DALLAS FEDERAL COURT DISMISSES CLAIMS FOR EQUITABLE SUBROGATION AGAINST THREE PRIMARY INSURERS

A Federal District Court Judge in Dallas recently granted motions to dismiss claims against three primary insurers in a suit seeking equitable subrogation for amounts paid to settle a construction defect case. In Trammell Crow Residential Co. v. St. Paul Fire Ins. Co., No. 3:11-CV-2853-N (N.D. Tex. May 27, 2014), the court dismissed third-party subrogation claims against three primary insurers and an equitable subrogation claim against an insured.

Trammell Crow initiated this lawsuit to recover amounts paid to settle a multi-million dollar construction defect suit from its insurers. The excess carrier, National Union, filed a third-party complaint against Trammell Crow’s primary insurers Virginia Surety, Old Republic, and First Specialty for equitable and contractual subrogation to recover the amount National Union contributed to the settlement.  National Union also brought counterclaims against Trammell Crow for breach of contract and equitable subrogation. Trammell Crow, Virginia Surety, Old Republic, and First Specialty all filed motions to dismiss National Unions counterclaims and third-party claims.

Federal District Court Judge David Godbey first addressed Trammell Crow’s motion to dismiss the counterclaims National Union filed for breach of contract and equitable subrogation. He found that under Texas law an insurer cannot seek subrogation on its own behalf or against its own insured. Judge Godbey did not find any of National Union’s arguments persuasive to support an exception to the general anti-subrogation rule and dismissed the subrogation counterclaims against Trammell Crow. As to the breach of contract claim, Trammell Crow argued that the Court should dismiss the contract claim based on Rule 12(f) as redundant of National Union’s affirmative defenses.  The Court found that Rule 12(f) is a “drastic” remedy and denied Trammell Crow’s motion as to breach of contract.

Judge Godbey then turned to National Union’s third-party equitable and contractual subrogation claims against Virginia Surety, Old Republic, and First Specialty.  The primary insurers argued that National Union cannot subrogate against them under either theory because their primary coverage policies do not overlap temporally with National Union’s excess coverage policy. The Court agreed and found that an excess insurer may only subrogate against the underlying primary insurer and other excess insurers; it may not subrogate against primary insurers whose policies do not overlap temporally with the excess policy. The Court further found that to hold otherwise would allow an excess insurer to “circumvent Texas’s anti-stacking rule by combining multiple policies to exceed the policy limit.” Based on these findings, Judge Godbey granted the three primary insurers motion to dismiss for failure to state a claim.