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Subrogation

©2014 Mark Courtois

Introduction

Subrogation is an area that has seen a lot of activity in the Texas courts over the last several years including three major decisions from the Texas Supreme Court. One of those decisions, Mid-Continent v. Liberty Mutual, is an important decision because it affects all cases where multiple primary insurers have co-existing defense or indemnity obligations to a single insured.  All adjusters who handle such cases in Texas, especially those in the areas of mass and toxic torts, and environmental and construction claims, need to be aware of this decision. This article explores recent developments in the area of insurance subrogation in Texas.

Subrogation Basics

Subrogation refers to the right of one who has paid an obligation which another should have paid to be indemnified by the other.1   There are three recognized types of subrogation in Texas: 1) equitable or legal subrogation; 2) contractual subrogation; and 3) statutory subrogation.2  Although most often used in the insurance context, equitable subrogation applies to all situations where a party shows that it involuntarily paid a debt primarily owed by another which in equity should have been paid by the other party.3   Contractual subrogation is created by a written agreement that grants a right to pursue reimbursement from a third party in exchange for payment of a loss.4    Under both equitable or contractual subrogation, the insurer stands in the shoes of the insured, and may assert only those rights held by the insured subject to any defenses of the third party against the insured.5 While equitable and contractual subrogation rest on common principles, they are not coequal in that express contractual subrogation terms trump equitable principles.6  For example, in a recently decided Texas Supreme Court case, the Court held that the equitable “made whole” doctrine, a common defense raised against health insurers trying to recover medical expenses paid on behalf of an injured plaintiff, does not prohibit those health insurers from enforcing clear and specific contractual subrogation rights which entitle them to recover the amount of health care benefits paid on behalf of the plaintiff.7

Antisubrogation Rule: No Subrogation by Insurer against its own Insured

The general rule is that absent a contractual right or statutory authority, an insurer cannot subrogate against its own insured for sums paid out under an insurance policy.8  This rule, known as the antisubrogation rule, provides that an insurer has no right of subrogation against its own insured for a claim arising from the very same risk for which the insured was covered.9   The prohibition against an insurer subrogating itself against its insured is based on, among other things, the public policy considerations which are raised due to the fiduciary type relationship between the insurer and its  insured.10  One court indicated that "the situation where an insurer attempts to subrogate and sue its own insured, whom it is obligated to  defend, gives rise to so many opportunities for conflict of interests or misrepresentation of the insured that public policy dictates that the insurer be denied the right to do so."11  Moreover, Texas courts have recognized a "special relationship" between an insurance company and its insured, giving rise to duties of good faith and fair dealing.12   Allowing an insurer to unilaterally settle uncovered claims and then step into the shoes of the claimant and sue its own insured runs counter to this relationship and to public policy interests which promote trust and eliminate conflicts of interests between insurer and insured.13  This issue was most recently considered in the 2008 Texas Supreme Court case of Excess Underwriters at Lloyd’s London v. Frank’s Casing Crew & Rental Tools, Inc.14  That case, discussed extensively in the 2008 summer edition of the Texas Legal Liability Advisor, reaffirms Texas law that without a specific contract provision providing a right of reimbursement, an insurer which settles a claim against its insured when coverage is disputed and is later determined not to exist, may only seek reimbursement from the insured if the insurer obtains the insured’s clear and unequivocal consent to the settlement and the insurer’s right to reimbursement.15  The Court reasoned that an insurer, rather than the insured, is best positioned to assess the viability of its coverage defense and determine what course of action is appropriate on the coverage issue because the insurer is in the business of analyzing and allocating risk.16  Accordingly, insurers are encouraged to do everything they can to promptly resolve coverage issues before they are put in the situation of having to decide whether they should fund the settlement of a claim that may not be covered.

Exceptions to the Antisubrogation Rule

Contractual and statutory subrogation are the main exceptions to the antisubrogation rule. However, there are other narrow exceptions to the general rule as well, including: 1) equitable subrogation claims of an excess insurer for legal malpractice against an insured’s defense attorneys or negligence against the primary insurer when the excess insurer has to pay more than it should have due to the attorney’s or primary insurer’s negligence;17 2) an insurer subrogation claim against the insured under a separate insurance policy;18 and 3) insurer subrogation against a third-party tortfeasor. 

