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Insurance Law Expert Commentary

9/18/2009 2:07:27 PM EST

Right to Subrogation Claims and the Restriction on Collateral Source Payments are as Different as Apples and Oranges in New York

by Ted Zwayer

Posted by Ted Zwayer

The federal judge who has presided over much of the September 11th World Trade Center litigation issued an important decision last month, In re September 11 Litig., 2009 U.S. Dist. LEXIS 73223 (S.D.N.Y. Aug. 13, 2009), concerning the plaintiff lessee of the World Trade Center, the various aviation defendants, and the property insurers of the World Trade Center. The dispute centered on the efforts of the lessee and the aviation defendants to prevent the insurers from exercising their rights of subrogation against the aviation defendants on the basis that subrogation was barred by the restriction on collateral source payments that applied to the lessee. Your first reaction may be, “Huh? Those are apple and oranges.” Fortunately, Judge Alvin K. Hellerstein agreed and prevented the creation of a quagmire in New York insurance practice.

The lessee, Larry Silverstein, leased the World Trade Center in July, 2001 for ninety-nine years, and insured the property through a consortium of insurers for $ 3.5 billion. After the attack and destruction of the World Trade Center, the lessee sued the aviation defendants for $ 12.3 billion. Congress, though, had enacted the Air Transportation Safety and System Stabilization Act of 2001, which provided that the liability of the aviation defendants for all claims arising from the attacks of September 11th could not exceed the liability insurance coverage of the aviation defendants.

Judge Hellerstein, in an earlier decision, In re September 11th Litig., 590 F. Supp. 2d 535 (S.D.N.Y. 2008), had determined that the claim of the lessee against the aviation defendants was limited to the fair market value of the leasehold, $ 2.8 billion, which is what the lessee had paid for the leasehold just weeks before the September 11th attack. The insurers eventually paid $ 4.1 billion to the lessee. The insurers then brought their subrogation claims under New York law against the aviation defendants, who sought to bar subrogation pursuant to the New York restriction on collateral source payments, N.Y. C.P.L.R. § 4545.

Judge Hellerstein succinctly explained the traditional right of insurers to subrogation. “Subrogation is the principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. The insurer, upon payment, is ‘substituted’ for and ‘stands in the shoes’ of the insured with respect to all rights, both substantive and procedural, that the insured possesses. In addition, the insurer is subject to all defenses that would apply against its insured. Subrogation is based upon principles of equity and natural justice, for an insurer who has been compelled by his contract to pay to or in behalf of the insured claims for damages ought to be reimbursed by the party whose fault has caused such damages." (citations omitted)

The restriction on collateral source payments, of course, is intended to prevent a plaintiff from obtaining a double recovery; a recovery from the plaintiff’s insurer (or other source) and from the defendant, for the identical damages. Judge Hellerstein explained the purpose of the restriction on collateral source payments as set forth in § 4545. “In sum, in the 1970s and 1980s, the New York legislature used § 4545 and its predecessor to trim back the collateral source rule and permit offsets against plaintiffs' recoveries. The result of the statute's evolution has been to control insurance costs by preventing, where applicable, the receipt of double recoveries by plaintiffs for economic loss. An insured plaintiff may still recover in full for its injury, but it may no longer collect from the tortfeasor that part of its damages that its insurer had made, or will make, whole. Section 4545 denies tort plaintiffs the right to recover damages that duplicate insurance recoveries.” (citations omitted)

The lessee and the aviation defendants argued that the subrogated insurers now stood in the shoes of their subrogor, the lessee, with only the “derivative and limited rights” of the lessee, and that § 4545, by abrogating the traditional common law rule that permitted collateral source payments, had also abrogated the insurers’ right to subrogation. Basically, the lessee and the aviation defendants argued that because the lessee had been paid $ 4.1 billion by the insurers, and Judge Hellerstein had ruled that the lessee’s claim against the aviation defendants was worth only $ 2.8 billion, and because the insurers had only the rights of the lessee, the claim of the insurers was barred.

Judge Hellerstein found that there was no connection between the right to subrogation and the restriction on collateral source payments. “Pouncing on an uncertainty which they ascribe to the case law applying the statute, the moving parties argue that § 4545, which abrogated the common law collateral source rule, must also have abrogated insurers' right of subrogation. However, as discussed below, the moving parties present a faulty analysis and a faulty reading of the New York case law.”

“Section 4545 prevents double recoveries; it was not intended to deprive insurers of their basic subrogation rights, provided by equity for fairness, and also by law through the assignment clauses typical of insurance contracts, which require the insured to assign its rights against the tortfeasor in consideration for receiving the insurance proceeds that allay its injury. Certainly, § 4545 was not intended to create a windfall for the tortfeasor, granting it the benefit of the injured party's insurance, for which it did not pay, as a reward, in effect, for committing a tort and injuring another.”

Judge Hellerstein concluded his eminently thoughtful decision with this reasoning. “Section 4545 does not affect the subrogation rights of plaintiffs' insurers. The principle of subrogation is so embedded in the common law, and would be so radically affected, that a very clear legislative intent to disrupt it is required. As the Court of Appeals has held, analyzing the statute in a different context, CPLR 4545(c) is a statute enacted in derogation of the common law and, as such, is to be strictly construed … in the narrowest sense that its words and underlying purposes permit, since the rules of the common law must be held no further abrogated than the clear import of the language used in the statute absolutely requires. The statute contains absolutely no language that effects the disruption for which the moving parties argue. It eliminated a well-established feature of the common law, the collateral source rule, with clarity. In the absence of any similar clarity, and in light of the consistent holdings of the Court of Appeals, I hold that the statute did not also eliminate the subrogation rights of plaintiffs' insurers…. In terms of the motions before me, although § 4545 may bar the WTCP Plaintiffs and Con Edison from recovering damages for which they have been compensated by their insurers, it does not bar their insurers, who have been compelled by contract to pay the loss caused by the negligence of another, from asserting subrogation rights against the alleged tortfeasors.” (citations omitted)

It is hard to imagine that the New York legislature intended in enacting § 4545 a result that differs from Judge Hellerstein’s conclusion. Thus, insurance counsel in New York are free to pursue their longstanding efforts to recover their subrogation claims from tortfeasors.

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