Opinion
01CV9291 (HB) and consolidated actions, 02CV0017(HB).
June 10, 2008
OPINION
Allianz Global Risks US Insurance Company ("Allianz"), Plaintiff, moves for partial summary judgment seeking a declaration that it shall be entitled to subrogation and priority of recovery over the World Trade Center Properties ("Silverstein Insureds"), Cross-Claim Plaintiffs, against any third party to the extent of payment made by Allianz to the Silverstein Insureds, as well as costs incurred by Allianz in obtaining such recovery. To resolve this issue, we turn first to the language in the excess policies between Allianz and the Silverstein Insureds. Allianz seeks to be subrogated to and have priority of recovery up to their insurance payments to Silverstein, while Silverstein seeks to recover uninsured losses in excess of the insurance payments already received. Each party contends that to the extent there is a right to recover against the alleged third party tortfeasors, they are entitled to priority. (See Pl. Mem. 8-10; Def. Mem. 10-18.) I find that the insurance contract does provide for contractual subrogation and gives priority of recovery to Allianz.
"Silverstein Insureds" refers collectively to: World Trade Center Properties, LLC, Silverstein Properties, Inc., Silverstein WTC Mgmt. Co., LLC, 1 World Trade Center, LLC, 2 World Trade Center, LLC, 4 World Trade Center, LLC, and 5 World Trade Center, LLC.
I. FACTUAL BACKGROUND
The facts of this ongoing dispute between those who had a property interest in the World Trade Center ("WTC") complex on September 11, 2001 and those who provided insurance for the properties is found in previous opinions, which are part of the "Insurance Coverage Litigation." See SR Int'l Business Ins. Co., Ltd. v. World Trade Center Properties, LLC, No. 01cv9291, 2006 WL 3073220 (S.D.N.Y. Oct. 31, 2006) (HB) (hereinafter "2006 SRI v. WTCP"); see also, e.g., World Trade Center Props., LLC v. Hartford Fire Ins. Co., et al., 345 F.3d 154 (2d Cir. 2003). Allianz provided excess property insurance coverage to Silverstein for the World Trade Center through two policies of insurance and, except for the premiums and limits of liability, the two policies have identical terms and conditions. (See Pl. 56.1 Stmt. Ex. A, Allianz Direct Policy, CLP 3001091, Ex. B, Allianz Fronting Policy, CLP 3001140.) Allianz's Direct Policy provides $77,898,734 per occurrence and its Fronting Policy provides $354,680,000 per occurrence for a total coverage to the Silverstein Insureds of $433 million per occurrence. (Pl. 56.1 Stmt. Exs. A and B).
On July 9, 2007, Allianz and the Silverstein Insureds entered into two settlement agreements settling all claims with respect to the Allianz Direct and Fronting Policies. (Pl. 56.1 Stmt., Ex. E, Fronting Policy Agreement; Ex. F, Direct Policy Agreement.) The agreements have identical provisions amongst which is one that states the parties are pursuing claims against third-parties for property and other damages occurring on September 11, 2001 and that these claims are pending in the Recovery Litigation. (Pl. 56.1 Stmt., Ex. E, Fronting Policy Settlement Agreement, ¶ 7; Ex. F, Direct Policy Settlement Agreement, ¶ 6.) This lawsuit grows out of the settlement agreement where we find a carve-out for any "disagreement with respect to issues of subrogation and priority of recovery in the Recovery Litigation."Id. Allianz counsel requested that I resolve this subrogation priority issue as a matter of law. (Jul. 10, 2007 John Massopust Letter to J. Baer.) The following day Silverstein Insureds wrote to me and Judge Hellerstein to challenge this request. (Jul. 11, 2007 Richard Williamson Letter to J. Baer.) On September 7, 2007 I accepted the dispute and ordered briefing.
The claims are pending now in the consolidated litigation entitled In Re September 11 Litigation, Index No. 21 MC 97 and In Re September 11 Property Damage and Business Loss Litigation, Index No. 21 MC 101, here in the Southern District of New York.
II. STANDARD OF REVIEW
The policy language is to be construed in accordance with New York law. 2006 SRI v. WTCP, 2006 WL 3073220, at *5 and under New York law, insurance policy interpretation is a question of law.Id. (citing Allianz Ins. Co. v. Lerner, 416 F.3d 109, 115-16 (2d Cir. 2005)). The intentions of the parties should control as well as the plain meaning of the language therein. Id. "Insurance policies should be examined `in light of the business purposes sought to be achieved by the parties and the plain meaning of the words chosen by them to effect those purposes.'" World Trade Center Properties, L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154, 183-84 (2d Cir. 2003).The threshold issue in the interpretation of an insurance policy is whether a term in the contract is ambiguous. Id. If a provision is determined to be ambiguous, the court may look to extrinsic evidence to determine the parties' intended meaning.Id. A term is ambiguous if it suggests more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business. Id.
