Carrier May Not Intervene in its Insured’s Tort Litigation Since It Didn’t Make any Payments

Owner of a building at 11 Essex claimed that negligent performance of excavation work on his neighboring (7 Essex) property caused damage to the building at 11 Essex.   11 Essex also submitted a claim to its own carrier, Tower, but Tower denied the claim.   Among other things, Tower contended that the “negligent work exclusion” precluded recovery for 11 Essex’s damage allegedly caused by negligent work done on 7 Essex’s property.  11 Essex filed two lawsuits: (a) one against Tower seeking first-party coverage; and (b) a tort action against 7 Essex.

The appellate Court, in a 2006 ruling, found for 11 Essex and determined that the “negligent work exclusion” does not bar coverage for property damage allegedly caused by work done on a neighbor’s property.

Tower filed a motion to intervene in 11 Essex’s lawsuit against 7 Essex.  The Court denied this motion, reasoning that since Tower never paid anything to its insured, it had no right of subrogation and therefore has no grounds to intervene.  The appellate court affirmed. [1]

During the course of discovery in 11 Essex’s tort action against its neighbor, deposition testimony revealed that 11 Essex may have caused its own damage to its building by lowering its basement floor below the foundation wall without revealing this fact to 7 Essex’s engineer.  When Tower learned of this, Tower filed a motion to amend its answer in the first party action against it to again assert the “negligent work exclusion.”  This time Tower claimed that its own insured negligently lowered its basement floor and that is what caused the damage, not any work by 7 Essex.  The trial court denied Tower’s motion and would not allow it amend.  However, the appellate court reversed.   The appeals court reasoned there was no prejudice to 11 Essex in allowing the amendment since 11 Essex had not previously disclosed the basement work to its carrier, Tower.  The court did note that there now appears to be a potential conflict of interest inasmuch as Tower’s defense to the first-party action is basically the same as  7 Essex’s defense to 11 Essex’s tort action.

Bottom Line:  A carrier does not have a right to sue a third party in tort (or to intervene in its own insured’s tort action) until that carrier has paid money.  Only after at least partial payment of a claim may a carrier “step into its insured’s shoes” and subrogate.

[1]  Essex Street Corp. v. Tower Insurance, 2010 WL 346221 (1st Dept February 2, 2010)