Only Causal Link Between Named Insured's Acts or Omissions and Injury Required for Additional Insured Coverage to Apply

CGL – SCOPE OF ADDITIONAL INSURED COVERAGE – CAUSED BY NAMED INSURED'S ACTS OR OMISSIONS – CAUSAL LINK – ANTISUBROGATION RULE  
Burlington Ins. Co. v. NYC Transit Auth.
(1st Dept., decided 8/11/2015)

If a CGL policy provides additional insured coverage "only with respect to liability for bodily injury ... caused, in whole or in part, by [the named insured's] acts or omissions ... [i]n the performance of [the named insured's] ongoing operations", must the named insured have been negligent or otherwise at fault for causing the bodily injury for such additional insured coverage to apply?

Breaking Solution's policy with Burlington Insurance Company provided that certain entities were additional insureds "only with respect to liability for bodily injury ... caused, in whole or in part, by [the named insured's] acts or omissions ... [i]n the performance of [the named insured's] ongoing operations[.]"

The question addressed by the First Department, Appellate Division, in this case was whether this "acts and omissions" language of the additional insured provision provides additional insured coverage where there is a causal link between the named insured's conduct and the injury, regardless of whether the named insured was negligent or otherwise at fault for causing the accident.  In REVERSING Supreme Court's orders granting Burlington's motion to amend its DJ complaint to assert a contractual indemnification claim against the putative additional insureds --  defendants New York City Transit Authority (NYCTA) and Metropolitan Transit Authority (MTA) -- and then granting Burlington summary judgment on its contractual indemnification claim against the NYCTA, the First Department held:

This Court's most recent precedents have construed additional insured endorsements containing substantially the same "acts and omissions" language as do the endorsements at issue here as providing additional insured coverage where there is a causal link between the named insured's conduct and the injury, regardless of whether the named insured was negligent or otherwise at fault for causing the accident. Adhering to these precedents, we hold that defendants were entitled to coverage as additional insureds in the underlying action under the subject insurance policy. Given that the policy covers defendants for this loss, the anti-subrogation rule bars Burlington from recovering, as subrogee of the City of New York, contractual indemnification from defendant NYCTA, under the lease agreement between the City and NYCTA, for the amounts Burlington has paid to defend and settle the underlying action on behalf of the City.

NYCTA and MTA engaged Breaking Solutions to supply concrete-breaking excavation machines and personnel to operate the machines under NYCTA's direction.  An explosion occurred in a Brooklyn subway tunnel that was being excavated by a Breaking Solutions machine. The explosion occurred when the excavator came into contact with an energized electrical cable buried below the concrete. It is undisputed that it had been NYCTA's responsibility to identify and mark or protect hazards in advance, so as to enable the excavator operator to avoid them, and to shut off power to electrical cables in the work area. An employee of NYCTA was injured in that explosion and sued. In the course of discovery in that action, it emerged that, while the Breaking Solutions excavator had caused the explosion by disturbing the buried cable, there had not been any negligence or other fault on the part of the Breaking Solutions employee who operated the excavator.  NYCTA's internal documents essentially admitted that it was at fault for the incident.

On that basis Burlington, which had defended and indemnified the City of New York in the personal injury action, sought contractual indemnification from NYCTA as the City's subrogee.  Among other grounds, NYCTA argued that because it qualified for additional insured coverage under Breaking Solutions' policy with Burlington, the antisubrogation rule applied to bar Burlington's claims against it.  Based on its finding that the "caused, in whole or part, by [the named insured's] acts or omission" language of the Burlington policy required only a casual link between the named insured's acts or omissions and the injury, rather than proof of the named insured's negligence or fault, the First Department reversed the lower court's orders and granted summary judgment to NYCTA and MTA, dismissing Burlington's complaint.

Twenty-One Floors of Wet -- New York Supreme Dismisses Subrogation Action Based on Anti-Subrogation Rule

BUILDER'S RISK – SUBROGATION – ANTISUBROGATION RULE – INSURABLE INTEREST
St. Paul Fire & Mar. Ins. Co. v. FD Sprinkler, Inc.
(Sup. Ct., New York Co., decided 8/31/2009)

St. Paul issued a builders risk policy to Chelsea 27th Streets Apartments, LLC for construction at 800 Sixth Avenue, New York, New York.  Subcontractors FD Sprinkler, Inc. and Woodworks Construction Company were named as additional insureds on that policy by the following provision:

All subcontractors as Additional Insureds, ATIMA. St. Paul does not waive its rights of subrogation. The insured is not permitted to release from liability any such subcontractor after a loss.

ATIMA is an underwriting acronym meaning "as their interests may appear". 