Summary judgment is appropriate only when all the submissions taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination, the court must view all facts in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 247 (1986). In the context of a contract dispute, summary judgment is improper when "contractual language is susceptible of a least two fairly reasonable interpretations." Ametex Frabrics v. Just in Materials, 140 F.3d 101, 107 (2d Cir. 1998).
III. DISCUSSION
The issue here is whether the subrogation clause in the Travelers form is binding on and applicable to the Allianz Policies and, if so, whether Allianz has priority of recovery over the Silverstein Insureds in the Recovery Litigation against third party tortfeasors. Subrogation is the right of an insurer, having paid losses of its insured, to be placed in the shoes of its insured so that it may recover from a third party legally responsible for the loss. See Teichman v. Community Hosp. of W. Suffolk, 87 N.Y.2d 514, 521 (1996); 23 N.Y. Jur. 2d,Contribution, Indemnity and Subrogation § 3 (1979) and Supp. May 2008. There are two types of subrogation, contractual and equitable.Winkelman v. Excelsior Ins. Co., 85 N.Y.2d 577 (1995). Contractual subrogation arises out of the insurance contract; equitable subrogation arises independently by operation of law.Federal Ins. Co. v. Arthur Andersen Co., 75 N.Y.2d 366, 372 (1990). The insurer's right of subrogation developed to prevent unjust enrichment and it arises by operation of law once the insurer makes a payment on behalf of its insured. Teichman, 87 N.Y. at 521 (citing 16 Couch on Insurance § 61:4, at 239-40 (3rd ed. 2005).
Subrogation's purpose is to prevent the insured from recovering twice for one harm, since without it, the insured might be able to recover from both the insurer and the tortfeasor. Winkelman, 85 N.Y.2d at 581. The doctrine is liberally applied to protect its natural beneficiaries, the insurers. Id. The insurer's right of subrogation is completely derivative and limited to the rights of the insured against the third party for its default or wrongdoing. Federal Ins. Co. v. Arthur Andersen Co., 75 N.Y.2d 366, 372 (1990).
See also PMA Capital Ins. Co. v. U.S. Airways, Inc., 626 S.E.2d 369 (Va. 2006) (finding that the insured airline's payments from the federal Air Stabilization Act funds established to compensate airlines for losses that resulted from 9/11 and which exceeded the defendant insured's policy limits with its plaintiff insurer constituted recoveries under the "Salvages and Recoveries" provision of the policy and the insured's recovery against the insurer should be offset by the amount paid by the federal government to prevent double recovery).
Allianz argues that it is entitled to contractual subrogation based on a plain reading of the Allianz and Travelers policies together. In addition, the subrogation clause in the Travelers form provides Allianz with priority for any recoveries from a liable third party, plus interest, attorney's fees and litigation expenses, and Allianz would be paid up to the amount paid to the insureds before Silverstein is entitled to share in the recovery. Allianz argues that the intention of the parties, as set out in the plain language of the contract, should govern issues of contractual interpretation and because the subrogation provision in the Travelers policy is unambiguous, Allianz has a right of contractual subrogation.
The Silverstein Insureds make two arguments: one procedural and one substantive. Procedurally, they argue that the Insurance Contract Litigation is the improper forum to hear these motions. Second, they urge that the issue is not ripe for adjudication since no liability has been assigned to the third parties in the Recovery Litigation; thus Allianz's motion amounts to a request for an advisory opinion.
Substantively, the Silverstein Insureds insist that they have priority to any potential recoveries. First, the Silverstein Insureds argue that the reference to "the Company" in the subrogation provision in the Travelers form cannot refer to both Travelers and Allianz — if so, there would be a priority conflict between Travelers and Allianz with no resolution. Second, the Silverstein Insureds argue that the provision in the Allianz Policies entitled "Application of Recoveries" creates an express difference from the primary Travelers form with respect to subrogation and priority, and, hence, the Recoveries clause is a contrary express provision and should control. This provision gives priority to recoveries to the Silverstein Insureds, not Allianz, because it provides that the Silverstein Insureds have priority until they recover their "Ultimate Net Loss." Even without this express provision, the Silverstein Insureds contend that they are entitled to priority of recovery consistent with principles of law and equity.
