For years, trial lawyers have been threatening and filing class action lawsuits in multiple states in an effort to thwart their arch nemesis—subrogation. States such as Montana have gone so far as to hold that it is the burden of the subrogated insurance company to determine and prove that its insured has been fully made whole before it can take any action toward recovering its subrogated insurance payments.
A growing list of states such as Montana, Washington, Arkansas, and New York have seen class action and bad faith lawsuits filed simply because an insurance company made a subrogation demand or took some efforts to recover its subrogated interest before it was established that its insured had been made whole for all of its damages. Trial lawyers in other states have undertaken efforts to flip those states into anti-subrogation paradises by attempting the same thing. Connecticut is one such state.
On June 6, 2023, the U.S. Court of Appeals for the 8th Circuit ruled on a Missouri bad faith class action lawsuit in which a St. Louis diner sued its own insurer (Owners Insurance Company), alleging bad faith for attempting to subrogate property damage before its insured had recovered anything from the tortfeasors.[1] The court ruled the conduct was not unlawful under Missouri’s subrogation statute and state case law, and the insurer’s actions did not violate its duty of good faith and fair dealing.
The facts of this case are worth noting. On March 15, 2015, Ambar Arango and Dzemal Omervic were involved in a car accident in St. Louis, and one of the cars crashed into White Knight Diner, which was insured by Owners, whose policy contained this subrogation clause:
If any person or organization to or from whom we make payment under this Coverage Part has the right to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after loss to impair them. But you may waive your right against another party in writing[.]
The policy was also subject to a $1,000 deductible. Owners paid White Knight $66,366.27, representing $49,965.10 for property damage and $16,371.17 for loss of business income.
White Knight subsequently brought a subrogation suit in Missouri state court against Arango and Omervic for lost income (the Arango Litigation). Arango was insured by State Farm, and Omervic was insured by Progressive. Both drivers were subject to policy limits for liability coverage: Arango’s State Farm policy limit was $50,000, and Omervic’s Progressive policy limit was $25,000. Before White Knight initiated the Arango Litigation, Owners sought to recoup from State Farm and Progressive the money it had paid to White Knight under the Policy, as well as White Knight’s $1,000 deductible. Specifically, on July 15, 2015, Owners sent State Farm a “Request for Payment” with instructions to “CONTACT [OWNERS] PRIOR TO SETTLEMENT.” On December 8, 2015, State Farm issued a check to Owners in the amount of $33,668.14, which represented half of the money Owners had paid to White Knight plus half of White Knight’s $1,000 deductible. Owners then issued a $500 check to White Knight for partial reimbursement of its deductible. State Farm did not require a full release of White Knight’s claims or future claims in exchange for its payment to Owners.
Owners also sent a near-identical request to Progressive but, unlike State Farm, Progressive declined to pay. Owners told White Knight about its efforts to subrogate its payment to White Knight from the drivers’ insurers, and White Knight did not object.
After Arango’s insurer (State Farm) paid Owners, Arango sought a setoff for that amount in the still-ongoing Arango Litigation. The state court denied that request, concluding that Arango could not assert a setoff against any amount she owed White Knight for sums State Farm paid to Owners. White Knight eventually settled its claim against Omervic for $25,000 and settled its claim against Arango for $16,331.86. The state court then dismissed White Knight’s case with prejudice.
While the Arango Litigation was still pending, White Knight and several other insureds filed the instant class action against various insurance companies including Owners. The plaintiffs sought, among other things, an order declaring that these insurers’ practice of settling subrogation claims with each other directly, without the insureds’ involvement, violated Missouri subrogation law. The class action was initially filed in Missouri state court, but it was subsequently removed to federal court by one of the defendant-insurers. After the insurers brought several motions to dismiss, the district court dismissed all parties except for Owners and White Knight. White Knight then filed an amended complaint against Owners only, adding new causes of action, including breach of contract and breach of the implied covenant of good faith and fair dealing.
Owners filed a motion for summary judgment on all claims. White Knight moved for partial summary judgment on its declaratory judgment claim. The district court granted Owners’ motion, denied White Knight’s motion, and entered judgment in Owners’ favor. White Knight appealed to the 8th Circuit.
