governing law will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248. A genuine issue for trial does not exist "unless the party opposing the motion can adduce evidence which, when considered in light of that party's burden of proof at trial, could be the basis for a jury finding in that party's favor." J.E. Mamiye & Sons, Inc. v. Fidelity Bank, 813 F.2d 610, 618 (3d Cir. 1987)(Becker, J., concurring).
B. Conventional Subrogation
City included a subrogation clause in Showboat's business auto policy which reads: "If we [City] make any payment, we are entitled to recover what we paid from other parties." The policy also provides that City is obligated to pay only those "sums the insured legally must pay as damages because of bodily injury . . . to which this insurance applies." (emphasis added). By its terms, therefore, the clause is only applicable if City made the settlement payment pursuant to the written business auto insurance policy. If the clause applies, City would be entitled to conventional subrogation and voluntariness would be no defense. See, e.g., Commercial Standard Ins. Co. v. American Employers Ins. Co., 209 F.2d 60, 65 (6th Cir. 1954)("The rule that payments by volunteers will not support subrogation does not apply to conventional subrogation."); Agricultural Ins. Co. v. Smith, 262 Cal. App. 2d 772, 69 Cal. Rptr. 50, 54-55 (Cal. Ct. App. 1968)("Appellant was not obliged to prove the contents of its insurance policy in order to establish its prima facie subrogation case. A subrogation action by an insurer is not a suit on the insurance contract, but an independent action in which equitable principles are applied to shift a loss for which the insurer has compensated its insured to one who caused the loss or who is legally responsible for the loss caused by another and whose equitable position is inferior to the insurer's.").
There is no dispute that when City made the decision to accept coverage and assign defense counsel, Hamilton had concluded that coverage was appropriate under the business automobile policy, which contains a subrogation clause. What remains for the court to consider is the impact of the subsequent, and short-lived, attempt by City to question coverage and reserve its rights.
An insurance carrier will be estopped from denying coverage or invoking exclusions from coverage where by its affirmative action it has controlled the defense in a lawsuit. Griggs v. Bertram, 88 N.J. 347, 355-56, 443 A.2d 163, 167 (1982). If an insurer undertakes to defend a lawsuit without a valid reservation of rights and the insured reasonable relies on that decision, the company is estopped from later denying coverage based on facts known to it at the time the defense was assumed. See id. The rationale behind estoppel in the insurance context is that the insured is justified in relying upon the carrier once the carrier assumes control of the defense. See id.5
City undertook the defense of Showboat shortly after Jorge filed his complaint. The reservation of rights was not issued until more than two years after the carrier-hired counsel for Jorge and Showboat made his first appearance in this court. Moreover, upon objection from Showboat, the reservation of rights was rescinded three months after it was issued.
City's decision to abandon its effort to avoid coverage reflected a recognition that it was probably estopped from repudiating the decision which Hamilton had made more than two years earlier -- the decision to afford coverage under the business auto policy which contains the subrogation clause.
Accordingly, conventional subrogation is appropriate and City can properly step into Showboat's shoes and attempt to recover from Travelers and USI.
C. Equitable Subrogation
Even if conventional subrogation were inappropriate, equitable subrogation would operate to enable City to proceed against Travelers and USI. This court is satisfied that City's settlement of the Jorge judgment on Showboat's behalf did not make City a volunteer. Therefore, City would not be precluded from recovery under a equitable subrogation theory.
In general, subrogation is an equitable rather than a contractual doctrine applied in the interests of justice when one who is not a volunteer pays an obligation which should be imposed on another. Pearlman v. Reliance Ins. Co., 371 U.S. 132, 137 n.12, 9 L. Ed. 2d 190, 83 S. Ct. 232 (1962)(citing Memphis & L.R.R. Co. v. Dow, 120 U.S. 287, 301-02, 30 L. Ed. 595, 7 S. Ct. 482 (1887)). Generally, subrogation applies where a party, "not acting voluntarily, but under some compulsion" pays a debt or discharges an obligation for which another is primarily liable and which "in equity and good conscience ought to be discharged by the latter." See, e.g., First Nat'l City Bank v. United States, 212 Ct. Cl. 357, 548 F.2d 928, 936 (Ct. Cl. 1977) (citing Compania Anonima Venezolana de Navegacion v. A.J. Perez Export Co., 303 F.2d 692, 697 (5th Cir. 1962), cert. denied, 371 U.S. 942, 9 L. Ed. 2d 276, 83 S. Ct. 321 (1962)); see also Restatement (First) of Restitution § 162 (1936) ("When a person discharges an obligation owed by another. . .and does so officiously, he is not entitled to reimbursement from the other."); Schmid v. First Camden Nat'l Bank & Trust Co., 130 N.J. Eq. 254, 22 A.2d 246, 253-54 (N.J. Ch. 1941)("Anyone, being under no legal obligation or liability to pay and having no interest menaced by the continuing existence of the debt, is a stranger, and if he pays the debt is a mere volunteer.").
