In a case rich with issues and holdings, Judge Rakoff of the U.S. District Court for the Southern District of New York was faced with an excess carrier which raised "the equitable 'unclean hands' doctrine" as a bar to a primary carrier's principal defense in a subrogation case. The excess carrier claimed subrogation rights against the primary carrier allegedly by effectively asserting rights against its own insured, which cannot be done in subrogation (known as "the antisubrogation rule").
So, the excess carrier pointed out that subrogation is an equitable remedy and if the primary carrier had "unclean hands," then the primary carrier should not be allowed to raise the antisubrogation rule in equity.
Judge Rakoff disagreed in a subrogation case arising under New York law. He wrote that the essential proofs in that case defeated the excess carrier's 'unclean hands' contention on the record:
...American Guarantee argues that ACE is barred from asserting the antisubrogation rule because ACE acted inequitably in the state-court litigation. (Citation omitted.) Here, American Guarantee argues that ACE, which controlled the defense of Wager Contracting in the state-court lawsuit, authorized a legal strategy focused on minimizing ACE's losses and shifting liability to American Guarantee rather than on defending Wager Contracting against all claims.
This is, in effect, an invocation of the equitable “unclean hands” doctrine. Under New York law, American Guarantee, as the proponent of the unclean hands defense, must demonstrate that “(1) [ACE] is guilty of immoral, unconscionable conduct; (2) the conduct was relied upon by [American Guarantee]; and (3) [American Guarantee] was injured thereby.” (Citations omitted.)
American Guarantee has failed to establish (or even raise a genuine dispute of material fact) that the unclean hands doctrine bars ACE from asserting the antisubrogation rule. The undisputed evidence shows that the counsel retained by ACE to defend Wager Contracting conscientiously acted in Wager Contracting's best interest in the underlying litigation. At bottom, then, American Guarantee's argument is that it was inequitable not to prioritize American Guarantee's interests in the case. But the mere fact that Wager Contracting's interests did not align with American Guarantee's does not even begin to suggest the type of bad-faith misconduct needed to make out a defense of unclean hands.
Ace Am. Ins. Co. v. American Guar. Liab. Ins. Co., ___ F. Supp. 3d ___, No. 16 Civ 8773 (JSR), 2017 WL 2840286, at *9 (S.D.N.Y. July 2, 2017) (emphasis added by boldface and italics; underlining by Judge Rakoff in original).
End result: There is at least a slim possibility, in theory, that the equitable defense of "unclean hands" is available in an equitable subrogation action between an excess carrier and a primary carrier. The reality will mostly trump the theory in this instance, as this case shows.
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