Stafford Metal Works, Inc. v. Cook Paint & Var. Co.

• Decision Date: 28 June 1976
• Docket Number: Civ. A. No. 4-2341.
• Citation: 418 F. Supp. 56
• Parties: STAFFORD METAL WORKS, INC., a corporation, Continental Casualty Company, Intervenor, v. COOK PAINT AND VARNISH CO., a corporation.
• Court: U.S. District Court — Northern District of Texas

418 F. Supp. 56

STAFFORD METAL WORKS, INC., a corporation Continental Casualty Company, Intervenor, v. COOK PAINT AND VARNISH CO., a corporation.

Civ. A. No. 4-2341.

United States District Court, N. D. Texas, Fort Worth Division.

June 28, 1976.

William B. David, Cantey, Hanger, Gooch, Cravens & Munn, Fort Worth, Tex., for intervenor as subrogee-plaintiff.

Beale Dean, Fort Worth, Tex., for intervenor as third-party defendant.

Royal H. Brin, Jr., Mark Martin, Strasburger, Price, Kelton, Martin & Unis, Dallas, Tex., for Cook Paint and Varnish Co.

MEMORANDUM AND ORDER OF DISMISSAL

MAHON, District Judge.

There is now before the Court Defendant's Motion to Dismiss of 23 March 1976. This motion came on for hearing before the Court on oral argument on 10 June 1976. In addition to oral argument, the Court has before it several briefs and memoranda filed by all present parties to this action. Having carefully considered all these sources of legal edification, the Court is of the opinion that Defendant's Motion to Dismiss should be granted.

I.

A brief description of the procedural history leading to the current posture of this case is necessary to understanding how this Motion to Dismiss arose.

On 30 July 1973, Stafford Metal Works, Inc., hereinafter "Stafford", filed its complaint based on negligence and products liability. Stafford claims that Cook Paint and Varnish Company hereinafter "Cook" supplied it with defective urethane foam insulation which caused a fire in Stafford's plant and resulted in extensive property damage. This suit placed Continental Casualty Co. hereinafter "Continental" in the unfortunate position of being at the same time the fire insurer for Plaintiff Stafford and the liability insurance carrier for Defendant Cook.

Under the insurance policies then in force, Continental paid Stafford the sum of $145,228.47 on its property losses due to fire. On 15 October 1973, Continental filed its complaint in intervention, subrogating itself to Stafford for the amount paid under the policy of fire insurance.

Under the terms of the liability insurance policy in force between Continental and Cook, Continental insured Cook for its liability resulting from property damage up to the amount of $100,000.00 for each incident and agreed to defend Cook in any suit seeking damages from Cook on account of property damage. Continental acknowledged its obligation and undertook the defense of Cook against Stafford, employing attorneys for that purpose.

Thus Continental was simultaneously defending Cook as its insured and asserting liability against Cook by way of subrogation for the amount paid to Stafford. Continental employed different attorneys to represent Cook than those it used to represent itself on subrogation. Continental claims that all files were kept entirely separate as between the defense and prosecution of this action and that it acted at all times in good faith with regard to the fiduciary duty it owed Cook.

Thereafter, Continental, as the liability insurer and defender of Cook, settled with Stafford for $163,774.36, the amount of Stafford's original claim in excess of Continental's own subrogation interest in Stafford's fire loss. This settlement exhausted Continental's liability policy with Cook and required the payment by Cook of the amount of $63,774.36 over the policy limits. Stafford then moved to be dismissed from this action, and on 31 October 1974, this Court granted Stafford's motion. Stafford's dismissal left pending only the action by Continental itself as Stafford's subrogee against its liability-insured Cook. Continental, having exhausted the monetary limits of its policy with Cook, and having fulfilled its obligation to defend Cook, withdrew from Cook's defense. Cook then employed attorneys of its own to continue its defense against its insurer Continental.

Various motions of the parties having accumulated the Court ordered a conference on all outstanding motions on 11 March 1976. At that conference it was decided that the case should proceed in three stages: (1) a hearing on Cook's Motion to Dismiss on the grounds that Continental, as an insurer of Cook, lacked standing to sue its own insured; (2) a hearing on Cook's Motion for Summary Judgment (not yet filed) on the question of whether Continental actually exercised good faith in handling Cook's defense; and (3) trial on the merits of the products liability claim (Continental's Motion for Separate Trials having been mooted by the determination to have summary judgment disposition of Cook's counterclaim as to good faith). In accordance with the Court's determination, briefs were filed with respect to the motion to dismiss, and the 10 June 1976 hearing was held on the matter of dismissal.

II.

