Who Remembers Drop Drafts? Should You Cash Them?

On Friday last week I got a call from an insurer client, who told me that in response to his approximately $21,000 subrogation demand to the insurer of a person who had negligently damaged his insured's home, my client received in the mail a check for approximately $14,000, marked "full and final settlement".

Should my client cash the check?  What if he does?

A Californian law firm says this:

Don´t get drop drafted. One trick adjusters love to do is to send you a check, usually for about $500 and a release for you to sign. They only time an adjuster will drop draft a check is when they are trying to settle for less than it is worth. Simply ignore the check or send it back.

~~from After an Auto Accident Considerations, The Ledger Law Firm blog, March 11, 2010.

That may be the prudent thing to do in California, but what about in New York?

Wait.  You know this one, you say.  You paid attention during training and know that section 216.6(g) of New York's Regulation 64 prohibits drop drafts:

(g) Checks or drafts in payment of claims; releases. No insurer shall issue a check or draft in payment of a first-party claim or any element thereof, arising under any policy subject to this Part that contains any language or provision that expressly or impliedly states that acceptance of such check or draft shall constitute a final settlement or release of any or all future obligations arising out of the loss. No insurer shall require execution of a release on a first- or third-party claim that is broader than the scope of the settlement.  (Emphasis added.)

No drop drafts allowed in payment of first-party claims in New York.  But subrogation claims are, by their nature, third-party claims, not first-party claims.

So should my client cash/deposit the check or not?  

You also recall that New York remains the only jurisdiction in which a check containing "full settlement" or "full and final settlement" or words of that sort on it can be negotiated without prejudice provided you write "under protest", "without prejudice" or words of that sort on the check before cashing or depositing it.  Only in New York can one cash a check offered in full settlement of a dispute and still be able to sue for the unpaid balance.  In all other states the consequences of cashing a check marked “payment in full” even under protest is a settlement (accord and satisfaction) in the amount of the check. 

New York Uniform Commercial Code § 1-308 states:

A party that with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as “without prejudice,” “under protest,” or the like are sufficient.

The seminal New York case on this issue is Horn Waterproofing   Corp. v. Bushwick Iron & Steel Co., Inc., a Court of Appeals’ decision  holding that writing “without prejudice” or “under protest” on a “full settlement” check avoids imposition of the doctrine of accord and satisfaction.

But is a payment offer check on a subrogation claim the type of transaction that New York's Uniform Commercial Code and its section 1-308 govern? 

What say you?  Cash the check or not?