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KEYSTONE PAPER CONVERTERS, INC. v. NEEMAR

March 8, 1983

KEYSTONE PAPER CONVERTERS, INC. and PHILADELPHIA PAPERS, INC.
v.
NEEMAR, INC. v. PHILADELPHIA ELECTRIC CO., GOULD COMPANY, INC., and ROBBINS ELECTRICAL DISTRIBUTORS, INC.



The opinion of the court was delivered by: HUYETT

 HUYETT, J.

 This action arises out of a fire that occurred on the premises of plaintiff Keystone Paper Converters (Keystone) on September 6, 1980. The fire caused damages totally $57,756.00 to Keystone, of which all but $2,000.00 was paid by its insurer, Travelers Insurance Company (Travelers). *fn1" At the time of the fire, Philadelphia Papers, Inc. (Philadelphia Papers) had paper on Keystone's premises, and it also suffered damages, which were covered by Reliance Insurance Company. Philadelphia Papers and Travelers, as subrogee of Keystone, brought this action against Neemar, Inc. (Neemar), who had installed new electrical switchgear equipment at Keystone's premises shortly before the fire. More than three months after the complaint was filed, Neemar moved for leave to file a third-party complaint against Philadelpha Electric Company (PECO), Gould Company, Inc. (Gould) and Robbins Electrical Distributors, Inc. (Robbins). Leave was granted, and the third-party complaint was filed. The claim against PECO is based upon its actions in repairing electrical fixtures at Neemar's premises after an earlier fire. The claim against Gould and Robbins is based upon Robbins' sale to Neemar of switchgear manufactured by Gould. This switchgear was used in the equipment installed by Neemar in Keystone's premises.

 Subsequently, Neemar sought and obtained leave to amend its answer by asserting a counterclaim against Keystone, based upon its alleged negligence in covering its overhead sprinkler system with a wooden ceiling. Neemar contends that, due to this negligence, Keystone should be held liable for contribution or indemnity over to Neemar on Philadelphia Papers' claim.

 DISCUSSION

 Although there are no Pennsylvania state appellate decisions that have dealt with this issue, there exists a large body of law to the effect that an insurer may not subrogate against its insured. *fn2" See Employers of Wausau v. Purex Corp., 476 F. Supp. 140 (E.D. Pa. 1979); Turner Const. Co. v. John B. Kelly Co., 442 F. Supp. 551 (E.D. Pa. 1976) and cases cited therein. In general, the rationale for this rule of law is that "by definition subrogation arises only with respect to the rights of the insured against third parties to whom the insurer owes no duty." 16 Couch on Insurance ยง 61:133 (2d ed. 1966). Travelers concedes this principle, but contends that it is inapplicable here and that the third-parties' motions are untimely and extraneous to the issues before me.

 A. Timeliness and Relevancy.

 In arguing that the subrogation issue is untimely and irrelevant, Travelers relies primarily upon Judge Shapiro's well reasoned analysis in Transport Trailer Service, Inc. v. Upjohn, 506 F. Supp. 442 (E.D. Pa. 1981). In Transport, Aetna Casualty and Surety Company (Aetna) had subrogated to the plaintiff's rights, after paying for fire loss and property damage. This loss resulted from a fire allegedly caused by defective polyurethane foam that was manufactured and sold by the defendant. At the time of the fire, Aetna also insured the defendant under a liability policy, with a $5,000,000.00 deductible. The defendant's previous losses and the amount in issue did not equal this deductible amount, so it was clear to the court that Aetna was not responsible for the defendant's liability arising from the suit. 506 F. Supp. at 444.

 The defendant brought a motion for partial summary judgment, arguing that the rule barring subrogation against one's own insured applied. In response, Aetna argued that the defendant's motion was untimely, in that it represented an affirmative defense that was not plead in the answer. The court ruled that, whether the motion would be viewed as one for partial summary judgment or one to amend the complaint, it was clear that the motion was untimely. By granting the motion, Aetna would be unduly prejudiced, for defendant was aware of this issue throughout its trial preparation, but failed to raise it until after the case was placed in the trial pool. Id. at 443. Therefore, the court denied the motion but granted leave to the defendant to implead Aetna as a third-party. In this way, if the defendant was found negligent on the initial claim, it could assert a claim against Aetna based upon a possible breach of the insurance policy. Id. at 444.

 Travelers does not argue that the third-party defendants' defense is insufficient for failure to specifically plead it under Federal Rule of Civil Procedure 8(c). As the court in Transport noted, failure to raise an affirmative defense does not forever bar a party from raising it, for a remedy exists under Federal Rule of Civil Procedure 15. Id. at 443. This rule provides that leave to amend pleadings "shall be freely given when justice so requires." I find that justice would require granting leave to amend in this case, if an issue were raised concerning the propriety of the present motion.

 The policies behind Rule 14(a) make it particularly appropriate that the third-party defendants' defense is heard now, before disposition of Keystone's claim against Neemar. I cannot ignore that the original claim, by Keystone against Neemar, is essentially a claim by an insurance company against itself. As Keystone itself asserts, "in the instant case, there is absolutely no indication that Travelers is seeking to avoid coverage or pass the risk of loss to Neemar." Further, Keystone states: "Indeed, Neemar is being defended pursuant to its policy with Travelers." Plaintiff's Memorandum at 14. If I am to accept these assertions as true, this means that Travelers is making use of subrogation law to sue itself in court. With the case postured as such, it is highly likely that Neemar, who is being defended by Travelers, will have incentive to be found negligent on the initial claim, so that the loss may be passed to the third-party defendants in whole or in part. In this way, Travelers can pass some or all of its losses to parties that it does not insure. As the case is structured presently, Travelers cannot avoid loss since Keystone has not brought a claim against these third-parties.

 Illustrative of the problems that are presented by this situation, Neemar, through counsel that is paid for by Travelers, has taken the position that the present motion should not be granted. *fn3" Accordingly, counsel for Neemar posits that its client should be sued. The questions that this position raises with regard to a conflict of interest between Travelers and Neemar will be discussed in depth below. For purposes of the issue of timeliness, it is sufficient to note that this situation evidences appearances of impropriety between the plaintiff and defendant. The very purpose of allowing a third-party defendant to raise defenses against the plaintiff, where the defendant fails to do so, is to avoid this type of inappropriate situation. As stated in F & D Property Co. v. Alkire, 385 F.2d 97, 100 (10th Cir. 1967):

 
For the purpose of defense against the plaintiff's complaint, a third party defendant is in the law suit as an adverse party to the same extent as the defendant and must act accordingly. This assures a third party defendant complete defense protection in an action ...

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