A retrocessionaire is two steps away from the policy issuing company and the insured so it is a pretty rare day when a retrocessionaire is allowed to pursue a recovery against a law firm that defended an underlying personal injury claim that went south.
In Century Property & Casualty Insurance Corp. v. McManus & Richter, No. 2022-05445 (N.Y. App. Div. 1st Dep’t, Feb. 15, 2024), which involved a personal injury claim arising from a construction accident, the demolition company that employed the injured worker failed to maintain the contractually required insurance limits that was to indemnify and hold the property owners harmless. The owners brought a third-party action against the demolition company that ultimately was dropped by counsel allegedly without authorization of the insurers for the owners, including the retrocessionaire. Subsequent to settlement with the injured worker, where the retrocessionaire had to fund the difference directly, the retrocessionaire brought an action against the law firm handling the defense for legal malpractice.
The motion court dismissed the complaint and the retrocessionaire appealed. Although the intermediate appellate court agreed with the motion court that the retrocessionaire could not bring a direct claim for legal malpractice because of lack of privity, the court modified the dismissal and sustained the retrocessionaire’s claim against the law firm based on equitable subrogation.
Some useful facts (as all cases are fact dependent). First, this was a 100% retrocession (retrocessional quota share). Second, According to the retrocessionaire, it “was contractually obligated to fund” a portion of the settlement in the underlying action on the property owner’s behalf. Third, there was a formal assignment of the primary carrier’s claims against the defense firm to the retrocessionaire concerning the underlying action.
In finding that the retrocessionaire could bring a claim against the law firm based on equitable estoppel, the court found that the retrocessionaire had a specific contractual obligation to pay, and did pay, the lion’s share of the settlement in the underlying action. The court distinguished a Third Department case that held a reinsurer had no subrogation rights, holding that the court’s conclusion that a reinsurer has no subrogation rights regarding the insured because no privity exits between the reinsurer and the insured lacks support and goes against long established New York law that “[t]he right of subrogation is founded upon principles of equity and not in contract” and “does not depend upon privity” (Catskill Natl. Bank v Dumary, 206 NY 550, 559 [1912]).
The appellate court concluded that where a reinsurer, or retrocessionaire, has paid a claim on behalf of an insured, equitable principles demand that the reinsurer be entitled to equitable subrogation on behalf of the insured. Because the retrocessionaire pled that it was contractually obligated to, and did, pay the majority of the underlying settlement and brought the action for legal malpractice as subrogee of the insured, the court held that the retrocessionaire could proceed with this action under the theory of equitable subrogation.