Subrogation Against a Third-Party Tortfeasor

In the Frymire Engineering case, the Texas Supreme Court looked at whether an insurer which paid to settle a contractual liability claim against the insured could subrogate against a third-party tortfeasor responsible for causing the damages that required the payment.19  The tortfeasor argued that because the payment was required by contract, the insurer’s settlement payment was not voluntary, and therefore, equitable subrogation was not applicable.20   The Court confirmed the general rule that equitable subrogation applies in every instance in which one person, not acting voluntarily, has paid a debt for which another is primarily liable and which in equity should be paid by the latter.21  The Court held that the insurer, in the name of its insured, could pursue claims against the alleged third-party tortfeasor under the doctrine of equitable subrogation because it had shown: 1) that it paid a debt primarily owed by the tortfeasor; 2) that it made the payment involuntarily; and 3) that it sought subrogation in a situation where the tortfeasor would be unjustly enriched if the insured was not allowed to pursue the claims.

Multiple Insurers Owing Duties to the Same Insured

Perhaps the most surprising development in the last decade in the subrogation context is the rule established in Mid-Continent v. Liberty Mutual.  In this 2007 case, the Texas Supreme Court considered whether one co-primary insurer had a reimbursement claim against another co-primary insurer covering the same loss for the same insured when there was a disproportionate amount paid by the first insurer to the settle the claim.22   The Court held that there is no direct duty of reimbursement bwtween co-primary insurers with identical “other insurance” pro-rata clauses.  Nothwithstanding, co-insurer subrogation has been permitted in other situations involving co-primary insurers.23   This issue is discussed in the Summer 2014 edition of the Texas Legal Liability Advisor.  


Notes
1. Employers Cas. Co. v. Dyess, 957 S.W.2d 884, 886 (Tex. App.--Amarillo 1997, pet. denied).
2. State Farm Mut. Auto. Ins. Co. v. Perkins, 216 S.W.3d 396, 400 (Tex. App. – Eastland 2006, no pet.).
3. Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765, 774 (Tex. 2007); Frymire Eng’g Co. v. Jomar Intern., Ltd., 259 S.W.3d 140, 142, 144-46 (Tex. 2008).
4. Mid-Continent Ins., 236 S.W.3d at 774.
5. Id.
6. Fortis Benefits v. Cantu, 234 S.W.3d 642, 648-649 (Tex. 2007).
7. Id. at 651.
8.Matagorda County v. Texas Ass'n of Counties Government Risk Management Pool, 975 S.W.2d 782, 786 (Tex. App.– Corpus Christi,1998) aff’d, 52 S.W.3d 128 (Tex. 2000); AGIP Petroleum Co. v. Gulf Island Fabrication, Inc., 920 F.Supp. 1318, 1326 (S.D. Tex.1996); Stafford Metal Works, Inc. v. Cook Paint & Varnish Co., 418 F. Supp. 56, 58 (N.D. Tex.1976).
9. State Farm Mut. Auto. Ins. Co. v. Perkins, 216 S.W.3d at 401.
10. Stafford, 418 F.Supp. at 58-59.
11. Stafford, at 62.
12. Crim Truck & Tractor Co. v. Navistar Intern. Transp. Corp., 823 S.W.2d 591, 593-94 (Tex.1992); Aranda v. Insurance Co. of N. Am., 748 S.W.2d 210, 212-13 (Tex.1988); Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex.1987).
13. Matagorda County v. Texas Ass'n of Counties Government Risk Management Pool, 975 S.W.2d 782, 786 Tex. App.– Corpus Christi,1998, aff’d 52 S.W.3d 128 (Tex. 2000).
14.  246 S.W.3d 42 (Tex. 2008).
15. Excess Underwriters at Lloyd’s London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d at 45 (Decision reaffirms rule set out in Texas Ass’n. of Counties County Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 135 (Tex. 2000)).
16. Id. at 47-48.
17. American Centennial Ins. Co. v. Canal Ins. Co., 843 Sw2d 480 (Tex. 1992); Keck, Mahin & Cate, Grant Cook v. Nat’l Union Fire Ins. Co., 20 SW3d 692, 703 (Tex. 2000).
18. State Farm Mut. Auto. Ins. Co. v. Perkins, 216 S.W.3d 396, 399 (Tex. App. – Eastland 2006, no pet.).
19. Frymire Engineering Co., Inc. v. Jomar Int’l, Ltd., 259 S.W.3d 140, 141 (Tex. 2008).
20. Id. at 145.
21. Id. at 142.
22. Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765, 768 (Tex. 2007).
23.Id. at 772.

©2014 Mark Courtois