acquisition of insurance on their behalf, third-party plaintiffs [the City and the Board] . . . waived any right of common-law indemnity up to the limit of the subject policy" (Valentin, 187 AD2d at 344); and on the Court of Appeals' decision in Pennsylvania Gen. to support the conclusion that the City and the Board could not "compel[] [the insurer, who was the same for both the OCP and GCL policies] to demand subrogation from its own insured [the contractor] for exactly the sort of claim for which [the contractor] purchased the policy in the first place" (Valentin, 187 AD2d at 344).

On the appeal of the First Department's order in Valentin and the cross appeals and appeal respectively of the orders in North Star and Prince, the Court of Appeals rejected the preindemnification doctrine, which it defined as "the conclusion that the owners' right to common-law indemnification is waived by reason of the contractors' obligation to procure insurance" (North Star, 82 NY2d at 292, n 1). The Court, however, concluded that the narrower anti-subrogation rule applied to bar the insurers' subrogation claims against the contractors in two of these cases, including Valentin. Specifically, the Court of Appeals held that the anti-subrogation rule, by which an insurer has no right of subrogation against its own insured for a claim arising from a risk for which the insured was covered, should be applied to the situation where an owner and contractor are insured under two policies covering the same risk and issued simultaneously by the same insurer.[10]

Claimants here interpret the First Department's decision in Valentin to hold "that the anti-subrogation rule does not apply to amounts in excess of policy coverage regardless of the characterization of the parties" (Brown Aff., ¶ 8; see also, Mem. of Law, p 3). This unqualified statement is apparently derived from the First Department's observation in Valentin that "as third-party plaintiffs [the City and the Board] seek to recover an amount in excess of the policy limitations, the third-party claim should have been dismissed only insofar as it requests indemnification/contribution for the amount covered by the insurance obtained by [the contractor] (see, Goffredo v Bay St. Landing Assocs., 179 AD2d 799)" (Valentin, 187 AD2d at 345); and the Court of Appeals' subsequent affirmance of the First Department's order in Valentin. Claimants further cite Goffredo, a preindemnification case, for the proposition that "[t]he anti-subrogation rule does not bar an insurer from bringing a subrogated claim against its own insured for amounts in excess of policy coverage" (Brown Aff., ¶ 15 [emphasis in original]; see also, Mem. of Law, p 7).

As an initial matter, the First Department's decision in Valentin was principally decided on the basis of the preindemnification doctrine, which was subsequently rejected by the Court of Appeals. Although the First Department also weaved references to and a quotation from Pennsylvania Gen., the Court of Appeals' first major exploration of the anti-subrogation rule, into its opinion, the word "anti-subrogation" is not mentioned even once and the decision certainly presents no analysis of this concept. Goffredo suffers from similar deficiencies.[11] As a consequence, the Court of Appeals' decision in North Star, not the First Department's earlier decisions in Valentin and Goffredo, offers whatever specific guidance the application of the anti-subrogation rule in construction site accident cases has to offer for these facts.

In applying the anti-subrogation rule to those situations where an owner and contractor are insured under two policies covering the same risk, issued simultaneously by the same insurer, the Court of Appeals in North Star recognized that the third-party plaintiff's (the owner's) insurance carrier is the real party in interest when the owner brings a third-party action for common-law indemnification and contribution against the third-party defendant (the contractor, who is the same carrier's insured for the same risk, albeit under a separate policy)[12] and so affirmed the First Department's order in Valentin reinstating the third-party action (which the trial court had dismissed in its entirety, without prejudice to commencement of a new action later) to the extent of potential losses exceeding the maximum amount available to the building's owner (the City) and operator (the Board) under the policy (i.e., the per occurrence policy limit). Although the Court of Appeals did not discuss why the third-party plaintiffs in Valentin were entitled to proceed against the third-party defendant for amounts in excess of the per occurrence policy limit or, put another way, why the anti-subrogation rule only barred the third-party action to the extent of potential losses within the per occurrence policy limit,[13] the reason seems obvious: the third-party plaintiffs, in addition to their claim for contractual indemnification under the insurance policy, which was barred by the anti-subrogation rule, had a separate and distinct claim against the contractor for common-law indemnification, which would come into play in the event of the third-party plaintiffs' exposure beyond the per occurrence policy limit (see, North Star, 82 NY2d at 292, citing Hawthorne v South Bronx Community Corp., 78 NY2d 433, 437 for the proposition that "common-law and contractual indemnification give rise to distinct claims that may be asserted simultaneously"; see also, Furey, Third Party Actions and the Antisubrogation Rule, 68 NYSBJ 32 [Nov. 1996] [noting that subsequent to North Star, "[t]he [anti-subrogation] rule has been applied to secure dismissals or stays of third party actions, to the extent the third party plaintiff's losses are within the coverage, even when the potential third party defendant has additional coverage from other sources" and "Technically, the [third-party defendant] employer is only off limits to the extent that claims are within the insurer's policy limits. The [third-party plaintiff] insured would be entitled to proceed against a co-insured employer to the extent it is exposed beyond the limits of their mutual carrier's coverage. For that reason, the appropriate relief when the [anti-subrogation] rule applies is partial summary judgment, perhaps with a stay of the third party action").

