ACE American Insurance Company v. American Guarantee & Liability Insurance Company

Filing 42

OPINION AND ORDER re: 24 MOTION for Summary Judgment Plaintiff ACE American Insurance Company's Notice of Motion for Summary Judgment filed by ACE American Insurance Company, 25 MOTION for Summary Judgment filed by American Guarantee & Liability Insurance Company. In this action, plaintiff ACE American Insurance Company ("ACE") and defendant American Guarantee & Liability Insurance Company ("American Guarantee") dispute whether and to what extent ACE or American Guarantee is ultimately responsible for funding a $5 million share of a $24 million settlement of a state-court personal injury lawsuit. To conclude the settlement and resolve that lawsuit, ACE paid $3.5 million and American Guarantee paid $1.5 million, with each reserving its right to contest its obligations in a subsequent lawsuit, i.e., the instant action. Currently before the Court are the parties' cross-motions for summary judgment, e ach of which seeks a declaration that the other insurer was responsible for the entire amount; as set forth herein. The Courts finds that the antisubrogation rule precludes American Guarantee from bringing any indemnification claim on behalf of Pe lham against Wager Contracting to the extent of such entities' common coverage as relates to liability for Richard Wager's injury. The Court therefore, in addition to denying American Guarantee's cross-motion for summary judgment, gra nts summary judgment in favor of ACE declaring that American Guarantee was and remains responsible for paying the full $5,000,000 limit of the American Guarantee Policy in connection with the state-court settlement. It follows that American Guarantee must pay to ACE $3,500,000 as reimbursement for the share of the Interim Funding Agreement paid by ACE. Clerk to enter judgment. (Signed by Judge Jed S. Rakoff on 7/2/2017) (mro)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------x
ACE AMERICAN INSURANCE COMPANY,
16 Civ.

8773

(JSR)

Plaintiff,
OPINION AND ORDER

-vAMERICAN GUARANTEE & LIABILITY
INSURANCE COMPANY,
Defendant.

JED S. RAKOFF, U.S.D.J.
In this action, plaintiff ACE American Insurance Company
("ACE")

and defendant American Guarantee & Liability Insurance

Company ("American Guarantee")

dispute whether and to what

extent ACE or American Guarantee is ultimately responsible for
funding a $5 million share of a $24 million settlement of a
state-court personal injury lawsuit. To conclude the settlement
and resolve that lawsuit, ACE paid $3.5 million and American
Guarantee paid $1.5 million, with each reserving its right to
contest its obligations in a subsequent lawsuit,

~,

the

instant action. Currently before the Court are the parties'
cross-motions for summary judgment, each of which seeks a
declaration that the other insurer was responsible for the
entire amount. Upon careful consideration, the Court hereby
grants ACE's cross-motion, denies American Guarantee's crossmotion, and declares that American Guarantee is responsible for

1

funding the settlement up to the limit of its $5 million excess
policy.
By way of background, on November 11, 2016, ACE commenced
this declaratory judgment action.

See Complaint, ECF No.

1.

Although the complaint recites two causes of action, ACE
effectively seeks only one remedy: a declaration that American
Guarantee,

rather than ACE, was and remains responsible for

funding the $5 million portion of the state-court settlement.
See id.

~~

38-47. On December 6,

2016, American Guarantee

answered the complaint and brought two counterclaims against
ACE, the first of which seeks a declaration that ACE is
responsible for refunding to American Guarantee the $1.S million
that American Guarantee paid,
million in damages.

and the second of which seeks $1.5

See Answer with Affirmative Defenses and

Counterclaims, ECF No.

13,

~~

20-33. On March 28, 2017, American

Guarantee filed an amended answer asserting for the first time
the affirmative defense of unclean hands. See First Amended
Answer with Affirmative Defenses and Counterclaims

("Am. Ans."),

ECF No. 22, at 8. On May 19, 2017, ACE and American Guarantee
cross-moved for summary judgment. 1 On June 8,

2017, ACE and

See Plaintiff ACE American Insurance Company's Brief in Support
of its Motion for Summary Judgment ("Plf. Mem."), ECF No. 31;
Local Civil Rule 56.l(a) Statement of Material Facts in Support
of Plaintiff ACE American Insurance Company's Motion for Summary
Judgment ("Plf. 56.l Stmt."), ECF No 32; American Guarantee &
Liability Insurance Company's Memorandum of Law in Support of
1

2

American Guarantee each filed answering papers; 2 on June 20,
2017, ACE and American Guarantee each filed reply papers; 3 and on
June 26,

2017, the Court held oral argument. See Transcript

dated June 26,
above,

2017. Having now carefully considered all the

the Court rules in favor of ACE,

for the reasons that

follow.
A court may grant summary judgment "only where

'there is no

genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.'" Darnell v.
849 F. 3d 17, 22

(2d Cir. 2017)

(quoting Fed. R. Civ.

Pineiro,
P.

56 (a)).

The court must "construe the evidence in the light most
favorable to the

[non-moving party], drawing all reasonable

inferences and resolving all ambiguities in [its]

favor." Id.

its Motion for Summary Judgment ("Def. Mem."), ECF No. 33;
American Guarantee & Liability Insurance Company's Statement of
Material Facts ("Def. 56.1 Stmt."), ECF No. 28.
2 See American Guarantee & Liability Insurance Company's
Memorandum of Law in Opposition to ACE American Insurance
Company's Motion for Summary Judgment ("Def. Opp."), ECF No. 35;
American Guarantee & Liability Insurance Company's Response to
Plaintiff's Rule 56.l Statement ("Def. 56.l Resp."), ECF No. 36;
Plaintiff ACE American Insurance Company's Brief in Opposition
to Defendant's Motion for Summary Judgment ("Plf. Opp."), ECF
No. 37; Plaintiff ACE American Insurance Company's Response to
Defendant's Rule 56.l(a) Statement of Material Facts ("Plf. 56.1
Resp."), ECF No. 38.