On December 24, 2003, a sprinkler head on the 21st floor accidently discharged, causing extensive water damage all all the way down to the lobby.  The door to a temporary bathroom had swung open and struck the sprinkler head, causing it to discharge.  FD Sprinkler has installed the sprinkler head, and Woodworks had framed and constructed the temporary bathroom.  St. Paul paid Chelsea $714,438 for the damages and commenced this subrogation action against FD Sprinkler, Woodworks and others to recover its payment.

FD Sprinkler and Woodworks moved for summary judgment dismissing the complaint on the ground that the antisubrogation rule barred St. Paul's action against them.   St. Paul opposed the motion by arguing that although FD Sprinkler and Woodworks were additional insureds on the policy, they were not insureds for the damages at issue, and therefore, were not protected by the antisubrogation rule. St. Paul asserted that these subcontractors enjoyed only limited property insurance protection under the policy, in that they were only covered for property damage "ATIMA", or to the extent of their respective financial interests in the insured property.

In GRANTING FD Sprinkler's and Woodworks' motions, New York County Supreme Court Justice Doris Ling-Cohan ruled that each had an insurable interest in the damaged property, and thus were insured under Chelsea's builder's risk policy with St. Paul because their trade subcontracts provided that “[a]ny Work performed by others that is damaged by this Subcontractor or its employees or agents shall be the sole responsibility of this Subcontractor to replace at no additional cost[.]”  Based on this finding, the court held that the antisubrogation rule applied to preclude this action against FD Sprinkler and Woodworks.

Primary Insurer Found Liable To Excess Insurer For Bad Faith Defense of Mutual Insured

CGL – OCP – ANTISUBROGATION RULE – PRIMARY TO EXCESS INSURER BAD FAITH
Federal Ins. Co. v. North Amer. Specialty Assur. Co.
(Sup. Ct., New York Co., decided 12/5/2008)

If a primary insurer manipulates the defense of its two named insureds -- an owner under a $1 million OCP policy and the general contractor (GC) under a $1 million CGL policy -- in a way that violates the antisubrogation rule and results in its payment of only $1 million instead of $2 million towards a personal injury action's settlement, can it be held liable to the GC's excess insurer in "bad faith" for the extra $1 million? Yes, says this court.

Galaxy General Contracting entered into a construction contract with NYC Partnership Housing Development Fund Company, Inc., Morningside-117 LLC and Harlem Community Development Corporation. Pursuant to that contract, Galaxy purchased from Commercial Underwriters Insurance Company (which became Allied World Assurance Company (U.S.), Inc.) a $1 million OCP policy for the owners. Galaxy itself was insured under a $1 million primary CGL policy with CUIC, and a $10 million excess policy with Federal.

A subcontractor's employee, Rafael Bermejo, fell from a scaffold and was injured during the construction project. He commenced a personal injury action against the owners and Galaxy, alleging causes of action for negligence and violations of Labor Law §§ 240(1) and 241(6). CUIC initially assigned one law firm to defend both Galaxy and the owners, and a single answer on their behalves was interposed.

Bermejo filed his note of issue and certificate of trial readiness in February 2002. In June 2002, based on its realization that there was a conflict of interest between the owners and Galaxy, CUIC assigned separate counsel to defend Galaxy. In December 2002, the owners' defense counsel moved to amend the owners' answer to assert cross claims against Galaxy for common-law and contractual indemnity and breach of contract, and for summary judgment on their indemnity claims against Galaxy. The motion court granted the owners' motion and granted conditional judgment to them against Galaxy on their indemnity claims.

Galaxy's defense counsel moved to reargue or renew the owners' motion on the ground that the antisubrogation rule barred Galaxy from indemnifying the owners. The court denied that motion, holding that Galaxy should have, but did not, raise the antisubrogation argument in its opposition to the owners' motion. The court found that that Galaxy had no reasonable excuse for failing to raise the antisubrogation issue at the appropriate time. It appears that the orders granting conditional judgment and denying Galaxy's motion to reargue/renew were not appealed.

At a settlement mediation in the Bermejo action, Galaxy's defense counsel offered Galaxy's $1 million CGL policy toward settlement but the owners refused to offer anything, contending that they were passive tortfeasors only. In a letter dated November 18, 2003, Federal memorialized its position that CUIC was required to exhaust the limits of both the CGL and OCP policies before Federal would become obligated to make any payment. According to Federal, irrespective of any indemnity rights that the owners might have over against Galaxy, since CUIC, the insurer of both the CGL and the OCP policies, "was obligated to defend each of its insureds, CUIC was barred by the antisubrogation doctrine from becoming subrogated to the right of any one of its insureds against any of its other insureds."

