Anti-Subrogation Rule When Pursuing Workers’ Comp 1B Coverage in Construction Accidents

In complex multi-party construction accident cases, applicability of commercial general liability (CGL) coverage and Workers’ Compensation (WC) 1B coverage is an oft-litigated issue. Most construction contracts require subcontractors to obtain separate WC and CGL policies.

General contractors will routinely require subcontractors to name the general contractor and owner as “additional insureds” on their policies. The WC 1B carrier provides liability coverage for bodily injury sustained by an employee, excluding coverage of the employer for contractual indemnity but covering it for common law indemnity or contribution. See Liberty Mutual Insurance v. Insurance Co. of the State of Pennsylvania, 43 A.D.3d 666 (1st Dep’t 2007). The CGL carrier provides coverage to the employer for contractual indemnity but excludes coverage for common law indemnity or contribution pursuant to the CGL employee exclusion. Hawthorne v. South Bronx, 78 N.Y.2d 433 (1991).

In labor lw actions, upstream parties such as the owner and general contractor typically assert common law indemnity/contribution and contractual third-party claims against the plaintiff’s employer. In order for third-party claims seeking contribution and common law indemnity to survive against an employer, the injured employee must have suffered a “grave injury” within the meaning of the WC Law Section 11. Dudek v. Metropolitan Transportation Authority of State of New York, 24 A.D.3d 21 (2d Dep’t 2005).

In the case of a “grave injury” claim, an insured employer could be potentially entitled to unlimited coverage from the 1B policy for common law and contribution claims. See WC Law Section 50 (2); Oneida Limited v. Utica Mutual Insurance, 263 A.D.2d 825 (3d Dep’t 1999). Any contractual claims could potentially be covered by the CGL policy. Therefore, the 1B carrier and the CGL carrier can be said to share joint responsibility for these third-party claims where the plaintiff has sustained a “grave injury.” That arrangement unfortunately gets more complicated in cases where the employer’s insurer is providing additional insured coverage to the third-party plaintiff(s).

Typically, if the CGL carrier for the plaintiff’s employer accepts an additional insured tender of an owner and general contractor without a reservation of rights, the CGL carrier for the plaintiff’s employer would control the defense of the owner/general contractor. With respect to a grave injury, the issue becomes the litigation of the third-party action against the named insured as the plaintiff’s employer and the potential implication of the anti-subrogation rule.

The Anti-Subrogation Rule

The anti-subrogation rule (ASR) is a common law defense, which provides that a subrogated insurer standing in the shoes of an insured cannot bring a recovery action against or sue its own insured. See Davis v. Heinz, 254 A.D.2d 830 (4th Dep’t 1998). The ASR prohibits an insurer from attempting to reimburse itself by seeking to recover from its own insured for the same risk with respect to which the insured has either purchased coverage or is otherwise covered under the subject policy. See North Star Reinsurance v. Continental Insurance, 82 N.Y.2d 281, 294 (1993).

In order for the ASR to apply, the liability which an insurer seeks to recover as subrogee must not only arise out of the precise risk for which insurance was purchased by a third-party, but the policy claimed to give rise to an anti-subrogation claim must also cover that liability. Franklin v. Stillwater Hydro Partners, 255 A.D.2d 998 (4th Dep’t 1998). Subrogation is typically permissible against an insured if the liability that is sought to be recovered by the insurer arises out of a risk that is not covered under the same policy. Romano v. Whitehall Properties, 59 A.D.3d 697 (2d Dep’t 2009) (The ASR does not apply where there are two distinct and separate policies which cover different risks).

The two primary purposes of the ASR are: to avoid a conflict of interest that would undercut the insurer’s incentive to provide an insured with a vigorous defense; and to prohibit an insurer from passing its loss to its own insured. Millennium Holdings v. Glidden, 53 N.E.3d 723, 728 (2016).

Application of the Anti-Subrogation Rule in Pursuing 1B Coverage

In an action which could be dismissed as violative of the ASR, the 1B carrier is not required to participate where a third-party action is being maintained for the sole purpose of triggering 1B coverage and there is no independent basis for which the third-party plaintiff (additional insured under the CGL policy) could proceed against the named insured. See e.g. National Union Fire Insurance v. NYSIF, 213 A.D.2d 164 (1st Dep’t 1995); Avalanche Wrecking v. NYSIF, 211 A.D.2d 551 (1st Dep’t 1995); Aetna v. Greater NY Mutual, 205 A.D.2d 433 (1st Dep’t 1994). Even in cases where the employer’s insurer denies a defense to an additional insured for the purpose of avoiding the implications of the ASR, courts have found that a conflict may still exist, though latent as opposed to open. National Casualty v. NYSIF, 227 AD2d 115 (1st Dep’t 1996). Courts have found that there are instances in matters involving a “grave injury” where a third party action by an additional insured against a named insured is not violative of the ASR insofar as the additional insured has an independent basis for maintaining the third-party action, thereby triggering unlimited 1B coverage. Courts have held that the Employer’s Liability exclusion prevents application of the ASR. See e.g. McGurran v. DiCanio Planned Development, 216 A.D.2d 538 (2nd Dep’t 1995); Zahno v. Urquart, 213 A.D.2d 1004 (4th Dep’t 1995). See also Forbes v. City of New York, 272 A.D.2d 221, 708 N.Y.S.2d 380 (1st Dep’t 2000) (holding that the ASR did not bar third-party complaint because the CGL policy did not cover the general contractor and subcontractor for the same risk; specifically, the general contractor was not covered for injuries to its own employees under the CGL and instead had WC insurance for that purpose).