What North Star suggests is that if the State had been amenable to suit in State Supreme Court in the medical malpractice action against Rose (which, of course, it was not) and Rose had brought a cross-claim or commenced a third-party action against the State seeking statutory indemnification under section 17, the court would have dismissed or stayed the cross-claim or third-party action to the extent of potential losses within the maximum amount available to Rose under the relevant policies--here, not the per occurrence policy limit[14] but rather the aggregate remaining from the primary policy plus the solvent insurers' (claimants') collective proportionate shares of the $5.5 million face value of the excess and umbrella policies ($2,144,405)--and Rose would have been free to pursue his claim for section 17 indemnification from the State for any monies that he paid out in settlement or judgment in excess of this coverage. In short, to the extent the fact patterns in construction site accident cases may be analogized to the situation here, the courts' application of the anti-subrogation rule in these cases to bar any suit for amounts up to a 100% policy loss per occurrence cuts against claimants' position in this claim. More to the point, North Star and similar cases say nothing directly about whether the anti-subrogation rule bars an insurer from proceeding as the subrogee of one insured to recover from another insured any monies paid by the insurer for a settlement or judgment outside the relevant policy's risks or limits, a topic addressed by the First Department in Chrysler, an automobile liability insurance case.
  1. Chrysler
In Chrysler, the renter of an automobile from Avis Rent-a-Car ("Avis"), who charged the rental to his supervisor's corporate credit card (the renter, his supervisor and their corporate employer are collectively referred to as "the renters"), was subsequently involved in a three-car accident, which resulted in two deaths followed by two wrongful death lawsuits. The rental agreement afforded the renters the benefits of an automobile liability insurance policy, and the insurer defended the renters, Avis and Chrysler Leasing Corporation ("Chrysler"), the record owner of the vehicle, in the wrongful death litigation.

The automobile liability insurance policy was a two-tier policy, although the rental agreement did not apprise the renters of this fact. Specifically, this policy provided the renters with coverage for bodily injury or death liability with limits of $100,000 for each person and a total of $300,000 for each accident; and insured Chrysler and Avis for liability up to $500,000 per person and $1,000,000 for each accident.

The insurer subsequently settled one of the wrongful death actions for $347,500, of which amount the insurer paid $322,500. That is, the insurer settled this action for an amount within the limits of its coverage to Chrysler and Avis ($500,000 per person), but outside the coverage provided the renters ($100,000 per person) by $222,500.

Four years after the settlement, the insurer, Chrysler and Avis sued the renters and their corporate successor and the renters' other insurers to recover the amount of the settlement in excess of the limits of the coverage provided to the renters under the automobile liability insurance policy (i.e., $222,500). Supreme Court found in their favor, but the First Department reversed.

