Krause v. American Guarantee & Liability Insurance Co., 22 N.Y.2d 147 (1968)

An insurer may implead a third party who is or may be liable to the insured, even before the insurer has made any payment to the insured, to avoid multiplicity of actions and ensure judicial efficiency, provided no contractual provision bars such action.

Summary

These cases, arising from the “salad oil swindle,” address whether an insurer can implead a third party allegedly responsible for the insured’s losses before the insurer pays the insured’s claim. The New York Court of Appeals held that impleader is permissible under CPLR 1007, promoting judicial efficiency by resolving primary and ultimate liability in one proceeding. The Court reasoned that delaying the third-party action could prejudice the insurer’s subrogation rights. The Court distinguished its prior holding in Ross v. Pawtucket Mut. Ins. Co. by emphasizing the absence of contractual restrictions on subrogation rights and the unique context of broker’s bonds involving potentially large losses, as opposed to minor auto collision claims.

Facts

D.R. Comenzo, Inc., and Ira Haupt & Co., two brokerage houses, suffered losses due to fraudulent warehouse receipts related to Allied Crude Vegetable Oil Refining Corporation’s (“Allied”) commodities storage. The plaintiffs, trustees in bankruptcy for Comenzo and Haupt, sought recovery on broker’s bonds issued by the defendant insurance companies. The insurers impleaded American Express Company (Amexco), alleging that Amexco, through its control of its subsidiary, American Express Warehousing, Ltd., was responsible for supervising Allied’s tanks and contributed to the losses.

Procedural History

In Krause, both the trustee and Amexco moved to dismiss the third-party complaint, which Special Term granted. The Appellate Division reversed, reinstating the third-party complaint. In Seligson, Amexco sought similar relief. Special Term denied the motion to dismiss but granted a stay. The Appellate Division affirmed the denial of dismissal. The Court of Appeals granted leave to appeal and consolidated the issues.

Issue(s)

Whether an insurer can implead a third party who may be liable to the insured before the insurer has made any payment to the insured.

Holding

Yes, because CPLR 1007 permits a defendant to implead any person “who is or may be liable to him.”

Court’s Reasoning

The Court reasoned that CPLR 1007’s language is broad enough to encompass contingent claims based on subrogation. Permitting impleader aligns with the spirit of an advanced practice code, which seeks “the avoidance of multiplicity and circuity of action, and the determination of the primary liability as well as the ultimate liability in one proceeding, whenever convenient.” While acknowledging potential concerns like delaying recovery for the insured, the Court emphasized that procedural devices like severances, separate trials, and stays can mitigate prejudice. The Court rejected arguments that impleader would deprive the insured of control over their claim, noting the insured’s freedom to press on with their claim or settle if no payment has been made by the insurer. The Court also reasoned that delaying the third-party action could severely prejudice the insurer’s subrogation rights, potentially leading to lost evidence or time-barred claims. Distinguishing Ross v. Pawtucket Mut. Ins. Co., the Court noted that the policy in Ross had specific restrictions on subrogation rights. The Court clarified that while impleader could be denied in minor auto collision cases for efficiency, this case involved a broker’s bond with the potential for ruinous losses. As stated in the opinion, “Procedural rules exist to further the ends of justice, not to force parties to forego substantive rights and not to give parties advantages which the true merits of their claims or defenses do not warrant.”