See Plaintiff ACE American Insurance Company's Reply Brief in
Further Support of its Motion for Summary Judgment, ECF No. 40;
American Guarantee & Liability Insurance Company's Reply
Memorandum of Law in Further Support of its Motion for Summary
Judgment ("Def. Reply"), ECF No. 41.
3

3

The relevant facts, which are undisputed, are as follows.
On October 31, 2009, Richard Wager, an employee of Wager
Contracting Company,

Inc.

("Wager Contracting"), was injured

while performing demolition work for Pelham Union Free School
District

("Pelham"). Plf. 56.1 Stmt.

~

37; Def. 56.1 Resp.

~

37.

Thereafter, in 2011, Richard Wager and his wife Sana Wager sued
Pelham (among others)

in New York state court, asserting claims

for violations of the New York Labor Law and common law
negligence. Def. 56.1 Stmt.
in turn,

~

16; Plf. 56.1 Resp.

~

16. Pelham,

sued Wager Contracting for common law and contractual

indemnification. Def. 56.1 Stmt.

~

20; Plf. 56.1 Resp.

~

20.

Several insurance policies covering Wager Contracting
and/or Pelham potentially provided coverage with respect to
Richard Wager's injury. To begin with, non-party NGM Insurance
Company ("NGM")

had issued a $1 million primary general

liability policy insuring both Wager Contracting and Pelham (the
"NGM Policy"). Plf. 56.1 Stmt.

~~

3-5; Def. 56.1 Resp.

~~

3-5;

see NGM Policy, Ex. B to Declaration of Adam M. Smith in Support
of American Guarantee & Liability Company's Motion for Summary
Judgment

("Smith Deel."), ECF No. 27. However, the NGM Policy

included workers'

compensation and employers'

liability

exclusions that, in general, barred coverage to Wager
Contracting for employees' bodily injuries unless Wager
Contracting had assumed that liability by contract. Plf. 56.1
4

Stmt.

~~

7-11; Def.

56.1 Resp.

7-11. In this case, however,

~~

Wager Contracting had assumed such liability by contract with
Pelham. Plf.

56.1 Stmt.

~

12; Def. 56.1 Resp.

~

12.

Second, American Guarantee had issued a $5 million
Commercial Umbrella Liability Policy covering both Wager
Contracting and Pelham (the "American Guarantee Policy"). Def.
56.1 Stmt.

~

11; Plf. 56.1 Resp.

Policy, Ex B. to Rule 26(a)

~

11; see American Guarantee

Initial Disclosure, ECF No. 17. The

American Guarantee Policy was excess to the NGM Policy, to which
the American Guarantee Policy "followed form." See Plf. 56.1
Stmt.

~~

14-18; Def. 56.1 Resp.

~~

14-18; see also Def. 56.1

Stmt.

~~

12-13; Plf. 56.1 Resp.

~~

12-13. In other words, the

American Guarantee Policy adopted in general the NGM Policy's
underlying substantive terms and thus provided the same basic
coverage at the excess layer.
Third, New York Schools Insurance Reciprocal

("NYSIR")

provided insurance to Pelham with limits of $1 million primary
and $15 million excess
35; Def. 56.1 Resp.

~

(the "NYSIR Policy"). Plf.

56.1 Stmt.

~

35; see NYSIR Policy, Ex. E to Smith Deel.

The NYSIR Policy did not cover Wager Contracting. Plf. 56.1
Stmt.

~

36; Def. 56.1 Resp.

~

36.

Finally, ACE issued a Specific Excess Workers' Compensation
and Employers' Liability Insurance Policy covering Wager
Contracting (the "ACE Policy"). Plf.
5

56.1 Stmt.

~~

21-28; Def.

56.1 Resp.

~~

21-28; see ACE Policy, Ex. A to Rule 26(a)

Initial

Disclosure. As a formal matter, ACE issued this policy to the
Special Trades Contracting and Construction Trust

("Special

Trades"), a group self-insurance program authorized by the New
York Workers' Compensation Law. Plf. 56.1 Stmt.
56.1 Resp.

~~

~~

21, 24; Def.

21, 24. Wager Contracting was a participant in

Special Trades, and hence was covered under the ACE Policy. Plf.
56.1 Stmt.

~~

23, 28; Def. 56.1 Resp.

was excess to Special Trades'
compensation/employers'
("SIR"). Plf. 56.l Stmt.

~~

23, 28. The ACE Policy

$1 million workers'

liability self-insured retention
~~

27,

30; Def. 56.1

Resp.~~

27,

30.

Theoretically, the ACE Policy provided unlimited workers'
compensation and employers'
~

32; Def. 56.l Resp.

56.1 Resp.

~

~

liability coverage. Plf. 56.1 Stmt.

32; see also Def. 56.l Stmt.

~

3; Plf.

3. However, the ACE Policy purported to limit its

coverage to "damages imposed upon [Wager Contracting] by law,"
as opposed to liabilities assumed by contract. See ACE Policy,
Part Two - Employers Liability Insurance

~

B(l).

The net of all this was that Pelham was covered by the
NYSIR Policy ($1 million primary/$15 million excess), by the NGM
Policy ($1 million primary), and by the American Guarantee
Policy ($5 million excess to the NGM Policy). Wager Contracting
was covered, as to workers' compensation/employers' liability
claims, by the $1 million SIR and by the ACE Policy (unlimited
6

excess to the SIR), and,

for general liability, by the NGM

Policy ($1 million primary) and by the American Guarantee Policy
($5 million excess to the NGM Policy). To complicate matters
further,

these policies covered bodily injuries under different

(and sometimes mutually exclusive) theories of liability. For
example, the American Guarantee policy excluded from coverage
liability for bodily injury based on a theory of common-law
indemnity, whereas the ACE Policy by implication excluded from
coverage liability for bodily injury based on a theory of
contractual indemnity.
On January 11, 2016, the state court hearing the underlying
personal injury action held, on summary judgment, that Pelham
was liable to Richard Wager under New York Labor Law Section
240. Plf. 56.1 Stmt.

