Alsobrook v. Jim Earp Chrysler-Plymouth, 2004 WL 726810 (Neb. App., April 6, 2004)
Hurst v. Dixon, 2004 WL 1119566 (Ark., May 20, 2004)
Exploration Place v. Midwest Drywall Co., 2004 WL 1077827 (Kan., May 14, 2004)
Following Reliance Insurance’s recent liquidation, statutorily created guaranty associations around the country stepped in to provide liability coverage for Reliance’s insureds. These substitute insurers (and their insureds) are statutorily protected from having to reimburse for subrogation claims. Recently, though, three separate courts have limited this protection, which has always been perceived as broad and all-encompassing. These decisions demonstrate two things: (1) that subrogation claims can continue against Reliance’s former insureds under certain circumstances, and (2) that the defendants in such matters must adhere to certain procedural and evidentiary requirements to avail themselves of the guaranty association protections.
Alsobrook v. Jim Earp Chrysler-Plymouth, 2004 WL 726810 (Neb. App., April 6, 2004)
In Alsobrook v. Jim Earp Chrysler-Plymouth, plaintiff sued an auto dealership alleging negligent repair of his vehicle. This vehicle was subsequently in an accident causing extensive damage to it, most of which was purportedly reimbursed to plaintiff by his auto insurance carrier. During the pendency of the lawsuit, defendant's liability insurer, Reliance, became insolvent, after which, the trial court granted defendant’s motion for partial summary judgment, limiting the claim to plaintiff’s purported $1,000 property damage deductible loss. Likewise, the court also dismissed the portion of the claim asserted to have been reimbursed by plaintiff’s own carrier (the subrogation claim). This decision was based upon the trial court’s review of the Nebraska Property and Liability Insurance Guaranty Association Act, Neb. Rev. Stat. § 44-2401 et seq. (“the NPLIGA Act”).
In reversing the lower court, the appellate court held that, upon review of the pleadings and the record, the evidence did not show, nor was it admitted in the pleadings, that plaintiff had in fact been reimbursed by his auto carrier for any portion of his property damages. The parties' briefing read as though such fact was in evidence, but the appellate court noticed that it simply was not. In turn, it held that the trial court's conclusion that the NPLIGA Act limited plaintiff’s recovery to his $1,000 deductible was “obviously without evidentiary support and clearly wrong.”
The second procedural problem noted by the appellate court was that the alleged subrogation nature of a portion of the claim and the asserted effect of the NPLIGA Act were never pled as affirmative defenses by defendant in the lawsuit. The court noted that an affirmative defense must be specifically pled to be considered. While the insolvency and liquidation proceedings involving Reliance were raised in an earlier motion to stay the litigation, defendant never amended its answer to allege Reliance's insolvency, plaintiff's subrogation interest, and/or the NPLIGA Act, even though it had pled other affirmative defenses. The appellate court held that if defendant wanted to use these affirmative defenses, they had to be actually pled.
Thus, the appellate court found that the trial court committed plain error in limiting the claim (and dismissing the subrogation portion of the claim) on the basis of Reliance's insolvency, the alleged subrogation interest, and the resulting effect under the NPLIGA Act. It therefore vacated the trial court's decision, remanding the matter for further proceedings.
It is likely that upon remand, if given the opportunity by the trial court, defendant will take the necessary steps set forth by the appellate court, i.e. (1) amend its answer to include the affirmative defenses offered by the NPLIGA Act, and (2) present to the trial court evidence that a portion of the claim was in fact paid by plaintiff’s own subrogating insurer. Nonetheless, this decision clarifies some of the necessary procedural and evidentiary steps that must be taken before a defendant can take advantage of guarantee association statutory protections.
Hurst v. Dixon, 2004 WL 1119566 (Ark., May 20, 2004)
In Hurst v. Dixon, the Supreme Court of Arkansas upheld a trial court’s refusal to give defendants a credit (or set-off) under the Mississippi Insurance Guaranty Association Law, codified at Miss. Code Ann. § 83-23-101 et seq. (1999) ("the MIGA Act"), for sums paid plaintiff by his insurance carrier and his employer's workers' compensation carrier.
Defendants asserted that the Mississippi Insurance Guaranty Association (“the Association”) was entitled to the statutory set-off or credit under the MIGA Act for amounts paid by other insurers to the plaintiff. It also asserted that the credit should inure to the benefit of defendants, as the alleged tortfeasors insured by Reliance prior to its insolvency. In this matter, the defendants had affirmatively pled entitlement under the MIGA Act to such a set-off or credit against any judgment rendered.
The trial court determined, however, that because the Association was not a party, and had not otherwise entered an appearance in the case, it could not claim a set-off or credit under the MIGA Act. In other words, the court ruled that the defendants were not entitled to assert the claim for a setoff or credit on behalf of the Association. Defendants contend that the trial court erred because they were entitled to get the benefit of a setoff or credit independent of the Association's right to the setoff or credit under the MIGA Act.
The pertinent section of the Mississippi statute provides as follows:
Any person having a claim against an insurer under any provision in an insurance policy other than a policy of an insolvent insurer, which is also a covered claim, shall be required to exhaust first his right under such policy. Any amount payable on a covered claim under this article shall be reduced by the amount of any recovery under such insurance policy.
