“Subrogation” seems to be a simple concept. You suffer a loss. Your insurance company pays for the loss. Your insurance company then assumes your rights against the party that damaged you. But, like everything in the insurance world, subrogation can result in numerous complications. The problem, of course, is that if your insurance company doesn’t have a good subrogation claim against a third party, the insurance company can be less enthusiastic about settling with you.
To illustrate some of the problems that can result from subrogation claims, consider the recent convoluted mess in Franklin Mutual Ins. Co. v. Castle Restoration and Construction, Inc., decided by the New Jersey Appellate Division. Ploschansky owned a unit in Harmon Cove Towers (“HCT”), a condominium community in Hudson County. FMI insured Ploschansky’s condominium under a homeowners’ policy. HCT hired Falcon as a consulting engineer for a restoration and waterproofing project. HCT also hired Castle to perform renovations. Ploschansky contended that the work was a disaster, and that his condo was flooded, causing significant damage. A spate of lawsuits resulted:
- Ploschansky sued HCT and Taylor, the company that managed the condo community for HCT, in Hudson County. HCT then filed a third-party complaint against Falcon and Castle, alleging negligence and breach of contract. Ploschansky did not amend his complaint to bring direct claims against Falcon or Castle. Ploschansky eventually settled his Hudson County case against HCT, and the case was dismissed.
- FMI filed a complaint in Hudson County against HCT, Taylor and Castle, as the subrogee of another condo owner.
- Ploschansky filed a coverage complaint against FMI in Passaic County, arguing that FMI had wrongfully refused to pay his damages claim. In his complaint in this case (Lawsuit No. 3), Ploschansky disclosed the existence of Lawsuit No. 1. Ploschansky won the coverage case, following a bench trial. The trial judge awarded Ploschansky $107,160 in damages.
- FMI filed yet another case, this one against Falcon and Castle, again in Hudson County, arguing that it was entitled to reimbursement from Falcon and Castle as Ploschansky’s subrogee.
Got all that? Good. Now, here’s the problem from FMI’s standpoint. Falcon and Castle argued that Lawsuit No. 4 should be barred by the Court since FMI’s claims could have been brought in Lawsuit No.1, but weren’t. New Jersey’s “entire controversy” doctrine generally requires that all claims against all parties relating to the same transaction be brought in a single proceeding. Unfortunately for FMI, the Appellate Division agreed, writing: “It remains clear that, regardless of when FMI’s subrogation rights accrued, FMI was standing in Ploschansky’s shoes as his subrogee on July 31, 2014, the date it filed its complaint against Falcon (in Lawsuit No. 4). By that date, Falcon had already been dismissed from the Hudson County action and, under the entire controversy doctrine, Ploschansky could no longer file a claim against Falcon for its role in the construction project that damaged the condominium. Because Ploschansky’s claims against Falcon were barred, FMI could also not file a claim against Falcon as its subrogee…FMI had a fair and reasonable opportunity to litigate its claim prior to the dismissal of the claims against Falcon in the Hudson County action (that is, Lawsuit No. 1).”
Why is subrogation a problem for policyholders and not only their insurance companies? In Ploschansky’s situation, it wasn’t, because he won his coverage trial against his carrier and (presumably) got paid. But it can become a problem, as I suggested above, if you’re in settlement negotiations with your carrier, and the carrier doesn’t believe that it has a good subrogation claim. The most important thing to remember is to protect your carrier’s subrogation claim to the extent possible. Preserve all evidence, and make sure that you notify your carrier of the claim in a timely fashion so that the carrier can’t claim “prejudice.” The more viable a subrogation claim is, the easier it is for your carrier to settle a claim with you.
By the way, there’s a doctrine related to subrogation law called the “made whole” doctrine, which requires that the policyholder actually be “made whole” before the carrier’s subrogation rights accrue. A Wisconsin law firm, Matthiesen, Wickert & Lehrer, S.C., has put together a very handy 50-state survey of the law on that issue, which you can access by clicking here.
You can read the full decision in Franklin Mutual Insurance Co. v. Castle Restoration and Construction, Inc. by clicking here.