In New York Cent. Mut. Ins. Co. v. TopBuild Home Servs., Inc., 2019 U.S. Dist. LEXIS 69634 (April 24, 2019), the United States District Court for the Eastern District of New York recently held that the “lesser of two” doctrine applies to subrogation actions, thereby limiting property damages to the lesser of repair costs or the property’s diminution in value.

In New York Cent. Mut. Ins. Co., New York Central Mutual Insurance Company’s (New York Central) insureds, Paul and Karen Mazzola, suffered a fire to their home. After the fire, New York Central paid the Mazzolas $708,465.74 to repair the property. New York Central brought a subrogation action against TopBuild Home Services, Inc. (TopBuild), alleging that the fire was caused by negligent work performed by TopBuild. New York Central sought to recover the repair costs it paid to the Mazzolas. TopBuild conceded liability but disputed the proper measure of damages.

TopBuild filed a motion for partial summary judgment, arguing that under the “lesser of two” doctrine, New York Central could recover only the lesser of the costs to repair the property or the property’s diminution in value. TopBuild, therefore, asserted that New York Central was not entitled to the repair costs of $708,465.74 but, rather, could recover only the property’s decline in value following the fire – approximately $250,000.^[1] In response, New York Central argued that New York’s “lesser of two” doctrine does not apply to subrogation actions because an insurance company cannot mitigate the payment it makes to its insured.

The Eastern District of New York found New York Central’s argument unavailing. The court found that a subrogating carrier must step into the shoes of its insured and, therefore, the carrier could not recover more than its insured was legally entitled. Accordingly, the court granted partial summary judgment for TopBuild, holding that, in subrogation actions, “the proper measure of damages for permanent injury to real property is the lesser of the decline in market value and the cost of restoration.”

New York Cent. Mut. Ins. Co. serves as a reminder that subrogating insurers step into their insured’s shoes. Thus, although insurers may issue a contract of insurance that allows an insured to collect replacement and/or restoration costs, insurers can recover the amount it paid its insured only if state law allows the insured to recover that amount from the tortfeasor had the insured sued the tortfeasor directly.

[1] Defendant’s expert determined the diminution in value to be $245,000 while the plaintiff’s expert determined that the diminution in value was $270,000. Because the only issue before the court was whether the “lesser of two” doctrine applied, the court did not need to resolve the party’s dispute as to the diminution in value.