American Family Mutual Insurance Company v. Northern Heritage Builders, L.L.C.

404 Ill.App.3d 584, 937 N.E.2d 323, 344 Ill. Dec. 617 (1st dist. 1st div. 2010)

Words & Phrases

Subrogation: In General

Trial Judge

Dennis J. Burke

Appellate Judge

Justice Hoffman, Hall and Lampkin concur.

Holding

Without executed assignment of rights, insurer could not pursue subrogation action.

Fact Summary

Michael McGrath hired Patrick Plunkett to design his home, and he hired Northern Heritage Builders to build it. He purchased homeowner’s insurance from American Family. McGrath’s home sustained damage when moisture and water seeped in from outside, which McGrath attributed to faulty construction. American Family denied the claim, and McGrath filed a federal action in the Northern District of Illinois. An order granting summary judgment to McGrath on the issue of coverage for water damage under the policy was granted. The case was tried, and the jury found for McGrath. After the verdict, McGrath and American Family settled the action. In the settlement agreement, McGrath did not assign his rights of recovery to American Family against a party responsible for damage to his home. While the federal action against American Family was pending, McGrath also filed suit in Cook County against Northern Heritage and Rapciak Construction. After the settlement of the federal action, American Family filed suit in Cook County as a subrogee of McGrath, asserting his same allegations. American Family filed a third amended complaint that asserted a claim of equitable subrogation against Northern Heritage and Plunkett. Plunkett filed a motion that Northern Heritage joined, arguing the third amended complaint was insufficient at law.

The circuit court granted the motion to dismiss American Family’s third amended complaint, and entered judgment in favor of Plunkett and Northern Heritage. American Family then filed a motion to reconsider the dismissal order. It was denied. American Family appealed the circuit court’s dismissal of the third amended complaint.

The Illinois appellate court upheld the dismissal of the complaint because McGrath had not assigned his rights to American Family as stipulated in the policy for the insurer to step into the shoes of the insured. On appeal, American Family claimed that when McGrath’s claim under the policy was paid, the insurer was equitably subrogated to his rights of action against the wrongdoers who caused the loss up to the amount of the settlement payment. However, the court found that American Family’s equitable right of subrogation originated in the insurance policy and not in the common law. The court cited to Couch’s and Benge for the proposition that common law or equitable subrogation cannot replace the express contractual terms of the right of subrogation. 16 Couch on Insurance Law §222:23 at 222-51 (3rd ed. 2000); Benge v. State Farm Mutual Auto. Ins. Co., 297 Ill. App. 3d 1062, 1071 (Ill. 1998). The court held that American Family’s rights derived from the contract, and in the contract American Family required McGrath to execute an assignment of rights. However, McGrath denied having assigned his rights to American Family. Without McGrath’s assignment of rights, American family could not stand in his shoes under the Policy.

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