Most auto insurance policies require their insured to pay a deductible when a claim is made. If the auto carrier is successful in subrogating a particular loss against a third party and recovers its claim payments, the issue often becomes what portion, if any, of the insured’s deductible must or should be reimbursed to the insured. The law of each state differs with regard to the obligation of the insurer to reimburse its insured the deductible in a particular claim, as well as the amount to be reimbursed. In the world of subrogation, the issue of how much of an insured’s deductible must be reimbursed to the insured after a carrier makes a successful subrogation recovery, remains a perplexing and even dangerous issue for subrogation professionals.
Subrogation professionals often assume that if a state employs or recognizes the “Made Whole Doctrine”, then the insured must be totally reimbursed for its out-of-pocket deductible and any uninsured losses before a carrier can subrogate. Unfortunately, this over simplistic view and application of the Made Whole Doctrine is not only erroneous, but also results in reduced subrogation recoveries for carriers across the country. Surprisingly, the obligation of an insurer to reimburse some or all of its insured’s deductible has very little to do with the Made Whole Doctrine in most states. Daniels v. State Farm Mut. Auto. Ins. Co., 2018 WL 3424941 (Wash. App. 2018), a brand-new decision by the Washington Court of Appeals affirms this.
The Made Whole Doctrine generally provides that under the common law subrogation principle of equity, an insured is entitled to be “made whole” before a subrogated insurer can participate in a recovery from a tortfeasor. Insurance Company of North America v. Lexow, 602 So.2d 528 (Fla. 1992). Insureds may argue that the Made Whole Doctrine prevents an insurer from subrogating or recovering anything on its subrogated interest whenever the insured has not been fully reimbursed for its deductible. Unfortunately, while observed and recognized by a large number of subrogation professionals throughout our industry, this view is incorrect. Although the specific law involved may change from state-to-state, the general consensus is that the Made Whole Doctrine does not give an insured an affirmative right or cause of action against its insurer to be “made whole”, beyond the payment of the insurance policy proceeds involved. Schonau v. Geico General Ins. Co., 903 So.2d 285 (Fla. App. 2005). Rather, the Made Whole Doctrine may be used only as a defense by insureds to protect the insured’s direct recovery from a tortfeasor, where the insured also lays claim to a limited amount of third-party proceeds based on subrogation. Florida Farm Bureau Ins. Co. v. Martin, 377 So.2d 827 (Fla. 1979).
Decisions from across the country applying the Made Whole Doctrine essentially hold that where an insurer and insured simultaneously attempt to recover all of their damages from a tortfeasor who cannot (because of insolvency, limited insurance coverage, or other reasons) pay the full value of damages, the insured has priority of recovery over the insurer’s subrogation interest. This is far different from an insured claiming it is entitled to 100% of its deductible before an insurer can subrogate on its own. Even the leading case in the country on the Made Whole Doctrine involved a dispute over limited third-party insurance proceeds between an insured and its insurer. Garrity v. Rural Mutual Ins. Co., 253 N.W.2d 512 (Wis. 1977). An insured always has the right to pursue a tortfeasor independently for its deductible, and that right alone is sufficient to allow the subrogee insurance company to keep its settlement, even if the insured is not made whole. Paulson v. Allstate Ins. Co., 665 N.W.2d 744 (Wis. 2003). Even one of the leading treatises on insurance, in its very first statement on the Made Whole Doctrine, raises the threshold issue of insufficient funds: “In many instances, the insurer and insured both have rights of recovery against the third party primarily liable for the loss, if the amount recoverable from the third party is insufficient to completely satisfy the claims of both.” Couch on Insurance, §223.133, at 223-145 (3d Ed. 2000).
The Utah Court of Appeals decided a case in which an insurer reimbursed an insured its deductible, but not before reducing the deductible based on depreciation of property damage caused by a fire. Birch v. Fire Ins. Exchange, 2005 WL 2298130 (Utah App. Sept. 22, 2005). In that case, fire damaged the insured’s property, and their insurance policy provided for full replacement costs, subject to a $500 deductible. The carrier subrogated against the tortfeasor but was able to recover only the depreciated value of the property. It then reimbursed its insured its deductible, but first reduced it based on the depreciation of the property. The insured argued that the Made Whole Doctrine should focus not on what he might legally have recovered from the tortfeasor, but rather on the total damages or loss he sustained. The Court disagreed and held that the reduction of the deductible was allowed because the maximum recoverable in the tort action was less than the replacement value insurance payment made by the insurer.
The Florida Court of Appeals astutely recognizes that a blanket application of the erroneous notion that an insured must recover its deductible first before a carrier will be allowed to recover dollar-one of any subrogation interest, will guarantee that insurance companies will simply readjust their premiums to pass on the added cost to consumers. Monte de Oca v. State Farm, 2004 WL 2955008 (Fla. App. 2004). It held that a 50% reimbursement of a deductible where the plaintiff was 50% at fault was perfectly equitable. What’s more, a third-party tortfeasor lacks any standing to complain that an insurance company cannot subrogate until its insured has been totally reimbursed its deductible or otherwise “made whole”. Nationwide Property and Casualty Ins. Co. v. DPF Architects, 792 So.2d 369 (Ala. 2000). Unless the insureds have intervened into the action to claim a right of recovery which would otherwise be prohibited due to lack of third-party proceeds or insurance coverage, a carrier is allowed to subrogate, notwithstanding the fact that the insured has not been made whole by complete reimbursement of its deductible. The only party withstanding to object to the insurer’s lack of reimbursement of 100% of a deductible is the insured – and even then, it should only be able to complain when the insured is making an affirmative claim and the third-party proceeds are insufficient to satisfy both the insured’s uninsured loss and the carrier’s subrogation interest. Economy Fire & Casualty Co. v. Goar, 564 So.2d 867 (Ala. 1990).
Washington State has now joined the growing number of states dispelling the myth that an insured must receive reimbursement of its full deductible—i.e., made whole—before the auto insurer can subrogate for its property damage payments.
On July 16, 2018, the Washington Court of Appeals decided the case of Daniels v. State Farm Mut. Automobile Ins. Co., 2018 WL 3424941 (Wash. App. 2018). In Daniels, the insured vehicle was damaged in a collision. The insured paid the deductible and State Farm paid the remaining amount of the cost to repair the vehicle. State Farm pursued subrogation and recovered 70% of its property subrogation interest and reimbursed the insured 70% of its deductible. The insured argued that the policy required that she be “fully compensated” for her loss which she argues includes the full amount of the deductible. State Farm contends that it satisfied the policy’s terms because Daniels was fully compensated when it paid the cost to repair her car. The court agreed with State Farm and held that the insured was “fully compensated” for property damage because State Farm paid her for all the property damage. The term “fully compensated” did not include recovery of the insured’s deductible. The insurer is not required to fully compensate the insured for a deductible before keeping any part of a subrogation recovery.
The Daniels case is a much-needed pro-subrogation clarification in Washington law. It limits the Made Whole Doctrine to PIP reimbursement, expressing that no such limitation applies in other “subrogation” settings, absent a common fund scenario. It also adds great weight to some of the above decisions, the preponderance of which clearly set forth that, in general, the Made Whole Doctrine does not and should not rear its ugly head with regard to the issue of how much, if any, of an insured’s deductible must be reimbursed to the insured when the carrier makes a successful subrogation recovery.
If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at [email protected].