The First Department remarked that "[o]n this appeal [the insurer] has argued that this well-established principle [that no right of subrogation arises in favor of an insurer against its own insured], although uniformly stated without qualifying language, means only that an insurer may not recover from an insured the sum it is obligated to pay under the insurance policy" (Chrysler, 85 AD2d at 413). Concluding that "[n]one of the authorities cited by [the insurer] supports this construction," the appellate court went on to review those authorities in detail and to conclude that "[f]rom the foregoing review it is apparent that, with arguable exceptions not here relevant, the rule is firmly established that an insurance company may not be subrogated to the claim of one insured against another insured even where the amount sought to be recovered is in excess of the coverage provided" (id. at 416). Claimants have chided the Court for basing the December decision on this "dictum."

Judge Posner has defined dictum as "a statement in a judicial opinion that could have been deleted without seriously impairing the analytical foundations of the holding--that, being peripheral, may not have received the full and careful consideration of the court that uttered it" (Sarnoff v Am. Home Products Corp., 798 F.2d 1075 at 1084). By this definition, the quoted excerpt was not dictum in the First Department's decision, but was in the December decision since the Court had already concluded that claimants had paid within the "coverage provided" in the facts of this case.

The First Department stated the anti-subrogation rule broadly in Chrysler, which the courts may in the future limit to or qualify by its facts (i.e., a two-tier automobile liability insurance policy where the insured renters were ignorant of this fact and so were committed to cooperate with the insurer in the ensuing tort litigation without knowing that the insurer might subsequently seek to sue them as its other insureds' subrogee). In the meantime Chrysler has been cited as general support for the anti-subrogation rule by numerous courts, most notably the Court of Appeals (see, Pennsylvania Gen., 68 NY2d at 471, 472).[15] Moreover but relatedly, any insurer that seeks to recover from its insured any amounts paid outside a policy's risks or limits immediately encounters the exception to the right of subrogation for payments voluntarily made.
  1. The volunteer exception

On the original motion, the State argued that any payment made by claimants outside the policy's risks or limits was voluntary--i.e., was not made pursuant to some obligation running from the subrogee to the subrogor--and therefore was not recoverable since a volunteer has no right to subrogation. The State cited Travelers, another construction site accident case, to support its position.

In Travelers, a contractor's employee was injured when a State-owned bridge collapsed during reconstruction. The contractor had procured an OCP policy from the insurer, which provided the State coverage for bodily injury in the amount of $1 million per occurrence. The contractor had also purchased a commercial general liability policy ("CGL") and a catastrophe umbrella policy for itself from the same insurer, which provided coverage in the amounts of $1 million and $5 million per occurrence respectively. Finally, the contractor purchased workers' compensation coverage for the construction project from another insurer.

The contractor's employee sued the State for his personal injuries in the Court of Claims, and the insurer commenced an action against the contractor for contribution and common-law indemnification, which the parties agreed to hold in abeyance until completion or resolution of the Court of Claims action. After a judgment entered in the Court of Claims in favor of claimant's employee was affirmed on appeal (Uderitz v State of New York, 231 AD2d 889), that Court directed the State to make a lump-sum payment in satisfaction of the judgment (Uderitz v State of New York, 173 Misc 2d 765), and the insurer made this payment and dusted off its action for contribution and common-law indemnification, seeking to recoup from the contractor so much of the judgment as it paid in excess of its acknowledged obligations to the State under the OCP (the $1 million per occurrence policy limit plus all costs and a pro rata portion of the interest paid to satisfy the judgment). The contractor's workers' compensation insurer undertook its defense in this action.

On the plaintiff's motion for summary judgment, Supreme Court found that the insurer had not made the required evidentiary showing to recover for common-law indemnification (i.e., an evidentiary showing that the State was only vicariously liable as an owner under the Labor Law and that the contractor was wholly responsible for causing the accident resulting in the contractor's employee's injuries).