Miss.Code Ann. § 83-23-123(1)(1999)(emphasis added).
The court recognized that other jurisdictions have held that an insured is entitled to the protections of the pertinent guaranty act even where the guaranty association is not a party to the action. See, e.g., Lonigro v. Lockett, 253 Ill.App.3d 308 (1993)(insured had standing to argue for setoff when Illinois Insurance Guaranty Fund undertook defense of insured); Proios v. Bokeir, 72 Wash.App. 193 (1993), (guaranty association took over insolvent insurer's obligation to defend and indemnify insured).
In this case, the Association was not a party, but, more important, there was nothing in the trial court record to reflect that the Association had agreed to undertake a defense of the matter. In other words, the Association had not indicated to the court or the other parties, either through pleadings or correspondence, that it had assumed the insolvent insurer's obligation to defend and indemnify defendants. As noted above, under the MIGA Act, the right to a setoff is conditioned upon there being a "covered claim," and any setoff is limited to coverage previously provided by the insolvent insurer. See Miss.Code Ann. §§ 83-23-109, 123.
Based on the record in this case, the court had no way of determining whether the claim arising from the plaintiff’s injuries was a "covered claim" under the MIGA Act, and whether the Association was defending the action. In turn, the appellate court could not say that the circuit court erred in refusing to grant defendants a setoff under the MIGA Act, so it affirmed the lower court decision.
Exploration Place, Inc. v. Midwest Drywall Co., Inc., 2004 WL 1077827 (Kan., May 14, 2004)
In Exploration Place, Inc. v. Midwest Drywall Co., Inc., a Kansas matter, a general contractor's property insurer brought a subrogation action against a subcontractor whose liability insurer, Reliance, became insolvent. The trial court made a determination that Kansas’s Insurance Guaranty Association Act, K.S.A. 40- 2901 et seq. (“the KIGA Act”), barred this and all claims against the insolvent carrier’s insureds. On appeal, the Kansas Supreme Court held that the Act did not bar claims for liability that were not covered by Reliance’s liability policy, and that factual questions remained as to whether or not the claims at issue were excluded from coverage under that original liability policy. In other words, the court held that under the KIGA Act, a subrogating insurer may indeed exercise rights of subrogation against a defendant whose insurer is insolvent, but the recovery is limited to any amount above the liability limits of the policy or for claims which there was no coverage under the defendant's policy with the insolvent insurer.
Under the KIGA Act, the Kansas Insurance Guaranty Association (“the Association”) is only obligated to pay "covered claims" of an insolvent insurer. K.S.A. 40-2903(c). The subrogating carrier argued that the KIGA Act does not bar that portion of the claim that would not have been covered by the Reliance liability policy. The subrogating carrier also argued that most of its subrogation claim was paid to repair and replace work defendant had originally performed incorrectly, and that this portion of its subrogation claim against the subcontractor would not have been covered under that policy because of the “work product” exclusion.
The Supreme Court of Kansas first resolved the question as to whether the KIGA Act bars all subrogation claims against an insured with an insolvent insurer, or only those that fall within the policy's coverage. It started by noting that prior decisions had held that the KIGA Act was designed to put claimants and policyholders in the same position in which they would have been in had the policyholders' insurance company remained solvent. In light of this purpose, the court found that any prohibition placed upon a subrogating insurer from recovering the difference between the liability limit of the defendants’ prior liability policy with an insolvent insurer and the actual damages for which such defendants would have been liable, is to put them in a better position than if their insurer had remained solvent. Obviously, if the insurer were solvent, such defendants would remain personally liable for any damages exceeding the limits of their liability policy.
The court found it consistent with these prior decisions to allow the subrogating carrier in this case to recover the portion of the damages that the liability policy with Reliance would not have covered. This ruling was consistent with the aforementioned purpose of the Guaranty Act. In making this decision, the court rejected the defendant’s arguments that the Association had assumed the defense without denying any claim based on the exclusion in question, and that requiring the Association to prove that it would have had coverage imposes a burden greater than it would normally have in any other insurance dispute.
Thus, the court determined that the carrier could subrogate against defendant for those amounts not covered by the Reliance policy. Those amounts, if any, would not be a "covered claim" under the KIGA Act, so the Act's bar against subrogation claims does not apply. The court thereby reversed the lower court and remanded it to determine the extent to which the subrogation claim would have been covered under the defendant’s liability policy.
PRACTICE TIPS:
1. First, simply because a defendant was previously insured by Reliance (or any other liquidated liability carrier) and is now having its claims “covered” by a state’s insurance guarantee association, that does not necessarily mean that a subrogation claim is automatically and/or always extinguished. Legislation in many states can be read to allow for the subrogation claim to continue for claims in excess of the defendant’s liability policy limits, and/or for claims that would not have otherwise been covered by such policy. The applicable legislation should be discussed with legal counsel before closing down any such subrogation claim against such a defendant.
2. More specifically, when asserting a claim against such a defendant, unlike normal circumstances (where claims are directed toward causes of action covered under liability policies), wherever possible the claims should be styled in a manner typically not covered under standard CGL policies, such as breach of contract or intentional torts (including torts such as intentional misrepresentation and conversion).
