Opinion ID: 600770
Heading Depth: 2
Heading Rank: 2

Heading: Application of Subrogation Clause

Text: 26 Having determined that Cantu was not acting as Amoco's insurer when it paid Gonzales and therefore did not make that payment on behalf of Amoco, we must next determine how to apportion Cantu's payment between Amoco and Vesta. The subrogation clause in the contract between Amoco and Vesta establishes that any amounts recovered shall be apportioned among the parties as follows: 1) any party that has already paid more than its designated share shall first be reimbursed up to the excess amount paid; 2) Vesta is then to be reimbursed out of any balance then remaining up to the amount it paid; and 3) lastly Amoco is entitled to claim any residue. 27 Under the terms of their contract, Vesta would be liable only after Amoco first satisfied a $5,000,000 self insurance retention. Amoco actually paid $2,715,000 to Gonzales--significantly less than the $5,000,000 self insurance retention. Consequently, if the subrogation clause applies to Cantu's payment, that payment must first be credited to any amount paid by Vesta before Amoco would be entitled to the residue. 28 Amoco argues that the subrogation clause should not be applied to the instant case because an insurer cannot exercise its right of subrogation against its own insured--it would defeat the purpose of insurance if an insurer could pay a loss then seek reimbursement from the insured. Although this may be a correct general statement of the law, it does not control the present situation. Vesta is not attempting to exercise subrogation rights against Amoco. Vesta's suit is based on a subrogation theory, but that subrogation theory runs against Cantu through Amoco, not against Amoco itself. Vesta is suing Amoco for reimbursement rather than for subrogation. This direct action for reimbursement is allowable because Cantu has already indemnified Amoco. 13 29 Amoco also argues that Vesta's right to subrogation did not accrue until Vesta paid under the insurance policy. As Amoco had already been indemnified by Cantu, Amoco had no cause of action against Cantu by the time that Vesta made a payment under the insurance policy. And, as Amoco no longer had a cause of action against Cantu, there was no cause of action to which Vesta could be subrogated when it paid under the insurance policy. Therefore, Vesta's subrogation cause of action ceased to exist before it accrued. This argument does not advance Amoco's position. 30 Amoco cites an intermediate Texas appellate court opinion to support the proposition that where an insured settles with or releases a wrongdoer from liability for a loss before payment of the loss has been made to the insurance company, the latter's right of subrogation is thereby destroyed. 14 Unfortunately for Amoco, such conduct also has the effect of forfeiting any claim the insured might have had under the insurance policy. 15 Additionally, although the insurance company would no longer have a cause of action against the tortfeasor, it would have one against the insured. 16 31 Amoco's argument also ignores the express language of the indemnity clause between Cantu and Amoco in which Cantu agreed to indemnify not only Amoco, but also its insurers. It is arguable that Vesta could have proceeded directly against Cantu for indemnity without relying on the subrogation clause. 32 Finally, Amoco claims that subrogation is a purely equitable doctrine and cites the district court's statement that it would be manifestly unfair to allow Vesta to avoid its contractual obligations simply because Amoco had the good sense to protect itself from payments within its self insured retention. 33 Initially, we question the soundness of this statement by the district court. Vesta and Amoco both appear to be experienced business entities. The agreed statement of facts submitted to the district court recites: The Vesta policy was drafted by each of the parties over a long period of time. Neither party is able to determine who drafted the actual clauses in issue [including the subrogation clause]. The language of the subrogation clause is not unusual or difficult to understand. Under the terms of the policy, Amoco could separately insure itself for any or all of its $5,000,000 self insurance retention. Amoco failed to take advantage of this opportunity, opting instead to include only an indemnity clause in the contract with Cantu--an indemnity clause which itself recognized the potential rights of Amoco's insurers in any indemnification. 34 The inclusion of the indemnity clause did eventuate to Amoco's benefit, albeit not to the extent desired by Amoco. The sums paid by Cantu had the effect of reducing by some $2,285,000 the amount that otherwise would have been paid by Amoco. If the settlement with Gonzales had not exceeded $5,000,000, the entire amount of the indemnification would have inured to Amoco's benefit; only if Gonzales's damages had exceeded $8,500,000 would the indemnity clause with Cantu have been of no benefit to Amoco. Even in this age of sizeable recoveries, an award of less than 8.5 million dollars is not so infrequent that Amoco could not have reasonably expected to benefit from the inclusion of the indemnity clause in its contract with Cantu. We are not at all convinced that there is any disparity in the equities here. 35 But even assuming that such a disparity existed, we would question the application of equitable principles to this subrogation claim. The instant case involves what Texas courts term conventional subrogation, (subrogation that arises by contract) as distinguished from legal subrogation (subrogation that arises by operation of law). 17 Admittedly, legal subrogation is an equitable concept and thus is governed by the principles of equity. 18 But even though some jurisdictions treat the distinction between conventional and legal subrogation as merely procedural, Texas does not. 19 Instead, Texas courts generally allow a subrogee claiming against a third party under conventional subrogation to recover without regard to the relative equities of the parties. 20 36 Texas law further recognizes that an underwriter is entitled to the benefits of subrogation as a matter of law (as distinguished from equity) even if its insured's right of recovery is contractual. 21 The San Antonio Court of Appeal interpreted a subrogation clause similar in wording to that in the Vesta policy to mandate that among excess carriers those contractually most remote from the primary coverage stand first in line when subrogation recoveries are distributed. Where the insurers' coverage is in the nature of layers, the excess carrier should recover under subrogation before primary insurers can be reimbursed. One can look at subrogation recovery as reducing the net loss, in which case the excess carriers would not be obligated to pay the loss. 22 37 Applying those same concepts to the instant case, in which the coverage provided by Vesta is excess to the self-insured underlying limits that Amoco was obligated to furnish, we conclude that the $3,500,000 payment contributed by Cantu's insurers towards the Gonzales settlement should be deemed to come off the top of the ultimate net loss that Amoco sustained as a result of the Gonzales settlement. So doing leaves the balance of the funds, which were advanced by Amoco for the Gonzales settlement, as amounts which Amoco was obligated to pay under its self-insured underlying limit.