New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on December 8, 2005, representing the position of the New York State Insurance Department.

RE: Subrogation and Physical Damage Claims - Regulation 64

Question Presented:

When a motor vehicle insurer pursues a subrogation claim against the insurer of a responsible third party, after paying a physical damage claim (which was subject to a deductible) to its insured, and this second insurer has failed to pay the subrogation claim but has not formally disputed its obligation to pay such claim, must the originating insurer submit the dispute to binding arbitration or commence a court action for payment no later than 180 calendar days following the payment of the claim to its insured?

Conclusion:

Yes, pursuant to N.Y. Codes Rules & Reg. tit. 11 § 216.7 (g).

Facts:

An insurer has paid a motor vehicle physical damage claim to its insured, which was subject to payment of a deductible by the insured. The insurer is pursuing a subrogation claim against the insurer of the other vehicle, which presumably has caused the physical damage to the insured’s vehicle. Under the facts presented, the other insurer has been notified of the subrogation claim and has not formally disputed, either verbally or in writing, its obligation to pay the claim, but, however, has not made any recovery payment. It is contended that the failure of the other insurer to formally dispute its obligation to pay the claim within the 180 day period does not trigger the originating insurer’s obligation under the regulation to commence an action against the other insurer for payment of the subrogation claim.

Analysis:

N.Y. Codes Rules & Reg. tit. 11 § 216.7 of Department Regulation 64 mandates standards for prompt, fair and equitable settlement of motor vehicle physical damage claims. Section 216.7 (g) governs subrogation agreements as follows:

(g) Subrogation agreements. (1) Where an insured has received payment under a physical damage coverage that is subject to a deductible, the insured shall share, pro rata, with the insurer any net recovery received by the insurer from third parties. Within 30 calendar days of such recovery, the insurer must mail or hand-deliver to the insured its payment for the insured’s pro rata share of the recovery.

(3) Unless the insurer returns its insured’s full deductible, it shall attempt to effect full recovery in clear liability cases and shall not enter into any intercompany agreements that provide for the acceptance of lesser amounts on a formula basis.

(4) If an insurer has paid a physical damage claim that is subject to a deductible and it has elected to pursue its subrogation claim, the insurer shall promptly attempt to effect recovery. If a dispute arises between two or more insurers regarding the subrogation recovery, and the insurers are unable to resolve it, the insurer seeking recovery shall submit the dispute to binding arbitration or a court action shall be commenced no later than 180 calendar days following the payment of the claim to its insured.

(5) If an insurer has paid a physical damage claim that is subject to a deductible and it is pursuing its subrogation claim, the insurer shall notify its insured in writing of the status of its claim 120 calendar days after the date of the claim payment to its insured. An updated status letter shall be sent every 120 calendar days thereafter until the claim is either honored or rejected.

(6) If an insurer has paid a physical damage claim that is subject to a deductible and it elects not to pursue its subrogation claim where the possibility of recovery exists, the insurer shall so notify its insured in writing within 60 calendar days after it has paid the claim, except that the notification shall be given at least 30 days prior to the running of any applicable statute of limitations or period required for notice of claim. If an insurer does not notify its insured within the time periods prescribed above and the statute of limitations or period required for notice of claim has expired, the insurer shall forthwith remit to its insured the full amount of the insured’s deductible.

The procedures and requirements of these sections make clear that the regulation is intended to ensure that insurers who are pursuing subrogation claims against parties whose negligence contributed to, or was responsible for, the damage to the vehicle must pursue the subrogation claims on a timely basis so that the insured can receive payment for part or all of the deductible, which was applied to payment of the damage claim. The regulation provides for this in several manners. Pursuant to Section 216.7(g)(3), it obligates the insurer to pursue full recovery of the claim in instances of clear liability on the part of a third party so that the insured receives a full return of its deductible. If the insurer does not pursue a subrogation claim under these circumstances, it must return the deductible to the insured in full.

Once an insurer has elected to pursue its subrogation claim, Section 216.7(g)(4) requires the insurer to "…promptly attempt to effect recovery. If a dispute arises between two or more insurers regarding the subrogation recovery, and the insurers are unable to resolve it, the insurer seeking recovery shall submit the dispute to binding arbitration or a court action shall be commenced no later than 180 calendar days following the payment of the claim to its insured." (emphasis added). This provision is clear in its meaning that not only should an insurer seek to recover promptly, but that a finite period should be established for the parties involved to resolve any question over the obligation to pay subrogation claims, or submit the matter to arbitration or court for resolution. In this context, the word "dispute" does not require any particular affirmative act on the part of the other insurer in denying liability for payment. The mere failure to pay the subrogation claim after a demand has been made constitutes a dispute for purposes of establishing a finite deadline for the insurer seeking recovery to initiate legal action. To adopt the definition urged herein, which would limit the deadline only to those situations when the other company formally denies liability through either word or deed, would create a period where delay and inaction by either insurer would leave recovery of the claim in administrative limbo where legal resolution could be delayed indefinitely to the detriment of the insured. To the contrary, the operation and purpose of the regulation is to ensure that an insured deserving the return of part or all of the applicable deductible receives it and should not be left without legal resolution for an extended or indefinite period of time.

For further information you may contact Supervising Attorney Lawrence M. Fuchsberg at the New York City Office.