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Full Compensation of Insured Does Not Preclude Contractual Subrogation — Issue of First Impression under Texas Law

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From Amerisure Ins. Co. v. Navigators Ins. Co., 2010 U.S. App. LEXIS 14354 (5th Cir. July 13, 2010):

The first issue that we must address is one of first impression for this court: whether Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 765, 776 (Tex. 2007), precludes contractual subrogation simply because the insured has been fully indemnified. We hold that it does not.

In Texas, parties create contractual-subrogation rights by agreement or contract, granting the right to pursue reimbursement from a third party in exchange for payment of a loss.... When the insurer seeks to recover through contractual subrogation, it "stands in the shoes of the insured, obtaining only those rights held by the insured against a third party, subject to any defenses held by the third party against the insured." ....

Most recently, Judge Lee Rosenthal, in a well-reasoned opinion, rejected the argument that Mid-Continent automatically precludes subrogation claims whenever the insured is fully indemnified.***

We agree with the majority of courts that have examined this issue and we reject the overly broad view of Mid-Continent's subrogation exclusion. That view would effectively end contractual subrogation in Texas. This cannot be so, particularly in light of the Texas Supreme Court's most recent contractual-subrogation decision in Texas Health Insurance Risk Pool v. Sigmundik, S.W.3d , 2010 Tex. LEXIS 405, 2010 WL 2136625 (Tex. 2010).

Although Sigmundik does not specifically address the reach of Mid-Continent, it is nonetheless instructive. There, the insurer had fully indemnified the insured for his medical expenses ($336,874.71) arising out of injuries sustained in an oil-field explosion. *** After the death of the insured, his wife filed a negligence action on behalf of herself, her two minor sons, and the insured's estate.*** The insurer intervened, arguing that it was "subrogated to the rights of [the insured] and his estate" based on an express subrogation provision in the policy***

.The negligence action settled for $800,000, and the court explained that, through contractual subrogation, the insurer stepped into the shoes of the insured (the estate) and has a valid claim to recover the $336,874.71 from the settlement. ***The court could not have reached this result if the broad view of Mid-Continent was in fact the law of Texas.

Since Mid-Continent, the Texas Supreme Court has not specified the precise boundaries of its holding as it applies to contractual subrogation when the insured is fully indemnified. Nor do we attempt to do so here. Instead, our decision here is an Erie guess, and in making an Erie guess, we must determine how the Texas Supreme Court would resolve the issue under the specific circumstances presented. *** Accordingly, in light of Sigmundik, we hold that Mid-Continent does not bar contractual subrogation simply because the insured is fully indemnified.

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New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.
New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.

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