Thursday, August 12, 2010

Nassau Supreme Applies Doctrine of Contra Proferendum to Conclude that Insured's Obligation Not to Impair Its Insurer's Subrogation Rights Applies Only If the Insurer Has Made Payment to Its Insured

Gould Inv., L.P. v. Travelers Cas. & Surety Co. of Am.

(Sup. Ct., Nassau Co., decided 7/26/2010)

If an insurer has not yet made payment of policy proceeds to its insured, must the insured still protect the insurer's potential subrogation rights of recovery in the event the insurer eventually does make payment?

Under the policy language at issue in this case, Nassau County Supreme Court Justice Ira B. Warshawsky said no, the obligations to pay and protect subrogation rights are coextensive and conjunctive, and the question of whether the insured has impaired its insurer's subrogation rights in breach of policy conditions need not be reached in the absence of payment.

Travelers issued a commercial crime policy to Gould Investors, LLP, and its affiliate, One Liberty Properties, Inc.  The policy afforded coverage for employee dishonesty, among other things.  The policy's conditions included  a requirement that the insured
"must transfer to us all your rights of recovery against any person or organization for any loss you sustained and for which we have paid or settled.  You [the insured] must also do everyhing necessary to secure those rights and do nothing after loss to impair them."  (Emphasis added.)
 In July 2005, One Liberty Properties discovered that its president and CEO of approximately six years had allegedly engaged in dishonest conduct during his employment.  In August 2005, Liberty filed a claim under its commercial crime policy with Travelers, and Travelers requested that the plaintiffs substantiate their alleged losses through the filing of a proof of loss statement and other supporting materials.

For reasons not clear from the decision, the claim was not paid.  In August 2005, plaintiffs were simultaneously sued by and brought suit against various persons and entities including Liberty's former CEO and the entities and person from whom he allegedly had received bribes and kickbacks in a numebr of real estate transactions.  In February and March of 2007, both actions were settled -- although not as to Liberty's former CEO -- when the parties executed stipulations of partial settlement and voluntary discontinuances. 

Plaintiffs thereafter commenced this action for declaratory and related relief as against Travelers, alleging that its claim was covered under the policy and that Travelers breached its obligations thereunder by failing to act upon the claim in good faith and/or to pay it.  In its answer, Travelers denied the material allegations of the within complaint and interposed several affrmative defenses, including defenses that the plaintiffs: (1) impaired Traveler's subrogation rights in violation of the policy's general conditions by executing the settlements; and (2) that they also failed to demonstrate the existence of a direct loss within the meaning of the policy.

Liberty's former CEO eventually pleaded guilty to a single count of conspiring to commit wire fraud and was sued by the Securities and Exchange Commission.  After filing a consent to settle that SEC action, the former CEO was ordered to disgorge nearly $900,000 to his victims in relation to two fraudulent schemes, one of which related to the plaintiffs' claim to Travelers.  Plaintiffs subsequently settled their action against Liberty's former CEO, allegedly "reserv[ing] any and all subrogation rights" possessed by Travelers, but not producing a copy of the settlement agreement allegedly for confidentiality reasons.

Travelers moved for summary judgment dismissing plaintiffs' complaint on the ground that plaintiffs had breached the policy's condition regarding Traverlers' subrogation rights by settling the 2005 actions and waiving their right to to seek recovery from the funds disgorged by Liberty's former CEO in the SEC matter.  In denying Travelers' motion, the court found that the policy's subrogation condition was subject to more than one reasonable interpretation, and, consequently, must under the doctrine of contra proferendum be construed against Travelers and in favor of the plaintiffs to mean that the insureds' obligation to protect and not impair Travelers' subrogation rights arose only after Travelers made payment under the policy, which it had not:
It is settled that an insured' s failure to protect the subrogation rights of the carrier may constitute a breach of the policy terms, and that the insured "bears the burden of establishing that a release has not "operate(d) to prejudice the subrogation rights of the insurer (Weinberg v. Transamerica Ins. Co., 62 NY2d 379 384 (1984); see generally, Progressive Ins. Co. v. Sheri Torah, Inc., 44 AD3d 837, 838; State Farm Mut. Auto. Ins. Co. v. Lucano, 11 AD3d 548; In re Allstate Ins. Co. (Richard E. Brown), 288 AD2d 955; Aetna Cas. Sur. Co. v. Longo Production, Inc., 247 AD2d 497; State Farm Fire and Cas. Co. v. Zyburo, 215 AD2d 566 567; Leeds Peninsula Pharmacy, Inc. v. American Nat. Fire Ins. Co., 125 AD2d 551 553).

* * * * *

Plaintiffs' response to the comparison to automobile cases is that they are inapplicable.  The reason is that in those cases the insured released the culpable party, whereas the insured in this case did not provide such a release to the culpable party, and the claim for subrogation remains viable as to the dishonest employee, Fishman. Affirmation of Schlesinger, Exh. "G" to affirmation of Lambert in Support of Motion, at ¶¶ 14-15.  The issue is whether or not this is adequate under the obligations of the policy to take no action which would jeopardize the insurer's rights of subrogation.  More importantly is the question as to whether or not the obligation to take no action which jeopardizes the insurer's rights of subrogation is contingent upon the payment of the claim by the carrier.  Reading ¶ 19 of the policy leads to a reasonable interpretation that the obligation to preserve subrogation rights [is] coextensive with the obligation of the carrier to pay the claim.  While Travelers argues that the obligations to pay the claim and to preserve the rights of subrogation are severable, and equally enforceable, the fact is that they are described in the conjunctive, using the word "and", not in the disjunctive.

When there is more than one reasonable interpretation of the language in an agreement the doctrine of contra proferendem requires the Court to adopt the interpretation which is contrary to the interpretation proffered by the author. In this instance, Travelers, the author of the document, must be bound by the interpretation that the obligation to protect subrogation rights arises only upon payment of the claim. In this case, Travelers was on notice of the claim in August 2005 , while the settlements of which it complains in its affirmative defenses, were in 2007 and 2008.  Had Travelers evaluated the damages sustained under the terms of the policy and made payment, they would have obtained subrogation rights against any and all persons against whom a claim could be made, but they did not do so.

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