Defendant May Counterclaim in a Subrogation Action

Insured Mehalick ran a restaurant called “Ranier’s Gourmet” in South Glens Falls, New York.  He leased the property from Michael Beshara.  In February 2004, water pipes froze and broke, causing property damage to the restaurant to the tune of $150,000.  Mehalick’s carrier, Peerless Insurance paid the restaurant’s claim and subrogated against the landlord, Beshara.  In support of its subrogation claim Peerless pointed to lease language that required Beshara to make sure the heating system was working and in good repair and put the responsibility for maintenance and repair on Beshara.

In response, Beshara not only answered and defended Peerless’ subrogation claim, but also asserted a counterclaim.  In this counterclaim, landlord Beshara sought recovery for the property damage caused to the building, alleging that it was the tenant restaurant’s responsibility to maintain heat in the premises and that it was his tenant’s failure to do so that caused pipes to freeze and break.

Mehalick’s carrier moved to dismiss Beshara’s counterclaim, arguing it was not appropriate for a defendant to assert a counterclaim in defense of a subrogation action.  The appellate court disagreed and allowed the counterclaim to go forward.  The court concluded that “a subrogee acquires all rights, defenses and remedies of the subrogor and is subject to any claims or defenses which may be raised against the subrogor.” [1]  However, the court noted that the defendant landlord cannot use a counterclaim to obtain  an “affirmative recovery” as against the tenant-restaurant.  The defendant landlord is only allowed a “set off” of any recovery by plaintiff.  If the defendant wanted to pursue the entire amount of its property damage against his tenant, he would have to either implead the restaurant into the subrogation action or file suit against it in a separate lawsuit. 

Bottom Line:  It is permissible for a defendant to assert a counter-claim in a subrogation action.  However, such a claim can, at best, act as a set-off to any recovery by the subrogating carrier.  Thus, for example if the jury awarded the plaintiff its $150,000 but also awarded the defendant on a $90,000 counterclaim, the plaintiff would receive the net amount of $60,000.  It would not be possible for the jury to deny the plaintiff’s claim and award the defendant the full $90,000 since a counterclaim in a subrogation action can only off-set the subrogating carrier’s recovery.  The defendant could, however, either implead the tenant-restaurant or file a separate lawsuit to protect its right to recovery the full $90,000.

[1] Peerless Ins. Co. a/s/o Rainer’s Gourmet v. Beshara, 3rd Dept No.:  508854 (7/1/10)