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The Right of Subrogation by an Insurer Against Its Insured and the Impact of Recent Legislation

The doctrine of subrogation provides that if an insurer pays a loss to its insured due to the wrongful act of another, the insurer is subrogated to the rights of the insured and may prosecute a suit against the wrongdoer for recovery of its outlay. The right of an insurer to be subrogated to the rights of its insured is typically based upon:

  1. the terms of the policy of insurance; or,
  2. the right of equitable subrogation, i.e., by operation of law.

The typical property insurance policy provision relating to subrogation provides in pertinent part:

Subrogation. An insured may waive in writing before a loss all rights of recovery against any person. If not waived, we may require an assignment of rights of recovery for a loss to the extent that payment is made by us.

Common Law Principles

The common-law concept for subrogation by an insurer to the rights of its insured was designed to place ultimate responsibility for loss upon the wrongdoer, i.e., on whom in good conscience it should fall, and to reimburse the innocent party who is compelled to pay.

As a general rule, an insurer does not have a right of subrogation or indemnification against its own insured. More specifically, an insurer has no right of subrogation against its own insured for claims arising from the very risk for which the insured was covered.

In most instances, these separate and distinct rules respecting an insurer's right of subrogation, and respecting the prohibition against subrogating against an insured, do not conflict nor pose a problem for most insurers; nor, do they generally pose a problem for the typical insured who may be liable for a negligent act.

Moreover, subrogation rights are usually not at issue when an insurer is faced with a claim caused by the intentional act of its insured. Thus, in such instances the insurer will generally have a right to properly deny coverage because the loss, as required by most property policies, was not accidental, and because of the typical exclusion, under most policies, for intentional acts committed by an insured.

However, where the insured has intentionally caused damage to the insured property, and where the insurer is required to pay an innocent coinsured, the two above-mentioned rules of law conflict. Thus, in instances where an insured is guilty of fraud or deceit, and where an insurer has paid a claim to an innocent coinsured, the insurer will, as subrogee and contrary to the general rules of law, seek to recover from the tortfeasor-insured an amount equivalent to that paid the innocent coinsured.

Economy Fire and Casualty Co. v. Warren

For example, in Economy Fire and Casualty Company v. Warren, the plaintiff settled a fire loss claim with its insureds -- a husband and wife -- for $20,514.05. Within two months following the settlement of the claim, the insured-wife gave a written statement admitting to intentionally causing the fire to the insured dwelling. The insurer then sought to rescind the settlement agreement entered into with its insureds, and also sought restitution of the entire amount of proceeds paid towards the claim.

The Court in Economy Fire concluded that the arson committed by the wife should not be imputed to the husband who was innocent of any wrongdoing so as to bar the husband's recovery. The Court held that the husband, as an innocent coinsured, was entitled to one-half of the insurance proceeds, and further held that the insurer was entitled to an equitable lien in its favor to the extent of the proceeds paid to the innocent coinsured. Economy Fire at 628, 390 N.E.2d at 364.

From an insured's perspective, Economy Fire stands for the proposition that an innocent coinsured is entitled to recover their proportionate share of insurance proceeds when, based upon a co-insured's intentional act, an insurer has a valid coverage defense against the non-innocent coinsured. Conversely, from an insurer's perspective, Economy Fire stands for the proposition that, when an insured breaches the terms of a policy by intentionally causing a loss, an insurer is entitled to an equitable lien in its favor to the extent of the proceeds paid to the innocent co-insured.

It is apparent that the court in Economy did not see the equity in allowing the innocent coinsured to be barred from recovery. Neither did they see the equity in forcing an insurer to pay insurance proceeds without allowing the insurer a chance to seek out the responsible party and make that party pay.

Madsen v. Threshermen's Mutual Ins. Co

In Madsen v. Threshermen's Mutual Insurance Company, the Wisconsin Court of Appeals acknowledged the general principle of insurance law, i.e., that an insurer does not have subrogation or indemnification rights against its own insured. The Madsen court also recognized, however, the inequity wrought by this long-standing principle when an insured intentionally causes a loss.

In its analysis, the Court in Madsen reasoned that common sense fairness requires an insured to be held liable for a loss that he or she intentionally causes:

[Although] ordinarily, an insurer does not have a right of subrogation or indemnification against its own insured... adhering to this principle in this instance would defeat a purpose of subrogation, which is to ultimately place the loss on the wrongdoer. Here, the wrongdoer and the insured are the same person . . . . Thus, requiring [the insured-wrongdoer] to reimburse [the insurer] would appropriately place the loss on the wrongdoer.

Treciak v. Treciak

It is interesting to note that a court in Florida held against the insurer in a similar case, Treciak v. Treciak. In Treciak, while going through a bitter divorce, the wife set fire to the husband's home. The insurer paid the loss and filed a subrogation action against the wife.

Because the parties were not yet divorced at the time of the incident, the court held that the insurer stood in the shoes of its insured, the husband, and thus was barred by the doctrine of interspousal immunity from suing the wife to recover on its subrogation claim. Such a result in Illinois is unlikely because the applicable statute which bars spouses from suing each other does not generally apply to intentional torts.

In the past, Courts relied upon the fact that spouses' obligations were joint, and concluded therefore, that an innocent coinsured spouse should not recover if the insured responsible for the wrong-doing could not recover. However, the majority of Courts now look to the language of the insurance policy and apply contract law.

Illinois Insurance Fraud Statute

A development in the common law view of an insurer's right of subrogation against its insured will likely occur with cases that are brought under a recently enacted Illinois criminal statute for persons who have defrauded, or who even attempt to defraud their insurance company by presenting a fictitious claim for insurance proceeds. In addition to criminal penalties for the convicted, the statute also provides civil remedies to the defrauded insurer.

Under paragraph 45-5 of the statute, any insured who attempts to defraud its insurer is liable for twice the amount of the property attempted to be obtained. Additionally, any insured who successfully defrauds its insurer, but whose scheme later becomes known to their insurer, is liable for three times the amount of the property wrongfully obtained. The statute also provides for the recovery of attorneys fees by the insurers who prevail under this section.

Interestingly, although the statute became effective as of the first of the year, questions are now being raised as to whether the statute may be employed against those fictitious claims which were filed in 1992, but where the investigation of such claim, and the attempted fraud, continues past the law's effective date. Although, Illinois courts have yet to rule specifically on that question as it concerns the recently enacted law, in a similar case, an Illinois Appellate Court upheld another law's application under similar circumstances in People of the State of Illinois v. Stephen D. Earles.


Needless to say, it would be advisable that, before considering a subrogation action against one's own insured, the insurer should determine whether or not the insured's conduct supports bringing a civil claim under the insurance fraud statute.

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