Until July 30, 2013, Connecticut was still one of the few states which hadn’t officially adopted the equitable Made Whole Doctrine in a subrogation setting. However, the new Supreme Court decision in Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 2013 WL 3818112 (Conn. 2013) has changed that. In their recently-released decision, the Court not only adopted the Made Whole Doctrine, but it also clarified that the Doctrine was not relevant when it comes to an obligation to reimburse a deductible.
The facts of the case are somewhat detailed. In 2005, Haynes Construction Company began building a housing development and retained TD Banknorth as its agent to arrange insurance. TD Banknorth procured a builder’s risk policy from Peerless Insurance Company and an inland marine policy from Hartford Insurance Company. In February, 2006, a fire destroyed a house being built in the Haynes’ development. Peerless denied coverage of the loss because the specific house involved was not listed in its builder’s risk policy – an error of omission by TD Banknorth. Haynes filed a claim against TD Banknorth for negligence. TD Banknorth had purchased E & O coverage from Fireman’s Fund, subject to a $150,000 deductible. Fireman’s Fund paid TD Banknorth $354,000, which was reduced to $204,000 due to the $150,000 deductible.
Fireman’s Fund then subrogated against Peerless and Hartford for the $354,000. In the ensuing settlement, Peerless paid $88,000 and Hartford paid $120,000 in exchange for complete releases. An issue arose as to who would receive the $208,000 – TD Banknorth or Fireman’s Fund – so the $208,000 was deposited in an escrow account and Fireman’s Fund commenced a declaratory judgment action against TD Banknorth in the Connecticut federal court seeking a declaration that it was entitled to all of the escrow funds. Fireman’s Fund claimed $10,000 in defense costs in addition to the $204,000 it had paid Haynes – for a total of $214,000. TD Banknorth counterclaimed for a declaratory judgment that, under Connecticut’s Made Whole Doctrine, it was entitled to recover its $150,000 deductible from the escrowed $208,000. Both parties moved for summary judgment and the federal trial court found that the subrogation clause in the Fireman’s Fund’s E & O policy abrogated Connecticut’s Made Whole Doctrine and granted summary judgment in favor of Fireman’s Fund. TD Banknorth appealed to the 2nd Circuit Court of Appeals.
Relying on the case of Wasko v. Manella, 849 A.2d 777 (Conn. 2004) for the proposition that boilerplate subrogation clauses are inadequate to abrogate default common-law subrogation rules, the 2nd Circuit concluded that the federal trial court erred in determining that the terms of the errors and omissions contract abrogated the Made Whole Doctrine. Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 644 F.3d 166 (2nd Cir. 2011). In addition, the 2nd Circuit rejected Fireman’s Fund’s alternative argument that, under Connecticut law, the Made Whole Doctrine applied only to insurance for first-party losses rather than third-party liability. With respect to Fireman’s Fund’s argument that the Made Whole Doctrine does not apply to deductibles, however, the 2nd Circuit determined that “no statutory or precedential support for either position” could be found in Connecticut law. Accordingly, the 2nd Circuit certified two questions to be addressed by the Connecticut Supreme Court:
- Does the Made Whole Doctrine apply in Connecticut?
- Is an insured made whole when it recovers all of its damages except for its deductible?
With regard to the first issue, the Court answered, “yes.” The Connecticut Supreme Court noted that it has never formally adopted or recognized the Made Whole Doctrine. It extolled the virtues of both legal and equitable subrogation as promoting equity by preventing an insured from recovering from both the tortfeasor and the insurance carrier for the same loss – unjustly enriching the insured. The Court also observed that when the amount recoverable from the tortfeasor is insufficient to satisfy both the total loss sustained by the insured and the amount the insurer pays on the claim, subrogation may lead to inequitable results. Accordingly, the Supreme Court announced that the Made Whole Doctrine will now operate as a default rule in Connecticut insurance contracts. However, the Court made clear that the Made Whole Doctrine is only the default rule and parties are free to provide differently in their insurance contract, provided they do so expressly. Therefore, it appears that the Made Whole Doctrine can still be avoided by contract with the appropriate policy language. The Court said that if the Legislature or the Commissioner of Insurance determines that a different result is warranted, either one could likewise modify this Doctrine.
With regard to the second issue, the Court also answered “yes.” An insured is made whole when it recovers all of its damages, but is not reimbursed its deductible. In other words, the Made Whole Doctrine does not apply to deductible reimbursement. A deductible is a thin layer of first-dollar liability retained by the consumer (and specifically not transferred to the insurer) to ensure risk-sharing and loss avoidance. Under the policy, the insured agrees to pay the deductible as a first-dollar obligation prior to implicating the insurer’s obligation to cover the damages. Therefore, the loss of the deductible is not a shortfall in the insurance coverage. The Court correctly observed that applying the Made Whole Doctrine to deductible reimbursement would unjustly enrich the insured because the insurer “accepted only the risk of paying if the loss exceeded the amount of the deductible, with premiums calculated based [on] the amount of first dollar liability accepted by the insured.” The Court noted that applying the Made Whole Doctrine to deductibles was not consistent with the purpose of a deductible. A deductible indicates the amount of risk retained by the insured. The insurance policy shifts the remaining risk of any damages above the deductible to the insurance company. The Supreme Court correctly noted that allowing the insured to recover a deductible from the carrier’s subrogation recovery would change the insurance contract to one without a deductible. As a result, Connecticut joined the few states which have addressed this specific issue.
Notably, NASP members Coleman Duncan and Laura Zaino filed persuasive amicus curiae briefs in this case.
If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at [email protected].