Here, the Silverstein Insureds rely on equitable subrogation to argue that long-established rules of priority of recovery permit the insured to be made whole before the insurer recovers its payments made to the insured under the policy. Finally, the Silverstein Insureds argue that the Air Transportation Safety and System Stabilization Act (ATSSSA) of 2001, Pub.L. No. 107-42, 115 Stat. 230 (codified as amended 49 U.S.C. § 401010 (2001)), which limits the liability of certain defendants, requires that the 9/11 property owners have priority over the insurers.
A. Ripeness
Make no mistake — this is not the first dispute where the parties have come to seek declaratory relief. In fact, this is the methodology employed with respect to most of the 9/11 insurance and recovery litigation which has been handled in this District. The Silverstein Insureds asked in its Answer and Counterclaims for declaratory judgments for all issues concerning its insurance contracts. (Silverstein's Suppl. And Second Am. Answer and Counterclaim, ¶ 169.) As Allianz put it:
The amended Answer and Counterclaim alleges the following: "The Silverstein Parties are therefore entitled to prompt relief from this Court (in addition to the relief specified in paragraph 166); . . . (e) providing related declaratory relief resolving various disputes as to policy interpretation that have developed between the Insurers and Insureds."
This Court has devoted almost six years to the interpretation and application of the insurance contracts between Allianz and Silverstein — both the Allianz Policies and the Travelers forms — and it has resolved the interrelationship of the Allianz Policies and Travelers forms in a series of orders that are binding on the parties and that set the parameters for resolving the instant dispute.
(Pl. Reply Br. 4.) As I have been charged with interpretation of the insurance contracts in the Insurance Contract Litigation, I agreed to try my hand at a resolution of this classic question of contract interpretation. (See Sept. 7, 2007 Letter Order endorsing Allianz's Letter Request Jul. 10, 2007.)
The Silverstein Insureds argue that there is in fact no dispute here because the parties were — with some help from others — able to settle their differences in July 2007. Would that it were so, but the fact is that these agreements plainly carve-out the issues of subrogation and priority. First, the parties mutually release and covenant not to sue each other for any claims in law or equity that "directly or indirectly concern, arise out, or relate to both of the Allianz [Policies]," but the release and covenant does not cover, "(d) except as set forth in paragraph 6, any claims, demands, debts, causes of action, obligations or liabilities relating to matters of subrogation, priority of recovery and claims against third parties." (Pl. 56.1 Stmt., Exs. E and F, ¶¶ 4, 5.) Paragraph 6 entitled "Subrogation/Priority of Recovery" explains that:
The Parties to this Agreement are pursuing claims against third-parties alleged to be responsible for property and other damages occurring on September 11, 2001. These claims are pending in the United States District Court for the Southern District of New York in consolidated litigation entitled In Re September 11 Litigation (21 MC 97) and In Re September 11 Property Damages and Business Loss Litigation (21 MC 101) (collectively the "Recovery Litigation"). The Parties have a disagreement with respect to issues of subrogation and priority of recovery in the Recovery Litigation. The Parties hereby agree that they shall request that either Judge Alvin K. Hellerstein or Judge Harold Baer, Jr. of the United States District Court for the Southern District of New York (with a request that the matter of which judge is to hear the motion to be determined by the two judges) resolve this disagreement by means of one or more motions.
(Pl. 56.1 Stmt., Exs. E, ¶ 6 and F, ¶ 6.) Thus, the settlement agreements provide for a carve-out to determine priority of subrogation and seek a determination by either Judge Hellerstein or me. Any other reading of these provisions would torture their meaning and undermine the intent of the parties in entering into the Settlement Agreements.
With respect to ripeness, Judge Mukasey rejected the Silverstein Insureds' past ripeness arguments. Judge Mukasey delineated the two factors to determine ripeness: "1) whether the underlying issue is fit for judicial decision, and 2) whether and to what extent the parties will endure hardship if a decision is withheld." S.R. Int'l Bus. Ins. v. World Trade Center Props., No. 01cv9291, 2005 WL 827074 (S.D.N.Y. Feb. 15, 2005). Judge Mukasey found that there was no further factual development needed to determine the period of restoration, the issue in dispute in that case, and found that Silverstein had no argument to support holding off a decision on this issue to wait for a determination of other contingencies, which was expected to be determined five years hence. Id., at *2-3.
