Insurance – The Anti-Subrogation Rule

Subrogation is the legal doctrine which allows one party, usually an insurance company, that pays a loss by its insured which was caused by a third party, to take over the rights of its insured against the third party and recover its claim payments.  It wouldn’t make much sense if, after paying a first-party insurance claim that its insured was partly responsible for, an insurance company could sue its insured to get their money back.  It would defeat the purpose of insurance.  Preventing precisely that sort of inequitable scenario is the purpose of the anti-subrogation rule (ASR).  Sometimes known as the “suing your own insured” defense, the ASR was originally developed based on the logical premise that because the carrier stands in the shoes of it’s insured, it would essentially be suing itself.  Therefore, no right of subrogation can arise in favor of an insurance company against its own insured.

The public policy behind the ASR is two-fold: (1) the insurer should not be able to pass its loss on to its own insured, avoiding coverage which the insured has paid for; and (2) the insurance company should not be placed in a situation where there is a potential conflict of interest.  However, this seemingly simple concept has many tentacles and each state has developed their own body of law with regard to how and when the ASR will be applied, setting forth numerous exceptions and rules regarding its application.

There are five fundamental reasons for the ASR.

ONE – an insurer who seeks subrogation stands in the shoes of the insured and can take nothing by subrogation but the rights of the insured.  Because a person cannot sue himself for damages, that person’s insurer, who stands in the person’s shoes for subrogation purposes, cannot sue the person either.

TWO – Public policy.  An insurer that has accepted premiums to cover certain risks should not be allowed to pass the same risks back to its insured in a subrogation action.  Otherwise, the insurer would be allowed to avoid the coverage that the insured has purchased.

THREE – The relationship between the insurer and its insured are fraught with conflicting interests.

FOUR – There is a possibility that, if insurers were permitted to sue their insureds for subrogation, the insurers would be able to obtain information from their insureds under the guise of policy provisions for later use in a subrogation action.

FIVE – An insurer’s right to sue its insured could be interpreted by the insurer as a judicial sanction to breach the insurance policy.

Texas has a rather well-developed body of ASR law.  While it is well-settled in Texas that the ASR applies if multiple insureds are covered under the same policy, the situation is less certain when insureds are covered under multiple policies issued by the same insurer.  In that instance, the application of the ASR varies by state.  As an example, if an independent contractor negligently repairs equipment, resulting in damage to the equipment and the destruction of the premises where the equipment is located, and the owner of the premises and the independent contractor are both insured by the same insurance company, but under different policies, the insurer for the owner may still be able to pursue the independent contractor even though it is technically the insurer’s “insured.”  Texas exceptions to the ASR include:

One exception is when the is not covered by the insurance policy.  This is according to the  Texas Supreme Court 2006 opinion, State Farm Mutual Automobile Insurance Co. v. Perkins.

Another exception is found in the 2000, Texas Supreme Court opinion styled, Keck, Mahin & Cate v. National Union Fire Ins. Co. of Pittsburgh, Pa., which says the exception applies when the insurance company has paid a third-party claim involuntarily, in good faith, and under a reasonable belief that the payment is necessary to its protection.

Another exception applies when the subrogation action is an excess insurer against a primary insurer and defense counsel for mishandling claim.  This was stated in the Texas Supreme Court 1992, opinion styled, Am. Centennial Ins. Co. v. Canal Ins. Co.