Can I still recover if my insured signed a release?
Every subrogation specialist has at one time or another contacted an adverse only to be told, “Sorry, we settled with your insured and they signed a release!” This is usually quickly followed up by a fax from the adverse with a letter that they are “closing their file, see attached release.” Sometimes you may be outright barred from any recovery. On the other hand, as the following article discusses, there are certain situations in which you may still be able to collect from the tortfeasor. If you can prove the adverse was on proper notice of your subrogation interest, then often the release DOES NOT bar recovery. If notice to the adverse cannot be proven, there is always the unpleasant option of looking to the insured for recovery if their settlement with the adverse was not approved by you AND the applicable release has destroyed your subrogation rights. Because subrogation involves “stepping into” the shoes of another, when an insurer brings an action against a tortfeasor based upon its subrogation rights, the insurer’s rights flow from the insured’s rights. The subrogated insurer can be subrogated to and enforce only such rights as the insured has against the party whose wrong caused the loss. In a subrogation suit, a tortfeasor may assert against the insurer any defense that the tortfeasor could have asserted against the insured. See 4 R. Long, The Law of Liability Insurance § 23.03[2], at 23-13 to 23-14 (1998). Therefore, the general rule provides that an insured may affect its insurer’s subrogation rights because they are derivative, i.e., the insurer’s subrogation rights rest upon the viability of the insured’s claim against the tortfeasor. Id. § 23.04[1], at 23-40. “One of the possible defenses is a waiver or release by the insured. If the insured waives its right to bring an action against the tortfeasor, then the insurer is barred from bringing a subrogation action.” Id. Most insurance policies, however, contain a provision prohibiting an insured from prejudicing “the insurer’s subrogation right. A violation of this provision will, in most cases, enable the insurer to deny the insured’s claim if it has not already paid it or to recover its money back from the insured if it has already paid.” The Law of Liability Insurance, supra, § 23.04, at 23-40. Thus, one avenue of reimbursement for the insurance company lies with its insured. Realistically though, as we all know, an insured who collects twice is not a good potential source of recovery.
A second avenue of reimbursement for the insurer, however, may lie with the tortfeasor. Generally speaking, if an insured settles with and releases the tortfeasor from liability before the insurer pays the loss under the terms of the policy, the insurer cannot enforce its right to subrogate against the tortfeasor when it does pay the claim, unless it can prove that the tortfeasor KNEW of the insurer’s right of reimbursement or can prove collusion between the insured and the tortfeasor in an attempt to defeat the insurer’s right. Id. 23.04[1], at 23-41 to 23-42. Most jurisdictions which have addressed this issue have held a release issued by an insured to a tortfeasor who has knowledge, either actual or constructive, that insurance has been paid does not bar the insurer’s subrogation claim. See Allstate Ins. Co. v. Mazzola, 175 F.3d 255, 260-61 (2d Cir. 1999) (New York law); Health Plus of New Mexico, Inc. v. Harrell, 125 N.M. 189, 1998 -NMCA- 064, 958 P.2d 1239, 1242-43 (Ct. App. 1998), cert. denied, 125 N.M. 145, 958 P.2d 103 (1998); Westchester Fire Ins. v. Heddington Ins., 883 F. Supp. 158, 162 (N.D. Tex. 1995), aff’d without op., 84 F.3d 432 (5th Cir. Tex. 1996) (holding that “[t]he insured cannot, after the loss has occurred and after payment to the insured by the insurer, prejudice the right to subrogation by settling with or releasing the offending party who had knowledge of the insurer’s right of subrogation.” The release is not effective as between the insurer and such third party); Lincoln Nat’l Health & Cas. Ins. Co. v. Mitsubishi Motor Sales of Am., 666 So. 2d 159, 163 (Fla. Dist. Ct. App. 5th Dist. 1995), review denied, 676 So. 2d 1369 (Fla. 1996); Markham v. Nationwide Mut. Fire Ins. Co., 125 N.C. App. 443, 481 S.E.2d 349, 353 (1997), review denied, 346 N.C. 281, 487 S.E.2d 551 (1997); Dadeland Dodge Inc. v. American Vehicle Ins. Co., 698 So. 2d 929, 930-31 (Fla. Dist. Ct. App. 3d Dist. 1997); Guese v Farmers Inter-Ins Exch, 238 Ill App 3d 196, 606 NE2d 215, 218 (1992); Ortega v Motors Ins Corp, 552 So 2d 1127, 1128 (Fla Dist Ct App 1989); National Union Underwriters v Piper Aircraft Corp, 595 F2d 546, 551 (10th Cir 1979) (Colorado law); Miller v Auto-Owners Ins Co, 392 So 2d 1201, 1203 (Ala Civ App 1981); Sentry Ins Co v Stuart, 246 Ark 680, 439 SW2d 797, 799 (1969); State Farm Mut Auto Ins Co v Sanditen, 701 P2d 876, 877 (Colo Ct App 1985); Country Mut Ins Co v Transit Cas Co, 59 Ill App 3d 283, 375 NE2d 575, 577 (1978); Home Ins Co v Hertz Corp, 71 Ill 2d 210, 375 NE2d 115, 119 (1978); Allum v Medcenter Health Care, 371 SW2d 557, 559-60 (Minn Ct App 1985); Melick v Stanley, 174 NJ Super 271, 416 A2d 415, 419 (App Div 1980); Aetna Cas & Sur Co v Norwalk Foods, Inc, 480 NYS2d 851, 852 (Civ Ct 1984); Record v Royal Globe Ins Co, 105 Misc 2d 1029, 431 NYS2d 262, 264 (Sup Ct 1980); Silinsky v State-Wide Ins Co, 30 AD2d 1, 289 NYS2d 541, 545 (1968); Nationwide Mut Ins Co v Canada Dry Bottling Co, 268 NC 503, 151 