An insurer's claim for a declaratory judgment against an insured that the insurer has a right to subrogation have been found to be ripe, even while the insured's claim against third-party tortfeasors was pending because the insurer has a sufficient interest in recovery against the third parties to create an "actual controversy" within the meaning of the Declaratory Judgment Act. See 16 Couch on Ins. 3d § 227:49 (2005) (citing Metayer v. PFL Life Ins. Co., 30 F. Supp. 2d 57 (D. Me. 1998)).
Since all other claims under the policies have been settled between Allianz and the Silverstein Insureds, there is no point to maintain the uncertainty over entitlement to and priority over the recovery proceeds in the Recovery Litigation, in which both parties are actively participating. As in the restoration period litigation, keeping this case on the docket presents practical issues and fails to promote settlement strategies in the underlying Recovery Litigation. Therefore, this issue is properly before me for resolution and ripe for adjudication.
B. Contractual Subrogation and Priority of Recovery Provision in Allianz Policies
As stated, Allianz and the Silverstein Insureds agree that the Allianz policies follow form to the Travelers policy "except as otherwise provided" in the Allianz policies. (Pl. 56.1 Stmt., Exs. A, B, Maintenance of Primary Insurance Endorsement.) The endorsement reads as follows in relevant part:
In consideration of the premium charged and subject to the terms, conditions and exclusions of the policy to which this endorsement is attached and to the following terms and conditions, it is agreed that with respect to the perils insured hereunder, this policy is subject to the same warranties, terms and conditions (except as regards premium, amount of insurance and limits of liability other than the deductible or self-insured retention where applicable, and the renewal agreement, if any, and EXCEPT AS OTHERWISE PROVIDED IN THIS POLICY OR AS PROVIDED IN AN ENDORSEMENT TO THIS POLICY) as are contained in or as may be added to the policy(ies) of the primary insurer(s) prior to the happening of a loss."Id. In sum, the Maintenance of Primary Insurance Endorsement provides that if there are any differences between the primary and excess policies, the differing provisions in the excess policies control.
1. The Allianz Policies Follow Form to the Travelers Policy
This endorsement trumps the default provision for Maintenance of Primary Insurance in the body of the Allianz policies, which provides that the excess policy is subject to the same warranties, terms and conditions of the primary policy(ies) except as otherwise stated herein. (See section F(3) "Maintenance of Primary Insurance," Pl. 56.1 Stmt., Exs. A, B.)
Specifically, the Silverstein Insureds say summary judgment is inappropriate because the Allianz Policies do not follow form to the Travelers form by virtue of the "Application of Recoveries" provision in the Allianz Policies. (Def. 56.1 Stmt ¶ 2.) Thus, while the parties agree that the Travelers form dictates the main terms and conditions of the Allianz policies, they disagree as to whether there is a right of subrogation in the Allianz Policies based on their interpretations of the contractual language in the Allianz Policies.
In my 2006 opinion, I found that the Allianz excess policies follow form to certain terms and conditions, namely replacement cost provisions, set forth in the policies issued to Silverstein by the primary carrier, Travelers Insurance ("Travelers form" or "Travelers policy"). 2006 SRI v. WTCP, 2006 WL 3073220, at *1. The Travelers form contains a provision governing "Subrogation and Subrogation Waiver." (Pl. 56.1 Stmt., Ex. C.) No such provision exists in the Allianz policies. However, the Silverstein Insureds claim that other provisions in the Allianz policies preclude application of the Travelers "Subrogation" clause.
2. Who the Subrogation Clause Applies to
The relevant subrogation and priority language in the subrogation provision in the Travelers form is as follows:
2. Subrogation — All Other Coverages
If any person or organization to or for whom the Company makes payment under this policy has rights to recover damages from another; those rights are transferred to the Company to the extent of such payment. That person or organization must do everything necessary to secure the Company's rights and must do nothing after the loss to impair them. The Company will be entitled to priority of recovery against any such third party (including interest) to the extent payment has been made by the Company, plus attorney's fees, expenses or costs incurred by the Company.
(Pl. 56.1 Stmt., Ex. C, Primary Policy.) The Silverstein Insureds argue that the reference to "the Company" in the Travelers form means Travelers and not Allianz. But the Silverstein Insureds have argued in the past that the excess carriers agreed to follow the Travelers form and were therefore bound by the terms of the policy that Travelers issued September 14, 2001. World Trade Center Props. v. Hartford Fire, 345 F.3d 154, 167 (2d Cir. 2003). Allianz was the only excess insurer of the 11 excess carriers to have issued a final policy by the time of the September 11th attacks and thus was the only carrier to in fact have been found to follow form to the Travelers policy issued September 14, 2001. Id. at 160, 167 n. 10. Because the Allianz policies follow form to the Travelers policy, any reference to the "Company" is to Allianz.
