One of the most successful weapons trial lawyers have discovered in combatting subrogation across the country has been the Made Whole Doctrine. It requires an insured to be fully compensated for damages (i.e., to be “made whole”) before the insurer is entitled to recover in subrogation from the at-fault third party tortfeasor. This “equitable” rule is applied passively in some states and aggressively in others. In Arkansas, for example, before subrogation can be pursued, an insurer must establish that the insured has been made whole.[1] Even worse, the state of Washington decision in Kosovan v. Omni Insurance Company, holds that a bad faith claim and a claim for violation of the Consumer Protection Act are both warranted when the PIP carrier attempts to subrogate its PIP payment before the insured is made whole.[2] This case further illustrates that these are very treacherous times for subrogation in Washington and it appears there are no limits to which trial lawyers are not willing to travel down the anti-subrogation rabbit hole. To make matters worse, Washington recently recognized a vehicle owner’s third-party claim for residual diminished value damage, or “stigma damage”, which is the loss of value of an automobile that remains after it is completely and professionally repaired.[3] This means there is almost always going to be uninsured damages the insured is owed when a carrier attempts to subrogate. It is as though courts are willing to throw away a key mechanism by which insurance premiums for small businesses across the country are kept in check.
Judges and legal scholars agree that subrogation recoveries are an important component in calculating the cost of premiums. One legal scholar at the University of Chicago explained how subrogation impacts insurance premiums.6 “An insurance company sets its rates based on historical net costs. Thus, if the insurer had one hundred policyholders in the experience period, and experienced a total of $20,000 in claim costs, it will set its actuarial premiums at $200 per policyholder. If, on the other hand, the insurance company experienced $20,000 in claim costs and received $5,000 in subrogation, it will set its actuarial premiums at $150 per policyholder.”[4] More and more, however, trial lawyers and short-sighted consumer advocates are bringing class action suits against insurance companies, arguing that subrogation efforts violate the Made Whole Doctrine.
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.
In the infamous Daniels v. State Farm Mut. Auto. Ins. Co. decision in Washington, wherein Daniels was insured by State Farm with a policy that included a $500 deductible. Daniels’s vehicle was at the center of the wreck; the driver of the car that hit her from behind was insured by GEICO, and the driver in front of her was insured by Liberty Mutual. State Farm paid the portion of the repair costs that exceeded Daniels’s deductible. State Farm then did the prudent thing and sought recovery of its payment from GEICO, which agreed that its insured was 70% at fault, and reimbursed State Farm for that portion of the total cost of the repairs. From these proceeds, State Farm reimbursed Daniels for 70% of her deductible. What could go wrong with such a responsible course of subrogation action by State Farm? Enter the trial lawyers. Lazuri Daniels sued State Farm for bad faith and sought class action status, arguing that by failing to fully reimburse its insureds for their deductibles after recovering in a subrogation action, State Farm violated both Washington law and its own insurance policy. And why not? Everybody hates insurance companies—until you need them.
Subrogation professionals know well the disaster which befalls an anti-subrogation state like Montana when its courts side with its trial lawyers and turns their back on small businesses. By extending an equitable Made Whole Doctrine on steroids to all lines of insurance subrogation, such states take the absurd position that an insured must be totally reimbursed for all losses, as well as costs, including attorney’s fees involved in recovering those losses, before the insurer can exercise any right of subrogation, regardless of contract language to the contrary. And attorneys’ fees breed more attorneys eager to file more class action bad faith litigation.
Some states are pushing back, however. On July 6, 2016, in Wisconsin—the state where the Made Whole Doctrine was born—the Supreme Court ruled that Dairyland Insurance Company could retain the property damage subrogation recovery it obtained from the tortfeasor while its insured’s bodily injury damages exceeded the bodily injury liability limits, and its insured was not made whole.[5] The Supreme Court held that the Made Whole Doctrine did not apply, under these circumstances, to prevent Dairyland from keeping its property damage subrogation recovery because the equities favor Dairyland: (1) Dairyland fully paid Dufour all he bargained for (bodily injury limit) under his policy, which included the policy’s limits for bodily injury and 100% of Dufour’s property damage; (2) Dufour had priority in settling with the tortfeasor’s insurer. By allowing Dufour to recover all proceeds under both policies, the court observed that Dairyland and Dufour were not in competition for a limited pool of funds, which is a necessary element for the Made Whole Doctrine to apply; and (3) the policy Dairyland issued to Dufour provided separate coverages for bodily injury and for property damage, and the court “decline[d] to rewrite Dairyland’s policy to provide for lump sum coverage where such coverage was not contemplated by the parties.”
The Texas Supreme Court responded to a bad faith lawsuit by holding that the Made Whole Doctrine is inapplicable where the parties’ agreed insurance contract merely provides for a clear and specific right of subrogation.[6]
A federal court in Pennsylvania held that it was not bad faith for State Farm—who had paid its insureds $456,281 in property damage following an explosion—to settle its subrogation claim for 50% of the damages and assign the remaining subrogation claim to the defendant utility company, despite the fact that the insured had not been made whole.[7]
Other states, like Ohio, have codified the Made Whole Doctrine. An example of a state that has codified the made whole doctrine in insurance law is Ohio. Section 2323.44 of the Ohio Statutes states that if an injured party is not fully compensated, the subrogating insurer still has a right to subrogate, but the claim is diminished in the same proportion as the injured party’s interest is diminished.
The Made Whole Doctrine is a lot more complicated and riskier than it used to be. It must be understood. It must be taken into consideration in all aspects of subrogation efforts, even small, innocent subrogation demands. It must be evaluated and contemplated before subrogation efforts are undertaken. The one thing it must not be is ignored. To do so would be at your own peril. Handing off subrogation efforts to a third-party adjusting firm or subrogation vendor who will quickly fire off subrogation demands on your behalf and as your agent won’t work either. The truth is, to borrow part of a quote from Thomas Edison, many subrogation opportunities these days are missed because they are dressed in overalls and look like work.
For questions about effectively safeguarding your subrogation program from potential bad faith and class action litigation, contact Gary Wickert at gwickert@mwl-law.com.
[1] Riley v. State Farm Mut. Auto. Ins. Co., 381 S.W.3d 840 (Ark. 2011).
[2] Kosovan v. Omni Insurance Company, 496 P.3d 347 (Wash. App. 2021),
[3] Grothe v. Kushnivich, 521 P.3d 228 (Wash. App. 2022).
[4] Jeffrey A. Greenblatt, Insurance and Subrogation: Where the Pie Isn’t Big Enough, Who Eats Last?, 64 U. Chi. L. Rev. 1337 (1997), citing Harry L. Sutton, Jr. and Allen J. Sorbo, Actuarial Issues in the Fee-For-Service/Prepaid Medical Group, 46 Center for Research in Ambulatory Healthcare Admin. 2d ed 1993. (“An adjustment to estimated total HMO expenses…should be included to project the impact of coordination of benefits, workers’ compensation, and subrogation.”), and author’s Phone Interview and Letter from Dean K. Lam, Senior Actuary for Allstate Insurance Company to Jeffrey A. Greenblatt, Jan. 30, 1997 (“Lamb letter”) (on file with U. Chi L. Rev.).
[5] Dufour v. Progressive Classic Ins. Co., 881 N.W.2d 678 (Wis. 2016).
[6] Fortis Benefits v. Cantu, 234 S.W.3d 642 (Tex. June 29, 2007).
[7] Alfano v. State Farm Fire and Cas. Co., 2009 WL 3030735 (M.D. Pa. 2009).