SE2d 14, 17 (1966); Aetna Cas & Sur Co v Associates Transports, Inc, 512 P2d 137, 142 (Okla 1973); Hospital Serv Corp v Pennsylvania Ins Co, 101 RI 708, 227 A2d 105, 112 (1967); Calvert Fire Ins Co v James, 236 SC 431, 114 SE2d 832, 836- 37 (1960); Farm Bureau Mut Ins Co v Orr, 379 NW2d 596, 598 (Minn Ct App 1985); See Johnson v Wright, 313 SE2d 343, 346 (SC Ct App 1984) (release of tortfeasor is ineffective in an action by a subrogee “only when the tortfeasor has full knowledge of the subrogation claim at the time of the release”). But see Preferred Risk Mut Ins Co v Courtney, 393 So 2d 1328, 1329 (Miss 1981) (although tortfeasor entered into settlement with insured after learning of insurer’s subrogation claim, insurer was precluded from suing in subrogation because its failure to obtain an assignment from insured when it made the policy payment served to subject tortfeasor to double liability by virtue of the collateral source rule). The state of Georgia has even extended the majority rule by holding [Defendants] can be found to have constructive notice of [plaintiff’s] statutory right of subrogation as no fault coverage is mandatory in Georgia…. Those who use the roads in Georgia (in this case a transport trucking firm and its insurance carrier) are presumed to know the law which gives the injured party’s insurance company a statutory right of subrogation in accidents involving a vehicle weighing more than 6,500 pounds. Therefore, anyone who seeks to settle with the insured party and obtains a release without the insurer’s consent does so at his own risk. Poole Truck Line v State Farm Mut Auto Ins Co, 294 SE2d 570 (Ga Ct App 1982). See also Aetna Cas & Sur Co v Westinghouse Elec Co, 176 Ga App 748, 337 SE2d 390, 395-96 (1985) (where the court held that a general release issued by an insured to a tortfeasor was ineffective to bar the insurer’s subrogation claim even though the tortfeasor had had no knowledge that the insurance had been paid. The court summarily held that, by virtue of the insurer’s preexisting subrogation rights, the insured had no authority to give a total release; as a result, the subrogation rights could not be encompassed by the release even though the tortfeasor had bargained for and purportedly received a complete release from the insured).
In addition to the actions of an insured, “[a]n insurer may relinquish its subrogation rights, either knowingly or unknowingly. It may do this expressly by waiving its right to subrogation or by engaging in conduct inconsistent with its exercise of its subrogation right. Thus, an insurer’s failure to assert its subrogation right may be construed as a waiver.” The Law of Liability Insurance, supra, § 23.04[2], at 23-45 to 23-46. There is little doubt that the rights of the insurance company, under the general rule that a release of the tortfeasor by the insured also releases the insurer, may be waived or lost by estoppel, and that such waiver or estoppel will arise where the insurer deliberately or negligently induces the insured to make the settlement with the tortfeasor, either by refusing or unreasonably delaying settlement under the policy, or by actually suggesting the insured’s course of action. Powers v. Calvert Fire Ins. Co. 216 SC 309, 57 SE2d 638 (1950) (Where the insurer, knowing of the insured’s weak financial condition and need for a prompt settlement, repeatedly put him off with promises until after he had brought an action against and settled with the tortfeasor, it could not thereafter escape liability on the claim that the insured’s action destroyed its right of subrogation, said the court in pointing out that in bringing his action the insured necessarily included a claim for all damages arising from the accident. The insurer was aware at all times of the course of litigation and settlement and did nothing to protect its rights, said the court, and it would not be allowed to sit down and hold its hand and purse and then escape liability because of the insured’s attempt, after fair notice, to recoup his loss from the tortfeasor, since the insurer’s conduct amounted to at least a waiver of its right of subrogation).
So the next time you hear, “Sorry, we settled with your insured and they signed a release!” And you quickly get a fax from the adverse with a letter that they are “closing their file, see attached release.” Dig through your file and find all the letters you sent to the tortfeasor and his carrier demanding payment and fax them right back with some of the cases cited in this article and a demand for 100%! Also, remember that practically speaking, the earlier you put the tortfeasor and his insurer on notice of your subrogation rights, then the better protected you will be. Further, beware of taking action against a tortfeasor unless it is absolutely clear that he was on notice of your subrogation claim when he settled with your insured because you and your insured will most likely be subject to a counterclaim suit for malicious prosecution, fraud, material misrepresentation, promissory estoppel, civil conspiracy etc… if notice was not provided.
Subro Tip: Each case is different and the underlying facts need to be FIRMLY established and researched before proceeding against the tortfeasor who has negotiated a release directly with your insured; HOWEVER, as a rule of thumb, a release issued by an insured to a tortfeasor who has knowledge, either actual or constructive, that insurance has been paid does not bar the insurer’s subrogation claim