November 7, 2013
Nusyn Erlich, a/ka/ NATHAN ERLICH and CHAYA ERLICH, individually and on behalf of all others similarly situated, Plaintiffs,
American International Group, Inc., NEW HAMPSHIRE INSURANCE CO., and EVEREST REINSURANCE COMPANY, Defendants.
Napoli Bern Ripka Shkolnik, LLP & Ambrecht & Maloney, PLLC for plaintiffs.
Robinson & Cole LLP, for AIG and NHIC.
Budd Larner, P.C., for Everest.
Shirley Werner Kornreich, J.
Motion Sequence Numbers 001 and 004 are consolidated for disposition.
Defendants American International Group, Inc. (AIG), New Hampshire Insurance Co. (NHIC), and Everest Reinsurance Company (Everest) move to dismiss the Amended Complaint (the AC) pursuant to CPLR 3211. Defendants' motions are granted for the reasons that follow.
Factual Background & Procedural History
This putative class action seeks to challenge the ability of insurance companies to retain settlement proceeds in subrogation actions against deep pocketed third-party tortfeasors, when the insured has recovered the full value of the policy, but not its uninsured losses. As discussed below, this issue has already been decided the by the Court of Appeals in Winkelmann v Excelsior Ins. Co., 85 N.Y.2d 577 (1995). Moreover, in this particular case, and unlike the facts in Winkelmann, plaintiffs' failure to timely commence their own action against the third-party tortfeasor and their failure to substantiate the existence of their purported uninsured losses further justify dismissal.
As this is a motion to dismiss, the facts recited are taken from the AC. However, as the court is dismissing this case with prejudice, and not granting leave to amend for a second time, the court considers, and rejects, plaintiffs' legal theories asserted for the first time in their briefs (not in the AC), since, in any event, such arguments fail as a matter of law. 
Plaintiffs Nusyn Erlich and Chaya Erlich are a married couple who live in a house in Brooklyn. AC ¶ 4. In April 2008, they purchased a water cooler, made by non-party Greenway Home Products, Inc. (Greenway), and installed it in their basement. ¶¶ 14-15. Days later, on April 10, 2008, the water cooler malfunctioned, causing a fire that substantially damaged the Erlichs' home and the property contained therein. Id. The damage was covered by a "multi-peril" homeowners' insurance policy issued by NHIC (the Policy). ¶ 4. NHIC is a subsidiary of AIG, a holding company that has no contractual relationship with plaintiffs and was not involved in the related subrogation proceeding. ¶ 5. NHIC entered into a reinsurance agreement with Everest, which covered the Policy,  and, in conjunction, also entered into an assignment agreement, under which NHIC assigned its subrogation rights to Everest.  ¶ 12.
The Policy's Replacement Cost Coverage Endorsement provides that plaintiffs are only entitled to such coverage if and when "the damaged or destroyed property is actually repaired or replaced by the INSURED with due diligence and dispatch" (capitalization in original). This endorsement further provides that, as is the case here, where the claim is for the "actual cash value" of the damaged property, and not for repair costs, such claim is subject to a depreciation deduction. Additionally, to make a claim under this endorsement, plaintiffs must give written notice to NHIC within 180 days after the loss.
Plaintiffs retained the services of Ben Gruber Adjusters, Inc. (Gruber), a licensed public insurance adjustor, which helped them file claims and correspond with NHIC and its agent, RJS Adjustment Company (RJS). ¶ 15. Four days after the fire, on April 14, 2008, plaintiffs sent a letter to RJS, stating that they "herewith make [a] claim for any monies withheld under the Replacement cost provision in the [Policy]." On May 7, 2008, plaintiffs submitted a $25, 000 claim to NHIC. On December 17, 2008, plaintiffs submitted a proof of loss to NHIC. ¶ 16. Plaintiffs also submitted further claims for the various damages covered by the Policy (i.e. real property damage, personal property damage, and increased living expenses). ¶¶ 17-18. In all, plaintiffs claimed $124, 123.81 in damages. NHIC promptly paid a total of $111, 956.61 (including payments made directly to plaintiffs and payments made directly to outside vendors, such as those who performed repairs for plaintiffs). Of the full amount claimed by plaintiffs, NHIC "held back" $12, 167.20 to cover plaintiffs' deductible ($1, 000) and depreciation ($11, 167.20). Upon receipt of the money, plaintiffs did not object to the depreciation deduction. Also, before receiving their money, plaintiffs signed Subrogation Receipts, as required by law, which allow NHIC (pursuant to the Policy's subrogation clause) to assert a subrogation claim against the third-party tortfeasor that caused plaintiffs' loss. On December 22, 2009, Gruber wrote to NHIC, asking for information regarding the identity of "the party responsible for [plaintiffs'] loss." NHIC did not respond to this letter.