The remaining carriers were limited to the Willis binder policy, not Travelers final policy.
By its plain language, the subrogation provision in question accomplishes two things: 1) it expressly transfers to the Company, i.e. the insurer, the insured's right of recovery of damages from a third party, to the extent of payments made by the insurer to the insured under the policy, and 2) it expressly grants to the insurer, priority of recovery of those third party damages, again to the extent of the insurer's payments to the insured.
3. Effect of Ultimate Net Loss and the Application of Recoveries Provision to the Subrogation Provision
Again, Allianz is bound by the provisions in the Travelers form unless there is clear contractual language in the Allianz policies to the contrary. It is undisputed that the subrogation provision in the Travelers form is not repeated in either of the two Allianz policies. The Silverstein Insureds argue that two elements in the Allianz policies trump the subrogation provision in the Travelers forms: the definition of Ultimate Net Loss and the Application of Recoveries.
Silverstein argues that the "Application of Recoveries" clause in the Allianz policies is a subrogation provision, and as such, it is a contrary provision that directly negates the insurer's right of subrogation, and it directs that the insured has priority of recovery from third parties. Allianz responds that not only is the Application of Recoveries clause not a subrogation provision, it is serves as a timing mechanism to ensure that the insurer has priority of recovery from third parties regardless of when such recoveries are made.
Like the dispute over replacement cost coverage that I decided in 2006, there is little case law interpreting "Application of Recoveries" provisions. 2006 SRI v. WTCP, at *8 (noting that New York courts have had occasion to construe replacement cost coverage only infrequently). The only two cases interpreting this provision is one relied upon by Silverstein Insureds, V. Van Dyke Trucking v. `The Seven Provinces' Ins., Ltd., 406 P.2d 584 (Wash. 1965) and a case that is part of the 9/11 litigation, PMA Capital Ins. Co. v. U.S. Airways, Inc., 626 S.E.2d 369 (Va. 2006).
Few if any cases exist to analyze "Application of Recoveries" clauses, as also noted the court in V. Van Dyke Trucking v. `The Seven Provinces' Ins., Ltd., 406 P.2d 584 (Wash. 1965) and little has changed since 1965. The very language that the Washington Supreme Court in V. Van Dyke suggested that the insurer could have relied upon to protect itself with respect to recoveries — that the recoveries of all for the sole benefit of the reinsured and not taken into account in computing the Ultimate Net Loss or Losses nor in any way prejudice the Reinsured's right of recovery was included in the Charter Reinsurance contract. This language was also included in Allianz's Policies.
The concept of salvage and recovery is distinct from the concept of subrogation, but both are equitable doctrines to avoid unjust enrichment and assure that the party at fault ultimately pays the loss. Robert M. Hall, Reinsurer Claims to Subrogation and Salvage Recoveries in a Receivership Context, available at http://www.robertmhall.com/articles/SubrogationArt.htm (last visited April 8, 2008); see also 16 Couch on Ins. 2d § 222:82. While subrogation is the right of the insurer to sue the third party who caused the loss, salvage is the equitable right of the insurer to the residual value of property for which the insurer has paid following a total loss. See Hall, Reinsurer Claims to Subrogation and Salvage Recoveries, supra.
Oftimes there is confusion in terminology between subrogation, recoveries, restitution, reimbursement, recoupment and contribution. 16 Couch on Ins. 2d, § 222:2. Recovery is the broadest term. 16 Couch on Ins. 2d, § 222:2. For example, an insurer's subrogation rights are not diminished or avoided by the fact that the insurer deducted salvage value from payment on the policy. See Giacomino v. Tri-State Ins. Co., 595 N.W.2d 530 (Minn.Ct.App. 1999). This confusion over terminology is perhaps best illustrated here by the Silverstein Insureds equating the "Application of Recoveries" provision with the subrogation clause.
For example, "[t]here is a difference between the right to seek reimbursement and the right of subrogation . . .: reimbursement is the contractual right of an insurer to a refund directly from the insured when the insured also receives payment for those same expenses from another source, while subrogation derives from the equitable doctrine providing that the insurer which pays losses of its insured is placed in the position of its insured so that it may recover not from the insured, but from the third party legally responsible for the loss." 16 Couch on Ins. 3d § 222:82.