Defendant cross-moved for summary judgment on the basis of both the anti-subrogation rule and the volunteer exception. As to the former, Supreme Court noted that the anti-subrogation rule does not apply where an exclusion in the insured's policy renders the policy inapplicable to the loss; that both the CGL and the umbrella policies contained an exclusion for bodily injury to an employee suffered during the course of employment; and that the contractor argued that an "insured contract" exception to this exclusion resulted in coverage relative to the insurer's indemnification claim. The Court found that since the construction contract between the State and the contractor had not been included in the motion papers, the contractor, which had the burden to establish the applicability of the exception to the exclusion, had not made an evidentiary showing that the construction contract fell within the policies' definition of an "insured contract" and therefore had not established, as a matter of law, that the insurer's claim was precluded by the anti-subrogation rule. As an aside, the Court observed that "[S]hould the construction contract contain the standard clause requiring [the contractor] to indemnify the State, then the ‘insured contract' exception would apply and [the insurer's] claim would be barred by the antisubrogation rule" (Travelers, 184 Misc 2d at 370).

The Court nonetheless granted summary judgment to the contractor on the basis of the volunteer exception to subrogation in view of the insurer's insistence that it was not obligated to pay more than the amount due under the OCP:[16]
In the present case, [the insurer] insists that coverage was not afforded by the CGL and umbrella policies pertaining to the [contractor's employee's personal injury] claim and that its payment was made for amounts it was not obligated to pay. [The contractor's] refusal to contribute towards a payment of the judgment did not impose a duty on [the insurer] to do so, nor did the order of the Court of Claims requiring the State to make immediate full payment of the judgment force [the insurer] to pay beyond its policy limits.

Therefore the overpayment made by [the insurer] in the absence of any legal liability or compulsion to do so, and which was not requested by [the contractor], was purely a voluntary payment which cannot be recovered
(id. at 373).

Claimants here similarly seek to recover what they insist are amounts paid outside the policies' risks or limits. They contend, however, that their payment of these amounts was not voluntary for two reasons: they "had to protect Dr. Rose from personal liability arising from the State's denial of POL 17 coverage and protect their own interests from a bad faith cause of action" (Brown Aff., ¶ 12; see also, id., ¶ 13, Mem. of Law, pp 4-5).

"Subrogation, an equitable doctrine taken from the civil law, is broad enough to include every instance in which one party pays a debt for which another is primarily answerable and which in equity and good conscience should have been discharged by the latter, so long as the payment was made either under compulsion or for the protection of some interest of the party making the payment, and in discharge of an existing liability" (Gerseta Corp. v Equitable Trust Co. of New York, 241 NY 418, 425-426). In determining whether a payment is voluntary, therefore, the relevant inquiry is the subrogee's self-interest in making the payment, not the insured's. Expressed in different terms, claimants must have had some "palpable interest" (Foremost County Mut. Ins. Co. v Home Indem. Co., 897 F2d 754, 762) in settling the action for more than their claimed contractual share of the liability. "Merely protecting its client's interests is insufficient to prevent [an insurance company] from being considered a volunteer" (id.; see also, Travelers, 184 Misc 2d at 371 ["[P]rotection of the State's [the insured's] interest alone is insufficient to prevent [the insurer] from being cast as a volunteer"). Accordingly, claimants' interest in protecting Rose, the additional insured, does not spare them from being considered a volunteer.

"[W]hen confronted with a settlement offer within the policy limits, an insurer may be held liable for damages to its insured for a bad faith refusal to settle" (Redcross v Aetna Cas. & Sur. Co., 260 AD2d 908, 911, citing Smith v General Acc. Ins. Co., 91 NY2d 648, 652-653 [emphasis added]). This potential liability flows from an insurer's implied duty of good faith to perform its obligation under the insurance policy without "do[ing] anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract" (Ansonia Associates Ltd. Partnership v Public Service Mut. Ins. Co., 257 AD2d 84, 87); and recognizes that an inherent conflict of interest may occur "whenever an insurer is presented with a settlement offer within policy limits . . . [between] on the one hand, the insurer's interest in minimizing its payments and on the other hand, the insured's interest in avoiding liability beyond the policy limits" (Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445, 452).

