Underwriters have commenced this action against Hawaiian to
recover 90% of the insured amount which had been paid to
Hawaiian. Plaintiff claims that by delivering the release to
the Charterers, Hawaiian destroyed Underwriters' subrogated
rights against the Charterers. The rights allegedly destroyed
by the release are those contained in clause 32(B) of the
charter party between Hawaiian and the Charterers which
provides that the Charterers must pay 90% of the remuneration
for the hire of the Poet if the ship fails to arrive at its
destination "because of damage caused by the perils of the
The Underwriters, in Hawaiian's name, attempted to exercise
their subrogated rights by seeking a court order compelling
Charterers to arbitrate the claim under clause 32(B). However,
because of the release granted by Hawaiian to Charterers, Judge
Brieant denied the petition. In The Matter of The Arbitration
between Hawaiian Eugenia Corporation, Petitioner, and The
Egyptian Commercial and Economic Office of Washington, D.C., as
Agents for The Ministry of Supply, Cairo, Arab Republic of
Egypt, Respondents, 82 Civ. 7381 CLB, Memorandum and Order
(S.D.N.Y. Jan. 17, 1983).
In this action both the Underwriters and Hawaiian move for
summary judgment. In the alternative, Hawaiian moves for an
order dismissing the action for failure to prosecute pursuant
to Fed.R.Civ.Pro. 41(b).
Hawaiian offers two arguments in support of its position. In
the first place, it contends that the Underwriters waived any
theoretical right of subrogation they might have had. According
to Hawaiian, the Underwriters waived their subrogated rights
either by omitting to give instructions to Hawaiian regarding
the release until after it was executed or by failing to pursue
recovery against the Agency for International Development
Hawaiian's second argument is that the release did not
destroy Underwriters' subrogated rights because, even absent a
release, Hawaiian did not have a right of recovery against the
For reasons discussed below Hawaiian's motions are denied,
while the Underwriters' motion for summary judgment is granted.
Hawaiian contends that, under New York law, the Underwriters
waived their rights by failing to respond within twenty days to
Hawaiian's request for instructions regarding the release. In
support of this proposition it cites Huth v. Nationwide Ins.
Co., 148 Misc.2d 1003, 560 N.Y.S.2d 724 (Sup.Ct. 1990), which
ruled that an insurer, who has not yet indemnified the insured,
must choose, within twenty days, whether to accept the
settlement proposed by a tortfeasor and waive its subrogated
rights or reject the settlement, pay the insured and pursue its
Huth is inapplicable, however, because in the instant case
the Underwriters had already indemnified Hawaiian. Moreover,
Huth seems to be predicated particularly upon The New York
State Insurance Law covering uninsured or underinsured
motorists, the applicable provisions of which are not
necessarily transferable to marine insurance cases.
The Underwriters' attorney contacted Hawaiian approximately
a month prior to the execution of the release requesting a copy
of the policy to evaluate the impact of the release. Because
Hawaiian provided the document requested only two weeks after
executing the release, knowing that the Underwriters believed
the document to be necessary to determine their position
concerning the release, Hawaiian cannot now plausibly claim
that the Underwriters intentionally relinquished their
Hawaiian further argues that the Underwriters waived any
right of recovery against the Charterers because they failed to
participate with Hawaiian in an effort to pursue recovery
against A.I.D. The argument is unpersuasive. In support of its
theory Hawaiian cites only an obscure Municipal Court case
holding that an insurer who fails to participate in an action
against a tortfeasor cannot later complain that it was deprived
of its rights of subrogation. Sun Ins. Office v. Hohenstein,
128 Misc. 870, 220 N.Y.S. 386 (Mun.Ct. 1927). Sun is irrelevant
because Hawaiian did not commence an action against Charterers.
On the contrary, Hawaiian released the Charterers from their
Hawaiian argues further that its release did not destroy any
subrogated rights because Hawaiian had no enforceable claim
against the Charterers. "Where the insured has no right of
recovery, the insurer has no right of subrogation."