Bermejo ultimately agreed to settle his action for $3 million. Galaxy was the only defendant that participated in that settlement, and the owners‘ cross claims against Galaxy were not settled. CUIC paid Bermejo the $1 million limit of Galaxy's CGL policy, and Federal paid $2 million under Galaxy's excess policy. Federal agreed with CUIC that a settlement of $3 million was reasonable, that if Bermejo’s case were tried, the jury would find the owners and Galaxy liable under the Labor Law statutes, and that the settlement was without prejudice to Federal’s right to recover from CUIC.

Federal then commenced this action to recover what it asserted was its $1 million overpayment from CUIC. Federal alleged that CUIC manipulated the litigation in the Bermejo action so that the settlement was against Galaxy only. If the $3 million settlement had been against the owners and Galaxy, CUIC would have paid Bermejo $2 million: $1 million on behalf of Galaxy under the CGL policy, and $1 million on behalf of the owners under their OCP policy. Federal’s excess coverage would have applied to the extent of $1 million only. But as the settlement involved Galaxy alone, CUIC only had to pay $1 million and Federal had to pay $2 million in excess coverage.

Federal asserted five causes of action—three against the CUIC defendants (North American Specialty Assurance Company and Allied World Assurance Company (US), Inc.), alone and two against CUIC together with Galaxy's defense counsel in the Bermejo action. In its first cause of action, Federal alleged that CUIC violated the antisubrogation rule in that, as the real party in interest, it claimed in the names of the owners a right of indemnity against Galaxy, its own insured. In its second cause of action, Federal alleged that CUIC acted in bad faith in defending Galaxy against the owners' indemnity claims by failing to raise the antisubrogation rule in opposition to the owners' motion for summary judgment. Had the rule been invoked, Federal claimed, the court in the Bermejo action "would have applied [it] to bar CUIC from becoming subrogated to the rights of some of its insureds...against another of its insureds...and limited any right of indemnity to the amount above the $1,000,000 limit of CUIC's OCP." Federal's third cause of action against CUIC alleged a similar theory of liability, but as Galaxy's subrogee.

Federal's fourth cause of action, against both CUIC and Galaxy's defense counsel, alleged legal malpractice. Without asserting a client relationship with Galaxy's defense counsel or alleging the existence of privity or any allegations of "near privity," Federal claimed merely that CUIC and Galaxy's defense counsel owed Galaxy a duty to defend. Federal further alleged that Galaxy's defense counsel was negligent in opposing the owners' motion for summary judgment on their indemnification claims by failing to assert antisubrogation or to apprise Federal in a timely manner that the owners had asserted such cross claims. According to the complaint, had Galaxy's defense counsel raised the antisubrogation rule, the court would have "limited any right of indemnity to the amount above the $1,000,000 limit of CUIC's OCP." Federal's fifth cause of action, also against CUIC and Galaxy's defense counsel, alleged a similar theory of liability, but as Galaxy's subrogee.

Galaxy's defense counsel moved, pre-answer, pursuant to CPLR 3211 (a)(1), (3) and (7), to dismiss the complaint against it. CUIC cross-moved for similar relief, arguing that Federal suffered no damages, individually or on behalf of Galaxy, and that Federal's complaint failed to state a cause of action for bad faith.

In modifying the motion court's order denying both motions, the First Department dismissed Federal's legal malpractice claims against Galaxy's defense counsel but sustained its direct claim against CUIC for its alleged bad faith failure to defend Galaxy in the Mermejo action. Federal Ins. Co. v North Am. Specialty Ins. Co., 47 AD3d 52 (1st Dept 2007). The case then returned to New York Supreme, and both Federal and CUIC moved for summary judgment.

In granting Federal's cross motion, New York County Supreme Court Justice Charles Ramos first reviewed New York caselaw regarding the antisubrogation rule and then held:

Federal asserts that CUIC conducted itself in the litigation so as to ensure that Galaxy, through Federal's policy, paid what the Owners should have paid. CUIC thus avoided paying from the Owners' policy and saved itself $1 million.

The Appellate Division set forth the state of the law in its opinion sustaining Federal's cause of action for bad faith:

The first cause of action presents a collision of two competing principles: antisubrogation and the right of a party, such as a premises owner, which is only vicariously responsible by virtue of the absolute liability imposed for a violation of Labor Law § 240 (1) (see e.g. Songui v City of New York, 2 AD3d 706 [2003]), to indemnification from the party actually responsible for the accident (see Kelly v City of New York, 32 AD3d 901 [2006]), such as general contractor Galaxy in the instant situation. Even though CUIC issued two separate policies (one to Galaxy and the other to the owners), the antisubrogation rule is applicable (North Star Reins. Corp. v Continental Ins. Co., 82 NY2d 281 [1993], supra). As the Court of Appeals has made clear, "a potential conflict of interest arises where the insurer that issued both policies seeks indemnification against [one of the parties to which it issued a policy]" (id. at 295-296). As relevant here, the Court observed that an insurer could manipulate the litigation in such a way as to "trigger coverage under other insurance policies held by the contractor such as a workers' compensation or excess policy" (id. at 296).