The plaintiff in a bad-faith action must show that the insured lost an actual opportunity to settle the claim at a time when all serious doubts about the insured's liability were removed (Pavia, 82 NY2d at 455); however, as the December decision noted at n 4, at the settlement hearing defense counsel stated that at the time the case settled no experts had even yet testified against Rose; that Rose was prepared to defend the medical malpractice action; and that the settlement did not constitute an admission or inference of liability. When claimants' counsel informed them of the terms of the settlement on October 1, 1997, he specifically observed that "although without merit, Underwriters [claimants] would undoubtedly have faced an assigned bad faith action brought by very aggressive counsel with a vengeful client" (Affirmation of Robert J. Brown, Esq., dated and filed January 16, 2001, Exhibit G [emphasis added]). An interest in avoiding litigation may constitute sufficient compulsion to deem a payment involuntary (see, Meckel v Continental Resources Co., 758 F2d 811, 814, n 1), but there is little reason from this record to suppose that claimants' self-interest in avoiding a bad-faith lawsuit compelled them to settle when they did.

More to the point, whereas this claim is based entirely upon the proposition that claimants' collective several and individual proportionate shares of the $2 million settlement ($709,854.42) delimit their contractual obligations, in order to avoid being tagged volunteers for amounts paid in excess of this sum, claimants assert that Rose had a potential bad-faith cause of action for any refusal to settle within their collective several and individual proportionate shares of the excess and umbrella policies' combined per occurrence and aggregate limit of $5.5 million ($2,144,405). In other words, claimants trim their views to the perceived legal exigencies: for purposes of the anti-subrogation rule, they insist that their policy limits are $709,854.42, not $2,144,405; to avoid the volunteer exception, they then turn around and argue that their policy limits are actually $2,144,405, not $709,854.42 because, of course, they could never be accused of bad faith for refusing a settlement offer that required them to pay outside their policies' risks or limits. Nor do claimants explain why they were contractually obligated to pay up to $2,144,405 to protect the interests of their additional insured, Rose, but not those of their insured, the State.
  1. The exception to the anti-subrogation doctrine for breach of a duty to provide insurance to a co-insured

On the original motion, claimants consistently referred to the State as a "co-insurer" of Rose, and they continue to do so, grudgingly conceding only that perhaps the State occupies some dubious dual status as both their insured under the policies and as a co-insurer of Rose pursuant to section 17: "To the extent the Court finds the State to be the ‘insured' under the insurance policies purchased by SUNY-Downstate, . . . the State is also a ‘co-insurer' of Dr. Rose pursuant to New York Public Officers Law Section 17" (Mem. of Law, p 3); and "While the insured party [SUNY-Downstate and its employee Dr. Rose] may be a small subdivision of one of the State's many departments, the State itself holds the position of insurer of Dr. Rose, a State employee protected by POL 17" (id., p 11 [emphasis in original]). This train of thought leads claimants to argue that the anti-subrogation rule does not apply in this case because they are seeking to recover for a breach of the State's obligation under section 17 to provide Rose with insurance, and there is a well-known exception to the anti-subrogation rule for breach of such an obligation.

The obvious flaw in this line of reasoning is that the State, in fact, did procure insurance coverage for Rose although section 17 did not require it to do so. As former Court of Claims Judge (now Supreme Court Justice) Andrew P. O'Rourke emphasized in his wide-ranging discussion of section 17 in Partman v State of New York (UID # 2001-017-614), section 17 (3) (a) obligates the State either to indemnify and save its employees harmless from or to pay any judgment or settlement arising out of any act or omission occurring or alleged to have occurred while the employee was acting within the scope of his State employment (i.e., "The state shall indemnify and save harmless its employees in the amount of any judgment obtained against such employees in any state or federal court, or in the amount of any settlement of a claim, or shall pay such judgment or settlement; provided, that the act or omission from which such judgment or settlement arose occurred while the employee was acting within the scope of his public employment or duties; . . ." [Public Officers Law § 17 (3) (a)]). An obligation to procure insurance coverage is completely distinct from the obligation to indemnify (Kinney v G. W. Lisk Co., 76 NY2d 215), which is the very basis for the exception to the anti-subrogation rule cited by claimants.
  1. Conclusion
The Court has always viewed claimants' prospects for recovery, poised between the Scylla of the anti-subrogation rule and the Charybdis of the volunteer exception, as dashed by the former rather than engulfed by the latter, but in either event doomed. Claimants have not persuaded the Court otherwise on this motion to reargue, which is denied.


