577 N.E.2d 756 | Ohio Ct. App. | 1991
Appellant, Transport Insurance Company ("Transport"), appeals from a judgment of the Franklin County Court of Common Pleas declaring that appellee, the American Insurance Company ("American"), may be subrogated to the rights of Wilson Freight Company ("Wilson Freight") against Transport on a policy of excess indemnity insurance issued to Wilson Freight by Transport.
Wilson Freight was a self-insured employer for purposes of paying Ohio workers' compensation benefits. To qualify as a self-insured employer, Wilson Freight was required to obtain a surety bond sufficient to secure its obligations to its employees. Wilson Freight obtained such a bond from American. Wilson Freight was also permitted, though not required, to obtain excess indemnity coverage to reimburse it for payments in excess of $50,000 in any one event. Wilson Freight procured such a policy of indemnity insurance from Transport. The policy provided that Transport would indemnify Wilson Freight for the "ultimate net loss in excess of" $50,000 incurred in paying workers' compensation benefits. The term "ultimate net loss" was further defined as "the sum actually paid in cash in the settlement or satisfaction of losses for which the insured is liable."
Wilson Freight filed a petition in bankruptcy and the Industrial Commission demanded that American make payment on the surety bonds it had issued to Wilson Freight. American then instituted this declaratory judgment action against Transport, the Industrial Commission of Ohio, and the Bureau of Workers' Compensation. American disputes the extent of its liability to the Industrial Commission and that issue remains pending in the proceedings below. On American's motion, the trial court entered partial summary judgment for American and against Transport, holding that American was entitled to all the benefits of the indemnification agreement between Wilson *923 Freight and Transport. From this judgment, Transport appeals, asserting the following assignments of error:
"1. The trial court erred as a matter of law when it concluded that American, as Wilson Freight's surety, was a third-party beneficiary of the indemnity contract between Wilson Freight and Transport.
"2. The trial court erred as a matter of law when it concluded that American was entitled to collect under the indemnity contract between Wilson Freight and Transport under principles of subrogation."
We will address the assignments of error in reverse order, as the second assignment of error raises the central issue in this case. Under the indemnity policy issued by Transport, payment of any loss by the insured is a condition precedent to Transport's duty of indemnification. Stickel v. Excess Ins. Co. of America
(1939),
In the seminal Ohio case addressing the subrogation of sureties, Maryland Cas. Co. v. Gough (1946),
Legal subrogation is an equitable doctrine derived from the civil law. Prairie State Bank v. United States (1896),
Legal subrogation achieves this objective by substituting one person to whom a particular right does not legally belong in the place of the legal owner of that right. Federal Union Life Ins.Co. v. Deitsch (1934),
A surety is traditionally subrogated to the rights of the one it pays, the obligee. Maryland Casualty, supra; Dempsey v. Bush
(1868),
Our research has revealed two classes of cases where courts have consistently held that a surety is subrogated to the rights of its principal, as well as the obligee. In construction cases where the surety completes performance for the defaulting principal under the contract, the surety will be subrogated to the principal's right to payment by the owner upon completion of the *925
project. Travelers Indemnity Co. v. Peacock Construction Co.
(C.A.5, 1970),
Similarly, where the surety is called to answer for the principal's default, the surety is subrogated to the principal's rights against others who by their negligence, breach of contract or breach of warranty contributed to that default.Travelers Indemnity Co. v. Evans Pipe Co. (C.A.6, 1970),
Moreover, it has long been the law of Ohio that a surety may assert the defenses of its principal to the debt held by the obligee. State, ex rel. Knox Co., v. Blake (1853),
We think the proper rule is that, when equitable, a surety is subrogated not only to the rights of the obligee, but also to the rights and remedies of the principal against third parties, where those rights arise from or are closely related to the debt the surety is called to pay under the suretyship agreement. As equity is served and unjust enrichment avoided, this rule is entirely consistent with the well-established law of subrogation. If Wilson Freight had paid its debt to the Industrial Commission, Transport's policy would have required it to indemnify Wilson Freight. We see no reason why Transport should be absolved of its contractual obligation simply because a surety steps in and discharges Wilson Freight's obligation to the Industrial Commission. Once the obligation of its principal is completely discharged, American steps into the shoes of its principal, Wilson Freight, and is entitled to exercise any rights arising from the debt paid, specifically the right to indemnification under Transport's policy of excess indemnity insurance.
The second assignment of error is not well taken.
The first assignment of error is easily disposed of, given our holding in the second assignment of error. Expressing no opinion on the applicability of third-party beneficiary law to the facts of this case, we find that the trial *926 court did not need to, nor did it, rely on this theory to support its judgment. Accordingly, the second assignment of error is also not well taken.
The assignments of error are overruled and the judgment of the trial court is affirmed.
Judgment affirmed.
BOWMAN, P.J., and BRYANT, J., concur.
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