Opinion ID: 541946
Heading Depth: 1
Heading Rank: 3

Heading: ability of an insurer to recover against its insured

Text: 37 The second issue relates to the ability of an insurer to recover against its own insured. The district court, in ordering judgment for Lloyd's Underwriters, concluded that an insurer which pays a claim for cargo damage can ultimately recover from its own insured when the damage was caused by the insured in its capacity as stevedore. We disagree. 38 In its memorandum and order of April 12, 1989, the district court effectively realigned the parties so as to bring in opposition Lloyd's Underwriters, which paid for the damaged cargo, and Amstar, whose employee caused the damage. Although Lloyd's Underwriters was never formally entered as a plaintiff against Amstar, the issue of whether Lloyd's had a right of recovery against Amstar was the underlying issue in all the briefs, motions, and arguments filed after April 1, 1988. It should be noted that, by making Lloyd's a direct plaintiff, and Amstar a direct defendant, the district court would have made it clear that Lloyd's was suing its own insured. But what cannot be done directly, cannot be done indirectly either. 39 Although Lloyd's Underwriters never filed a claim against Amstar, Farr Man/Woodhouse has consistently argued that Lloyd's was entitled to recovery from Amstar under the purely equitable doctrine of subrogation. Stafford Metal Works, Inc. v. Cook Paint and Varnish Co., 418 F.Supp. 56, 58 (N.D.Tex.1976). Under that doctrine, an insurance carrier, upon payment of a loss, becomes subrogated to rights and remedies of its assured to proceed against a party primarily liable without the necessity of any formal assignment or stipulation.... New York Bd. of Fire Underwriters v. Trans Urban Constr. Co., 458 N.Y.S.2d 216, 219, 91 A.D.2d 115, aff'd, 60 N.Y.2d 912, 470 N.Y. S.2d 578, 458 N.E.2d 1255 (1983). 5 See also Bispham, Principles of Equity Sec. 310, at 285 (11th ed. 1931). 40 Farr Man/Woodhouse essentially argues that Amstar is schizophrenic: it is both the sugar owner and the stevedore. As the sugar owner, Farr Man/Woodhouse contends, Amstar was a holder under the certificates of insurance, but Amstar as the stevedore was not. Thus, by making payment to Amstar as the owner of the cargo, Lloyd's Underwriters became subrogated to the rights of the assured against the party which caused the damage--Amstar as the stevedore. Since Amstar was wearing two hats, and Lloyd's insured the head under only one of them, Farr Man/Woodhouse contends that allowing Lloyd's to recover on its subrogation claim against the other head would not result in Lloyd's making a recovery against its own insured. 41 Pursuant to Section 12 of the charter party, the parties agreed that: 42 (A) Marine ... insurance, with loss payable to buyer [Amstar] from time title and risk of loss passes to buyer [Amstar] and to seller [Farr Man] prior to title and risk of loss passing to buyer [Amstar], shall be procured and maintained by buyer ... at expense of seller, on all sugar sold hereunder. The marine policy shall cover all risk of physical loss or damage from any external cause; shall include customary on-shore coverage until completion of discharge of such sugar at destination port and delivery into warehouse as directed by buyer [Amstar].... 43 From the terms of the contract it is clear that, at the time the cargo damage occurred, Amstar had title to the sugar, and thus was the assured under the cargo insurance policy. It follows then, that the party to whose rights Lloyd's sought to be subrogated was Amstar, and that since the damage was caused by Amstar's negligence, the party against which Lloyd's proceeded was also Amstar. 44 It is well settled that the equity of subrogation invests the underwriters with the rights of the assured against third persons, not with a right to override its own obligation to the assured. Great Lakes Transit Corp. v. Interstate S.S. Co., 301 U.S. 646, 654, 57 S.Ct. 915, 918, 81 L.Ed. 1318 (1937). Moreover, insurance underwriters cannot recover back from [their insured] what they have paid to it [and what] they had expressly agreed to pay to [it]. Id. See New Amsterdam Casualty Co. v. Homans-Kohler, Inc., 305 F.Supp. 1017, 1019 (D.R.I.1969), later app., 310 F.Supp. 374 (D.R.I.1970), aff'd, New Amsterdam Casualty Co. v. Holmes, 435 F.2d 1232, 1233-35 (1st Cir.1970). See also Dow Chem. Co. v. M/V Roberta Tabor, 815 F.2d 1037, 1043 (5th Cir.1987). More than one hundred years ago, the Supreme Court provided guidance which, we think, is instructive in this case: 45 The right of action against another person, the equitable interest in which passes to the insurer, being only that which the assured has, it follows that if the assured has no such right of action, none passes to the insurer.... 