Federal Court In North Carolina Holds Insurer’s Subrogation Rights Survive Subsequent Settlement and Release in Underlying Action

A federal court in North Carolina, applying North Carolina law, held that an insurer, subrogated to the rights of its insured based on payment made under a property policy, could assert the insured’s claim for damage against a third party even where a subsequent settlement and release agreement specifically provided that all liens, including those arising from the insurer’s subrogation rights, would be paid from settlement funds. N.C. Farm Bureau Mut. Ins. Co. v. Strickland’s Auto & Truck Repairs, No. 1:19CV513, 2021 U.S. Dist. LEXIS 30135, 2021 WL 633646 (M.D.N.C. Feb. 18, 2021).

The insureds made claims for negligence and breach of warranty against an auto repair company. The insureds alleged that a tractor replacement engine purchased from the company had caused an explosion and subsequent fire that consumed the insured’s garage, which housed race cars and specialized machines, tools and equipment. Before the suit, the insured’s property insurer had paid policy limits for the property damage. The auto repair company agreed to settle the liability action in exchange for a release providing that settlement funds be applied to any liens, including specifically any arising by operation of law from the property insurer’s potential subrogation claims. Nevertheless, the property insurer sued the auto repair company asserting its subrogation rights.

On cross-motions for summary judgment, the court held that, under North Carolina law, the auto repair company could not assert the release of subrogated claims when payment under the policy predated the release and evidence showed that the auto repair company had actual knowledge of the insurer’s subrogation rights before execution. The court rejected the argument that the release should bar the insurer’s claims because the insurer could have no greater rights than the insured under subrogation, reasoning that the extent of the insurer’s subrogation rights were determined and perfected at the time of payment, and therefore were not defined by the release. Furthermore, it held that as the fact that insurer participated in discovery and negotiations and was aware of the terms of the settlement and release when proposed made no difference because the timing of the release subsequent to payment and the auto repair company’s knowledge of the insurance payment were determinative.