Federal Ins. Co. v. Arthur Andersen & Co.

CourtNew York Court of Appeals
Citation75 N.Y.2d 366,553 N.Y.S.2d 291,552 N.E.2d 870
Decision Date22 February 1990
Parties, 552 N.E.2d 870 FEDERAL INSURANCE COMPANY, Appellant, v. ARTHUR ANDERSEN & CO., Respondent.

Page 291

553 N.Y.S.2d 291
75 N.Y.2d 366, 552 N.E.2d 870
ARTHUR ANDERSEN & CO., Respondent.
Court of Appeals of New York.
Feb. 22, 1990.

[75 N.Y.2d 367] Arthur N. Lambert and Susan E. Jaffee, New York City, for appellant.

[75 N.Y.2d 368] Sidney H. Stein and Rob J. Crichton, New York City, for respondent.



Plaintiff, a fidelity insurer, paid its insured for a loss caused by the defalcations of an employee. Thereafter, it sued defendant, its insured's accountant and auditor, to recover what it had paid, alleging that defendant was negligent in failing to discover the defalcations. This appeal is from

Page 292

[552 N.E.2d 871] an order affirming summary judgment against plaintiff and dismissing its action. 148 A.D.2d 349, 540 N.Y.S.2d 120.

The decisive question is whether plaintiff's rights to recover as equitable subrogee to the extent of its payment to its insured are barred as a matter of law, as defendant contends, either because plaintiff did not reimburse its insured for the full amount of the loss or because of the operation of the doctrine of superior equities. For reasons which follow, we reject the contention that plaintiff's equitable rights are barred. Accordingly, the order of the Appellate Division should be reversed and summary judgment denied.


Between 1975 and 1983, Albert Ferrarese, an employee of Benton & Bowles (B & B), embezzled approximately $4,000,000 by manipulating the books of account and creating nonexistent receivables. Defendant--B & B's auditor which prepared financial statements for the years 1980, 1981, and 1982--was allegedly negligent in failing to uncover the fictitious receivables and permitting them to be reflected in B & B's balance [75 N.Y.2d 370] sheet. After discovery of Ferrarese's defalcations, defendant and B & B on May 2, 1983 entered into a "Settlement Agreement and Release" under which each party released the other from any claims arising out of or connected with the fictitious receivables. As part of the settlement, defendant agreed to perform $900,000 worth of professional services for B & B. The agreement also contained the following provision: "It is further understood and agreed that this release shall not diminish, compromise, prejudice or otherwise affect in any way any rights of one party to this agreement against the other to which a third party may be subrogated by virtue of any insurance policy or otherwise" (emphasis added).

On February 13, 1985 plaintiff paid B & B $1,000,000 for the loss--the policy limit under its contract. In the "Release, Assignment and Subrogation Agreement" accompanying the payment, plaintiff and B & B each reserved its rights to seek reimbursement from Ferrarese or from any other person or firms responsible for the loss; B & B agreed that it did "hereby subrogate, assign, transfer and set unto [plaintiff] all the rights, claims, interest and causes of action it ha[d] against [defendant] up to the amount paid by [plaintiff] to [B & B]"; and B & B promised to cooperate with plaintiff in its efforts to seek reimbursement from defendant and to retain and produce at plaintiff's request all correspondence, books and other documents pertaining to the loss. In addition, plaintiff and B & B, agreed as follows: "It is further understood that any of the aforesaid rights that [plaintiff] has against [defendant] have not been prejudiced or impaired in any way by any agreements entered into between [B & B] and [defendant]".

In granting defendant's motion for summary judgment and dismissing plaintiff's amended complaint, Supreme Court rejected plaintiff's contention that its agreement with its insured, B & B, gave it the right to sue defendant as B & B's contractual subrogee. The court construed the writing between B & B and plaintiff not as an agreement effecting a contractual subrogation but rather as one purporting to assign to plaintiff whatever claims B & B had against defendant. Because B & B had released defendant in the May 2, 1983 agreement, Supreme Court reasoned that B & B had no rights to assign to plaintiff on February 13, 1985 when it attempted to do so. Thus, the court concluded that the February 13, 1985 agreement gave plaintiff no rights either as contractual subrogee or assignee.

