Opinion ID: 174629
Heading Depth: 1
Heading Rank: 3

Heading: National Union's Subrogation Rights are Subject to Subsequent Agreements Entered into by KCPL, Including Travelers's Policy.

Text: Regardless of any claims to priority found in the National Union Policy, Missouri law requires that National Union, as the subrogee, be bound by limitations KCPL places upon itself as subrogor. Jos. A. Bank Clothiers, Inc. v. Brodsky, 950 S.W.2d 297 (Mo.Ct.App.1997) ( Bank ), is directly on point. Bank holds that where an insured has a contractual obligation to a party, and an insurer asserts subrogation rights, the insurer merely stands in the shoes of the insured and therefore any claims by the insurer are subject to the contractual duties and limitations that apply to the insured. The facts in Bank involved a clothing retailer (Bank) whose shop was flooded and whose landlord was responsible, in part, for the flooding. In the property lease between Bank and the landlord, Bank had agreed to maintain insurance naming the landlord as an additional insured. Bank initially had fulfilled this duty. In obtaining insurance with a different firm for a subsequent year, however, Bank failed to list the landlord as an additional named insured. When the insurer tried to recover through subrogation in a claim against the landlord, the Missouri Court of Appeals ultimately held the insurer could not recover. The court recognized that the insurer was not a party to the lease agreement and that the landlord was not, in fact, listed as a named co-insured. The court nevertheless applied Missouri's no subrogation rule and held that because the insurer could not ignore Bank's contractual relationship with the landlord, the landlord was to be considered a named insured, therefore precluding a subrogation claim. Id. at 302 (Where an insurance company attempts to recover, as a subrogee, from a coinsured under the policy, whose negligent act occasioned the loss, the claim must fail in the absence of design or fraud on the part of the coinsured.). Although the landlord was not technically a co-insured, the Missouri Court of Appeals held, The lease provisions for co-insurance bind Bank. [The insurer] as Bank's subrogee, is also bound by a coinsured relationship of Bank and [the landlord]. Id. The court relied in part on insurance law and held, Where a party is required by contract to carry insurance for the benefit of another, that party will be treated as a coinsured. Id. at 303; see also Rock Springs Realty, Inc. v. Waid, 392 S.W.2d 270, 277 (Mo.1965); Monsanto Chem. Co. v. Am. Bitumuls Co., 249 S.W.2d 428, 431 (Mo.1952). In the alternative, however, the court relied on simple contract law, stating that Bank's breach of the contractual duty to provide insurance for the landlord precluded suit by Bank against the landlord. The court held, The subrogee stands in the place of the subrogor.... Thus, Bank's breach forecloses its claim against [the landlord] and [the insurer's] claim as Bank's subrogee. Bank, 950 S.W.2d at 303 Applying Bank, we hold that National Union is entitled to exercise only those rights KCPL itself could exercise. KCPL, as a party to the Travelers policy, was bound to recognize the priority of Travelers's subrogation claim as against insured proceeds. Regardless of any arguments National Union may present based upon purported priority as established through its own policy, it cannot ignore KCPL's own contractual duties toward Travelers when standing in KCPL's shoes. See Century Indemn. Co. v. London Underwriters, 12 Cal.App.4th 1701, 1709, 16 Cal.Rptr.2d 393 (1993) (applying California law consistent with Missouri law and holding a primary insurer, as the subrogee of the insured, had no greater rights than [the insured] itself and thus was bound by the agreement that [the insured] had made with [the excess insurer]). National Union argues against this position and against the holding of Bank and Century Indemnity and cites cases generally for the proposition that contracts bind only the parties to the contract. See, e.g., EEOC v. Waffle House, Inc., 534 U.S. 279, 293, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002) (It goes without saying that a contract cannot bind a nonparty.); In re Exec Tech Partners v. Resolution Trust Corp., 107 F.3d 677, 680 (8th Cir.1997) (applying Missouri law). These cases espouse a fundamental and unobjectionable aspect of contract law. They do not defeat our analysis, however, because as a subrogee, National Union's claim of right to the contested proceeds for insured losses can be no greater than KCPL's rights. KCPL is a party to the Travelers policy and KCPL's rights are precisely the contract rights under examination. Here the critical inquiry is whether Traveler's holds a priority interest or whether National Union, when standing in KCPL's shoes, holds the greater interest. National Union also cites a Missouri Court of Appeals case involving a recording statute and subrogation provisions in a series of loan documents and deeds of trust. See Kansas City Downtown Minority Dev. Corp. v. Corrigan Assocs., 868 S.W.2d 210 (Mo.Ct.App.1994). As an initial matter, we reject National Union's assertion that we are bound by Corrigan; we are not bound by the decisions of a state's intermediate courts. Swope v. Siegel-Robert, Inc., 243 