Contracts that include all the provisions in question here — subrogation clause, a priority of recovery clause, and application of recoveries clause, and definition of Ultimate Net Loss — are a frequent phenomenon and show that each is a distinct concept and source of rights and duties. See, e.g., Brokers and Reinsurance Markets Association Contract Wording Book, available at http://www.brma.org/frommembers/frommemcontractwdbook.htm (last visited May 8, 2008). Though this last reference work focuses on the reinsurance market, these provisions are in fact typical throughout many insurance contracts, especially excess insurance contracts, and are tailored to the particular market and the particular parties, i.e. marine versus building and property insurance. An English reinsurance case that analyzes the ultimate net loss calculation and the application of recoveries gives further proof that the concepts and substantive provisions of salvage and recovery are distinct from subrogation and priority of recovery. See. e.g., Charter Reinsurance Co. Ltd. v. Fagan [1997] AC 313 (H.L.) (22 May 1996) (construing Ultimate Net Loss and requirement of actual payment to trigger payment by reinsurers to the insurer given the insurer's insolvency).
The application of recoveries is linked to the calculation of the amount of the payment by the insurer, whereas subrogation has nothing to do with the amount of payment from the insurer to the insured. Rather, subrogation is purely about the right of the insurer to step into the shoes of the insured to recover from a responsible third party the monies already paid out under the policy for the insured's loss.
Payment of loss, or the loss settlement from the insurer to the insured is calculated by reference to the Ultimate Net Loss definition. The two Allianz policies define Ultimate Net Loss for the Silverstein Insureds as follows:
The actual loss sustained by the Insured as a direct result of the action of perils insured against by the policy(ies) specified in Section A. 6 . . . after making deductions for: deductible(s) and/or other self-insured retention(s) to be borne by the Insured, all recoveries, salvages and other insurances (other than recoveries under the policies of the Underlying Insurers) whether recoverable or not.
(Pl. 56.1 Stmt., Exs. A and B, ¶ G(2), "Ultimate Net Loss".) Thus, Ultimate Net Loss is not the initial loss suffered by the insured, but that loss minus deductibles and recoveries, such as property salvaged from the accident and other relevant adjustments, recovered by the insured. Allianz's obligation to pay the Ultimate Net Loss is found in the Indemnity Provision. (Pl. 56.1 Stmt., Exs. A and B, "Indemnity Provision".)
The "Application of Recoveries" clause, which does not define salvage or recovery, dictates how to treat salvages, recoveries or payments from other sources, recovered subsequent to the loss settlement, or payment of the loss under the policy, between the insurer and the insured. The "Application of Recoveries" clause in the Allianz Policies, which is found in the section entitled "Conditions," provides as follow:
Application of Recoveries
All salvages, recoveries or payments recovered or received subsequent to a loss settlement under this policy shall be applied as if recovered or received prior to such settlement and all necessary adjustments shall then be made between the insured and the insurers provided always that nothing in this Clause shall be construed to mean that losses under this policy are not recoverable until the Insured's Ultimate Net Loss has been finally ascertained.
(Pl. 56.1 Stmt., Exs. A and B.) The plain language of this clause dictates that the recoveries made subsequent to the loss settlement — in other words, after the Ultimate Net Loss had been calculated to determine the payment under the policy — will simply be treated as though they were included in the Ultimate Net Loss calculation.
Since the later recoveries or payments will reduce the loss suffered by the insured, the Application of Recoveries clause will also reduce what the insurer owed to the insured under the policy and require the parties to make "necessary adjustments." Again, this is completely distinct from the concept of subrogation, which entitles the insurer to sue or seek payment from the responsible third party tortfeasors for payments it has made. The necessary adjustment is more like a reimbursement, whereby the insurer has a direct and independent right of payment against the insured, as distinct from the right of subrogation. 16 Couch on Ins. 3d § 222:82; see also Teichman by Teichman v. Community Hosp. of Western Suffolk, 87 N.Y.2d 514 (1996) (distinguishing between the two concepts).
The difference in concepts is clear by looking at what constitutes "full payment." To trigger the right of subrogation, the insurer has to pay the full amount due under the policy. Such subrogation rights are not diminished or avoided by the fact that the insurer properly applied either the policy deductible and certainly not for any deduction of salvage value, such as that contemplated in these Allianz policies. See 16 Couch on Ins. 3d § 223:18. This is because the net loss reduced by any recovery is a different concept than the subrogation right of the insurer to sue the third parties to the extent of its loss settlement. Again, where the policy spells out the right of subrogation and priority of recovery to the insurer, as explained in Federal Insurance and other New York cases, courts will enforce the contractual rights over equitable limitations.