[75 N.Y.2d 371] Supreme Court also rejected plaintiff's alternative theory that, however the February 13, 1985 agreement might be construed, plaintiff should be permitted to advance a claim for reimbursement as equitable subrogee. The court, citing McGrath v. Carnegie Trust Co., 221 N.Y. 92, 116 N.E. 787 and American Sur. Co. v. Gerold, 255 App.Div. 285, 7 N.Y.S.2d 447, rearg. denied 255 App.Div. 950, 8 N.Y.S.2d 662, stated that "it is basic to the existence of subrogation that the proposed subrogee pay the debt owed by the debtor to the

Page 293

[552 N.E.2d 872] creditor, in full." (Emphasis added.) Noting that plaintiff had made only a partial payment, the court held that even when "the partial payment represents the full extent of the duty owed by the proposed subrogee to the creditor, [it] will not result in subrogation".

In view of its holding that plaintiff's failure to make payment for the full loss to B & B barred its claim for equitable subrogation, Supreme Court found it unnecessary to determine whether plaintiff's rights as equitable subrogee were also barred by application of the doctrine of superior equities. Supreme Court, however, did reject plaintiff's contention that the doctrine of superior equities does not exist in New York. The Appellate Division unanimously affirmed the summary judgment and dismissal for the reasons stated at Supreme Court.


Any rights which plaintiff, as B & B's insurer, has as equitable subrogee accrued to it not by virtue of some agreement with B & B, but independently of any contractual provision upon payment of the loss under its policy. Thus, if we hold that plaintiff may properly make a claim as B & B's equitable subrogee, as we do, it becomes unnecessary to determine whether plaintiff also has a valid claim as contractual subrogee under the February 13, 1985 agreement with B & B. It would make no difference whether in the February 13, 1985 writing plaintiff and B & B intended a contractual subrogation of B & B's rights against defendant or, as the courts below viewed it, an effort, albeit unsuccessful, to assign B & B's rights, as long as there is no language in the agreement with B & B which could be construed as barring plaintiff's claim as equitable subrogee. There is no such language.

Moreover, the May 2, 1983 "Settlement Agreement and Release" between B & B and defendant expressly exempted from the release any subrogation rights of an insurance [75 N.Y.2d 372] company, and B & B unequivocally represented in its February 13, 1985 agreement with plaintiff that its prior release of defendant had not impaired or prejudiced whatever subrogation rights plaintiff might have. Under these writings plaintiff's rights to proceed against defendant as equitable subrogee were clearly preserved (see, Connecticut Fire Ins. Co. v. Erie Ry. Co., 73 N.Y. 399, 404-405; Point Tennis Co. v. Irvin Indus. Corp., 63 A.D.2d 967, 405 N.Y.S.2d 506; see also, Weinberg v. Transamerica Ins. Co., 62 N.Y.2d 379, 383-384, 477 N.Y.S.2d 99, 465 N.E.2d 819). We turn to a discussion of these rights.


Unlike contractual subrogation where the subrogee's rights are defined in an express agreement between the insurer-subrogee and the insured-subrogor, the rights of an insurer against a third party as equitable subrogee arise independently of any agreement (see, American Sur. Co. v. Palmer, 240 N.Y. 63, 67, 147 N.E. 359; New York Bd. of Fire Underwriters v. Trans Urban Constr. Co., 91 A.D.2d 115, 119-120, 458 N.Y.S.2d 216, affd. 60 N.Y.2d 912, 470 N.Y.S.2d 578, 458 N.E.2d 1255; 16 Couch, Insurance 2d § 61:46 et seq.). These rights accrue upon payment of the loss and are based upon the principle that in equity an insurer, which has been compelled under its policy to pay a loss, ought in fairness to be reimbursed by the party which caused the loss (see, Ocean Acc. & Guar. Corp. v. Hooker Electrochemical Corp., 240 N.Y. 37, 47, 147 N.E. 351; Pittsburgh-Westmoreland Coal Co. v. Kerr, 220 N.Y. 137, 143-144, 115 N.E. 465; National Sur. Co. v. National City Bank, 184 App.Div. 771, 773-774, 172 N.Y.S. 413). The rights of an insurer as equitable subrogee against a third party are derivative and limited to such rights as the insured "would have had against such third party for its default or wrongdoing." (Ocean Acc. & Guar. Corp. v. Hooker Electrochemical Corp., supra, 240 N.Y. at 47, 147 N.E. 351.) Thus, the insurer can only recover if the insured could have recovered and its claim as subrogee is subject to whatever defenses the third party might have asserted against its insured (see, American Sur. Co. v. Town of Islip, 268

Page 294

[552 N.E.2d 873] App.Div. 92, 94, 48 N.Y.S.2d 749; 11A Appleman, Insurance Law & Practice § 6551, at 3-9; see generally, 16 Couch, Insurance 2d § 61:285, at 326).

In New York, rights of insurers to recover as equitable subrogees against negligent third parties have been recognized in cases where the insurer has paid an automobile collision loss (see, e.g., Hamilton Fire Ins. Co. v....

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