~

51; Def. 56.1 Resp.

Pelham Union Free School District, No.
Jan. 11, 2016)

~

51; see Wager v.

68572/2012

(N.Y. Sup. Ct.

("Decision and Order"), Ex. V to Smith Deel. The

Decision and Order also somewhat cryptically resolved Wager
Contracting's summary judgment motion seeking dismissal of
Pelham's indemnity claims by dismissing so much of Pelham's
claims "as seek[]

indemnification for sums up to the limits of

the policy insuring both Wager Contracting and [Pelham]." Plf.
56.1 Stmt.

~

52; Def. 56.1 Resp.

~

Ex. V to Smith Deel., at 26.

7

52; see Decision and Order,

Following the summary judgment decision, the parties
reached an agreement to dismiss all claims, counterclaims, and
cross-claims in the state-court lawsuit in exchange for paying
$24 million to Richard Wager and Sana Wager.
~

55; Def. 56.1 Resp.

~

Plf. 56.1 Stmt.

55. ACE sought to have American

Guarantee fund its full $5 million policy, but American
Guarantee resisted on the ground that, because the ACE Policy
was unlimited, the American Guarantee Policy was never
triggered. See Plf.

56.1 Stmt.

~~

57-58; Def. 56.l Resp.

57-

~~

58. In order to conclude the settlement, therefore, ACE and
American Guarantee entered an Interim Funding Agreement under
which ACE paid $3.5 million and AGLIC paid $1.5 million of the
disputed $5 million, with each side reserving its right to
resolve this dispute in a later proceeding.
~

59; Def. 56.1 Resp.

~

Plf.

56.1 Stmt.

59; see Interim Funding Agreement, Ex.

43 to Declaration of Amy C. Gross in Opposition to Defendant's
Motion for Summary Judgment, ECF No.

39. ACE also paid most of

the balance of the $24 million settlement. Plf. 56.l Stmt.
Def.

56.l Resp.

~

~

66;

66.

Against this background, the dispositive issue in this case
is whether the New York antisubrogation rule 4 prevents American

ACE and American Guarantee agree that New York law governs all
issues raised by their cross motions. See Plf. Mem. at 14, 19;
Def Mem. at 11.

4

8

Guarantee from bringing an indemnity claim as the subrogee of
one of American Guarantee's insureds,

Pelham, against another of

American Guarantee's insureds, Wager Contracting.

If such a

claim is permitted under New York state law, then American
Guarantee may shift its liability for Richard Wager's injury which American Guarantee incurred through insuring Pelham - to
Wager Contracting and, potentially, to ACE, the real party in
interest.

If such a claim is barred under New York state law,

however, then American Guarantee is stuck with the $5 million
liability.
Under New York law, the equitable doctrine of subrogation
"entitles an insurer to 'stand in the shoes'

of its insured to

seek indemnification from third parties whose wrongdoing has
caused a loss for which the insurer is bound to reimburse." N.
Star Reins. Corp. v. Cont'l Ins. Co.,
(citing Penn. Gen.
471

82 N.Y.2d 281,

Ins. Co. v. Austin Powder Co.,

294

(1993)

68 N.Y.2d 465,

(1986)). "An insurer, however, has no right of subrogation

against its own insured for a claim arising from the very risk
for which the insured was covered." Id. The antisubrogation rule
is a common-law doctrine crafted by the New York Court of
Appeals "both to prevent the insurer from passing the incidence
of loss to its own insured and to guard against the potential
for conflict of interest that may affect the insurer's incentive
to provide a vigorous defense for its insured." Id. at 294-95.
9

The New York Court of Appeals has applied the
antisubrogation rule to block indemnity claims brought by excess
insurers such as American Guarantee. See Jefferson Ins. Co. of
N.Y. v. Travelers Indem. Co.,
Jefferson,

92 N.Y.2d 363, 373-75

(1998).

In

an employee of Continental Copy caused an injury

while driving a van that was leased from A-Drive. Three carriers
insured both of these entities. A-Drive had a primary policy
issued by Reliance and an excess policy issued by Jefferson,
each of which also covered Continental Copy, whose employee was
a permissive user of the van.

For its part, Continental Copy had

a comprehensive policy issued by Travelers that named A-Drive as
an additional insured. As relevant here, the New York Court of
Appeals had no trouble rejecting the excess insurer's attempt to
bring indemnity claims on behalf of A-Drive against Continental.
Id. at 373

("[W]e conclude that the antisubrogation rule did bar

the indemnity claim against Travelers as the insurer of
Continental Copy.").
The Second Circuit, in a non-precedential decision, has
applied the antisubrogation rule in a case similar to the
instant case. See Ohio Cas.
Co.,

372 F. App'x 107

Ins. Co. v. Transcontinental Ins.

(2d Cir. 2010)

(summary order)

(applying

New York law). In this decision, an injured worker sued a
project owner,

Downtown Development, LLC ("Downtown"), which

brought an indemnity claim against the injured worker's
10

employer, Wildman & Bernhardt Construction,

Inc.