The employer’s liability exclusion generally provides that the insurance does not apply to: “Bodily injury to any employee of the insured arising out of and in the course of his employment by the insured or to any obligation of the insured to indemnify another because of damages arising out of such injury.” In McGurran, the court found that because of the presence of the Employer’s Liability exclusion in the CGL policy, the public policy considerations underlying the ASR were not violated. Since the CGL policy did not cover the employer for any damages which it may have sustained as the result of the plaintiffs injuries, the CGL carrier is not seeking to pass the incidence of its loss to its named insured and thus avoid the coverage which its insured purchased. Id. Accordingly, the WC carrier was not permitted to invoke the ASR.

In Liberty Mutual Insurance v. Insurance Co. of the State of Pennsylvania, 43 A.D.3d 666, 667, 841 N.Y.S.2d 288, 289 (1st Dep’t. 2007), the court found that the ASR did not apply. The court’s determination that the 1B carrier was required to reimburse the CGL carrier after settlement hinged on whether the subcontractor was liable for common-law indemnification (covered by the 1B policy, but not the general liability policies) because the plaintiff employee sustained a “grave injury.” The CGL excess policy was only triggered for liability in excess of the “retained limit,” which was defined as the available limits of the underlying policies listed as “controlling underlying insurance” in the WC policy declarations. In addition, because the 1B carrier was a primary insurer and its policy was not exhausted, it was “not entitled to an apportionment of liability between itself and the CGL carrier, whose excess coverage is implicated only upon the exhaustion of primary insurance.”

The holdings in Liberty and McGurran have been called into question and distinguished by ACE American Insurance v. American Guarantee & Liability Insurance, 257 F.Supp3d 596 (S.D.N.Y. 2017). In ACE, the underlying matter involved a “grave injury” claim in which the CGL carrier for the plaintiff’s employer picked up the tenders for the owner/general contractor as additional insureds. The court in ACE held that the WC policy was not implicated and the third-party action by the owner against plaintiff’s employer violated the ASR. The ACE court noted that the policy exclusions were not present as in McGurran and the application of McGurran was limited in any event, since the CGL carrier in that matter was not obligated to defend the employer against the third-party plaintiff (and did not undertake such defense), there never arose any potential conflict of interest.

Furthermore, the court in ACE acknowledged that its holding ran counter to Liberty. The court noted that it was unclear from the Liberty decision whether the subcontractor and the owner were both insureds under the excess policy at issue. Regardless, the ACE court refused to follow Liberty because, in Liberty, pursuant to the language of the policies at issue, exhaustion of the employer’s liability policy was required before the excess policy was triggered. This policy language was not present in the applicable policies in the ACE matter. See also Bosquez v. RXR Realty, 195 A.D.3d 536 (1st Dep’t 2021).

Practical Implications

In view of the foregoing caselaw, it is evident that pursuing potentially unlimited 1B coverage in “grave injury” claims on behalf of plaintiff’s employer and additional insureds requires careful analysis of the ASR. In assessing the applicability of the ASR, and maintaining the third-party action when the underlying claim involves a “grave injury,” consideration should be given to the language of the CGL and 1B policies at issue.

Without definitive guidance from New York courts, we can expect practitioners and courts alike to continue to grapple with questions surrounding availability of potentially unlimited employer’s liability coverage in complex multi-party labor law matters.

In the absence of “bright-line” rules in this area of law, the key takeaways from the current caselaw are as follows: the ASR does not apply and the 1B coverage is implicated where the CGL policy employee exclusion renders that policy inapplicable to the common law indemnity/contribution claims; and the ASR is not violated where the WC 1B carrier has an obligation to afford coverage that takes precedence over that issued by an excess CGL insurer, subject to the other insurance clause contained in the excess policy.

Going forward, we anticipate that defense practitioners will argue that a CGL policy and a WC 1B policy are two separate avenues of coverage that were obtained by the insured seeking coverage for distinct risks thereby providing an independent basis to pursue third-party actions and obviating the anti-subrogation rule.

Thomas J. Maroney is a partner in the New York office at Kennedys. Contact him at [email protected]. Hilary F. Simon is an associate in the New York office of the firm. Contact her [email protected].