Russo by Russo v. Rochford

• Decision Date: 16 January 1984
• Citation: 472 N.Y.S.2d 954,123 Misc.2d 55
• Parties: Lisa RUSSO, an infant by her mother and natural guardian, Anna RUSSO and Anna Russo, individually, Plaintiffs, v. Pat ROCHFORD and Robert C. Clemente, Defendants.
• Court: New York Supreme Court

Page 954

472 N.Y.S.2d 954

123 Misc.2d 55

Lisa RUSSO, an infant by her mother and natural guardian Anna RUSSO and Anna Russo, individually, Plaintiffs, v.Pat ROCHFORD and Robert C. Clemente, Defendants.

Supreme Court, Trial Term Queens County, Part 5.

Jan. 16, 1984.

Shapiro, Shiff, Beilly, Rosenberg & Fox, New York City, for Allstate ins. co.

Stanley R. Waxman, P.C., Kew Gardens, for Aetna Life and Cas. Ins. Co.

MEMORANDUM

HAROLD HYMAN, Justice.

On September 23, 1980, a car owned by defendantPatricia Rochford and operated by defendantRobert C. Clemente struck the infant plaintiff, Lisa Russo, who at the time was riding a bicycle.Shortly thereafter, a negligence action ensued demanding judgment in the sum of $1,000,000.00 for the injured plaintiff and $300,000.00 for her mother and natural guardian.Defendant Clemente fell within the omnibus coverage of his codefendant's automobile liability policy with Aetna Insurance Company(hereinafter "Aetna") and the non-owned automobile coverage of his father's liability policy with Allstate Insurance Company(hereinafter "Allstate").After a default judgment was taken against the defendants for so-called "law office failures" by counsel retained by the automobile owner's insurer, 89 A.D.2d 892, 453 N.Y.S.2d 456, and the matter came on for an inquest, the two above-named carriers entered into a stipulation in open court with plaintiffs agreeing that the infant plaintiff was entitled to $110,000.00 in full settlement of her claim, a sum above Aetna's $10,000.00 policy limits.However, waiving their rights to appeal, both carriers called upon this court to determine the relative responsibility of each carrier for the default and to apportion the $100,000.00 excess sum as between these carriers in accordance with its ultimate decision.

Having undertaken an exhaustive and time-consuming review of the relevant case law in this area so as to effectuate a disposition based in legal precedent, it appears that in the context of this dispute the central issues are of first impression in this State.These issues are concisely stated below:

(1) In relation to an insurer's contractual duty to defend, what is the proper allocation of the burden of defense between the primary and excess insurance carrier in "coincidence cases?"¹

(2) In handling the defense of the insured, how is the relationship between the primary and excess insurance carrier on the one hand, and between the insured and the respective carriers on the other, defined and measured, and what duties and obligations attend such relationships?

(3) Where the primary insurance carrier has assumed control of a lawsuit, what is the extent of any duty which the excess insurance carrier may have with respect to defense of a claim against the insured, and just what must occur before the excess carrier may be called on to assist in the defense?

Duties of a Primary Insurer to an Excess Insurer

Where an excess insurer rather than an insured is obligated to pay that part of the plaintiff's judgment which is greater than the primary insurer's policy limits, the courts have granted a right of action to the excess insurer to recover its damages from a primary insurer where the primary insurer has breached its duty to settle litigation in good faith or acted negligently in the defense of the underlying action.A review of those cases reveals a number of theories upon which recovery has been allowed: (1) the theory that the excess insurer is equitably subrogated to the rights of the insured against the primary insurer; (2) the theory that the primary insurer owes a direct duty to the excess insurer; and (3) the theory that the primary insurer, excess insurer, and the insured owe to each other a triangular reciprocal duty to use due care in the handling and settling of claims against the insured.

(1) Equitable Subrogation.

Basically, through the vehicle of equitable subrogation, a primary insurer is responsible to an excess insurer for a verdict in excess of the primary policy limits if the primary insurer breached its implied obligation to manage the insured's defense in good faith by failing to bring about a settlement within the policy limits (St. Paul Fire & Marine Ins. Co. v. U.S. Fidelity & Guar. Co., 43 N.Y.2d 977, 404 N.Y.S.2d 552, 375 N.E.2d 733;cf.Lisi v. Nepola, 84 A.D.2d 560, 443 N.Y.S.2d 270, affd.56 N.Y.2d 708, 451 N.Y.S.2d 733, 436 N.E.2d 1335).