August 6, 2002
Albany, New York

HON. SUSAN PHILLIPS READ
Judge of the Court of Claims




[1]The case settled for $3.5 million altogether: $2 million contributed by claimants on behalf of Rose, and $1.5 million contributed by the common insurer of Rose's two remaining co-defendants, a physician and the estate of a physician.
[2]The Liquidation Bureau of the New York State Insurance Department ("Liquidation Bureau") paid $51,914, the amount of the aggregate still available under SUNY Downstate's primary policy with Great Atlantic Insurance Company ("Great Atlantic"). On the original motion, it was not entirely clear whether only $51,914 remained because of the aggregate's depletion by other settlements or judgments or because of Great Atlantic's insolvency, and what if any importance claimants attributed to Great Atlantic's insolvency. On this motion claimants aver "that only $51,914 of the settlement was paid out of the aggregate remaining in the $500,000 primary policy has no affect [sic] upon the Claim. The first excess policy was triggered by the exhaustion of the primary policy aggregate and Claimants have no basis upon which to seek reimbursement from the primary policy" (Brown Aff., ¶ 19).

[3]The Court makes this point because of claimants' observation that "[i]mplicit in the Court's Decision would appear to be the acknowledgment that Dr. Rose, the Claimants' subrogee, was at all times relevant to the Claim an employee of the State" (Affirmation of Robert J. Brown, dated January 25 and filed February 14, 2002, with annexed Exhibit A ["Brown Aff."]; ¶ 4; Memorandum of Law in Support of Motion for Leave to Reargue, dated January 25 and received February 14, 2002 ["Mem. of Law"], pp 2-3). There is no dispute that Rose was a full-time faculty physician at SUNY Downstate whose alleged act of malpractice arose from his participation in SUNY Downstate's clinical practice plan (which circumstances triggered his coverage under SUNY Downstate's primary policy and the excess and umbrella policies underwritten by claimants), but it does not inevitably follow--as claimants seem to imply--that these same circumstances establish that Rose was acting within the scope of his State employment for purposes of Public Officers Law § 17 (see, Frontier Ins. Co. [Angtuaco] v State of New York, 146 Misc 2d 237, supra; Frontier Ins. Co. [Mann] v State of New York, Claim No. 84945, Motion No. M-48509 [Blinder, J., Dec. 13, 1993, at 3]). In the Frontier litigation, the State initially argued that a physician who committed an alleged act of medical malpractice in the treatment of a clinical practice patient (i.e., a patient who would or could be billed through the clinical practice plan to which the physician belonged) was, by virtue of this fact alone, acting outside the scope of State employment. The courts did not warm to this proposition (e.g.,"[T]he court rejects the State's inflexible position that the mere fact that a medical service was rendered to a practice plan patient removes a faculty-member physician from the protection of Public Officers Law § 17" [Angtuaco, 146 Misc 2d at 248]); however, they did not decide the converse, that the State was always obligated by section 17 to defend and indemnify a physician for an alleged act of medical malpractice in the treatment of a clinical practice patient. Instead, the Frontier litigation established a five-part inquiry to determine whether a particular act of alleged medical malpractice in the treatment of a clinical practice patient fell within the scope of the physician's State employment for purposes of section 17, which occurred when (1) the primary purpose of the physician's employment was to teach his specialty area to SUNY medical students and resident physicians; (2) the operation or other treatment giving rise to the medical malpractice action was a procedure within the specialty area; (3) the physician was observed and/or assisted by the students or residents whom he was employed to teach when performing the act(s) which subsequently gave rise to the malpractice action; (4) the operation or other treatment in question was performed in a hospital authorized and approved for teaching by the medical school; and (5) it was within the contemplation of both the physician and the medical school that the physician's teaching duties would include treatment of patients who would be clinical practice patients. The parties here particularly contest the third factor.
[4]The policies at issue covered the time period December 16, 1977-1978; the medical malpractice action was commenced in 1983 and settled in 1997.