The 8th Circuit began by noting that, in Missouri, if an insurance company “under its contract obligation pays all or part of the property damage incurred by its insured[,]” that insurance company is subrogated to the insured’s rights against the third party that caused the damage.[2] Unlike some states, which provide that legal title to a property damage claim passes to [an] injured party’s insurer once the insurer pays the injured party’s claim, Missouri provides that the legal title to the cause of action remains in the insured, and that the insurer’s only interest is an equitable right to subrogation.[3] since the insured still holds the legal right to the claim, the insurer cannot sue the tortfeasor directly but must wait and assert its subrogation interest against any recovery the insured makes against the tortfeasor,” and since the insurer has no right to prosecute a claim directly, it certainly has no right to arbitrate and settle the claim directly, without the insured’s consent.[4] Relying on Hagar, White Knight asserted that Owners’ efforts to obtain reimbursement directly from State Farm and Progressive, before White Knight had recovered anything from the tortfeasors, “violated Missouri subrogation law.” The Hagar case says that because a subrogated carrier only holds a “subrogation interest” in the claim, it has no right to prosecute (via lawsuit or arbitration) any portion of the insured’s claim against the tortfeasor or its liability carrier directly. Accordingly, after Hagar, a court in Missouri will not recognize as valid an insurer’s premature effort to recover money from a tortfeasor, under the guise of subrogation, that it paid its injured insured.
The 8th Circuit then went on to say that a refusal to recognize a premature payment as valid subrogation is not the same as saying those premature efforts being “illegal.” Here Owners sought—and partially obtained—payment from the drivers’ insurers, even though Owners had no legal right to the claim against either driver. The state court recognized this, denying Arango’s request for a credit against the judgment for the money State Farm—Arango’s insurer—had already paid Owners.
The more difficult question was whether Owners breached the contract (insurance policy) when it sought reimbursement from the tortfeasors’ insurers in a manner contrary to the subrogation rights granted in the Policy. not expressly prohibit Owners from requesting payment from the tortfeasors’ insurers. And to the extent White Knight argued that Owners breached its contract because its reimbursement request to State Farm violated Missouri law, this argument was not persuasive as explained below.
White Knight’s claim also fails because it did not establish that it suffered any damages as a result of Owners’ failure to abide by the contracted-for procedures. White Knight, as an insured party under the Policy, contracted for and paid premiums to receive insurance. And Owners settled White Knight’s claim under the Policy when Owners paid White Knight a total of $66,366.27 for property damage and business income loss. On appeal, White Knight does not argue that Owners’ payment under the Policy was insufficient to compensate it for its covered losses, nor does White Knight contend that it made additional requests for compensation or that such requests were denied by Owners. To the contrary, by not spending all of the money it received from Owners, White Knight implicitly conceded that additional funds were unnecessary for its claimed property repairs. In short, White Knight does not point the court to evidence of additional covered loss amounts that Owners failed to pay under the Policy.
In the end, the 8th Circuit Court of Appeals affirmed the trial court’s ruling, holding that because the breach of contract claim fails, the bad faith allegation must also fail. This ruling is a victory for subrogation and a defeat for trial lawyers performing an all-out blitz on subrogation by alleging in multiple states that any effort to make a recovery before the insured is made whole is tantamount to bad faith.
Nancy Case is an insurance litigation trial attorney and partner at Matthiesen, Wickert & Lehrer, S.C. and concentrates her practice on ERISA and non-ERISA subrogation, litigation, and employee benefits plan drafting and compliance. Nancy is licensed in Wisconsin, Illinois, and Washington State, is a member of the Illinois Trial Bar, and is admitted to numerous federal courts throughout the country. For questions regarding this article, please contact Nancy Case at ncase@mwl-law.com.
[1] White Knight Diner, LLC v. Owners Ins. Co., 2023 WL 3831545 (8th Cir. 2023).
[2] Farmers Ins. Co. v. Effertz, 795 S.W.2d 424 (Mo. App. 1990); Kroeker v. State Farm Mut. Auto. Ins. Co., 466 S.W.2d 105 (Mo. App. 1971).
[3] Hagar v. Wright Tire & Appliance, Inc., 33 S.W.3d 605 (Mo. App. 2000).
[4] Id.