It is a well established general principal of equity that an insurer cannot subrogate itself against its own insured where the injury was caused by the negligence of the insured himself. Phoenix Insurance Co. v. Erie & Western Transportation Co., 117 U.S. 312, 320-325, 6 S.Ct. 750, 29 L.Ed. 873 (1886); Federal Insurance Co. v. Tamiami Trail Tours, Inc., 117 F.2d 794, 796 (5th Cir. 1941); 46 C.J.S. Insurance § 1209 at 154 (1946 & Supp.1975) & cases cited therein at n.13.

Subrogation is a purely equitable doctrine and remedy which is logically intertwined with the collateral source rule. It allows the person who pays the loss or satisfies the claim of another person under a legally cognizable obligation or interest to substitute himself for that other person and assert his rights. Aetna Life Insurance Co. v. Middleport, 124 U.S. 534, 549, 8 S.Ct. 625, 31 L.Ed. 537 (1888); D. Dobbs, Handbook on the Law of Remedies §§ 4.3 & 8.10 (1973). There are at least three equitable reasons traditionally advanced for permitting subrogation: (1) that the person who in good faith pays the debt or obligation of another has equitably purchased (quasi-contractually), or is at least entitled to, the obligation owed by the debtor or tortfeasor; (2) that the wrongdoer (tortfeasor) is not entitled to a windfall release from his obligation simply because the injured party had the foresight to obtain insurance; and (3) that public policy is served by allowing insurers to recover and thus reduce insurance rates generally.

There are several reasons, however, for not allowing an insurer to recover against his own insured that have traditionally been held to outweigh the general policy in favor of subrogation.

(1) The first reason is primarily conceptual. The insurer who subrogates himself to his insured stands in the shoes of his insured and can take nothing by subrogation but the rights of the insured. Phoenix, supra, 117 U.S. at 321, 6 S.Ct. 750; Dobbs, supra, § 4.3. Thus, there can be no subrogation where the insured has no cause of action against the defendant to a lawsuit. International Insurance Co. v. Medical-Professional Bldg. of Corpus Christi, 405 S.W.2d 867, 869 (Tex.Civ.App.—Corpus Christi 1966, writ ref'd n. r. e.). Since a person could not bring an action against himself for damages, neither can an insurer who would subrogate himself to that person.

(2) The second reason is more important and based on more practical public policy grounds. The very nature and existence of insurance revolves around understanding and manipulating the concept of risk: risk management, risk control, risk transference, risk distribution, risk retention, etc. See R. Keeton, Basic Text on Insurance Law § 1.2 (1971).

An overwhelming percentage of all insurable losses sustained because of fire can be directly traced to some act or acts of negligence. . . . It is in full appreciation of these conditions that the property owner seeks insurance, and it is after painstaking analysis of them that the insurer fixes his premium and issues the policies. It is in recognition of this practice that the law requires the insurer to assume the risk of the negligence of the insured and permits recovery by an insured whose negligence proximately caused the loss. noting Phoenix, supra, 117 U.S. 312, 6 S.Ct. 750, 29 L.Ed. 873.

Tamiami, supra, 117 F.2d at 796.

The remaining reasons commonly given are also based on public policy. (3) The fiduciary relationship between insurer and insured is fraught with conflicting interests. See Employees Casualty Co. v. Tilley, 496 S.W.2d 552, 557-561 (Tex.1973). It is thought that allowing the insurer to sue his own insured would upset this tenuous relationship. (4) Additionally, because of the fiduciary relationship, the insurer would be able to secure information from its insured under guise of policy provisions available for later use in a subrogation action against the insured. Home Insurance Co. v. Pinski Bros., 160 Mont. 219, 500 P.2d 945, 948-949 (1972). (5) Finally, the right to sue his own insured could be interpreted by an insurer as judicial sanction to breach the policy of insurance. See Pinski, supra, 500 P.2d at 948-949.

It appears that the only case in any jurisdiction directly in point to the present fact situation¹ is Pinski, supra, 500 P.2d 945, a 1972 decision by the Supreme Court of Montana. In that case, Home Insurance Co. paid off a property damage loss of approximately $135,000 that resulted from a boiler explosion at the Montana Deaconess Hospital. Home Insurance Co. then claimed subrogation to the rights of the Hospital against those allegedly responsible. Home Insurance Co. settled with all the defendants except a firm of architects who had a $25,000 comprehensive liability insurance policy with Home Indemnity Co., a wholly owned subsidiary of Home Insurance Co. Home Indemnity Co. had refused to defend the firm of architects in the lawsuit. The Court in Pinski held that the insurer had no subrogation rights against its own liability policy insured for a property damage loss it paid another insured under a fire and extended coverage policy. The Pinski Court stated:

There is yet a further and perhaps more cogent reason why

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