New York Law Bars Subrogation by Lloyd’s in LaGuardia Project, Appeals Court Affirms

A federal appeals court has declared that New York law prevents Lloyd’s from recovering some loss payments from Zurich American because Zurich’s insured was also an insured of Lloyd’s in a case involving a construction project at LaGuardia Airport.

The Second Circuit Court of Appeals affirmed that New York’s anti-subrogation law provides that an insurer has no right of subrogation against its own insured for a claim arising from the very risk for which the insured was covered.

The insured, Skansa USA Building, was insured by both Zurich and Lloyd’s on the airport project. Arch Insurance was also on the project.

The Port Authority of New York and New Jersey hired LaGuardia Gateway Partners (LGA) as the developer for the project, which then subcontracted with a joint venture that included Skanska USA Building Inc. Skanska and LGA obtained a Contractors Controlled Insurance Program for the project, which included a “tower” of general liability insurance with $300 million of coverage in three layers. Zurich underwrote the base layer of coverage, Arch provided a first layer of excess coverage, and then Lloyd’s provided a second excess policy, which was a third layer of coverage on top of Arch’s.

Each layer of coverage, including Lloyd’s, contained a standard employer’s liability exclusion, which carves out from coverage liability for bodily injury to an employee of the insured arising from the employee’s employment by the insured. However, there is an exception to this exclusion. The policy does cover liability assumed by the insured in an “insured contract” such as the contract between Skanska and LGA.

The dispute arose from a personal injury suit filed against Port Authority and LGA by a Skanska employee injured while working on the LGA project. Zurich agreed that the general liability insurance policy provided coverage for the suit and arranged for counsel to represent the Port Authority and LGA beginning in August 2018. Roughly three years later, Lloyd’s contacted that counsel and requested that LGA and Port Authority commence a third-party claim for common law indemnification or contribution against Skanska. However, that counsel concluded that New York’s anti-subrogation rule would bar it.

After continued disputes between Lloyd’s and Zurich and their attorneys, Zurich sought a declaratory judgment that the anti-subrogation rule would indeed bar the indemnification or contribution claim against Skanska.

The federal district court granted Zurich’s request, asserting that the state’s anti-subrogation rule is an exception to an insurer’s usual right of subrogation against third parties.

The district court said that the sole issue was whether the anti-subrogation rule bars Lloyd’s from causing its insureds, LGA and Port Authority, to sue its other named insured, Skanska, for common law indemnification or contribution. The court accused Lloyd’s of trying to “muddy the water” of what the court saw as a straightforward case by relying on the viability of a hypothetical indemnity claim brought by LGA or Port Authority against Skanska.

In weighing the appeal by Lloyd’s, the Second Circuit came to the same conclusion, agreeing with the lower court that the two key elements for the anti-subrogation rule to apply were present in the case:

“Lloyd’s insures Skanska under the general liability policy. That policy, through the insured contract provision, covers Skanska for the obligation it assumed in the contract to indemnify LGA and Port Authority for losses resulting from third-party claims for bodily injury like the one underlying the present action. Thus, Lloyd’s cannot subrogate against Skanska—its own insured—for losses arising from the underlying suit, exactly the risk for which Lloyd’s insures Skanska. What Lloyd’s proposes is precisely what the anti- subrogation rule prohibits. Straightforward application of the rule bars the claim. ”

The federal appeals court pointed to the New York Court of Appeals which has said that the important public policies served by the rule mean that it “must take precedence over the parties’ private contractual arrangements.”

New York’s courts have explained that the anti-subrogation rule is needed “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.”

The anti-subrogation rule prevents an insurer from recouping losses from its insured “even where the insured has expressly agreed to indemnify the party from whom the insurer’s rights are derived and has procured separate insurance covering the same risk.”