("Wildman")

Transcontintenal Insurance Company ("Transcontinental") had
issued two insurance policies, one a general liability policy
that covered both Downtown and Wildman, and the other a workers'
compensation/employers' liability policy covering only Wildman.
Ohio Casualty Insurance Company ("Ohio Casualty") had issued an
umbrella insurance policy covering both Downtown and Wildman
for,

inter alia,

liabilities assumed by contract; this policy

was excess to both of Transcontinental's policies. After Ohio
Casualty and Transcontintenal jointly funded a settlement
resolving all claims in exchange for an $8.8 million payment to
the injured worker, Ohio Casualty sought indemnity from
Transcontintenal as the unlimited insurer of Wildman. The Second
Circuit, however,

rejected Ohio Casualty's attempt to assert a

subrogation claim on behalf of Downtown against Wildman, because
Ohio Casualty itself insured Wildman for one of the claims at
issue: the contractual, as opposed to common law,
claim. See id. at 112

indemnity

("[T]he antisubrogation rule prohibits

Ohio Casualty from pursuing the present litigation as though the
contractual claims between its two insureds did not exist.")
(citing Maksymowicz v. N.Y.C. Bd. of Educ.,

647 N.Y.S.2d 780

(1st Dep't 1996)).
The same reasoning applies here. As in Ohio Casualty, an
excess carrier (American Guarantee)
11

that insures both the

project manager (Pelham) and the injured worker's employer
(Wager Contracting)

seeks to shift its share of the settlement

to the employer's primary insurer

(ACE), which has an unlimited

obligation for the injury at issue. As in Ohio Casualty, the
only way the excess insurer can shift its liability to the
primary insurer is via a subrogation claim on behalf of the
project manager against the employer,

~,

on behalf of one

insured against another insured. And as in Ohio Casualty, the
excess carrier insures the employer for at least one of the
claims resolved by the settlement of the injury lawsuit: the
contractual indemnity claim. See Plf. 56.1 Stmt.
Def. 56.l Resp.

~~

13; Plf. 56.1 Resp.

~~

8-12, 14-18;

8-12, 14-18; see also Def. 56.l Stmt.
~~

~~

12-

12-13. Thus, as in Ohio Casualty, the

antisubrogation rule bars American Guarantee's claim: American
Guarantee cannot bring a subrogation claim on behalf of one
insured,

Pelham, against another insured, Wager Contracting,

a risk that American Guarantee covers.
American Guarantee argues that the antisubrogation rule
does not apply for several reasons discussed below. But it is
worth first observing that the core defect in American
Guarantee's position is its singular focus on the coverage
provided to Wager Contracting without considering how the
liability could come to rest with that entity.

In particular,

American Guarantee frames this case as a coverage priority
12

for

dispute that only concerns how Wager Contracting's insurers must
allocate coverage among themselves. American Guarantee argues
that its policy is excess to ACE's policy, and that, because the
ACE Policy is unlimited for the injury at issue, American
Guarantee's excess layer is simply never reached.
This focus on Wager Contracting alone is mistaken. The
state court decision found Pelham liable for Richard Wager's
injury,

and, because Pelham's primary coverage was indisputably

insufficient to cover that liability,

Pelham's excess policies

(the NYSIR Policy and the American Guarantee Policy alike)
necessarily placed in issue. And,
concedes,

were

as American Guarantee

see Def. Opp. at 11-12, the only way Pelham's

liability can be transferred to Wager Contracting is through an
indemnity claim.

It is thus a mistake to focus solely on

coverage priority as to Wager Contracting, because American
Guarantee can only reach that entity (and its other insurance
coverage)
Pelham,

through an indemnity claim on behalf of one insured,

against another insured, Wager Contracting -

which is

the exact route blocked by the antisubrogation rule.s

5

For these reasons, most of the cases the defendant cites in
support of its argument against applying the antisubrogation
rule are inapposite. See Tully Constr. Co., Inc. v Illinois
Natl. Ins. Co., 15 N.Y.S.3d 404 (2nd Dep't 2015); Merchants Mut.
Ins. Co. v. N.Y. State Ins. Fund, 926 N.Y.S.2d 783 (4th Dep't
2011); Comm' rs of State Ins. Fund v Aetna Cas. & Sur. Co., 728
N.Y.S.2d 6 (1st Dep't 2001). These cases concern a dispute over
coverage priority as to a single policyholder with primary and
13

In arguing to the contrary, American Guarantee places great
weight on a First Department decision that supposedly shows that
Ohio Casualty was wrongly decided. See Liberty Mut.
Ins. Co. of State of Penn.,

841 N.Y.S.2d 288

So far as is clear from the face of decision,

Ins. Co. v.

(1st Dep't 2007).
in Liberty Mutual,

an injured worker sued the project owner, which brought
indemnification claims against the worker's employer, General
Industrial Service Corporation ("General") . 6 One of General's two
primary insurers and its sole excess insurer, Liberty Mutual
Insurance Company ("Liberty Mutual"), settled the case for a
total of $2.S million. Afterward, Liberty Mutual sought
reimbursement from the other primary insurer (AIG), whose bid to
avoid repaying Mutual Liberty under the antisubrogation rule was
seemingly rejected. See id. at 289

("As to Liberty's claim for

reimbursement of its indemnification of General, the fact
remains that AIG was a primary insurer whose obligation to cover
General's liability took precedence over that of Liberty, an

excess policies issued by separate insurers. Each stands only
for the proposition that an excess policy cannot be triggered
until the primary policy is exhausted. None implicates or even
discusses the antisubrogation rule.
6

To be precise, the injured employee sued both the project owner
and the construction manager, each of which filed
indemnification claims against the employer. See Liberty Mutual,
841 N.Y.S.2d at 289. In other words, two parties filled the role
that Pelham alone fills in this case. However, because that
distinction makes no difference, the Court treats them
collectively.
14

excess insurer, and AIG may not avoid its contractual obligation
to the insured by invoking the antisubrogation rule."). American
Guarantee urges that this is the precise fact pattern at issue
in the instant case and that this decision compels rejecting
ACE's invocation of the antisubrogation rule.
American Guarantee's reliance on Liberty Mutual is
misplaced. Even if Liberty Mutual were binding on this Court
(and it is not), there is considerable doubt that the decision
does,

in fact,

support American Guarantee's position. Moreover,

to the extent that it does,

it does so in derogation of the New

York Court of Appeals' articulation of the antisubrogation rule,
which is binding on this Court.
In particular,

there are at least three plausible readings

of the Liberty Mutual decision's apparent rejection of the
antisubrogation rule:
First, under the reading of the decision urged by ACE,
Liberty Mutual did not involve a carrier attempting to bring a
subrogation claim on behalf of one insured against another
insured at all, but was instead merely a coverage priority
dispute concerning a single party in fact,

