In the world of subrogation, insurers typically pursue recovery by directly asserting their subrogation rights against responsible third parties. However, in the decision rendered by a federal court for the Eastern District of Wisconsin, the subrogated carrier tried something different. In Reynolds v. MJC America, Ltd., 2025 WL 659390 (E.D. Wis. Feb. 28, 2025), American Family Insurance assigned its subrogation rights to its insured, Cynthia Reynolds, following a house fire which resulted in $132,239.12 in property damage paid by American Family. This assignment strategy has been used before to try to avoid waivers of subrogation. However, in this case, it appears to have been driven by an effort to maximize American Family’s subrogation recovery—most notably by positioning the case to seek punitive damages, which would have been unavailable had American Family prosecuted the claim in its own name. The decision in Reynolds raises the question about the role such subrogation assignments can play in smaller cases in which egregious actions on the part of the defendants might warrant the award of punitive damages. If this strategy is effective, it could help carriers and their subrogation counsel more cost-effectively litigate smaller losses.
The Purpose Behind the Subrogation Assignment
Subrogation can be expensive, and quite often, a subrogation case isn’t pursued because the expenses and time involved with civil litigation make it only a marginally profitable venture. Typically, insurers prosecute their own subrogation claims, but American Family chose instead to assign its rights to Reynolds in exchange for a lien on any recovery. The key distinction is that while a subrogee can only recover what it paid, an insured plaintiff may seek additional damages, including punitive damages under Wisconsin law, if the defendant’s conduct was deemed “outrageous.” Wangen v. Ford Motor Co., 97 Wis. 2d 260, 271, 294 N.W.2d 437, 444 (1980). The structure of this assignment and lien agreement was likely intended to exploit this distinction, creating a potential avenue for American Family to recover beyond the $132,239.12 it paid on Reynolds’s claim.
Another possible motivation for structuring the case this way was to mitigate the impact of comparative fault. If American Family had pursued the subrogation action itself and a jury found Reynolds partially at fault for the fire, the subrogation recovery could have been reduced. However, by assigning the claim to Reynolds and allowing her to seek punitive damages, any reduction in compensatory recovery due to comparative fault could be offset by an award of punitive damages. In this way, the assignment could have served as a hedge against the risk of a diminished subrogation recovery.
Cost Considerations and Litigation Strategy
The most likely reason for the assignment was to make the case more financially viable. Litigating a subrogation claim of this size can be expensive, particularly when expert witness fees and discovery costs are considered. The prospect of punitive damages likely made the case more attractive not only for Reynolds but also for her attorney, who may have been working on a contingency fee basis. If the case had proceeded purely as a subrogation action, the recovery would have been limited to the amount paid by American Family, potentially making litigation costs prohibitive. However, with the potential for a punitive damages award, the financial calculus changed, making it a more cost-effective case to pursue.
Ethical Considerations and Dual Representation
The court’s ruling also raised concerns about the ethical implications of this strategy. American Family’s subrogation counsel represented both American Family and its insured, Reynolds, in negotiating the assignment and lien agreement. The court noted that such dual representation is “ethically perilous” because the insurer and insured may have conflicting interests. See Wis. SCR 20:1.7. Specifically, while an insured may want to maximize recovery—including punitive damages—an insurer’s primary goal is typically to recover its payout quickly and efficiently. These differing priorities could create conflicts, particularly where an attorney stands to benefit from an increased punitive damages award on a contingency fee basis.
The court stopped short of finding actual impropriety, noting that American Family is a sophisticated litigant and that Reynolds was not placed in a worse position by the arrangement. However, the case highlights the risks inherent in dual representation in subrogation matters, particularly where an assignment is used as a strategic tool to enhance potential recoveries.
The Court’s Response to the Assignment Strategy
The lien agreement in this case included a condition that Reynolds retain American Family’s subrogation counsel to prosecute a claim against Gree USA, Inc. Reynolds’s deposition testimony revealed that she has been only nominally involved in the action. She expressed no understanding of the assignment and lien agreement, did not even review her own discovery responses, and did not appear to understand the nature and extent of her claims. From Gree’s perspective, although prosecuted in Reynolds’s name, this is an action prosecuted for American Family’s benefit by American Family’s subrogation attorney.
Gree argued to the court that the assignment and lien agreement was an improper attempt to sidestep limitations on punitive damages in subrogation cases. The court recognized that the structure of the case effectively allowed American Family to seek a greater recovery than it could have obtained through a traditional subrogation action. However, because American Family had fully assigned its rights, the court held that Reynolds was the real party in interest and was entitled to pursue the claim in her own name, including any claims for punitive damages.
The decision underscores the thin line between permissible litigation strategy and impermissible manipulation of legal procedures. While the court did not invalidate the assignment, it acknowledged that its primary function was to enhance the scope of potential recovery. This raises broader questions about whether courts will continue to allow such strategies or whether future decisions may impose greater restrictions on assignments that are designed primarily to seek punitive damages.
Key Takeaways for Subrogation Professionals
- Assignments Can Expand Recovery Potential – Insurers looking to maximize recovery may consider assigning subrogation rights to insureds, particularly where punitive damages may be available.
- Comparative Fault Considerations – Assigning a claim to the insured can serve as a safeguard against reductions in subrogation recovery due to comparative fault, as punitive damages may help offset such reductions.
- Cost-Effectiveness in Litigation – The potential for punitive damages can make a case more financially viable by justifying litigation expenses that might not otherwise be practical.
- Ethical Risks of Dual Representation – Attorneys handling both the insured’s and insurer’s interests must be cautious of potential conflicts, ensuring that all parties fully understand and consent to the arrangement.
- Judicial Scrutiny of Subrogation Assignments – While courts have generally upheld assignments, they may become more critical of arrangements that appear to be designed primarily to bypass limitations on subrogation recoveries.
Conclusion
The Reynolds case exemplifies the evolving strategies insurers and their attorneys use to maximize recovery in subrogation claims. While such an assignment may allow for the pursuit of punitive damages, and in other cases might create an avenue for avoiding subrogation waivers, it also raises ethical and procedural concerns that future courts may examine more closely. For subrogation professionals, this decision serves as a case study in the benefits and risks of structuring claims to optimize recovery potential.
If you have any questions on subrogation property losses in Wisconsin or anywhere in the U.S., please contact Nicholas J. DeStefanis at ndestefanis@mwl-law.com.
