Wade Clark Mulcahy LLP

In New Jersey Manufacturers Insurance Company v. Lallygone LLC, the New Jersey Appellate Court affirmed a trial court’s decision to dismiss an insurer’s subrogation claim where similar claims raised by its insured were rejected by a court. In that case, New Jersey Manufacturer’s Insurance Company (“NJM”) issued a homeowner’s policy to its insured who hired a construction company, Lallygone, to perform certain garage renovations. The insured paid a 50% deposit through PayPal, and Lallygone hired subcontractors and purchased materials to begin the project. However, nine days into the project, the garage collapsed. NJM paid approximately $190,000 for the resulting claim and the insured also obtained a refund for the deposit from PayPal.

Lallygone filed suit against the insured in the Special Civil Part, claiming breach of contract and unjust enrichment since the insured had rescinded the down payment. The insured filed a counterclaim against Lallygone for breach of contract and Consumer Fraud. The insured admitted that the NJM claim had been completed, and there were no other pending matters or parties. Lallygone was awarded $9,151.76 at trial because the insured failed to compensate Lallygone for the cost of the materials and workmanship prior to the collapse. The trial court dismissed the counterclaim and found, among other things, that there was no evidence in the record as to what caused the dilapidated garage to collapse and noted that “the mere fact that that was not successful does not mean that [Lallygone] did anything wrong."

NJM subsequently filed a subrogation action against Lallygone, which moved to dismiss on the basis of res judicata and the entire controversy doctrine. The trial court granted the motion and found that the insured had prosecuted and lost on claims which stemmed from the same factual nexus of events related to the garage collapse.

The Appellate Division affirmed, finding that the subrogation claim was precluded by res judicata and the entire controversy doctrine. In so holding, the Court observed that as a subrogee, NJM can only recover as much as the Insured can recover, and that, because it "stands in the shoes" of the insured, NJM is bound by the prior actions of the insured. Because the insured brought and lost on the claims which "stem from the same factual nexus and all relat[e] to the collapse of the garage," NJM could not proceed with its subrogation claim. The Court noted that it was not clear why the insured raised his claims when he had already made a claim to NJM, but the fact remained that he tried the claims to a decision in a court of competent jurisdiction and therefore NJM's subrogation interest was also tried to a final decision on the merits. The rejection of the insured’s claims by the Special Civil Part “closed the door” on NJM from being able to recover on the same claims in the second proceeding.

This case serves as a warning for insurers to monitor the actions of their insureds after a loss and to consider participating or intervening in any legal proceedings involving the insured which may impact a company’s subrogation rights. The failure to do could, as in this case, result in the loss of those rights.