[5]The named insured under these policies, SUNY Downstate, is not a legal entity separate and distinct from the State (see, e.g., Gaines v State Univ. of New York-Downstate Hosp. and William B. Solomon, M.D., Marin, J., UID # 2000-016-079 ["SUNY and its constituent entities are no different from any state agency, such as the Department of Transportation, and any acts or omissions properly imputed to an agency are deemed to be those of the State"]; Encore Coll. Bookstores, Inc. v Auxiliary Serv. Corp. of State Univ. of New York at Farmingdale, 87 NY2d 410, 417 ["SUNY, a public university, clearly constitutes an ‘agency' defined as ‘any . . . governmental entity performing a governmental or proprietary function for the state' (Public Officers Law § 86 [3])"]). On the original motion, claimants completely ignored this fact, and they still seem to harbor the notion that the State is somehow not actually both their insured and their adversary in the quest, as their other insured's subrogee, for section 17 indemnification; for example, "The insurance policies at issue provided coverage to the named insured, SUNY-Downstate. It is worth noting that the insured, an educational facility, is not the State body that provides State employees with a defense or indemnification" (Mem. of Law, p 14). There is nothing worth noting because the suggested distinction between SUNY Downstate and the State is non-existent.
[6]Because the primary carrier, Great Atlantic, was insolvent, the Liquidation Bureau paid Rose's defense costs in the medical malpractice litigation.
[7]The relevant endorsement covered full-time faculty physicians, such as Rose, for alleged acts of malpractice arising from their limited right of private practice as participants in SUNY Downstate's clinical practice plan during the 12-month policy period.
[8]In North Star, the Court of Appeals was particularly worried about the ability of the insurer, as subrogee of the third-party plaintiff, to manipulate the litigation to its advantage in relation to the third-party defendant's other insurers (North Star, 82 NY2d at 295-296).
[9]This is not unusual. In construction site accident cases, in which, as discussed later, the anti-subrogation rule plays a prominent role in determining which of several applicable insurance policies pays first, both insureds, the owner and the contractor, have a common interest in defeating the personal injury plaintiff's claim. The doctrine of comparative fault, though, makes them potential adversaries as well.
[10]The Court split 4-3 in North Star. On the question of preindemnification, the dissenters were of the view that the cases should have been remanded for a factual determination as to whether the owners had, in fact, waived common-law indemnification. Their "primary disagreement," however, was with the majority's application of the anti-subrogation rule to multi-party, multi-insurer construction site accident cases, which, as a practical matter, "prohibit[ed] the insurers from spreading the loss among the contractors' various insurers, though all have been paid premiums to cover the losses at issue" (North Star, 82 NY2d at 297) by extending Pennsylvania Gen., which applied the anti-subrogation rule when a single policy covered both insureds, to a situation in which the insureds were covered under separate policies.
[11]The Court of Appeals in North Star identified Goffredo as one of several Appellate Division cases "rely[ing] on Michalak, Pennsylvania Gen. and each other, and offer[ing] little by way of analysis" to support the preindemnification doctrine (North Star, 82 NY2d at 292).
[12]As Chief Judge Kaye observed at the outset in North Star, "These cases, which originated as damages claims for employees' work site injuries, are today solely contests among insurance carriers over which insurance policy should bear the loss" (North Star, 82 NY2d at 287).
[13]The First Department likewise did not discuss in its decision in Valentin why the third-party plaintiffs were entitled to proceed against the third-party defendant for amounts in excess of the per occurrence policy limit; however, the Court notes that this result comports with the preindemnification doctrine, which was based on the notion that a party for which insurance was procured (the third-party plaintiff) could not pursue the policy's purchaser (the third-party defendant) for contribution or indemnification related to a covered risk until the policy's limits had been exhausted.
[14]As noted previously, the per occurrence and aggregate limits of the excess and umbrella policies were $500,000 and $5 million respectively.
[15]The Court of Appeals in Pennsylvania Gen. also cited liberally and quoted from Home Ins. Co. v Pinski Bros. (500 P.2d 945), a case in which the Montana Supreme Court applied the anti-subrogation rule to bar an insurance company's recovery from its insured of an amount in excess of the coverage provided (see, Pennsylvania Gen., 68 NY2d at 471, 472).
[16]Of course, a concession otherwise would have caused the insurer's claim to run afoul of the anti-subrogation rule.