the employer, General. And

the decision does not indicate one way or another

whether Liberty Mutual also insured the project owner, as would
be needed to implicate the antisubrogation rule. Although the
appellate briefs underlying the decision reveal that one party
15

argued that Liberty Mutual also covered the project owner,

see

Ex. AA to Smith Deel., Liberty Mutual's enigmatic rejection of
the antisubrogation rule may merely mean that the First
Department found otherwise. Under this reading, Liberty Mutual
stands only for the unremarkable proposition that excess
coverage is not triggered until the primary coverage is
exhausted. That offers no aid to American Guarantee.
Second, the Liberty Mutual court may have concluded that
Liberty Mutual insured both the project owner and the employer
(as needed to implicate the antisubrogation rule), but may
nonetheless have held in Liberty Mutual's favor because AIG
likewise insured the project owner and employer. This reading is
suggested by Liberty Mutual's citation to Jefferson Insurance
Company,

92 N.Y.2d at 375, which involves that precise fact

pattern. As explained above,

Jefferson expressly held that the

antisubrogation rule bars the common insurer's indemnity claim
in this scenario, but, given the unusual cross-coverage,
Jefferson nonetheless allowed the excess insurer to recover from
the primary insurer because the excess insurer's obligations
were never triggered as to either insured. Under this reading of
Liberty Mutual, while the antisubrogation rule barred Liberty
Mutual's subrogation claim, Liberty Mutual was nonetheless
entitled to reimbursement because AIG was obligated to provide
primary coverage to both insureds before Liberty Mutual's excess
16

layer was triggered. This reading of Liberty Mutual would offer
American Guarantee no support because ACE only insured Wager
Contracting, the employer, and not Pelham, the project owner.
Third, and finally,

under the reading urged by American

Guarantee, the First Department may have found that, much like
the instant case, Liberty Mutual, the excess carrier,

insured

the project owner and the employer, and AIG, the primary
carrier,

insured only the employer, but may nonetheless have

concluded that the antisubrogation rule did not apply because
the employer's primary coverage must be exhausted first. While
that reading would indeed support American Guarantee's position
here, it cannot be reconciled with the New York Court of
Appeals' authoritative interpretation of the antisubrogation
rule that this Court is bound to follow. As explained above,

in

Jefferson, the New York Court of Appeals squarely held that an
excess insurer cannot bring a subrogation claim against another
insured for a risk it covers. See 92 N.Y.2d at 373

("Reaching

[excess insurer] and [first primary insurer's] alternative
theory of recovery -

indemnity - we conclude that the

antisubrogation rule did bar the indemnity claim against

[second

primary insurer] as the insurer of Continental Copy."). The fact
that the ACE Policy is unlimited in this case but not in
Jefferson makes no difference; the antisubrogation rule blocks
this path regardless of what lies at its end. Thus, even if,
17

arguendo, Liberty Mutual rejected the antisubrogation rule on
the same facts that are present here, the decision cannot be
followed. Accordingly, Liberty Mutual provides no basis
whatsoever to refuse to apply the antisubrogation rule to the
instant case.
American Guarantee next attempts to avoid the
antisubrogation rule by arguing that the rule does not apply
when the policy justifications underlying the rule are absent,
as they supposedly are here. As noted, the New York Court of
Appeals created the antisubrogation rule "both to prevent the
insurer from passing the incidence of loss to its own insured
and to guard against the potential for conflict of interest that
may affect the insurer's incentive to provide a vigorous defense
for its insured." N. Star Reins.,

82 N.Y.2d at 294-95. Here,

American Guarantee argues that it was not seeking to pass its
loss to its own insured because ACE's policy provided unlimited
coverage for Richard Wager's injury, and that there was no
conflict of interest because American Guarantee did not control
the defense of Wager Contracting or Pelham.
This argument is not persuasive.
Guarantee is,

in fact,

For one thing, American

trying to shift its liability to a

policyholder that it insured for that very risk.

In other words,

American Guarantee, which insures Wager Contracting for bodily
injuries to its employees as they arise out of contractual
18

assumptions of liability,

is trying to shift the liability for

Richard Wager's injury to Wager Contracting. American
Guarantee's argument that this somehow does not implicate the
antisubrogation rule erroneously relies on the fact that Wager
Contracting was separately covered for this risk by the ACE
Policy. As Ohio Casualty makes clear, however, the relevant
question is whether the common insurer's policies respond to the
underlying liability, not whether some other insurer's policy
happens also to respond to that risk. See 372 F. App'x at 11112. Accordingly, because American Guarantee insures Wager
Contracting for Richard Wager's injury, American Guarantee's
attempt to avoid funding the settlement runs afoul of the main
reason for the antisubrogation rule.
Thus, American Guarantee's argument is reduced to the
contention that where the second policy underlying the
antisubrogation rule - avoiding an insurer's conflict of
interest with its insureds - is absent, the rule does not apply.
That is not the law.

Indeed, the New York Court of Appeals has

applied the antisubrogation doctrine to excess and primary
insurers alike without noting whether either insurer controlled
the underlying litigation or was otherwise at risk of having a
conflict of interest with a policyholder. See Jefferson,

92

N.Y.2d at 373-75. Accordingly, although it is undisputed that
American Guarantee did not control the state-court litigation,
19

that fact does not permit American Guarantee to avoid the
antisubrogation rule.
None of American Guarantee's cases is to the contrary.
the most part,

For

each declines to apply the antisubrogation rule

because its elements were not satisfied, not because the
animating policies were not present. See, e.g.,
Johnstown,

862 N.Y.S.2d 162, 165

Pesta v. City of

(3rd Dep't 2008)

(declining to

apply the rule where the policies either named only one insured
or excluded from coverage the risk at issue); McGurran v.
DiCanio Planned Dev. Corp.,
1995)

("[The]