A payor is not a volunteer if it is acting under compulsion to protect its own interests. Prairie State Bank v. United States, 164 U.S. 227, 231, 41 L. Ed. 412, 17 S. Ct. 142 (1896); American Commercial Lines, Inc., Valley Line Co., 529 F.2d 921, 924 (8th Cir. 1976). One is not to be considered a volunteer if one has an interest which is jeopardized by the continued existence of a debt of another and pays the debt to protect that interest. See Camden County Welfare Bd. v. Federal Deposit Ins. Corp., 1 N.J. Super. 532, 552, 62 A.2d 416, 426 (N.J. Super. 1948). Several types of interests have been identified as satisfactory "compulsion" so as to free the subrogation-seeking party from classification as a volunteer. See New York Stock Exch., Inc. v. Sloan, Fed. Sec. L. Rep. P 97,618, CIV.A. No. 71-2912, 1980 WL 1431, *1 (S.D.N.Y. Aug. 15, 1980)("Among the protected interests which have been held to give rise to a right of subrogation are: an interest in avoiding litigation and settling a fairly disputed obligation. . . the interest of a mortgagee in the mortgaged property. . .the interest of a creditor in maintaining the solvency of a debtor. . . the interest of the winning party to an arbitration award in obtaining the report of a referee . . .[the interest in maintaining] good business relations.")(citations omitted)
; American Commercial, 529 F.2d at 924 (finding that payor's desire to avoid potential liability or at least a complex lawsuit was sufficient to avoid volunteer status); cf. Ford v. United States, 115 Ct. Cl. 793, 88 F. Supp. 263, 264 (Ct. Cl. 1950) (finding that United States was not a mere "volunteer" in paying debt of Englishman and would be subrogated to the rights of the Englishman where payment was made for "the sake of promoting friendly relations with friendly countries").
Several circuits have developed tests for determining whether it is permissible to subrogate a company that made a payment when the obligation to do so was unclear. The Eighth Circuit requires a showing of the "substantial likelihood" of liability at the time the debt was paid. See American Commercial, 529 F.2d at 924. The Sixth Circuit asks whether there is either "any palpable interest" that "will be protected by the extinguishment of a debt" or whether the payment was made under "a moral obligation." See Commercial Standard, 209 F.2d at 64. One lower court has expanded the set of rights that will give to subrogation by suggesting that any "reasonable economic interest" will qualify. See New York Stock Exch., 1980 WL 1431, at *1.
In the insurance context, the Tenth Circuit has held that the liability of an insurer need not be "ironclad" in order for it to settle a claim without a subsequent finding that the payment to the insured was voluntary. See Weir v. Federal Ins. Co., 811 F.2d 1387, 1395 (10th Cir. 1987). The Tenth Circuit went on to say that "[a] payment is not voluntary if it is made with a reasonable or good faith belief in an obligation or personal interest in making that payment." See id. (emphasis added). Any doubt as to the applicability of this principle of no subrogation for voluntary payment by the insurer is construed in favor of the insurer and the nonexistence of a volunteer status. See Allstate Ins. Co. v. Quinn Constr. Co., 713 F. Supp. 35, 38 (D. Mass 1989)(quoting 16 G. Couch, R. Anderson & M. Rhodes, Cyclopedia of Insurance Law § 61:57, at 140 (rev. 2d ed. 1983)), vacated, 784 F. Supp. 927 (D. Mass. 1990).
City had a palpable economic interest in accepting coverage, defending the case, and settling the judgment against Showboat. Not only did City protect its business relations with Showboat (and possibly other customers), but it was also able to control the defense of the litigation and avoid entanglement in insurance coverage litigation. These interests alone are more than sufficient to support City's non-volunteer status and to allow equitable subrogation. It is also evident that for more than two years City believed there was coverage for Showboat. City's belated questioning of this decision and its realization that such questioning came too late to permit revocation of the original coverage decision hardly makes City's actions non-voluntary.
D. Public Policy
There are sound policy reasons for interpreting "volunteer" status narrowly when the payor is an insurer like City. First, public policy favors the prompt payment of claims made by an insured against an insurer and disfavors assertion by an insurer of technical defenses to avoid liability on the policy. See Smith, 69 Cal. Rptr. at 55. Were an insurer's right to subrogation imperiled unless it asserted all potential defenses against its insured before it paid a claim, the obvious result would be that insurers would resist prompt payment of claims. Weir, 811 F.2d at 1395 n.6; Allstate, 713 F. Supp. at 38; Smith, 69 Cal. Rptr. at 55. This result cannot be supported upon the principles of either equity or common sense. Id.
If Showboat, rather than City, had paid the judgment, Showboat would without a doubt have a right to recover against Travelers and USI. See supra n.3. The result should be no different merely because Showboat's insurance company signed on the dotted line. See New York Stock Exch., 1980 WL 1431, at *2 ("Every equitable consideration in the context of the case suggests that plaintiffs having reimbursed customers . . . who lost their funds or securities through the machinations of the defendant . . . should have the right to pursue the remedies which would have been available to the customers if they had not been reimbursed."). Travelers and USI would be held liable if Showboat had itself paid the judgment. There is simply no public policy reason why the obligation of a tortfeasor's carrier should depend on the action or inaction of another party's insurer.
Defendants' motions for summary judgment must fail. City has subrogation rights against Travelers and USI under both conventional and equitable theories of subrogation. City paid the Jorge judgment pursuant to its business auto policy, and later concluded that it was estopped from repudiating this decision. Thus, conventional subrogation is in order. Even if conventional subrogation were inappropriate, equitable subrogation would apply because City should not be classified as a volunteer. City's interests in preserving business relationships, in controlling the defense of the action, and in avoiding entanglement in complex insurance coverage litigation more than suffice to prevent City from being labeled a volunteer.
Public policy also dictates that City should be entitled to subrogation. Denying subrogation would undermine the goal of encouraging insurance companies to make prompt coverage determinations. Moreover, Travelers and USI, as the alleged insurers of Jiffy and DeCecco, the true tortfeasors in this underlying litigation, should not escape the liability that would have certainly befallen them had Showboat simply paid the judgment on its own. Accordingly, defendants' motions for summary judgment are denied. An appropriate order will issue.
Dated: November 8, 1996
JOSEPH E. IRENAS, U.S.D.J.