Thus, the antisubrogation rule, if asserted, would have defeated the owners' claims for indemnification from Galaxy. CUIC's exposure, at the time it entered negotiations to settle the Bermejo claim, would have been $2,000,000, not $1,000,000 as was the case after the owners successfully moved for summary judgment on their indemnification claims against Galaxy. Since, however, the conditional award of summary judgment was never appealed or vacated as part of the settlement process, it has res judicata effect and serves to bar any claim that Galaxy has an antisubrogation defense to the owners' indemnification claims (see Allstate Ins. Co. v American Home Assur. Co., 43 AD3d 113 [2007]) or that Federal has an indemnification claim against CUIC based on that nonasserted defense. (Federal Ins. Co . v North American Specialty Ins. Co., 47 AD3d 52, 63 [lst Dept. 2007]).

It is clear that by failing to abide by the antisubrogation rule, CUIC kept the Owners out of the settlement, thus reducing the amount of money that CUIC had to pay Bermejo, and increasing the amount that Federal had to pay Bermejo under the excess policy.

Federal may assert a bad faith claim on its own and as subrogee even though the claim rests on the same allegations as the antisubrogation claim. A primary carrier owes its insured and the excess insurer a duty to exercise good faith in handling a claim (Hartford Acc. and Indem. Co. v Michigan Mut. Ins. Co., 93 AD2d 337, 341 [4th Dept 19831, affd 61 NY2d 569 [19841). A prima facie case of bad faith must include allegations that the insurer deliberately or recklessly failed to place its insured's interests on an equal footing with its own interests (see Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445, 453 [1993]). The complaint and the moving affidavits sufficiently demonstrate bad faith, Federal at 64, insofar as CUIC violated the antisubrogation doctrine by acting against the interests of its insured Galaxy.

The only question left is to determine if CUIC alleges facts sufficient to establish a defense. The defense appears to be that the events that led up to the settlement of the Bermejo Action happened without any active participation by CUIC. This ignores the fact that CUIC, by taking a position contrary to the antisubrogation doctrine, violated its duty to Federal. It is not required, as CUIC suggests, that its failure to abide by its duty was directed by it.

Nor is a defense established by merely appointing independent counsel. When a primary insurer appoints counsel to defend an excess insurer involved ini a suit, the primary insurer is a fiduciary of the excess insurer. Hartford Acc. & Indem. Co. v Michigan Mut. Ins. Co., 93 AD2d 337, 341 (1st Dept 1983) , aff’d, 61 NY2d 569 (1984)(“the primary carrier owes to the excess insurer the same fiduciary obligation which the primary insurer owes to its insured, namely, a duty t o proceed in good faith and in the exercise of honest discretion”). After such appointment has been made, the primary insurer's obligation is not necessarily satisfied. Feliberty v Damon, 72 NY2d 112, 117 (1988) (“when an insured has been sued, the insurer does not satisfy its duty t.o defend merely by designating independent counsel to defend the litigation”). Therefore, although Federal has no claim under the antisubrogation doctrine itself, because of its failure to appeal, the violation of the doctrine is sufficient evidence of bad faith to warrant entry of judgment, absent an affirmative defense, which is neither effectively pled nor proven.

As the record fails to rebut the prima facia case and otherwise does not contain any extrinsic evidence that. would establish a defense, the motion by plaintiff for summary judgment is granted and the cross-motion is denied.

Judgment for Federal for $1 million plus interest, presumably from the date Federal paid that extra million. With that much at stake, a trip for the case back to the First Department seems likely.

Antisubrogation Rule Bars Physical Damage Claim Against Permissive User of Loaner Car

AUTO – USE OF LOANER CAR – PHYSICAL DAMAGE – ANTI-SUBROGATION RULE
Motors Ins. Corp. v. Africk
(2nd Dept., decided 10/7/2008)

This one almost slipped by me. Car dealers and their insurers routinely seek to hold permissive users of the dealers' vehicles liable for physical damage to the dealers' vehicles and damages to third parties. The rules of whose and which coverage is primary for first- and third-party claims are complex and derive from an understanding of case law, statutes and policy language.

Arroway Chevrolet loaned a vehicle to David Africk while it was servicing his vehicle. Africk subsequently damaged the loaner in a one-car collision. Arroway's insurer, Motors Insurance Corp., paid Arroway's claim for the physical damage to the loaner under its comprehensive and collision policy and commenced this subrogation action against Africk to recover the amount it had paid Arroway.

