No Subrogation Interest Where Insurer Has Right to Reimbursement from the Insured
Take a look at the unusual factual scenario in Travelers Indem. Co. of Ill. v. Western Am. Spec. Trans. Servs., Inc. Weeding through some complex facts, the insured held a $4 million policy. The policy contained two unique provisions: (1) granting any claimant the right to sue the insurer directly for payment under the policy; and (2) granting the insurer the right to reimbursement from the insured for any payment under the policy. The insurer paid a claim under the policy. Then the insurer filed a lawsuit on behalf of the insured, asserting a subrogation interest in the rights of the insured.
The Court of Appeals disagreed based on the unique policy. In a normal policy, a claimant files suit against the insured. If the insurer pays off the claim, then the insurer has stepped into the shoes of the insured and gains a subrogation interest.
Under the Travelers policy, however, the claimant files suit directly against the insurer. The insurer is paying off its own debt. The insured is not off the hook at this point; it still owes reimbursement to the insurer. Thus, the insurer has actually paid to step into the shoes of the claimant. Essentially, it's the exact reverse of a normal subrogation interest.
The moral of the story? Check to see whether the insurer can be sued directly. Then check whether the insurer has a right of reimbursement against its own insured. If so, there's a strong challenge to the insurer making any claim for subrogation.