On March 2, 2010, Everest commenced a subrogation action against Greenway in the United States District Court for the Eastern District of New York (the Subrogation Action). In that action, Everest alleged that Greenway, the manufacturer of plaintiffs' water cooler, was liable for plaintiffs' damages, and thus was obligated to reimburse Everest for the claim payments it made to plaintiffs (as NHIC's reinsurer). Everest settled the Subrogation Action with Greenway in November 2010. However, the settlement payment Everest received from Greenway was less than the amount Everest paid to plaintiffs. In April 2011, Everest sent plaintiffs a check in the amount of $620, "representing [plaintiffs'] pro rata share of the net subrogation recovery."  Thus, the total amount "held back" is $11, 547.20 ($380 in unreimbursed deductible plus $11, 167.20 of depreciation).
Plaintiffs commenced this action on August 1, 2012. Their operative pleading, the AC, was filed on October 1, 2012. The AC lists six causes of action: (1) a declaratory judgment as to defendants' subrogation business practices; (2) injunctive relief as to such practices; (3) violation of the doctrine of equitable subrogation; (4) violation of GBL § 349; (5) unjust enrichment and constructive trust; and (6) an accounting.
Plaintiffs contend that they are entitled to two categories of damages. First, plaintiffs seek the "held back" amount of $11, 547.20, contending that they are entitled to a full reimbursement of their deductible and that the Policy does not entitle NHIC to hold back depreciation. Second, plaintiffs aver that Everest must disgorge its settlement with Greenway since an insurance company is not entitled to keep subrogation proceeds until its insured has been fully compensated for all of its uninsured losses. Plaintiffs are wrong.
On a motion to dismiss, the court must accept as true the facts alleged in the complaint as well as all reasonable inferences that may be gleaned from those facts. Amaro v Gani Realty Corp., 60 A.D.3d 491 (1st Dept 2009); Skillgames, L.L.C. v Brody, 1 A.D.3d 247, 250 (1st Dept 2003), citing McGill v Parker, 179 A.D.2d 98, 105 (1992); see also Cron v Harago Fabrics, 91 N.Y.2d 362, 366 (1998). The court is not permitted to assess the merits of the complaint or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action. Skillgames, id., citing Guggenheimer v Ginzburg, 43 N.Y.2d 268, 275 (1977). Deficiencies in the complaint may be remedied by affidavits submitted by the plaintiff. Amaro, 60 N.Y.3d at 491. "However, factual allegations that do not state a viable cause of action, that consist of bare legal conclusions, or that are inherently incredible or clearly contradicted by documentary evidence are not entitled to such consideration." Skillgames, 1 A.D.3d at 250, citing Caniglia v Chicago Tribune-New York News Syndicate, 204 A.D.2d 233 (1st Dept 1994). Further, where the defendant seeks to dismiss the complaint based upon documentary evidence, the motion will succeed if "the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law." Goshen v Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326 (2002) (citation omitted); Leon v Martinez, 84 N.Y.2d 83, 88 (1994).
At the outset, the court notes that it will not refute, point by point, the myriad inaccurate statements of law in plaintiffs' brief, most of which are supported by laws of other jurisdictions which differ from New York law.  In short, plaintiffs baldly proffer a version of the "made whole" doctrine that is not recognized under New York law and which is squarely at odds with precedent repeatedly affirmed by the Court of Appeals. 
