New Wisconsin Federal Court Decision Makes Made Whole Doctrine A Self-Fulfilling Prophecy

What if the deck was stacked in such a way that insureds and tortfeasors could gerrymander and structure a tort settlement so as to ensure that the insured would never be “made whole”? Surely such ability would be a legal absurdity in a state where subrogation is supposedly favored for all of the societal benefits it serves. Such an artifice couldn’t possibly exist in Wisconsin where the Supreme Court has stated unequivocally that the remedy of subrogation is “highly favored and the courts are inclined to extend rather than to restrict the principle, and to give it a liberal application.” D’Angelo v. Cornell Paperboard Products Co., 120 N.W.2d 70, 77 (Wis. 1963). Sadly, that is exactly the deck Wisconsin insurers face according to a new federal court decision which draws liberally from a growing trend of anti-subrogation decisions.

In Gabe’s Const. Co., Inc. v. Holly Pipe Corp., 2015 WL 1014624 (E.D. Wis. 2015), plaintiff, Gabe’s Construction Company, Inc. (“Gabe’s”), rented pipe from defendants, NST Corporation and Holly Pipe Corporation, for use in a construction project in Florida. The pipe broke during installation causing significant damage. Gabe’s submitted a claim to its insurer, National Fire Insurance Company of Hartford (“National Fire”), which paid Gabe’s $692,928. Gabe’s then brought a diversity action against defendants and their insurers and named National Fire as an involuntary plaintiff. National Fire brought a subrogation claim against Gabe’s and defendants demanding reimbursement for the money it paid Gabe’s. While the litigation was pending, Gabe’s settled with the defendants for $250,000. National Fire was advised of the negotiations leading to the settlement, but chose not to be a party to it. As part of the settlement, Gabe’s agreed to indemnify defendants for sums the defendants might be found to owe National Fire on its subrogation claim. Gabe’s and the defendants filed separate motions to dismiss National Fire’s subrogation claim. Defendants argued that they should be dismissed because the indemnification agreement makes Gabe’s liable if National Fire prevails on its subrogation claim, and Gabe’s argued that it should be dismissed because it has not been made whole for the loss it sustained.

The federal judge was faced with the issue of whether National Fire’s subrogation claim against the defendants should be dismissed due to the settlement agreement. Reaching back to draw from an alarming trend of anti-subrogation state appellate court decisions, the court answered this question in the affirmative. The court held that because the settlement agreement contained an agreement that the insured would indemnify the defendants for any subrogation claims, National Fire must look only to its insured for reimbursement, and any such reimbursement depends on whether the insured has been made whole. The policy behind subrogation rests on equitable principles, including (1) ensuring that the plaintiff is fully compensated for the loss; (2) preventing unjust enrichment; and (3) ensuring that the wrongdoer is held responsible for his conduct. There was no mention of the fact that avoiding the “highly favored” subrogation rights of an insurer is as simple as conspiring with the tortfeasor and including an indemnity agreement in the release. It appears the courts are no longer “inclined to extend rather than to restrict” the time-honored doctrine of subrogation.

Generally, when a subrogated insurer and its own insured are competing for a limited pool of settlement funds that cannot cover both parties’ claims, the Made Whole Doctrine applies and the insurer may not recover unless its insured has been made whole. Conversely, when the available pool of settlement funds is sufficient to cover the claims of both the subrogated insurer and its insured, the Made Whole Doctrine does not apply and a subrogated insurer is entitled to recover regardless of whether its insured was made whole. This is because when adequate funds are available to cover both claims and the insured still settles for less than a made-whole amount, it should not be allowed to argue that it was not made whole.

However, when the settlement agreement requires the insured to indemnify the defendant for any subrogation interests, this automatically creates a limited pool of settlement funds over which the insured and insurer must compete, triggering the Made Whole Doctrine. Gabe’s and the defendants followed the “Schulte settlement procedure.” The “Schulte settlement procedure” is where the insured settles directly with a tortfeasor without resolving the subrogated carrier’s interests, the settling parties ask the circuit court to determine whether the injured party has been made whole, and the subrogated carrier has an opportunity to participate in the hearing.

National Fire argued that according to Muller, where the policy limits are sufficient to cover all claims (as here), the insured cannot settle for less than policy limits and then invoke the Made Whole Doctrine. However, Muller did not involve an indemnification agreement and so it doesn’t apply. Muller v. Society Insurance Co., 750 N.W.2d 1 (Wis. 2008).

National Fire also argued that the Made Whole Doctrine did not apply because, when Gabe’s settled, it breached its obligations under the policy to protect National Fire’s subrogation rights. However, the court held that the record in this case indicated that Gabe’s made efforts to secure National Fire’s subrogation rights, including naming it as a party in the litigation, and cooperating in discovery, expert witness retention, and mediation efforts. Furthermore, the court noted that its decision to settle was based on “good faith and reasonable reasons for compromising the claim.” In addition, without paying even lip service to the rights of a subrogated insurer, the court flatly stated that a party has the right to settle on its own terms, and the Made Whole Doctrine cannot be circumvented by contract. The court held that whether Gabe’s was made whole was a fact question to be determined in later proceedings.

This unfortunate federal court decision confirms that an injured plaintiff may settle directly with a tortfeasor without resolving the subrogated carrier’s interests, if the settling parties ask the circuit court to determine whether the injured party has been made whole and the subrogated carrier has an opportunity to participate in the hearing. This is known as the “Schulte settlement procedure”. The injured party should have the right to settle on its own terms and that refusal to recognize indemnification agreements could hamper plaintiffs’ settlement attempts. When the insured and tortfeasor have settled and included an indemnification clause in their settlement agreement, they create a limited pool of funds over which the insured and subrogated carrier must compete, and the Made Whole Doctrine is triggered. When the subrogated carrier’s interests are not resolved, the settling parties ask the court to determine if the insured has been made whole. This is true even when the settlement is for much less than the subrogated amount. If the insured and tortfeasors are freely given the ability to “rig” a settlement in such a way as to avoid repayment of one penny of a significant subrogation interest – an interest which our industry plans and relies on in calculating the premiums charged to the citizens and businesses of Wisconsin – it clearly isn’t as “highly favored” as our Supreme Court says it is.

For a summary of the important Wisconsin decisions dealing with the Made Whole Doctrine and a chronology of the case law on that subject, see the MWL’s publication entitled “Summary of Wisconsin Made Whole Decisions” found HERE.

If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at

Gary L. Wickert

Gary L. Wickert is an insurance trial lawyer and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C. Gary has nearly four decades of litigation experience and is regarded as one of the world’s leading experts on insurance subrogation. He is the author of several subrogation books and legal treatises and a national and international speaker and lecturer on subrogation and motivational topics.