It is insignificant that the major portion of litigation between primary and excess insurers arises out of situations where there has been a breach of the implied obligation to settle claims in good faith.In essence the rights owed the excess insurer are derived from the duty owed the insured, one of those duties being the distinctly recognized contractual duty to defend with due care.If a breach occurs in meeting either the settlement or defense obligations, the excess insurer may recover from the primary.

To effect a recovery, the first means employed to bridge the lack of a contractual relationship, or lack of privity, between the primary and excess insurer was equitable subrogation.Once obliged to discharge the primary insurer's liability for a judgment in excess of the primary insurance policy, the excess insurer effectively stands in the shoes of the insured and is permitted to assert all claims against the primary insurer which the insured himself could have asserted.This principle has been cited with approval by the Court of Appeals in St. Paul Fire & Marine Ins. Co. v. U.S. Fidelity & Guar. Co.(supra).

Whether excess liability should be imposed upon Aetna, as primary insurer, depends upon whether its conduct in defending Clemente, the permissive user, violated the negligence standard established in this jurisdiction (as previously described) for imposition of excess liability in a suit brought by the insured against its insurer.In due course, this will be discussed in full.

Finally, it cannot be overemphasized that, since subrogation is an equitable remedy, the excess insurer's obligations, vis-a-vis the primary insurer, must be given equal consideration.Hence, as succinctly stated in Home Ins. Co. v. Royal Indemnity Co., 68 Misc.2d 737, 327 N.Y.S.2d 745, 747, affd.39 A.D.2d 678, 332 N.Y.S.2d 1003, app. den.31 N.Y.2d 641, 337 N.Y.S.2d 1025, 289 N.E.2d 565: "Just as [the primary insurer] owed [the excess insurer] the duty of negotiating in good faith so [the excess] owed [the primary] the contractual duty of cooperation, and the common law duty to mitigate damages."This court viewsthe Home Insurance decision as a proper and logical extension of the adoption of equitable subrogation by an excess insurer of the insured's right against a primary insurer.In the context of this case, not only would Allstate, as excess insurer and equitable subrogee, be entitled to enforce Aetna's primary duty to defend with reasonable care a claim against their common insured, but Allstate would equally be obliged, as Aetna suggests, to cooperate with Aetna, where needed, in furnishing such a defense.

(2) Direct Duty Owed by Primary Carrier to Excess Carrier.

Until recently, an excess carrier's only action in this State against a primary insurer was in equitable subrogation.With the decision in The Hartford Accident and Indemnity Co. v. Michigan Mut. Ins. Co., 93 A.D.2d 337, 462 N.Y.S.2d 175, mot. for lv. to app. gtd. 95 A.D.2d 738, 464 N.Y.S.2d 172, the Appellate Division, First Department has joined the minority of courts that have upheld the right of the excess insurer to recover from the primary insurer upon the basis of a direct duty owed by the primary to the excess.

Briefly stated, the action in Hartford(supra) involved the alleged bad faith and breach of fiduciary duty owed to plaintiff by Michigan Mutual as primary insurer, in the underlying action, and malpractice by counsel for the prime carrier in that action, in failing to name the injured party's employer in the underlying negligence suit though the excess insurer had demanded of the primary insurer and its attorneys that this employer be impleaded as a third-party defendant.The concern of the Appellate Court was with the nature of the remedy available to Hartford, as excess carrier, against Michigan Mutual, as primary insurer.The issue was delineated as follows: Whether Hartford had a valid cause of action "in its own right" against Michigan Mutual and, if so, whether Special Term erred in concluding that Hartford could not proceed in its individual capacity and any relief which could be sought was solely as subrogee of its insureds.

The essence of Hartford's claim was that Michigan Mutual breached its fiduciary obligation to its insureds and to Hartford, as the excess insurer, in that by not proceeding against the employer as a third-party defendant, Michigan Mutual sought to avoid additional liability which would have attached to Michigan Mutual since it was also the worker's compensation insurer of the employer.In finding that Michigan Mutual, as primary carrier, was in full control of the defense in the underlying action and that by failing to implead the employer, the primary carrier placed its own interest above that of the excess carrier, the Court, in no uncertain terms, stated (supra at p. 342, 462 N.Y.S.2d 175):

"Michigan Mutual, to whom the defense of the underlying action had been entrusted, owed a primary obligation to its assured and to the excess insurer to exercise good faith in handling the defense and to safeguard the rights and interest of the excess carrier.As primary insurer, it acts as a fiduciary and is held to an exacting standard of utmost good faith.Any such right of action arises as a result of the independent and direct duty to the excess insurer and is not dependent upon equitable principles of subrogation (citation omitted)."(Emphasis added.)

The holding in Hartford(supra), is significant since an important distinction exists between the...