Court Denies Insureds’ Attempt to “Piggyback” Claims Onto Carrier’s Subrogation Action

Mr. and Mrs. Erlich purchased a water cooler from Greenway in April 2008 and installed it in the basement of their Brooklyn residence.  A few days later, the water cooler malfunctioned and caused a fire, which damaged their home and contents.  Their carrier, NHIC, paid $124,123.81, to or on behalf of the Erliches as the actual cash value (“ACV”) of their damages and the Erliches suffered a $1,000 deductible.   NHIC held back $11,167.20 in replacement cost, which was available if the Erliches timely rebuilt and/or replaced contents.

NHIC assigned their rights to its reinsurance carrier, Everest, who brought a subrogation action against the water cooler manufacturer, Greenway.   Everest settled its subrogation action with Greenway in November 2010 for an unspecified amount.  Everest tendered a check to the Erliches for $620, which represented the pro rata share of the Erliches’s $1,000 deductible.

In August 2012, the Erliches sued NHIC, Everest and others asserting a variety of claims, among them:  (a) the insureds must be “made whole” for their (unspecified) uninsured loss prior to NHIC and Everest receiving any money from their subrogation suit; (b) the insureds are entitled to refund of their entire $1,000 deductible, not just their pro-rated share; and (c) that the insureds are entitled to receive their entire hold back of $11,167.20.  The Court disagreed with the Erliches and dismissed their lawsuit.

The judge noted that New York’s highest court had clearly established, in 1995, that an insurance carrier that has paid its insured the amount due to him/her under the policy has the right to bring a subrogation action against third parties, and the insured does not have the right to be made whole (i.e., receive 100% of its uninsured as well as insured damages) prior to the carrier recovering from others in subrogation. [1]   Whereas other states have adopted a “made whole” doctrine, New York has expressly rejected it.  Where the tortfeasor (in this case, the water cooler manufacturer) has sufficient funds (i.e., has insurance or is a large corporation with assets), the insured must bring its own lawsuit against the third party tortfeasor to recover any damages that were not repaid by insurance, and must file their complaint prior to the running of the applicable statute of limitations, which the Erliches failed to do.   The judge stated:  “The policyholder cannot sit on its rights, allowing its claims against the tortfeasor to become time barred, and then sue its insurer for a portion of the subrogation settlement.”  The Erliches cannot now “piggyback on its insurer’s lawsuit.”

The Court further found that the insureds were not entitled to their “hold back.”  The subject policy required the insureds to submit proof that they had repaired or replaced property or contents in order to receive their hold back, and such proof must be sent in writing within 180 days of the loss.   This was a contractual provision contained in the policy, and since the insureds did not fulfill their obligations under the 180-day clause, they were time-barred from claiming their hold back. 

Finally, the court noted that New York law does not require a carrier to return any portion of the insured’s deductible following a subrogation settlement.  Everest contended that they returned the $620 “voluntarily” to the Erliches even though they were under no legal obligation to do so.   Since the insureds had no legal entitlement to any returned deductible, they were not entitled to receive the remaining $380.

BOTTOM LINE:  This is a great victory for insurance carriers.  We will monitor to see if the decision is appealed.  To summarize, the judge:

(a)    re-affirmed New York’s rejection of the “made whole” doctrine.  A carrier that has fulfilled its obligation to its insured may pursue recovery of the amount paid from third parties and, so long as the third-party tortfeasor has sufficient assets, the insurer has no obligation to its insured for any of its claimed uninsured losses; 

(b)    ruled that an insured cannot “piggyback” its uninsured loss onto the carrier’s subrogation claim and must file a (timely) separate action against the third-party tortfeasor; 

(c)    ruled that the insurer is not legally obligated to return any of its insureds’ deductible  following a subrogation settlement by its insurer [2] ;  and

(d)    ruled that the insureds’ entitlement to any “hold back” is dictated by the terms of the policy and the insureds must timely fulfill their obligations under the policy in order to receive their hold back

[1] Winkelmann v. Excelsior Ins. Co., 85 NY2d 577 (1995)
[2] Although often times carriers will “voluntarily” return some or all its insured’s deductible after it has recovered funds in subrogation.

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