The Iyagehs commenced an action against the third-party defendants for damage caused to their property in May 2002. The third-party defendants settled with the Iyagehs. The Iyagehs then commenced this action against State Farm, their insurer, who denied their claim. State Farm in turn commenced the third-party action seeking indemnification and contribution. Third-Party defendants moved to dismiss the third-party action on the ground that the statute of limitations had run on this claim.

Third-Party defendants asserted that State Farms action, which was filed in September 2005, was time-barred because it was, in essence, a claim for subrogation and as such has the same three-year statutory life as does the underlying claim for property damage which accrued when the property damage was sustained in May 2002.

In response, State Farm argued that this is not an action for subrogation because its right to subrogation was extinguished when the third-party defendant voluntarily settled with its insured before State Farm paid out any money on the insureds claim. State Farm argued that since subrogation only exists when the insurer has paid the claim, and thereby acquires the right to stand in the shoes of its insured, it does not, and cannot, make a claim to subrogation and is only making a claim that sounds in contribution and indemnification against the eventuality that it may be required to pay its insureds claim in the first-party action. Such claim, State Farm argued, is not time barred.

The court held, The right to indemnification or contribution is derived from the legal relationship between the parties. The right to common law indemnification comes about in a circumstance where an entity is not negligent but is held vicariously liable to a plaintiff by virtue of its status and thereby has the right to seek recovery from the active tortfeasor for any sums it may have been required to pay out. In order to be entitled to contractual indemnification an indemnitee must be able to point to a written agreement between itself and the indemnitor that unequivocally grants it the right to seek indemnification in the event it is held liable. If State Farm is held liable to the Iyagehs, its liability would be premised upon its contract of insurance with them rather than upon negligence theories of vicarious liability or joint liability. Moreover the third-party defendants have no contractual relationship with State Farm such that they can be deemed to have assumed the responsibility to indemnify State Farm against any loss caused by their alleged negligence (see Seven Sixty Travel, Inc. v. American Motorists Ins. Co., 98 Misc.2d 509 (Sup Court, Albany. Co. 1979). Indeed the only possible theory upon which the third-party complaint can be premised is subrogation for theories of contribution or indemnification will not lie under these facts. And State Farm has shown us no case to the contrary.

However, even assuming arguendo the doubtful proposition that a conditional claim for equitable subrogation can be made where, as here, the insurer has not paid its insureds claim, but may be required to do so and the insured has settled with the wrongdoer, this third-party action must nonetheless be dismissed because it is untimely

Accordingly, the third-party defendants motion to dismiss the third-party action is granted, and the third-party action is dismissed.

Comment: The right to subrogation, which is included in most property insurance policies as well as health insurance and some other kinds of policies, does not vest until the insurer has paid the claim and thus steps into the shoes of its policyholder in regard to the right to collect damages from the tortfeasor, which is the essence of what subrogation is. Contribution is a negligence concept, whereby an alleged tortfeasor seeks to share the blame with another alleged tortfeasor. In this case, by State Farm denying its policyholders claim, State Farm ruled out any position as a subrogee (unless it eventually paid the claim by either settling or by losing a DJ action).

As the Court of Appeals made clear in Walker v. Stein, the statute of limitations on subrogation is three years from the date of loss. If that date is approaching and the insurer has not yet acquired subrogation rights, it must commence an action against the alleged tortfeasor anyway, in order not to fall under the statute of limitations.

Here, State Farm made the same mistake that Allstate did in Walker v. Stein " it waited more than three years from the date of loss to commence the subrogation action (it also made the mistake of styling its claim as one for contribution, because the plaintiffs suit was based on breach of contract. There is no such thing as contribution in a breach of contract suit).

So what State Farm should have done in this case was to commence a subrogation action prior to the three-year anniversary of the loss against the third-party even though it had not acquired subrogation rights yet. Then, pending the outcome of the policyholders suit against State Farm, the insurer would either lose (and then pay the claim and acquire the subrogation rights) or win (and thus not pay the claim and have no need for subrogation rights).

Iyageh v. State Farm Fire and Casualty Co., NYLJ 2/27/07, 13084/03 Supreme Court, Kings Co.) (Kramer, J)