In AFFIRMING the trial court's dismissal of the complaint against Africk, the Second Department applied the anti-subrogation rule, holding:

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 (see North Star Reins. Corp. v Continental Ins. Co., 82 NY2d 281, 294; Pennsylvania Gen. Ins. Co. v Austin Powder Co., 68 NY2d 465, 471; Lodovichetti v Baez, 31 AD3d 718, 719; Blanco v CVS Corp., 18 AD3d 685, 686). For the purposes of the antisubrogation rule, a permissive user of an insured vehicle is treated no differently than a named insured (see Jefferson Ins. Co. of N.Y. v Travelers Indem. Co., 92 NY2d 363, 374-375).

Here, the insurer does not dispute that the Supreme Court properly found that Arroway's loan of the vehicle to the defendant made him a permissive user (see Matter of Liberty Mut. Ins. Co. v Clench, 180 AD2d 684). Moreover, under the terms of the relevant policy, the insurer agreed to indemnify Arroway for "loss to a covered auto caused by . . . collision with another object," and for "loss to a covered auto caused by the failure of a person in lawful possession of a covered auto under a lease, rental or loaner agreement to return it to a dealer in accordance with the terms of the agreement." Thus, the insurer is seeking recovery from a permissive user, authorized by its insured, for a claim arising from the very risk for which the insured was covered, an outcome barred by the antisubrogation rule (see Jefferson Ins. Co. of N.Y. v Travelers Indem. Co., 92 NY2d at 374-375; North Star Reins. Corp. v Continental Ins. Co., 82 NY2d at 294).

It is important to note that this decision does not mention whether the Arroway's policy with Motors contained a "no liability" clause, which may have affected Africk's status as an "insured", at least for liability coverage purposes. Coverage Counsel is going to pull the appellate briefs and will let everyone know. For now, this decision appears to support the argument that a car dealer's insurer may not subrogate against the permissive user of a loaner car for physical damage to it. Do you understand now why car dealers and their insurers are so adament in calling loaner vehicles rentals? Hint: it has something to do with New York Insurance Law § 3440.

Antisubrogation Rule Bars Subrogation Claim Against Subtenant

COMMERCIAL PROPERTY – FIRE LOSS – SUBROGATION – ANTISUBROGATION RULE
Utica Mut. Ins. Co. v. Jan's Euro Motors, Inc.
(Sup. Ct., Suffolk Co., decided 7/18/2008)

Interesting case. Perhaps one of first impression in New York.

Commack Auto Collision subleased space to Jan's Euro Motors within a building that Commack leased on Jericho Turnpike in Commack, New York. A rider to the sublease required Commack, the overtenant landlord, to maintain fire and hazard insurance coverage with extended coverage on the premises, and that the undertenant (Jan’s) was to pay its pro rata cost of this insurance as additional rent. In particular, that rider required Jan’s to pay $75.00 per month as an additional rent “representing its pro rata share of the fire insurance premium for the building[.]”

On April 6, 2003, a fire caused damage to the building and its contents. Utica Mutual paid $343,402.74 in fire damages and commenced this subrogation action as subrogor of Commack against Jan's and its owner, alleging that Jan's negligence caused the fire. Jan's moved to dismiss the complaint based on its argument that because it made pro rata payments under the sublease for fire insurance and Commack was required to maintain the insurance on Jan’s behalf, the antisubrogation rule barred Utica's subrogation claim against it.

Utica, of course, argued that the policy listed only Commack, and not Jan's, as an insured. Suffolk County Supreme Court Justice Peter Fox Cohalan prefaced his decision by noting that "[t]he issues to be determined in this motion are whether Jan’s is an 'insured' under the facts of this case, and whether or not subrogation is precluded against Jan’s by Utica." The court also noted that "[n]o case on point has been found on the very issue presented in this action", before holding:

In the instant action, the sublease agreement required the overtenant landlord (Commack) to maintain fire and hazard insurance coverage with extended coverage of the Premises, and the undertenant (Jan’s) paid its pro rata cost of this insurance as additional rent. It is clear that the intent of the parties was that Commack was to obtain insurance on behalf of Jan’s. In support of this motion, Utica submitted the report of its investigation into the April 6, 2003 fire, which contained the results of the interview with Jim Young (hereinafter Young), the owner of Commack. Young stated that Jan’s lease called for the premium payment on the Traveler’s Group policy insuring the overall building. Based upon the foregoing, although not individually named on the policy, Jan’s is deemed to have been an insured under the policy at issue in that it paid its pro rata share of the premiums and it is undisputed that the loss occurred on the premises at 2153 Jericho Turnpike, Commack, New York, where Jan’s was doing business. Although Commack did not separately name Jan’s in the policy as an insured, it did specifically list the address of the premises to be covered by the policy obtained by Commack, including that section of the building occupied by Jan’s.