The Court of Appeals' decision in Winkelmann is squarely on point with this case. In Winkelmann (which also involved a policy covering fire damage), the Court held that "an insurer who has paid its insured the full amount due under a [policy], but less than the insured's loss, may proceed against the third-party tortfeasor responsible for the loss before the insured has been made whole by the tortfeasor." Winkelmann, 85 N.Y.2d at 579. That is, an insurance company need not wait for its insured to sue the third-party tortfeasor before commencing its own subrogation action. Indeed, in Winkelmann, the Court reaffirmed the long-recognized prejudice that insurers' would suffer if their right to assert subrogation claims could be delayed by coverage disputes with their insured. See id. at 584, citing Krause v Am. Guar. & Liab. Ins. Co., 22 N.Y.2d 147, 155 (1968); see also RLI Ins. Co. v Turner/Santa Fe, 58 A.D.3d 413, 414 (1st Dept 2009). Consequently, Everest was well within its rights to commence the Subrogation Action. 
That being said, plaintiffs contend that they are entitled to some or all of the proceeds from the settlement of the Subrogation Action, even though they have received their maximum recovery under the policy. And, the proceeds received by Everest from Greenway were to reimburse Everest for its payments to plaintiffs. Nonetheless, plaintiffs argue they are entitled to disgorge Everest's subrogation recovery because plaintiffs' right to recover for their uninsured losses has priority over their insurer's right to recover their claim payments from the tortfeasor. In some instances, as discussed below, plaintiffs would be correct. But, under the facts in this case, plaintiffs are wrong.
"It is well established that when an insurer pays for losses sustained by its insured that were occasioned by a wrongdoer, the insurer is entitled to seek recovery of the monies it expended under the doctrine of equitable subrogation." Fasso v Doerr, 12 N.Y.3d 80, 86 (2009). However, an insurer's subrogation rights are limited when "the sources of recovery ultimately available are inadequate to fully compensate the insured for its losses, then the insurer — who has been paid by the insured to assume the risk of loss — has no right to share in the proceeds of the insured's recovery from the tortfeasor." Id. at 87, quoting Winkelmann, 85 N.Y.2d at 581. For instance, if a policyholder suffers $200 of losses, only $100 of which are insured, and the carrier pays out the policy limit of $100 and then recovers $100 from the tortfeasor, that subrogation recovery can be disgorged by the policyholder if the tortfeasor lacks the funds to compensate the policyholder for its $100 of uninsured losses. However, where the tortfeasor is not judgment proof (e.g. where it is a multinational company), the policyholder must commence its own action against the tortfeasor to recover its uninsured losses. It cannot piggyback on its insurer's lawsuit, especially where, as here, to do so would greatly prejudice the insurer because, by settling with the tortfeasor, the insurer has already released its claims. The policyholder cannot sit on its rights, allowing its claims against the tortfeasor to become time barred, and then sue its insurer for a portion of the subrogation settlement. That is fundamentally unfair, and contravenes the subrogation framework and public policy repeatedly articulated by the Court of Appeals. Yet, that is exactly what plaintiffs seek to do in this action.
Nor do plaintiffs also have a right to further recovery under the Policy. Plaintiffs have received the full amount of claimed damages to which they were entitled under the Policy. They cannot now, more than five years after the fire, claim other losses or repair costs, which they never before claimed, and for which they have no proof. Procedurally, the time to submit that proof was in plaintiffs' opposition papers.  More critically, under the Policy, the 180 day notice period has long passed. If, after receiving their first round of payments, plaintiffs incurred more repair costs, they were obligated to notify NHIC and provide the requisite substantiation. They did not. Thus, plaintiffs are precluded from seeking further recovery under the Policy.
Plaintiffs' claim to the "held back" amount is wholly without merit. The Policy expressly permits the depreciation deduction. In addition, neither the policy nor any New York legal authority supports plaintiffs' contention that they are entitled to a refund of their deductible.  As for plaintiffs' claims against AIG, such claims would warrant dismissal even if plaintiffs' claims survived against NHIC and Everest, since AIG, a holding company, has no contractual relationship to plaintiffs, did not issue any relevant insurance or reinsurance, and was not a party to the Subrogation Action. AIG simply has nothing to do with this case. Accordingly, it is
ORDERED that the motions by defendants American International Group, Inc., New Hampshire Insurance Co., and Everest Reinsurance Company to dismiss the Amended Complaint is granted, and the Clerk is directed to dismiss to enter judgement dismissing the Amended Complaint with prejudice.