The Silverstein Insureds rely on V. Van Dyke Truck. v. `The Seven Provinces' Ins., Ltd., 406 P.2d 584 (Wash. 1965) to conflate the subrogation provisions and recoveries provisions and to show that the Application of Recoveries obviates subrogation and gives priority to the insured. V. Van Dyke Trucking was a case of contribution by a second insurance company after the loss settlement had occurred, not a question of the right of subrogation against third party tortfeasors. In that case, the excess insurer tried to treat its contribution from the second insurer as a payment entirely outside the policy, and not as a salvage or recovery. The excess insurer argued that the second insurer had made another payment via settlement with the insured, which arose out of a second lawsuit on the same underlying injury, and therefore, the insured's rights to further payments from that insurer was extinguished upon receipt of payment and any additional payments were outside the policy. V. Van Dyke Trucking, 406 P.2d at 588-89.
The court found that the payment to the insurer was, in fact, a "salvage," and under the "Application of Salvages" clause, the payment had to be used to recalculate the Ultimate Net Loss. Id. at 586-87. Further, the court held that if the excess insurer had wanted to ensure that contributions from other insurers redound solely to its own benefit, it should have done so in the contract. V. Van Dyke Trucking, 406 P.2d at 587.
This case has virtually no applicability to the question presented here. First, it is clear that the "Application of Salvage" clause was not a subrogation provision giving the insurer the right to sue third party tortfeasors. The provision simply is used to adjust the Ultimate Net Loss calculation when salvages and recoveries from other sources are made after the loss settlement between the insured and its insurer. In fact, the Washington court never mentions subrogation. The only tortfeasor in that action was the insured and subrogation was not an issue. Secondly, the court specifically stated that the insurer could have negotiated its right to receive full contribution from other insurers but failed to do so.
Here, there is a subrogation clause with a priority of recoveries language that grants Allianz priority of payments made to the insured via recoveries to the extent of its liability to the Silverstein Insureds. Thus, the Application of Recoveries clause is dedicated to determining the calculation of ultimate net loss when payments are received after the loss settlement has occurred; it has no effect on the contractual subrogation or the contracted priority of subrogation. In light of New York's view that subrogation is available to protect the insurer and the fact that clear language existed in the contract to provide both subrogation and priority to the insurer, Allianz prevails.
C. Equitable Subrogation
1. Equitable Subrogation and the "Made Whole" Doctrine
I explained above that the contractual provision for subrogation in the Travelers form is applicable to the two Allianz policies, and the Allianz Application of Recoveries clauses are not in conflict with the subrogation clause. Thus, the next question is whether there is any support in New York for the proposition that the made whole rule of equitable subrogation trumps contractual subrogation giving priority of all recoveries to the insurer. Under the New York law of equitable subrogation, the equitable subrogee's rights accrue upon payment of the loss.Federal Ins., 75 N.Y.2d at 372. The Silverstein Insureds argue that a fundamental rule of equitable subrogation is the right of the insured to be made whole before the insurer's right to subrogation in fact accrue. "The equitable principle underlying the made whole rule is that the burden of loss should rest on the party paid to assume the risk, and not on an inadequately compensated insured, who is the least able to shoulder the loss." USF G. v. Maggiore, 299 A.D.2d 341, 344 (N.Y.App.Div. 2002).
While the Appellate Division enunciated the made whole rule in the context of equitable subrogation as a means of placing the burden on loss on the party paid to assume the risk, it rejected the contention of one of many insured tenants of a building, which had largely been consumed by a fire, that the various insurers are not entitled to receive any of the interpleader funds until after each and every individual policyholder has been made whole. The court affirmed the lower court's proposal to divide the interpleader funds among the 13 insurers and individual tenants, but required each insurer to prove that its individual insured with claims had been made whole before it shared in the funds. USF G. v. Maggiore, 299 A.D.2d 341, 344 (N.Y.App.Div. 2002).
In Winkelman, the Court of Appeals made it clear that the insurer's right of subrogation is not affected by the insured's right to be made whole. Winkelman, 85 N.Y.2d at 583. The insurer who was an equitable subrogee is under no obligation to delay seeking recovery from the tortfeasor until the insured has exhausted its efforts to collect from the third-party tortfeasor.Winkelman, 85 N.Y.2d at 583. An insurer who has paid the policy limits possesses the derivative and limited rights of the insured and may proceed directly against the negligent third party to recoup the amount paid, even if the insured's losses are not fully covered by the proceeds of the policy. Winkelman, 85 N.Y.2d at 582 (citing Federal Ins. Co., 75 N.Y.2d at 374).