With respect to the antisubrogation rule, the court ruled:

In that the sublease agreement is clear on its face that Commack was procuring insurance on the premises being sublet by Jan’s, and that money for the insurance premium was collected on a pro rata basis by Commack who failed to specifically name Jan’s on the policy, it would appear that a conflict would arise if Commack tried to make a claim against Jan’s for the damage which Utica claims was caused by Jan’s alleged negligence. Commack does not claim any out of pocket expenses as a result of the property damage, and therefore has no indemnification claim either in its own right against Jan as indemnification does not arise until the indemnitee has actually sustained a loss (See, Bay Ridge Air Rights v State of New York, 44 NY2d 49, 404 NYS2d 73 [1978]). The Court finds that the language of the sublease agreement shows that Jan’s was intended to benefit from the insurance being procured by Commack who failed to add Jan’s to the policy as an additional insured. Thus Utica is attempting to benefit from its insured’s failure to name Jan’s as an insured on the policy when Jan’s was paying the premium for its pro rata share. Had Jan’s been named on the Utica policy, there would be no issue as to Utica being precluded by the antisubrogation rule.

* * * * *

Based upon the foregoing, the Court finds that Commack, as subrogor, was required to provide the insurance on behalf of Jan’s which paid its pro rata share of insurance premiums, and that Utica stands in the shoes of its insured, Commack, and is therefore barred by the antisubrogation rule from asserting a subrogation claim against Jan’s as Jan’s was indirectly insured by Utica who insured the entire premises.

The decision's reference to a "Travelers Group policy" makes it sound like Travelers insured the building, for which Jan's made monthly pro rata payments, and Utica Mutual insured the business personal property within. It is unclear whether Jan's additional rent for pro rata insurance costs was for the building owner's policy with Travelers, or for Commack's policy with Utica Mutual. Nonethess, it is remarkable that the court deemed Jan's to be an "insured" under Commack's policy with Utica Mutual, protected by the antisubrogation rule, simply because it contributed to the property's fire insurance costs. Instead of arguing that it was an "insured" under Utica's policy, perhaps Jan's should have defended the subrogation action by arguing that Commack's breach of its promise to procure insurance for Jan's effectively barred Utica's subrogation action. Not quite the antisubrogation rule, but the same outcome. With over $300,000 at stake, Utica Mutual will probably appeal this decision, and we'll get to see what the Second Department thinks.

It Started With A Blast

Buffalo, New York
April 23, 1979
(c) Buffalo Evening News

A truck loaded with dynamite caught fire and exploded this morning at a Town of Lancaster stone quarry, injuring nine workers, leveling nearby buildings and vehicles, and sending shock waves that blew out windows of home several miles away.

Miraculously, Leonard Rinker, a truck driver from Lancaster Stone Products Corp. on Barton Road, was able to run to safety when the cab of his truck caught fire just after 7 a.m. and he called to other workers to take cover. * * *

The explosion flattened buildings, destroyed 26 trucks and cars, and tore down power lines at the quarry site.

The force of the blast cracked foundations of nearby homes, police said, and residents of the villages of Lancaster and Depew reported their windows were blown out and cupboards rattled. Windows were also blown out at police headquarters on Main Street in Clarence. * * *

Mr. Rinker told the Buffalo Evening News that he ran from his truck when the cab filled with smoke. He said he was about 1,500 feet away when the truck exploded. * * *

A hole 6 feet deep and 20 feet across was left where the truck had been, officials said, and parts of the vehicle were found 200 yards away.

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In commemoration of Independence Day, I thought I'd share a report of some local fireworks that formed the basis of what is known in New York as the "antisubrogation rule".

In Pennsylvania General Ins. Co. v. Austin Powder Co., 68 NY2d 465 (1986), the New York Court of Appeals ruled:

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. This rule applies even where the insured has expressly agreed to indemnify the party from whom the insurer's rights are derived and has procured separate insurance covering the same risk.

Bison Ford Truck Sales rented a truck Austin Powder Company under a rental agreement that required Bison Ford to obtain primary liability insurance and Austin Powder to indemnify Bison Ford for liability arising out of Austin Powder's use of the vehicle. Liberty Mutual issued auto policies to Bison Ford under which Austin Powder and Rinker were found to be "additional insureds". Austin Powder used the truck to transport dynamite and blasting caps to a stone quarry in Lancaster, New York, a northeastern suburb of Buffalo. The driver, Leonard Rinker, overloaded the truck, causing the rear wheels and wheel wells to overheat from friction. Did I mention that the truck was loaded with dynamite and blasting caps?

A 6 x 20 foot crater and 1 million in 1979 dollars in property damage later, Pennsylvania General commenced this subrogation action for $2,252.35 in auto physical damage it had paid to its insured (a new AMC Pacer cost $3,100 in 1979). On behalf of Bison Ford, Liberty Mutual settled and paid that claim, and crossclaimed as Bison Ford's subrogee against Austin Powder under the rental agreement, which presented the courts with this opportunity to address and impose the antisubrogation rule.

