Carrier Cannot Subrogate Against One Who is Insured by the Same Carrier

The Reeds’ teenage daughter woke up in the middle of the night to find her bedroom was on fire. The Reeds’ carrier, Liberty Mutual (“Liberty”), sent investigators to the scene, who determined the fire began at an electric-powered water filter in an aquarium. Liberty put the manufacturer of the filter on notice and gave them an opportunity to inspect the scene and evidence. Coincidentally, the water filter manufacturer was also insured by Liberty, subject to a $250,000 deductible. A subrogation action was brought in the name of the Reeds against the manufacturer, Aqueon. Following discovery, Aqueon moved to dismiss the action, arguing that the “anti-subrogation rule” barred the action. The court granted the motion, with one proviso.

First the court (the federal court for the Western District of New York) noted that the “real party in interest” (i.e., the party that had the most to gain from the litigation) was Liberty, even though the action was brought in the Reeds’ name. [1]   The court noted there was no question Liberty was the real party in interest since they investigated the fire, put the defendants on notice, conducted a test burn on an exemplar aquarium, and had the most to gain financially from the lawsuit. 

The court found there was at least the potential for a conflict of interest, since Liberty was defending Aqueon, but Liberty would stand to benefit if it could pass some of its costs onto Aqueon’s $250,000 deductible.  This conflict “may affect the insurer’s motivation to provide a vigorous defense for its insured.”  The anti-subrogation rule is designed to prevent an insurer from passing to one of its own insureds the losses resulting from the risk that the insurer “willing agreed to accept.”  The total loss sustained as a result of the fire was $325,424.82.   Since Aqueon’s deductible was $250,000, “Liberty Mutual potentially would shift a major portion of the loss it would pay to [the Reeds] to the defendants.”  The court determined that this would be an inappropriate shifting of the loss onto one of its own insureds.

However, the court limited its holding only to those damages paid out by Liberty Mutual.  The Reeds had suffered over $42,000 in damages above and beyond their policy limit.  The court allowed the Reeds to seek recovery as against Aqueon for their out-of-pocket damages. 

Bottom Line:  Where the carrier for the plaintiff is the same as the carrier for the defendant, the “anti-subrogation rule” prevents a subrogation action from being brought, at least where the defendant has a significant deductible or self-insured retention. It is unclear whether or not the court would hold the same way where the defendant had little or no deductible (in which case, there would be no conflict of interest or shifting of the loss from the carrier onto its own insured).

[1] Reed v. Aqueon Prods., 2014 U.S. Dist. LEXIS 170253 (WDNY December 9, 2014)