628 N.Y.S.2d 773,

774

(2nd Dep't

policy does not insure both DPD and DRC for the

specific claims raised by the plaintiff in the underlying
personal injury action[.]"). And American Guarantee's final case
in this vein, Hartford Acc.
61 N.Y.2d 569

(1984),

& Indem. Co. v Mich. Mut.

is inapposite on its face,

Ins. Co.,

for it held

only that a conflicted insurer could not, under the guise of
honoring the antisubrogation rule, dodge various bad-faith
claims for failing to implead the injured worker's employer.
Here, of course, Wager Contracting was duly impleaded; indeed,
the thrust of American Guarantee's position is that its
indemnity claim against Wager Contracting is permissible. 7

7

In a similar vein, American Guarantee protests the purported
anomaly of finding that the antisubrogation rule blocks
indemnity claims against Wager Contracting brought by Pelham's
primary insurer (NGM) and top-layer excess insurer (American
20

For its next argument, American Guarantee contends that ACE
is collaterally estopped from asserting that the antisubrogation
rule bars American Guarantee's indemnity claim on behalf of
Pelham against Wager Contracting. "Under New York law, the
doctrine of issue preclusion only applies if

(1)

the issue in

question was actually and necessarily decided in a prior
proceeding, and (2)

the party against whom the doctrine is

asserted had a full and fair opportunity to litigate the issue
in the first proceeding." 8 Colon v. Coughlin,
(2d Cir. 1995)
Co.,

(footnote omitted)

65 N.Y.2d 449

58 F.3d 865,

869

(citing Kaufman v. Eli Lilly

&

(1985)). The doctrine applies "only if it is

quite clear that these requirements have been satisfied, lest a
party be 'precluded from obtaining at least one full hearing on
his or her claim.'" Id.
v. Lopez,

46 N.Y.2d 481,

(quoting Gramatan Home Investors Corp.
485

(1979)). American Guarantee argues

Guarantee), but does not block an indemnity claim against Wager
Contracting brought by the supposedly intermediate excess
insurer (NYSIR). See Transcript dated June 26, 2017. But that is
no anomaly at all, because NGM and American Guarantee each
insured both Pelham and Wager Contracting, whereas NYSIR insured
Pelham alone. The antisubrogation rule thus stood as no bar to
NYSIR's (successful) bid to shift its liability to Wager
Contracting, and it is for this reason that ACE, as the
unlimited insurer of Wager Contracting, paid the vast majority
of the $24 million settlement.
This issue is governed by New York state law because the
underlying decision was issued by a state court. See Colon, 58
F.3d at 869 n.2 ("We give a prior state court decision the same
preclusive effect that the courts of that state would give to
it. ff) •
8

21

ACE is bound by the state-court's alleged rejection of the
argument that the antisubrogation rule bars American Guarantee's
claim.
It is true that the state court, in its decision on summary
judgment, briefly touched on the antisubrogation rule.

In full,

the relevant passage reads:
Additionally, Wager Contracting is entitled to summary
judgment dismissing so much of [Pelham's] third-party cause
of action as seeks indemnification for sums up to the
limits of the policy insuring both Wager Contracting and
[Pelham]. Moreover, while [Pelham's] claims for
indemnification beyond the limits of Wager Contracting's
policy are not barred, an award of summary judgment on
[Pelham's] third-party claims for indemnification would be
premature at this time.
See Decision and Order, Ex. V to Smith Deel., at 26. American
Guarantee's collateral estoppel argument is based on the state
court's use of the singular ("policy")
("policies")

rather than the plural

in applying the antisubrogation rule. Thus,

American Guarantee urges that "policy" refers exclusively to
NGM's primary policy that insured both Pelham and Wager
Contracting and excludes by implication American Guarantee's
"follow-form" excess policy. On this reading, the state court
found that the antisubrogation rule only barred NGM's indemnity
claims, but not American Guarantee's. The defendant further
argues that the state court, by stating that the indemnity
claims "beyond the limits of Wager Contracting's policy are not
barred," affirmatively found that the antisubrogation rule does
22

not apply to American Guarantee's indemnity claim. On this
reading, if the state court meant to apply the antisubrogation
rule to American Guarantee, it supposedly would have used the
word "policies" in explaining the scope of its holding.
The Court disagrees with the defendant's reading of the
summary judgment decision. ACE is not collaterally estopped from
asserting the antisubrogation rule against American Guarantee
because it is far from "quite clear" that the state court
"actually and necessarily" held in American Guarantee's favor on
this issue. See Colon,

58 F.3d at 869. Most obviously, the state

court decision does not expressly reject the antisubrogation
rule as to any insurer; in fact,

the decision's only clear

holding is that the antisubrogation rule does indeed block an
indemnity claim on behalf of Pelham against Wager Contracting
at least to the limit of some unidentified "policy." The state
court decision also fails to identify what the relevant
insurance policies were, as would be expected for a decision
applying the antisubrogation rule as to one policy but rejecting
it as to another. Moreover, because a decision applying the
antisubrogation rule differently to a primary insurer and a
"follow form" excess insurer covering the same risk would be,
for the reasons discussed supra, at the very least in serious

23

tension with binding New York precedents, one would expect the
state court to explain its reasoning - which it plainly did not.9
The better reading of the summary judgment decision is that
the state court found

(as does this Court)

that the

antisubrogation rule barred the common insurers'

indemnity

claims, but, because damages were not yet fixed,

did not reach

whether that holding applied to both NGM and American Guarantee.
Indeed, the state court understood Pelham to argue that the
antisubrogation rule issue was not ripe for that very reason.
See Decision and Order, Ex. V to Smith Deel., at 17. The state
court therefore used the word "policy" in the abstract to mean
"insurance coverage," and not to implicitly distinguish between
primary and excess policies. This reading is bolstered by the
fact that the state court, after finding that the
antisubrogation rule applied in the abstract, expressly reserved
decision on whether to award summary judgment to Pelham on
claims beyond the limits of the "policy," finding any such
determination would be "premature." That same uncertainty in

9 American Guarantee's insistence that the state court's use of
the singular is conclusive is particularly dubious in the
context of this passage, where the state court referred to the
"limits" of the "policy" without explaining how a supposedly
single policy had multiple limits. The state court also referred
indifferently to Pelham's indemnification claims against Wager
Contracting in the singular ("third-party cause of action as
seeks indemnification") and the plural ("third-party claims for
indemnification").
24

damages rendered premature a decision distinguishing between
Pelham's different carriers.
Accordingly, ACE is not collaterally estopped from
asserting the antisubrogation rule here.
For the defendant's final argument against the application
of the antisubrogation rule, American Guarantee argues that ACE
is barred from asserting the antisubrogation rule because ACE
acted inequitably in the state-court litigation. See HDI-Gerling
Am.

