Despite Granting Dismissal, Court Still Rules On Subrogation Issues
By Don R. Sampen, published, Chicago Daily Law Bulletin, May 18, 2021
The U.S. District Court for the Northern District of Illinois recently held that one insurer was entitled to seek subrogation from another insurer for defense and indemnity costs for a claim brought against their common insured, but that the subrogation action had to be dismissed because it was premature.
The case is James River Insurance Co. v. Canal Insurance Co., No. 19-cv-5208, 2021 U.S. Dist. Lexis 74717 (N.D. Ill., April 19). The insurer seeking subrogation, James River, was represented by Clyde & Co. of Miami. Leahy Eisenberg & Fraenkel Ltd. of Chicago represented Canal.
The insurers’ common insured, Cardinal Transport, was sued in West Virginia in connection with a truck-unloading crash. Canal provided Cardinal Transport with business auto coverage, and James River provided commercial general liability coverage. Both policies had a $1 million occurrence limit.
Cardinal Transport tendered to Canal, and it initially agreed to defend. James River, however, also hired counsel and provided a defense. Subsequently, Canal assumed a monitoring role in the litigation, and shortly before trial it advised that its policy provided no coverage at all.
A jury awarded judgment against Cardinal Transport for $5.4 million, and James River pursued an appeal. While the appeal was pending, James River brought this action against Canal seeking to recover defense costs and indemnity on a subrogation theory. Canal moved to dismiss.
In an opinion by Judge John J. Tharp, applying Illinois law, the court granted the motion to dismiss but in the process ruled on some of the substantive coverage and subrogation issues.
Tharp initially addressed subrogation. James River contended it relied for subrogation on the terms of its policy, which transferred to it the insured’s rights against others, including, according to James River, the Cardinal Transport’s right to coverage against Canal.
Canal contended, however, that notwithstanding the contractual subrogation provision, James River had to fulfill the requirements for equitable subrogation, as set forth in Home Insurance Co. v. Cincinnati Insurance Co., 213 Ill.2d 307 (2004). Those requirements were (1) a primary obligation of the defendant carrier, (2) a secondary obligation of the plaintiff carrier and (3) the plaintiff carrier discharging its liability to the insured in a manner that extinguished the liability of the defendant carrier.
Tharp disagreed, saying that under 7th U.S. Circuit Court of Appeals interpretation of Illinois law, the contract terms for subrogation apply, and the court need not take into account the elements of equitable subrogation.
Tharp did, though, agree with Canal that a separate subrogation requirement recognized in Illinois case law would apply, namely, the unavailability of partial subrogation. He observed that James River’s complaint and brief described its defense costs, but at least as of the time of the filing of the complaint, James River had paid no indemnity costs.
Thus, since James River had not paid off its liability completely, including payment of indemnity, its claim was premature, and its complaint would be dismissed.
Tharp nonetheless found it appropriate to address James River’s estoppel theory of recovery against Canal, because the issue had been briefed, and James River would likely soon be asserting a ripe subrogation claim. The theory was that by agreeing initially to defend Cardinal Transport but then withdrawing, Canal was estopped to deny coverage.
Canal responded that estoppel would apply only if prejudice resulted from its withdrawal of a defense. Tharp disagreed and found that prejudice is not a prerequisite under the circumstances alleged here, where Canal never really assumed Cardinal Transport’s defense in the first place.
As for the consequences of the estoppel, Tharp observed that Illinois law is ill-defined as to whether the estopped insurer becomes liable to the insured only up to its policy limit, or whether it may be held responsible also for the judgment against the insured in excess of the limit.
He ultimately construed the law as imposing an obligation for the excess judgment only if the insurer caused it or acted in bad faith, which, he said, was not the case here for Canal. Thus, if the facts were proved as James River alleged, Canal would be liable to Cardinal Transport, and to James River on a subrogation theory, only up to its $1 million policy limit, plus defense costs.
Because the subrogation claim was premature, however, Tharp granted the motion to dismiss, with leave to re-plead once James River’s full subrogation claim became known.
Contractual subrogation rights are not limited by the same requirements that apply to equitable subrogation.
An insurer is not entitled to recover partial subrogation, meaning that it must wait until it has paid off its liability completely before it recovers funds from a third party.
An insurer that has breached its duty to defend is typically liable to the insured for defense costs plus the amount of the judgment against the insured up to the insurer’s policy limit, except where the insurer’s breach caused an excess judgment or engaged in bad faith, in which case the insurer may be liable beyond its policy limit.