A fire seriously damaged a brass foundry that employed seven people. The named insured was an incorporated business that was family owned and operated for several generations. After the insurer paid in excess of $200,000 for the fire loss claim, it commenced subrogation action against the corporation president, alleging that the fire was caused by his negligent acts. The president, a member of the family, filed a summary judgment to dismiss the complaint on the grounds that subrogation against him was barred by law, as he was an insured under the policy because he was an officer of the corporation. He appealed from a denial of his motion.

The appeal court cited Federal Insurance Company v. Tamiami Trail Tours, 117 F2d 794, 796 as follows: "An overwhelming percentage of all insurable losses sustained because of fire can be directly traced to some act or acts of negligence. Were it not for the errant human element, the hazards insured against would be greatly diminished. It is in full appreciation of these conditions that the property owner seeks insurance, and it is after painstaking analysis of them that the insurer fixes his premiums and issues the policies. It is in recognition of this practice that the law requires the insurer to assume the risk of the negligence of the insured and permits recovery by an insured whose negligence proximately caused the loss."

The appeal court concluded that "the equities clearly favor the defendant" in this case. By policy provisions, he was found to be: An additional insured for fire loss to his personal belongings at the premises; a specifically named insured under automobile liability coverage; an insured under the general liability coverage "had he somehow caused a fire at other premises while acting within the scope of his duties with the corporation." Accordingly, he could not be considered a third party to whom the insurer did not owe a duty.

Attention was called to the following remarks of the appeal court in Pennsylvania General Insurance Company v. Austin Powder Company (68 NY2d 465): "A third party, by definition, is one to whom the insurer owes no duty under the insurance policy through which its loss was incurred." It stressed that insurer subrogation is "traditionally applied" to third parties whose wrongful acts caused a loss requiring insured indemnification by the insurer.

The court said that, if the president and principal shareholder of the closely held corporation had operated the foundry as a single proprietorship or partnership, he undoubtedly would have been a named insured and there would have been no subrogation action. As it was, he fully cooperated with the insurer by signing a subrogation receipt, when the fire loss claim was paid, subrogating the insurer to all of the named insured's rights of recovery "against any person or corporation."

The appeal court concluded that "the compromise of the integrity of the insurer's relationship with insured and the potential conflict of interest inherent in this dilemma forced upon defendant by plaintiff" (executing subrogation receipt upon payment of claim) required denial of the insurer's right of subrogation. The trial court was reversed and summary judgment was awarded to the corporation president.

(FIREMEN'S INSURANCE COMPANY OF NEWARK, NEW JERSEY, Respondent v. WHEELER, Appellant. New York Supreme Court, Appellate Division, Third Judicial Department. No. 61800. February 21, 1991. CCH 1991 Fire and Casualty Cases, Paragraph 3033.)