Pennsylvania finds exception to anti-subrogation rule – Insurance

United States: Pennsylvania finds exception to anti-subrogation rule

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The Pennsylvania Supreme Court recently adopted the “non-coverage exception” in Arlet v. workers’ compensation appeal board. 2022 WL 529350 (Pa. 2022). As most subrogation professionals know, the anti-subrogation rule prohibits insurers from subrogating their own insureds. The Court in Arlet held that the rule does not apply where the insurer makes payments on an uncovered risk.

Robert Arlet, a shipbuilder employed by the Flagship Niagara League, slipped on an icy sidewalk at work and injured himself. The flagship’s insurer, Acadia Insurance Company, paid Mr. Arlet compensation for his injuries under a commercial hull policy. The policy provided compensation and protection coverage for “crew members”.

After receiving payments from Acadie, Mr. Arlet filed for workers’ compensation. Flagship argued that the Jones Act, a federal maritime law, prevented recovery under the Workers Compensation Act. The Jones Act gave “sailors” the right to claim damages from their employer. If so, the Jones Act would limit Mr. Arlet’s recovery to claims against Flagship, claims that Acadia has already settled under the commercial hull policy.

The Workers’ Compensation Appeals Board (WCAB) awarded workers’ compensation to Mr. Arlet, finding that as a “shore employee” he did not qualify as a “seafarer” under of the Jones Act. However, the WCAB determined that Mr. Arlet qualified as a “crew member” under the commercial hull policy. He ruled that Acadia properly provided coverage and that the anti-subrogation doctrine precluded subrogation against Flagship, the allegedly at-fault party.

The Pennsylvania Commonwealth Court found that the terms “sailor” and “crew member” were interchangeable and that Mr. Arlet was neither. The ruling meant that Mr Arlet was entitled to workers’ compensation, but should not have received trades policy benefits. Nevertheless, the Court held that the anti-subrogation prevented Acadia from subrogating Flagship.

On appeal, the Pennsylvania Supreme Court only considered whether Acadia could subrogate Flagship. The Court described the public policy underlying the anti-subrogation rule, concluding that it serves two equitable purposes:

  1. Risk distribution – it prevents the insurer from passing the loss on to its insured, an act that would avoid the cover that the insured had purchased; and

  2. Conflict of interest – it protects against conflicts of interest that could affect the insurer’s incentive to provide a vigorous defense to its insured.

However, the Court concluded that the so-called “exception of non-coverage”, i.e. when the insurer seeks subrogation for a payment made on a risk against which it has not insured itself, was consistent with the “purposes and public policy supporting the rule”. The Court held that since the commercial hull policy did not provide coverage, preventing Acadia from subrogating Flagship did not serve an equitable purpose.

While the scope of the non-coverage exception is admittedly narrow, Arlet shows how subrogation is rooted in equity. Even its well-established doctrines, like the anti-subrogation rule, are governed by fair principles.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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