Illinois Produce International, Inc. v. Reliance Ins. Co.,
388 F. Supp. 29 (N.D.Ill. 1975).
According to Hawaiian, the Underwriters did not prove that
the Charterers might have been liable for the freight. This
argument is undermined by Hawaiian's agreement in the Marine
Confirmation of Insurance that its contract with the Charterers
would allocate to the Charterers the risk of loss of the
freight due to non-arrival of the vessel. Since the freight
insurance contract was conditioned upon the inclusion in the
charter party of clause 32(B), which requires the Charterers to
pay freight even if the ship fails to arrive provided that
Hawaiian is not at fault, Hawaiian had reason to expect that
the Underwriters would attempt to collect freight charges from
the Charterers. The inclusion of clause 32(B), gave the
Underwriters reason to rely on the Charterers' broad commitment
to pay the freight in assessing the risk profile of this
policy. Thus, Hawaiian may not now claim that the Charterers
were never liable for the freight.
Hawaiian further maintains that there was no right of
recovery against the Charterers because the condition
precedent*fn2 that A.I.D. be satisfied with the evidence
submitted by the shipowners was not met. However, Hawaiian
cannot now persuasively raise this argument because it failed
to provide to the A.I.D. evidence that, according to the
Underwriters, may have satisfied the agency. See U.S. Nat'l
Transp. Safety Bd., Marine Accident Report on the Disappearance
of the S.S. Poet (1981). As this report may have satisfied
A.I.D.'s requirements, Hawaiian fails to demonstrate that the
subrogated rights were worthless.
Underwriters have moved for summary judgment on the grounds
that upon being indemnified Hawaiian had a duty to preserve the
Underwriters' subrogated rights against the Charterers. Under
governing New York law:
an insured will be held to have prejudiced the
subrogation rights of his insurer unless he
establishes by express provision in the release
executed to the third party or by necessary
implication arising from the circumstances of the
execution of the release that the settling parties
reserved the rights of the insurer against the
third-party tort-feasor or otherwise limited the
extent of their settlement to achieve that result.
Weinberg v. Transamerica Insurance Co., 62 N.Y.2d 379, 381-382,
477 N.Y.S.2d 99, 465 N.E.2d 819 (1984).
The Weinberg court ruled that the burden was on the insured
to prove that its release did not prejudice the subrogated
rights of the insurer, and the insurance policy in Weinberg
contained an express contractual provision requiring the
insured not to prejudice the subrogation rights of the insurer.
In contrast, in the present case the freight insurance contract
contained no comparable covenant. Nevertheless, the
Underwriters' subrogated rights may not be fairly left to the
whim of Hawaiian without eviscerating the aim of
the equitable right of subrogation which arises upon full
indemnification of the insured. Federal Ins. Co. v. Arthur
Andersen & Co., 75 N.Y.2d 366, 553 N.Y.S.2d 291, 293,
552 N.E.2d 870 (1990) (the right of subrogation accrues equitably
upon payment of the loss). The goal of equitable subrogation is
to secure the discharge of a liability by the person who in
good conscience ought to pay it. To implement this goal, the
indemnified party has an implied duty to preserve the
subrogated rights of the insurer and bears the burden of
proving that the release did not destroy the subrogated rights.
Even though Hawaiian was not bound by specific contract
language to preserve the Underwriters' subrogated rights, such
a duty, and the related burden of proof, are fairly to be
implied when, as in this case, the loss has been fully
reimbursed by the insurer, and the insured was aware of the
Hawaiian's motion to dismiss for failure to prosecute
pursuant to Fed. R.Civ.P. 41(b) is denied. There is no evidence
that the plaintiff deliberately proceeded in a dilatory fashion
or that the plaintiff failed to honor its commitments.
Lyell Theatre Corp. v. Loews Corp., 682 F.2d 37 (2nd Cir.
1982). The party's right to due process and the strong public
policy that favors adjudication on the merits militate against
dismissal for failure to prosecute. See Lukensow v. Harley Cars
of New York, 124 F.R.D. 64 (S.D.N.Y. 1989); see also Dove v.
Codesco, 569 F.2d 807 (4th Cir. 1978).
The Underwriters' motion for summary judgment is granted;
Hawaiian's motions for summary judgment and for dismissal based
on failure to prosecute are denied.
Submit judgment on notice.