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

Eliot Spitzer
Governor

Eric Dinallo
Superintendent

The Office of General Counsel issued the following opinion on September 10, 2007 representing the position of the New York State Insurance Department.

Re: Subrogation of a Regulation 64 Claim

QUESTIONS PRESENTED:

1. If an insured's policy only covers $20 per day for a rental car, may the insured's insurance company (hereinafter, the first-party insurer) seek subrogation from the liable party's insurer (hereinafter, the third-party insurer) to cover the additional $8.99 per day required to pay the entire cost of the rental?

2. If an insured's policy only covers eight days of car rental, but the insured required use of the rental car for 11 days, may the first-party insurer seek subrogation from the third-party insurer for the entire cost, including the cost of the extra three days of the car rental?

CONCLUSIONS:

1. Yes. In this scenario, the first-party insurer may subrogate all of the claims of its insured.

2. Yes. In this scenario, the first-party insurer may subrogate all of the claims of its insured.

FACTS:

The inquirer reports that the inquirer works for the third-party insurer in a matter involving a claim filed by the first-party insurer on behalf of its insured. There had been an automobile accident that resulted in physical damage to the automobile insured by the first-party insurer. The first-party insurer's physical damage policy covers automobile rental costs while its insured's automobile is being repaired. In this situation, the first-party insurer's policy only covered rental costs of $20.00 per day, even though the actual rental cost was $28.99 per day. Also, the first-party insurer's policy only covered rentals for eight days, yet the rented vehicle was actually required for 11 days.

On behalf of its insured, the first-party insurer now seeks subrogation against the inquirer’s insured under the inquirer’s liability policy for both the amount it paid the insured under the first-party's insurance policy, as well as for the excess amount at issue arising from the actual cost to rent a replacement vehicle. The inquirer asks whether the inquirer’s company, the third-party insurer, must honor the subrogation claim for the excess amount at issue. This opinion is based upon the assumption that the inquirer’s insured is one hundred percent liable for the accident.

ANALYSIS:

11 NYCRR Part 216 (Regulation 64) is relevant to the inquirer’s query. It sets forth standards for prompt, fair and equitable settlements. Section 216.6 reads in pertinent part as follows:

(a) In any case where there is no dispute as to coverage, it shall be the duty of every insurer to offer claimants, or their authorized representatives, amounts which are fair and reasonable as shown by its investigation of the claim, providing the amounts so offered are within policy limits and in accordance with the policy provisions.

Section 216.6 recognizes that an insurer is only required to pay a claim to the limits of the insurance policy that covers its insured. Further, Section 216.7(g) directs how certain recovered subrogated claims shall impact the insured's deductible.1

However, Regulation 64 does not preclude an insurer from subrogating any other of its insured's documented legal claims. In In re Enron Corp., 307 B.R. 372 (S.D.N.Y. 2004), the court discussed the concept of subrogation:

The New York Courts have long recognized and enforced the doctrine of subrogation. Subrogation means [t]he substitution of one person in the place of another [as] to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other [as] to the debt or claim, and its rights, remedies, or securities. The right of subrogation . . . is founded upon the facts and circumstances of a particular case and upon principles of natural justice . . . . It is a creature of equity, and is enforced solely for the purpose of accomplishing the ends of substantial justice.

Id. at 379 (citations and internal quotation marks omitted).

Thus, in each of the scenarios presented here, the first-party insurer, in addition to seeking subrogation for insurance claims that it paid to the insured, may seek subrogation for any of its insured's documented legal claims. Therefore, to the extent of the inquirer’s insured's liability in this matter, and subject to the policy's liability limits, the third-party insurer (i.e., the inquirer’s company) must pay the first-party's claim to cover the costs of the automobile rental that are at issue.

For further information one may contact, Senior Attorney Susan Dess at the New York City Office.

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1 11 NYCRR § 216.7 provides:  (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.

(2) Net recovery shall be the total recovery less the insurer's allocated loss adjustment expenses attributable to such recovery. The formula for computing net recovery and the insured's share of recovery of the deductible may be stated as follows:

(i) TOTAL RECOVERY-ALLOCATED LOSS ADJUSTMENT EXPENSES = NET RECOVERY

(ii) DEDUCTIBLE/TOTAL LOSS x NET RECOVERY = INSURED'S SHARE OF NET RECOVERY

Application of Formula: Assume a loss of $500 subject to a $100 deductible with $50 in allocated loss adjustment expenses:

(a)  if there is full recovery of $500:  computation of net recovery: $500 - $50 = $450 computation of insured's share of recovery: $100/$500 x $450 = $90(b) If there is a partial recovery of $300:computation of net recovery: $300 - $50 = $250 computation of insured's share of recovery: $100/$500 x $250 = $50

(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.