46 .... 47 For instance, if two ships, owned by the same person, come into collision by the fault of the master and crew of the one ship and to the injury of the other, an underwriter who has insured the injured ship, and received an abandonment from the owner, and paid him the amount of the insurance as and for a total loss, acquires thereby no right to recover against the other ship, because the assured, the owner of both ships, could not sue himself. 48 Phoenix Ins. Co. v. Erie Transportation Co., 117 U.S. 312, 321-22, 6 S.Ct. 750, 754, 29 L.Ed. 873 (1886). The insurer is entitled to take by subrogation only the rights of the assured, regardless of whether the loss was total, or, as in this case, partial. Id. at 321, 6 S.Ct. at 753. 49 Although there are doubtless many public policy reasons for prohibiting an insurer from suing its own insured, e.g., Pennsylvania Gen. Ins. Co. v. Austin Powder Co., 68 N.Y.2d 465, 510 N.Y.S.2d 67, 502 N.E.2d 982 (1986) (contrary rule would permit insurer to avoid coverage which insured purchased); Stafford Metal Works, Inc. v. Cook Paint & Varnish Co., 418 F.Supp. at 58 (fiduciary relationship between insured and insurer could create conflict of interest in law suit); Great Lakes Transit Corp. v. Interstate S.S. Co., 301 U.S. at 654, 57 S.Ct. at 918 (prevents an insurer from overrid[ing] its own obligation to the assured), we think the law is clear, and not in need of elaboration. The fact that it was the insured whose negligence caused the damage, does not, in our view, abrogate long established doctrine. See New Amsterdam Casualty Co. v. Holmes, 435 F.2d 1232 (1st Cir.1970). 50 Furthermore, the district court found that [t]he Sugar Contracts, the Charter Party and the Insurance Certificates all indicate that the parties intended Lloyd's to insure the cargo warehouse to warehouse. Nowhere does it state that Amstar would be excluded from coverage under the Lloyd's policy if it acted in the capacity of the stevedore. In view of the Supreme Court's dictates, an insurer contemplating subrogation against its own insured must do so in clear and unequivocal language. See Great Lakes Transit Corp. v. Interstate S.S. Co., 301 U.S. at 654, 57 S.Ct. at 918. This clear exception requirement is not an onerous burden to impose upon an insurer where the contract permits the assured to select the stevedore. In this case, Clause 6 of the charter party provided that: 51 [d]ischarge from vessel of each shipment hereunder shall be made by buyer [Amstar], or its designee, as discharging stevedore.... 52 In cases such as this, the insurer assumes the risk that the stevedore operations will be completed by the assured itself, and that damage will occur. See Royal Exch. Assurance of America, Inc. v. SS President Adams, 510 F.Supp. 581, 583 (W.D.Wash.1981); Pennsylvania Gen. Ins. v. Austin Powder Co., 68 N.Y.2d at 470, 510 N.Y.S.2d 67, 502 N.E.2d 982. 53 The district court, for reasons which are unclear to us, relied on Gibbs v. S/S Dona Paz, 96 F.R.D. 599, 600-01 (E.D.Pa.1983), to hold that an insurer which had paid a claim for cargo damage could ultimately recover from its own insured where the damage was actually caused by the insured in its capacity as stevedore. In so doing, the district court attempted to further a policy of imposing liability in a manner designed to encourage the exercise of due care. But one case cannot withstand the weight of authority pressing this court to move in another direction. It is the rule in this circuit, as elsewhere, that an insurer may not sue its own insured unless clear exceptions to this rule are manifested in the insurance contract. Because those exceptions are not present in the contract at issue here, we reverse the district court's entry of judgment for Lloyd's Underwriters against Amstar in the amount of $215,495.23 plus interest and costs, and direct the entry of Amstar's motion for summary judgment against Lloyd's Underwriters. 6