F.3d 486, 496 (8th Cir.2001). Further, Corrigan is factually distinguishable as it involved recording statutes and subrogation in the context of deeds of trust and multiple loan agreements; it did not involve questions of subrogation priority as between primary and excess insurers. In Corrigan, the court held that a subordinate lender, whose lien was extinguished upon foreclosure by the primary lienholder, could not recover from the primary lienholder because (1) the recording statutes did not permit recognition of the subordinate lender's assertion of priority, and (2) the evidence did not show an intent among the parties to accord priority to the subordinate lender. If anything, the material holding we should take from Corrigan, then, is not that a subrogee is free from the contractual limitations of the subrogor. Rather the material point is that it is necessary to examine the intent of the parties in the apportionment of rights. In this case, that necessarily entails an examination of the risks the different insurers contracted to insure. Contrary to National Union's arguments, then, Corrigan affords National Union no shelter from Travelers's priority claim. Finally, we note that the district court in the present case discussed the inherently limited nature of subrogation rights and found no duty for National Union to make a payment to Travelers. The court, discussing Great Atl. Ins. Co. v. Liberty Mut. Ins. Co., 576 F.Supp. 561, 564 (E.D.Mo. 1983), stated: The court held that even assuming the excess carrier was subrogated to the rights of the insured, the excess carrier had no right to collect additional money from the primary carrier.... The same is true here. KCP & L has no legal right to collect additional money from National Union; therefore, even were Travelers to stand in KCP & L's shoes, Travelers would have only the rights possessed by KCP & L, which do not include the right to collect an additional $10 million from National Union. We disagree that Great Atlantic is applicable to the present situation. Great Atlantic is distinguishable because it involved an attempt to force a primary insurer to pay on a policy that did not cover the loss at issue. Here, Travelers seeks only the recognition of its priority subrogation rights as to the proceeds from the Rockwell Automation judgment, not additional payment beyond the policy limits by National Union. Great Atlantic involved mistakes of fact and mutual mistakes between contracting parties, and, as the court in Great Atlantic summarized, one party was trying to profit by another's inadvertent mistake. Id. at 565 (The sum and substance of the foregoing is that Great Atlantic is seeking to profit by the inadvertent mistake of Liberty Mutual for the purpose of obtaining money to which it is not entitled. The evidence admits of but one conclusion, namely, that Great Atlantic is not entitled to recover against Liberty Mutual.). In Great Atlantic, a primary insurer inadvertently wrote two $500,000 policies that covered risks in the United States as well as Canadian risks even though the insured and the primary insurer clearly had intended one policy to cover domestic risks and the other to cover Canadian risks. Ultimately, the primary insurer made a payment of the policy limits on the policy the parties had intended to cover domestic risks. An excess insurer then made a payment on an excess policy for an amount less than $500,000. After making its payment, the excess insurer sought to recover the amount of its payment from the primary insurer. The excess insurer argued that the primary insurer should have to pay under the Canadian-risk policy that had mistakenly been written to include domestic risks. The court refused to order additional payment. The court held that, contrary to the mutual mistake of the primary insurer and the insured, the evidence established that the primary insurer and the insured had intended there to be only $500,000 of primary coverage for domestic risks. The court then held that, because the insured itself had no right to recover additional funds from the primary insurer, the excess insurer, through subrogation, could not recover additional money from the primary insurer. Great Atlantic, then, is wholly distinct from the present case. There the excess insurer was not asking for subrogation recoveries held by a primary insurer to be disgorged in favor of an excess insurer with a superior subrogation right. Further, we believe Great Atlantic stands for the proposition that the parties' intent matters and insurers should be held to pay for the risks they contracted to accept. Importantly, even if Great Atlantic were applicable here, the question in the present case is not whether National Union owes KCPL some additional amounts under some unexhausted National Union policy. The question is simply whether, in the distribution of the proceeds from the Rockwell Automation judgment, the parties honored KCPL's contractual duties to Travelers or whether funds were improperly diverted and should be disgorged by National Union to Travelers, the party with the priority interest. We conclude that National Union, like KCPL, was bound to recognize Travelers's priority interest and must now disgorge $10 million from its 55% share of the $97 million judgment against Rockwell Automation. [8]