I doubt that Essex v. Heck would apply to your situation. Essex was an equitable subrogation case, and yours is a first party claim where benefits were apparently paid to the wrong insured (the "additional insured") rather than to you, the primary named insured. Therefore it does not sound like your issue involves any "waiver of subrogation rights." If the insurance company made a mistake and incorrectly compensated an additional insured (AI) who had no damage - and therefore no valid claim - then the insuror may well (still) owe the primary insured. However, you say that the "named insureds damages are denied." This is puzzling, because typically the AI's coverage is no broader than that of the named insured. More information is needed, and I recommend you briefly consult a coverage lawyer in your area. Bring the policy and written communications with the insuror.
This response is intended to provide general legal information rather than specific legal advice, and does not create an attorney-client relationship.
You should do some research on the made whole rule. Typically if you as the insured are not 'made whole' the insurance company cannot assert their subrogation/recovery rights. That being said, there are a host of exceptions that become very complex. Unfortunately this forum is not appropriate to discuss each. I would consult with an attorney to review the claim, the recovery and other facts that may assist you in making this argument. Best of luck. http://www.mwl-law.com/CM/InsuranceNewsandDevelopments/Changing-Face-of-Made-Whole-in-CA.pdf
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