Plaintiff, a fidelity insurer, paid its insured for a loss caused by the defalcations of an employee. Thereafter, it sued defendant, its insured’s accountant and auditor, to recover what it had paid, alleging that defendant was negligent in failing to discover the defalcations. This appeal is from an order affirming summary judgment against plaintiff and dismissing its action.
The decisive question is whether plaintiff’s rights to recover as equitable subrogee to the extent of its payment to its insured are barred as a matter of law, as defendant contends, either because plaintiff did not reimburse its insured for the full amount of the loss or because of the operation of the doctrine of superior equities. For reasons which follow, we reject the contention that plaintiff’s equitable rights are barred. Accordingly, the order of the Appellate Division should be reversed and summary judgment denied.
I
Between 1975 and 1983, Albert Ferrarese, an employee of Benton & Bowles (B&B), embezzled approximately $4,000,000 by manipulating the books of account and creating nonexistent receivables. Defendant — B&B’s auditor which prepared financial statements for the years 1980, 1981, and 1982 — was allegedly negligent in failing to uncover the fictitious receivables and permitting them to be reflected in B&B’s balance
On February 13, 1985 plaintiff paid B&B $1,000,000 for the loss — the policy limit under its contract. In the "Release, Assignment and Subrogation Agreement” accompanying the payment, plaintiff and B&B each reserved its rights to seek reimbursement from Ferrarese or from any other person or firms responsible for the loss; B&B agreed that it did "hereby subrogate, assign, transfer and set unto [plaintiff] all the rights, claims, interest and causes of action it ha[d] against [defendant] up to the amount paid by [plaintiff] to [B&B]”; and B&B promised to cooperate with plaintiff in its efforts to seek reimbursement from defendant and to retain and produce at plaintiff’s request all correspondence, books and other documents pertaining to the loss. In addition, plaintiff and B&B, agreed as follows: "It is further understood that any of the aforesaid rights that [plaintiff] has against [defendant] have not been prejudiced or impaired in any way by any agreements entered into between [B&B] and [defendant]”.
In granting defеndant’s motion for summary judgment and dismissing plaintiff’s amended complaint, Supreme Court rejected plaintiff’s contention that its agreement with its insured, B&B, gave it the right to sue defendant as B&B’s contractual subrogee. The court construed the writing between B&B and plaintiff not as an agreement effecting a contractual subrogation but rather as one purporting tо assign to plaintiff whatever claims B&B had against defendant. Because B&B had released defendant in the May 2, 1983 agreement, Supreme Court reasoned that B&B had no rights to assign to plaintiff on February 13, 1985 when it attempted to do so. Thus, the court concluded that the February 13, 1985 agreement gave plaintiff no rights either as contractual subrogee or assigneе.
In view of its holding thаt plaintiff’s failure to make payment for the full loss to B&B barred its claim for equitable subrogation, Supreme Court found it unnecessary to determine whether plaintiff’s rights as equitable subrogee were also barred by application of the doctrine of superior equities. Supreme Court, however, did reject plaintiff’s сontention that the doctrine of superior equities does not exist in New York. The Appellate Division unanimously affirmed the summary judgment and dismissal for the reasons stated at Supreme Court.
II
Any rights which plaintiff, as B&B’s insurer, has as equitable subrogee accrued to it not by virtue of some agreement with B&B, but independently of any contractual provision upon payment of the loss under its policy. Thus, if we hold that plaintiff may properly make a claim as B&B’s equitable subrogee, as we do, it becomes unnecessary to determine whether plaintiff also has a valid claim as contractual subrogee under the February 13, 1985 agreement with B&B. It would make no differencе whether in the February 13, 1985 writing plaintiff and B&B intended a contractual subrogation of B&B’s rights against defendant or, as the courts below viewed it, an effort, albeit unsuccessful, to assign B&B’s rights, as long as there is no language in the agreement with B&B which could be construed as barring plaintiff’s claim as equitable subrogee. There is no such language.
Moreover, the May 2, 1983 "Settlement Agreemеnt and Release” between B&B and defendant expressly exempted from the release any subrogation rights of an insurance
Ill
Unlike contractual subrogation where the subrogee’s rights are defined in an express agreement between the insurersubrogee and the insured-subrogor, the rights of an insurer against a third party as equitable subrogee arise independently of any agreement
(see, American Sur. Co. v Palmer,
In New York, rights of insurers to recover as equitable subrogees against negligent third parties have been recognized in cases where the insurer has paid an automobile collision loss
(see, e.g., Hamilton Fire Ins. Co. v Greger,
While our court has not considered the precise question of whether the fidelity insurer of an employer may proceed as subrogee against public accountants who negligently fail to discover an employee’s defalcations, other courts have held that such an insurer may do so
(see, e.g., National Sur. Corp. v Lybrand,
We have held that "the principle of subrogation ought to be liberally applied to the protection of those who are its natural beneficiaries.”