This case did not create the antisubrogation rule, but refined it somewhat to provide for its application even where the insured has expressly agreed to indemnify the subrogor and procured separate insurance covering the same risk. Liberty Mutual unsuccessfully argued that the indemnification provision of the rental agreement between Bison Ford and Austin Powder, coupled with the fact that Austin Powder had procured its own liability insurance, should permit recovery from Austin Powder. The Court of Appeals disagreed, finding no reason to create an exception to the antisubrogation rule since Austin Powder and Rinker clearly were covered as additional insureds under Liberty Mutual's primary insurance policy with Bison Ford.

Austin Powder has been cited 215 times since being decided in 1986 and remains one of the seminal antisubrogation cases in New York. It has been followed, explained and distinguished, but not overruled. Although leasing and rental companies and their insurers have learned to limit or circumvent its holding in relation to mandatory liability insurance coverages owed to lessees, renters and customers, New York judges continue to apply its holding to prevent insurers from subrogating against parties to whom or which they owed defense and indemnification coverage for the same risk, as in the recent decision in ELRAC, Inc. d/b/a Enterprise Rent a Car v. Russo (Dist. Ct., Nassau Co., decided 6/10/2008).

Antisubrogation Rule Bars Rental Car Company's Indemnification Action Against Renter for Third-Party's Property Damage

AUTO – RENTAL VEHICLE – UNAUTHORIZED DRIVER – VEHICLE & TRAFFIC LAW § 370 – ANTISUBROGATION RULE
ELRAC, Inc. d/b/a Enterprise Rent a Car v. Russo
(Dist. Ct., Nassau Co., decided 6/10/2008)

I love it when things work the way they're supposed to. Like when a judge decides a default judgment motion based on established legal principles, instead of simply adopting wholesale the moving party's arguments and submissions without regard to the law.

Russo rented a car from ELRAC/Enterprise and, according to the complaint, allowed someone not listed on the rental agreement to drive the rental car. That person had an accident with a non-party's vehicle, causing $1,700 in damage to it. ELRAC paid that damage and brought this action for indemnification against Russo under the provisions of the rental contract.

Russo was served with but failed to answer the complaint, and ELRAC moved for a default judgment. Russo, representing himself pro se according to the decision, did not oppose ELRAC's motion.

Although ELRAC demonstrated both proper service of the complaint on Russo, as well as his failure to answer, Nassau County District Court Judge Andrew Engel not only denied ELRAC's unopposed default judgment motion but dismissed the complaint, noting initially:

The Plaintiff's proof of jurisdiction and the Defendant's default does not impose upon the court "a mandatory, ministerial duty to grant a motion for a default judgment"(citations omitted). To succeed, a plaintiff must demonstrate that it possesses a viable cause of action (citations omitted) by submitting an affidavit of facts and/or a complaint verified by a party with personal knowledge, (citations omitted) "so the court has nonhearsay confirmation of the factual basis constituting a prima facie case[.]"

Judge Engel found the following deficiencies in ELRAC's motion papers:

• the affirmation of ELRAC's counsel, and the complaint verified by counsel (rather than a knowledgeable representative of ELRAC), were of no probative value;
• the affidavit of ELRAC's vehicle repair manager, which did nothing more than discuss, in conclusory terms, the alleged cost of repairing the rental vehicle, had no relevance to this action, which sought recovery for the alleged cost of repairing a third party's vehicle;
• the affidavit of ELRAC's loss control manager did not allege personal knowledge or the source of its allegation that the non-party's vehicle was damaged as "a direct and proximate result of the negligence of the Defendant [Russo] and the unauthorized driver";
• the police accident report submitted by ELRAC's counsel was not in evidentiary form and, therefore, was insufficient to establish Russo's negligence;
• the allegation of ELRAC's loss control manager that ELRAC paid the non-party's damages was unsupported by any proof; and
• the allegation of ELRAC's loss control manager that Russo was contractually obligated to indemnify ELRAC for third-party property damage caused by an unauthorized driver was "without merit."