The only instance in New York where the insurer may have to wait for the insured to be "made whole" is the narrow situation in which the insurer seeks equitable subrogation against its own insured and the proceeds of insurance plus the insured's recovery from the negligent third party fall short of making the insured whole. Winkelman, 85 N.Y.2d at 583 (my emphasis). The Court of Appeals, which did not have a copy of the insurance policy or other documentation of contractual subrogation, limited this rule to the context of equitable subrogation. See also USF G., 299 A.D.2d at 344 (applying equitable subrogation despite the alleged existence of a contractual subrogation clause because the underlying policy, which contained the subrogation clause, was not in the record on appeal).
Generally, contractual subrogation trumps equitable subrogation and the made whole doctrine so long as the language giving priority of recovery to the insurer is clear and explicit. See Winkelman, 85 N.Y.2d at 583. However, some courts ignore contractual subrogation in the face of the equitable made whole doctrine. See, e.g., Oss v. United Svcs. Automobile Ass'n, 807 F.2d 457, 460 (5th Cir. 1987); Fleetwood v. Med Ctr. Bank, 786 S.W.2d 550, 554 (Tex.Civ.App. 1990). Courts have ignored contractual subrogation provisions in the limited cases of group health insurance, uninsured motorist insurance, no-fault insurance and workers' compensation, hardly our case, where the insureds are more vulnerable, i.e. where the insured has little, if any, input regarding the content of the contract. 16 Couch on Ins. 3d, §§ 223:145, 223:146; see, e.g., Teichman, 87 N.Y.2d 514.
2. Doctrine of Superior Equities
In the last sentence of their opposition brief, the Silverstein Insureds state that the doctrine of superior equities applies in this case, without further analysis or explanation. (Def. Br. 18.) The New York Court of Appeals has explained that this doctrine is essentially another application of equitable principles and that subrogation, which is supposed to dispense equity and justice among the parties, should not be permitted where that result would not be achieved. Federal Ins. Co., 75 N.Y.2d at 376. Application of the doctrine of superior equities arises in contexts, for example, where subrogation is sought against innocent third parties, where they might be viewed as superior in equity to the insurer. Id. But the court in Federal Insurance specifically held that neither the made whole doctrine, nor the doctrine of superior equities applied there because, as here, there was a clear contractual provision that preserved the insurer's subrogation rights. Id.
In Federal Insurance the defendant, Arthur Andersen Co., the insured's auditor, argued that the plaintiff insurer because the insurance company was paid to cover the loss to its insured, and as such, was in an inferior position in equity to it, the allegedly negligent wrongdoer. Id. However, the New York Court insisted that in a case where the third party's liability to the insured is based on fault, limitations on the insurer's right to sue the faulty third party would completely undermine the basic equitable principle of subrogation, which is meant to compel the ultimate payment of a debt by one who in justice, equity and good conscience ought to pay it. Id. at 377 ("While arguably a compensated insurer or surety should in fairness bear the loss where the third party's liability is solely contractual and not based on fault, such a result seems neither fair nor judicious when the loss has been caused by the third party's tortious conduct.").
Here, where the Recovery Litigation is geared to resolve the fault of third parties in the terrorist attack of 9/11 and fix their measure of liability to the insured, the insurer, by equity or, as in this case, by contract, maintains its right of subrogation to recover to the extent of its payments to the insured, whether its payment was partial or complete. Id. 3. Impact of the ATSSSA and Subrogation and Priority
The Silverstein Insureds for the last string to its bow argue that the ATSSSA overrides express contractual provisions in insurance contracts to give priority to the property owners in connection with the 9/11 litigation and thus to allow the Silverstein Insureds to recover first in order to help in the rebuilding efforts. But Judge Martin held that nothing in the legislation or history of the ATSSSA suggests preemption of insurance contracts between insurers and insureds with a property interest in the World Trade Center. S.R. Int'l Bus. Ins. v. World Trade Center Props., 2002 WL 1905968, at *3 (S.D.N.Y. Aug. 19, 2002). While that holding adjudicated the question of the existence of the appraisal provision of the policies, the same applies here. There is nothing to indicate such Congressional intent in passage of the ATSSSA to alter the substantive rights existing among property owners and their insurers. Id.