Ins. Co. v. Navigators Ins. Co., 199 F. Supp.

(D. Mass. 2016)

(applying New York law)

3d 422,

430

(denying summary

judgment where there was a genuine factual dispute that the
primary insurer "deliberately allocated the settlement in such a
manner as to force

[the excess insurer]

to cover the excess

amount at issue"). Here, American Guarantee argues that ACE,
which controlled the defense of Wager Contracting in the statecourt lawsuit, authorized a legal strategy focused on minimizing
ACE's losses and shifting liability to American Guarantee rather
than on defending Wager Contracting against all claims.
This is, in effect, an invocation of the equitable "unclean
hands" doctrine.

10

Under New York law, American Guarantee, as the

proponent of the unclean hands defense, must demonstrate that

10

Although American Guarantee avoids labeling this argument as
such, unclean hands is the defense American Guarantee set up in
its answer. See Am. Ans. at 8.
25

"(1)

[ACE]

is guilty of immoral, unconscionable conduct;

conduct was relied upon by [American Guarantee]; and
[American Guarantee]

(SHS),

2016 WL 4064036,

Inc. v.
at *5

SAS Grp.,

(3)

(1966)

Inc., No.

(S.D.N.Y. July 29,

see also Nat'l Distillers & Chem. Corp. v.
N.Y.2d 12, 15-16

the

was injured thereby." See Versatile

Housewares & Gardening Sys.,
10182

(2)

2016);

Seyopp Corp.,

("[The unclean hands doctrine]

used unless the plaintiff is guilty of immoral,

09-cv-

17

is never

unconscionable

conduct and even then only when the conduct relied on is
directly related to the subject matter in litigation and the
party seeking to invoke the doctrine was injured by such
conduct."

(internal quotation marks omitted)).

American Guarantee has failed to establish
genuine dispute of material fact)

(or even raise a

that the unclean hands

doctrine bars ACE from asserting the antisubrogation rule. The
undisputed evidence shows that the counsel retained by ACE to
defend Wager Contracting conscientiously acted in Wager
Contracting's best interest in the underlying litigation. At
bottom, then, American Guarantee's argument is that it was
inequitable not to prioritize American Guarantee's interests in
the case. But the mere fact that Wager Contracting's interests
did not align with American Guarantee's does not even begin to
suggest the type of bad-faith misconduct needed to make out a
defense of unclean hands.
26

In particular, American Guarantee marshals the following
evidence in support of its argument that ACE's immorally or
unconscionably managed the state-court litigation to American
Guarantee's detriment.

In 2012, the law firm initially assigned

to defend Wager Contracting (Stewart, Greenblatt, Manning &
Baez) was uncertain whether the antisubrogation rule would bar
American Guarantee's claim on behalf of Pelham against Wager
Contracting. See Def.

56.1 Stmt.

~

30; Plf.

56.1 Resp.

~

30.

11

ACE thereafter retained new counsel to defend Wager Contracting
(Fabiani Cohen & Hall, LLP), which evaluated the extent of Wager
Contracting's insurance coverage and concluded that, by virtue
of the antisubrogation rule, American Guarantee's $5 million
policy was potentially available as a "cushion" to partially
shield ACE from any judgment or settlement arising out of

11

In particular, Wager Contracting's initial counsel reported as
follows:
With respect to the $5 million excess policy issued by
American Guarantee & Liability Insurance Co., we still do
not have a complete copy of the policy. We will need to
review the policy to confirm whether the anti-subrogation
rule bars [Pelham's] claims against Wager Contracting Co.,
up to the extent of the excess policy as well.
Wager Contracting Co.'s Employer Liability carriers will
likely be on the hook for the entire settlement or verdict
in excess of the amount barred by the anti-subrogation rule
in light of the fact that the plaintiff has suffered a
grave injury.
Ex.

J

to Smith Deel. at 1-2.
27

Richard Wager's injury.
Cohen wrote to

For example,

on March 22,

2015,

Stephen

AC~:

If Pelham, et al are in fact covered under Wager's GL
primary and excess policy as Al's, the rule of antisubrogation would bar the third party claim against Wager
Conlracting to the extent of the insurance limits made
available. In that sense, Wager's GL insurance would in
effect, be primary vis a vis the ACE EL coverage. If
Pelham, et al. are not covered under Wager's GL primary and
excess poJicies as Al's but those policies do afford
coverage to Wager for contractual indemnity, those policies
should co-insure with ACE until they are exhausted. In
either case, you have a cushion or a partner equal to
Wager's GL primary and excess limits.
See Ex.

L to Smith Deel.,

firm also considered,

at 2. The Fabiani Cohen & Hall law

but ultimately rejected, making an

argument on summary judgment in the state-court litigation that
might potentially have defeated Pelham's contractual indemnity
claim against Wager Contracting

(a theory of liability plainly

covered by the American Guarantee Policy,
by the ACE Policy).