(Ocean Acc. & Guar. Corp. v Hooker Electrochemical Corp.,
IV
Defendant contends first that there should be a legal bar to equitable subrogation because plaintiff has reimbursed its insured for only a part of the loss, not all of it. Defendant cites cases dealing with the rights of sureties and creditors
(see, e.g., Hanlon v Union Bank,
The theory underlying these rules is simply that subrogation to the rights of the creditor should in no way impair the creditor’s interest in the security for the debt or its right to proceed against the debtor. When the debt is paid in full the creditor no longer has an interest in pursuing the debtor or resоrting to the collateral. Until it is paid, however, it is entitled to exclusive possession of the collateral and control of the debt and the remedies for its enforcement
(see, American Sur. Co. v Gerold,
Neither the rules requiring full payment of the debt nor their underlying rationale fit the case of an insurer which, like plaintiff, has paid part of the loss tо its insured and seeks to recoup only what it has paid from the alleged wrongdoer. Permitting the insurer to sue for that amount as equitable subrogee does not affect the insured’s right to sue for the amount of the loss remaining unreimbursed. Thus, the general rule is that an insurer which has paid part of a loss may proceed
pro tanto
against а third person whose negligence or wrongful act caused the loss
(see, Hamilton Fire Ins. Co. v Greger,
It is not suggested that applying the general rule in this case and permitting plaintiff to be subrogated to the extent of the $1,000,000 payment to B&B could work to B&B’s detriment. B&B cannot claim that permitting subrogation will prejudice its rights, since it has already pursued and settled its claim against defendant. Thus, the case of
American Sur. Co. v Gerold
(
Finally, defendant contends that it should be insulated from any liability to plaintiff by the doctrine of superior equities. The rule that the right of subrogation should not be invoked against one whose equities are equal or superior to those of the party seeking to be subrogated has been applied in cases in our State involving rights of creditors where obligations are secured by surety bonds or mortgages
(see, e.g., Seely’s Son v Fulton-Edison, Inc.,
While the doctrine of superior equities is sometimes alluded to in the context of an insurer’s claim to subrogation rights
(see, e.g., Murphy v Aetna Ins. Co.,
Analysis of the New York cases where the doctrine of superior equities has been discussed leads to the conclusion that, in essence, it is an application of the established principle that subrogation is designed "to dispense equity and justicе among the parties”
(Seely’s Son v Fulton-Edison, Inc., supra,
at 578) and should not be permitted where that result will not be achieved
(see, Ocean Acc. & Guar. Corp. v Hooker Electrochemical Corp.,
Defendant would, nevertheless, have us hold, as a matter of law, that as between it and plaintiff, its equities are superior and that, therefore, plaintiff’s claim should be dismissed. Defendant argues that, although plaintiff as the insurer has not benefited from the loss and is charged with no wrongdoing, the fact that plaintiff is a compensаted insurer puts it in an inferior position in equity to defendant — an allegedly negligent wrongdoer. This court has not applied such a rule
(see, e.g., Hamilton Fire Ins. Co. v Greger,
It is difficult to see the merit of the rule that defendant proposes in the case of a fidelity insurer seeking subrogation against an allegedly negligent public accountant: viz., that because the risk аssumed includes the specific risk that the defalcation may be caused by the insured’s accountant’s negligence in making an audit and because the fidelity insurer has received premiums for this risk, it should lose its right as the insured’s equitable subrogee. While arguably a compensated insurer or surety should in fairness bear the loss where the third party’s liability is solely contractual and not based on fault
(see, Meyers v Bank of Am. Natl. Trust & Sav. Assn., supra; see generally, Standard Acc. Ins. Co. v Pellecchia,
15 NJ 162,
Defendant contends, however, that the doctrine of superior equities calls fоr a denial of subrogation by a fidelity insurer in a case of this kind because of the particular nature of the obligations of an accountant and auditor and the inherent limitations in detecting errors or irregularities through the auditing process (see, Matson, Subrogation Claims Against Auditors: What is "The Purest Equity?", 6 Ohio NU L Rev 313 [advocating a rule that the auditor or accountant should not be liable to the fidelity insurer absent some proof of "participation” in the defalcations]). Such contentions pertain to causation and to the claimed breach of the duties owed by the public accountant to the insured and involve factual questions for the trial сourt in determining whether the fidelity insurer should recover as equitable subrogee.
Assuming for the sake of argument that defendant’s negligence in failing to discover Ferrarese’s defalcations caused the loss, defendant could have been held directly liable to B&B in a suit brought by it. The rule defendant urges here would allow it to esсape this liability simply because the victim, B&B, carried fidelity insurance. In effect, defendant seeks to avail itself of B&B’s fidelity insurance as its own liability policy without paying for it. Such a rule would be contrary to precedent
(see, e.g., Federal & Deposit Co. v Queens County Trust Co.,
The order of the Appellate Division should be reversed, with costs, and the motion for summary judgment denied.
Chief Judge Wachtler and Judges Simons, Kaye, Alexander, Titone and Bellacosa concur.
Order reversed, etc.