Great Am. Ins. Co. v. U.S., 734

• Decision Date: 21 April 1978
• Docket Number: D,No. 734,734
• Citation: 575 F.2d 1031
• Parties: GREAT AMERICAN INSURANCE COMPANY, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. ocket 77-6201.
• Court: U.S. Court of Appeals — Second Circuit

Page 1031

575 F.2d 1031

GREAT AMERICAN INSURANCE COMPANY, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 734, Docket 77-6201.

United States Court of Appeals Second Circuit.

Argued March 16, 1978.

Decided April 21, 1978.

Lawrence S. Greengrass, New York City (Rein, Mound & Cotton, New York City, Arthur N. Brook, New York City, of counsel), for plaintiff-appellant.

Elaine C. Buck, Asst. U. S. Atty., Brooklyn, N.Y. (David G. Trager, U. S. Atty., E. D. N.Y., Mary McGowan Davis, Asst. U. S. Atty., Brooklyn, N.Y., of counsel), for defendant-appellee.

Before GEWIN, ^* and MULLIGAN, Circuit Judges, and MILLER, Judge. ^**

MULLIGAN, Circuit Judge:

This appeal involves an issue of law apparently never litigated in this circuit and although its resolution is not difficult, its novelty and importance require discussion. The facts are not in issue. The appellant Great American Insurance Company (Great American) issued a New York State Standard Fire Insurance Policy ¹ upon premises in West Hempstead, New York protecting the interests of its named insureds, the owner and mortgagees. The rent paying tenants of the premises were allegedly government witnesses under the protection of United States Marshals. Early in the morning of January 6, 1973 the tenants, presumably for security purposes, moved from the premises while allegedly under the direction and supervision of the Marshals. In the process they allegedly removed numerous fixtures and extensively damaged the insured premises. The owner made a claim under the policy which Great American rejected. The owner and mortgagees thereupon commenced an action in the state court to recover their loss under the terms of the policy. Great American ultimately settled the claim for $18,699.80 on December 15, 1975. The insurer, having paid the claim, in turn made a written claim for reimbursement against the United States on May 21, 1976. That claim was denied on November 10, 1976 by the Director of the United States Marshals Service, Department of Justice, on the ground that investigation revealed no evidence of negligence or wrongful acts on the part of its personnel.

Great American thereupon brought an action under the Federal Tort Claims Act, 28 U.S.C. §§ 1346(b), 2671 et seq. in the United States District Court, Eastern District of New York on December 15, 1976 claiming to be subrogated pro tanto to the rights of the insured owner and mortgagees. On March 18, 1977 the United States filed a motion to dismiss on the ground, inter alia, that the action was barred by 28 U.S.C. § 2401(b) ² since it was commenced more than two years after the alleged negligent acts or omissions had occurred. While the motion was pending, Great American on March 31, 1977 filed an amended complaint in which it urged as an additional cause of action that the United States was liable "by way of indemnity." In his opinion of November 1, 1977, District Judge George C. Pratt dismissed the amended complaint finding that the claim asserted was not one for indemnity but a claim for property damage based on plaintiff's subrogation rights as an insurer. Judge Pratt held that since that cause of action accrued when the damage occurred and not when the plaintiff paid the loss, the claim was barred by § 2401(b). Appellant appeals from this order. We agree with the district court and affirm the order dismissing the complaint.

The parties to this appeal are in agreement that if the appellant insurer's claim is only as a subrogee of its insured, then its rights here are limited to those of its subrogor and its claim is time-barred in this case. The only issue then is whether Great American's claim arises solely out of its derivative right of subrogation or is supplemented by an independent claim for indemnification.

There is a subrogation clause in the Standard Fire Insurance Policy (lines 162-165), N.Y. Ins. Law § 168 (McKinney Supp. 1977), which permits the carrier to require an assignment of all right of recovery against any party for loss to the extent that payment is made by the insurer. In fact the sole basis for the complaint initially filed in this litigation was the traditional assertion of Great American's subrogation rights. Faced with the motion to dismiss because such an action was clearly time-barred, however, appellant raised the alternate claim for indemnification in its amended complaint. This cause of action is based on the theory that a claim resting upon an implied contract of indemnity accrued to Great American upon payment of the claim to its insureds. The theory is admittedly novel. There is not a single reported case in American jurisprudence cited by appellant or discovered by this court which holds that upon an insurance carrier's payment to its insured, the insurer becomes vested with a claim arising out of an implied contract of indemnity with the tortfeasor who caused the damage necessitating payment by the carrier to the insured. On the contrary, the authorities and the cases unanimously hold that the insurer's recovery is premised exclusively upon subrogation ³ which, while equitable in nature, is also expressly provided for in the insurance contract here.

The Standard Fire Insurance Policy itself is, of course, a contract of indemnity, but it runs between Great American and its named insureds. ⁴ The United States is not a party to that contract of indemnity and the insurer's right as a compensated indemnitor to recover the loss it has incurred is fixed by the policy's subrogation clause, which in effect makes Great American an assignee subject to whatever defenses the tortfeasor may have against the insured. As Professor Vance has pointed out:

In fire insurance . . . the insurer, upon paying to the assured the amount of a loss of the property insured, is doubtless subrogated in a corresponding amount to the assured's right of action against any other person responsible for the loss. But the right of the insurer against such other person does not rest upon any relation of contract or of privity between them. It arises out of the nature of the contract of insurance as a contract of indemnity, and is derived from the assured alone, and can be enforced in his right only.

Vance on Insurance, supra, at 787 n. 2, quoting St. Louis, I.M. & S. Railway Co. v. Commercial Union Insurance Co., supra, 139 U.S. at 235, 11 S.Ct. 554.

Appellant here has confused the principle of indemnity which underlies subrogation with an implied action for indemnification which is completely distinguishable.

By the subrogation of the insurer is meant the substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third person for the loss covered by insurance.

E. Patterson, Essentials of Insurance Law, 147, 148 (2d ed. 1957) (emphasis omitted). Subrogation, therefore, is based upon the principle of indemnity but is an exclusively derivative remedy which depends upon the claim of the insured and is subject to whatever defenses the tortfeasor has against the insured. E. g., Vance on Insurance, supra, § 134.

On the other hand, the obligation to indemnify another is defined by § 76 of the Restatement of Restitution.

A person who, in whole or in part, has discharged a duty which is owed by him but which as between himself and another should have been discharged by the other, is entitled to indemnity from the other, unless the payor is barred by the wrongful...