See id.

at 4

but likely not covered

("Some preliminary thoughts

(and these are still a work in progress)

[W]e will argue

that Pelham hasn't proven that that indemnity provision at issue
. was part of the Wager Contracting contract.").
American Guarantee argues that the foregoing conduct was
inequitable because it shows that ACE manipulated the statecourt litigation to protect ACE,

not to protect Wager

Contracting. American Guarantee points out that,
Policy was unlimited for the injury at issue,

28

because the ACE

it would make no

difference to Wager Contracting whether the antisubrogation rule
applied to American Guarantee; Wager Contracting's only concern
would be that it is covered. Thus, any efforts even to
investigate other possible sources of coverage were not in Wager
Contracting's interest.
However, American Guarantee has failed to show "immoral,
unconscionable conduct" on the part of ACE. See Versatile
Housewares,

2016 WL 4064036, at *5. To start with, American

Guarantee has failed to show that ACE manipulated the litigation
to the detriment of its insured, Wager Contracting, which might
arguably meet that demanding standard. American Guarantee's sole
evidence of such manipulation is the fact that Wager
Contracting's lawyers decided against raising,

on summary

judgment, the argument that the relevant contract lacked an
indemnity clause altogether, which might theoretically have
defeated Pelham's contractual indemnity claim. However, that
argument, when tentatively raised by Wager Contracting's
lawyers, was expressly couched as a work in progress. See Ex. L
to Smith Deel. More importantly, ACE also argues, and American
Guarantee does not deny,

that the argument was presumably

rejected because it was frivolous:

the indemnity provision was

plainly, and permissibly, incorporated by reference into the
relevant contract. See Plf. Opp. at 13-14 & n.14; cf.

29

Def. Reply

at 6. There is thus no showing that the litigation was conducted
against Wager Contracting's interest.
All American Guarantee has shown, therefore,

is that ACE

arguably managed the underlying litigation with both Wager
Contracting's and ACE's interests in mind: Wager Contracting
because all viable arguments were made on its behalf, and ACE
because one of those arguments, the antisubrogation rule, had
the collateral effect of reducing ACE's exposure. But it was not
unconscionable and immoral to proceed in this fashion.

Indeed,

attorneys potentially risk malpractice claims where they fail to
maximize insurance coverage for their clients, see Shaya B.
Pac., LLC v. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP,
827 N.Y.S.2d 231, 235-36

(2d Dep't 2006), and arranging the

litigation to be able to draw on both the ACE Policy and the
American Guarantee Policy (if need be)
duty.

If nothing else,

is consistent with that

raising the antisubrogation rule was a

costless way for Wager Contracting to guard against the
possibility, however remote, of ACE's insolvency or refusal to
honor its policy.
Finally, when ACE settled the litigation,

it did not

attempt to allocate certain portions of the funds to particular
theories of liability

(~,

the contractual indemnity claim)

in

a bid to trigger American Guarantee's payment obligations;
instead, it merely settled for a lump sum ($24 million) and left
30

for judicial resolution in this case whether the antisubrogation
rule would apply. Cf. HDI-Gerling Am.
at 429

Ins. Co.,

199 F.

Supp.

3d

(finding fact question concerning whether the primary

insurer "deliberately allocated the settlement in such a manner
as to force

[the excess insurer]

to cover the excess amount at

issue"). American Guarantee has thus failed to show "immoral
[and]

unconscionable" conduct.

12

American Guarantee has also failed to show reliance on the
alleged misconduct.

See Nat'l Distillers & Chem. Corp.,

N.Y.2d at 15-16 ("[The unclean hands doctrine]
unless the plaintiff is guilty of immoral,

17

is never used

unconscionable

conduct and even then only when the conduct relied on is
directly related to the subject matter in litigation .

II

(internal quotation marks omitted)). American Guarantee points
to no evidence that it somehow relied on the actions taken by
counsel for Wager Contracting that ACE retained.

12

Indeed, there

American Guarantee also argues that ACE engaged in other
miscellaneous misconduct, such as "pressuring" the defendant
into settling, but these claims uniformly lack the requisite
connection to the defendant's core complaint: that ACE unfairly
manipulated the state-court litigation. See Nat'l Distillers &
Chem. Corp., 17 N.Y.2d at 15. For example, AGLIC claims that the
Fabiani Cohen & Hall firm falsely told the state court that NGM
had agreed to defend Wager Contracting, when in fact NGM did not
do so for another month. It is doubtful that American Guarantee
has even raised a genuine factual dispute on this point, but
assuming arguendo that it has, these alleged misrepresentations
simply do not implicate American Guarantee's manipulation
theory, nor has American Guarantee shown how it might possibly
have been injured thereby.
31

is no dispute that American Guarantee's representative testified
that she had no complaints about how the Fabiani Cohen & Hall
firm handled the state-court litigation and never even discussed
the antisubrogation rule with that firm,

even after the firm

mentioned it in writing several times. See Plf. 56.l Resp.
~~

66-67,

70,

72

(citing Deposition of Barbara Picinich).

Accordingly, American Guarantee has failed to show that ACE
cannot assert the antisubrogation rule under the unclean hands
defense.
The Court has considered American Guarantee's other
arguments and finds them totally without merit.
foregoing reasons,

13

Thus,

for the

the Courts finds that the antisubrogation

rule precludes American Guarantee from bringing any
indemnification claim on behalf of Pelham against Wager
Contracting to the extent of such entities'

common coverage as

relates to liability for Richard Wager's injury. The Court
therefore,

in addition to denying American Guarantee's cross-

motion for summary judgment, grants summary judgment in favor of
ACE declaring that American Guarantee was and remains
responsible for paying the full $5,000,000 limit of the American
Guarantee Policy in connection with the state-court settlement.

13

In particular, the Court, having found that the
antisubrogation rule blocks American Guarantee's claim, need not
reach the parties' other main dispute, viz., whether the
American Guarantee Policy is excess to the ACE Policy.
32

It follows that American Guarantee must pay to ACE $3,500,000 as
reimbursement for the share of the Interim Funding Agreement
paid by ACE. Clerk to enter judgment.
SO ORDERED.
Dated:

New York, NY
July -1_, 201 7

33