With respect to the final point -- that Russo could not be held contractually obligated to indemnify ELRAC for third-party property damages of less that $10,000 caused by a driver not listed on or authorized by the rental agreement to drive the rental car -- Judge Engel's analysis and reasoning was spot on:

• NY Vehicle & Traffic Law § 388 makes the owner of a vehicle used or operated in New York State liable for BI or PD resulting from negligence in the use or operation of such vehicle by any person using or operating that vehicle with the express or implied permission of the owner;
• "even in the face of a rental agreement which restricts the use of a vehicle to the lessee, '[a]s a commercial lessor of vehicles, ELRAC is deemed to have constructively consented to the operation of its vehicle by anyone using it with the lessee's permission'";
• ELRAC should not be heard to argue that the driver of its vehicle was unauthorized when, in apparent recognition of this constructive consent, it never raised a claim of lack of permissive use against the non-party's property damage claim and instead paid same;
• under V&T § 370, car rental companies are required to provide their lessees with primary insurance coverage up to the minimum liability limits required by statute ($25,000/$50,000/$10,000), and self-insurers, like ELRAC, are not exempt from this requirement; the coverage provided pursuant to V&T § 370 "must inure to the benefit of any permissive user of the vehicle"; and, finally,
• the "antisubrogation rule" barred ELRAC from enforcing the rental agreement's indemnification provision against Russo up to the $10,000 required property damage liability coverage limit of V&T § 370.

With respect to the antisubrogation rule's applicability in this case, the court held:

Pursuant to the "antisubrogation rule, "[a]n insurer has no right to subrogation against its own insured for a claim arising from the very risk for which the insured was covered. This rule applies even where the insured has expressly agreed to indemnify the party from whom the insurer's rights are derived" (citations omitted)[.] This rule is based, in part, on the potential for conflict of interest between the insurer and the insured, as well as to avoid allowing the insurer " to pass the incidence of the loss ... from itself to its own insured and thus avoid the coverage which its insured purchased" (citations omitted). "While the present case[] doe[es] not involve subrogation - since ELRAC is not seeking to step into the shoes of its insureds to sue responsible third parties - the policy behind the antisubrogation rule [would, nevertheless, preclude the Plaintiff from receiving the recovery it seeks herein]" (citation omitted).

The antisubrogation rule notwithstanding, a car rental company may enforce the indemnification clause in its rental agreement to the extent its liability exceeds the statutory minimum amount of insurance it is required to maintain. (citations omitted) In apparent recognition thereof, the indemnity provision in the Plaintiff's rental agreement herein provides, in pertinent part:

8. Renter's Indemnity Provision: Renter agrees to defend, indemnify, and hold Owner harmless from all losses, liabilities, damages, injury or property damage claim presented by any third party for all amounts in excess of the minimum dollar amounts required to be maintained by the Owner by the applicable motor vehicle financial responsibility laws of the State in which this agreement of rental was executed.

While VTL § 370 once failed to require vehicle owners to maintain a minimum amount of coverage for property damage, referring only to "maximum" coverage, thereby permitting complete indemnification from the lessee, as otherwise permissible by law (citations omitted), this section was amended in 2005, before the date of the lease agreement and accident sub judice, to explicitly provide, in pertinent part:

Every person, firm, association or corporation engaged in the business of carrying or transporting passengers for hire in any motor vehicle or motorcycle, ... , which shall be operated over, upon or along any public street or highway of the state of New York shall file with the Commissioner of motor vehicles for each motor vehicle or motorcycle intended to be so operated evidence, in such form as the commissioner may prescribe, of a corporate surety bond or a policy of insurance, ... , for the payment of a minimum sum, called minimum liability on all judgments for damages because of injury to or destruction of property of others in any one accident, recovered against such person, firm, association or corporation upon claims arising out of the same transaction or transactions connected with the same subject of action, to be apportioned ratably among the judgment creditors according to the amount of their respective judgments for damage or injury caused in the operation, maintenance, use or the defective construction of such motor vehicle or motorcycle as follows:

(b) For damages for and incident to injury to or destruction of property; for each motor vehicle and each motorcycle a bond or insurance policy with a minimum liability of ten thousand dollars. VTL § 370(1)(b)

As before this amendment was enacted, this requirement applies with equal force to automobile rental companies and to self-insurers. See, VTL § 370(3). For this reason, along with a reiteration of the principle of constructive consent by the Court of Appeals, the decisions in ELRAC, Inc. v. Masara, supra, and AIU Insurance Company v. ELRAC, supra, have been been discredited. See, Murdza v. Zimmerman, supra; Lancer Insurance Company v. Republic Franklin Insurance Company, supra.

Based upon the foregoing, even if this court were to overlook the evidentiary insufficiency of the Plaintiff's papers, it is clear that the alleged property damage of $1,700.00 claimed by the Plaintiff falls far below the $10,000.00 of property damage coverage afforded by the Plaintiff to the Defendant, pursuant to VTL § 370. Applying all of the principles of law stated hereinabove to these facts, it is clear that the Plaintiff does not possess a viable cause of action against the Defendant. Accordingly, the Plaintiff's motion is denied and the action is dismissed.

And just who was it who supposedly said: "Je weniger die Leute darüber wissen, wie Würste und Gesetze gemacht werden, desto besser schlafen sie nachts" (The less the people know about how sausages and laws are made, the better they sleep in the night.)? No one should lose any sleep over this decision. Especially pro se defendants like Mr. Russo.