Insurance policy deductibles and subrogation make strange bedfellows. Most property and automobile insurance policies require that the insured pay a deductible—an out-of-pocket payment the insured is required to pay toward a covered loss before the insurance company kicks in with its own claim dollars. Some policies allow the insured to select a deductible, with the higher deductible policies usually having lower premiums because the smaller claims are absorbed with the insured’s deductible. Deductibles serve a dual purpose: they save the insurance company the administrative and overhead cost of processing smaller claims, and simultaneously help keep insurance premium costs lower. At the same time, one of the chief purposes of subrogation is also to help keep the cost of insurance premiums low by recovering the claim dollars from the responsible tortfeasor. Despite their similarity in purpose, subrogation and deductibles don’t always mix very well when the insurance carrier is pursuing a third-party tortfeasor via subrogation.
If an auto carrier is successful in subrogating a particular loss against a third party and makes a recovery of some or all of its claim payments, the issue often arises as to what portion, if any, of the insured’s deductible 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. Twenty-three states contain regulations or administrative codes which specifically and, in detail, govern when and under what circumstances an insured’s deductible should be reimbursed by a subrogating insurer. For example, in Texas, the Tex. Ins. Code § 542.204 specifically requires an insurer to “take action” to recover a deductible within one year from the date a claim is paid or 90 days before the statute of limitations runs-whichever is sooner. If it does not, the law requires an insurer to pay a deductible back to its insured. However, this burden does not apply if an insured is notified that subrogation will not be pursued and the insured is authorized to proceed on his own to recover any losses he deems he has suffered. However, this code section applies only to private passenger automobile policies. No other applicable statute, administrative code provision or case law gives us guidance for matters involving fire and casualty, property, or health insurance subrogation. However, the Texas Department of Insurance (TDI) indicates that the reimbursement of the insurance deductible in a third-party claim is usually dictated by the level of recovery – usually a pro-rata reimbursement based on the percentage of recovery. However, the TDI warns that a carrier must be consistent on its deductible reimbursement policy.
California law requires that every insurer that makes a subrogation demand must include in every such demand the insured’s deductible. 10 CA A.D.C. § 2695.7(q). Insurers must share subrogation recoveries on a pro-rata basis to reimburse a pro-rata share of their insureds’ deductibles. A pro-rata share of legal expenses and fees may be deducted on a pro-rata basis, if incurred. Iowa law requires that an insurer shall, upon the insured’s request, include the insured’s deductible in any subrogation demand. Iowa A.D.C. § 191-15.43 (507B)(4). Any subrogation recoveries will be shared on a pro-rata basis with the insured unless the deductible amount has otherwise been recovered. New York law requires an insurer which has made a physical damage third-party subrogation recovery to mail or hand deliver to the insured a pro-rata share of the insured’s deductible, within thirty days after such recovery. N.Y. Ins. Reg. 64 § 216.7(g)(1). Wyoming, on the other hand, has enacted a specific statute which requires that an insurer reimburse its insured its deductible, in full, before any part of the recovery is applied to any other use. Wyo. Stat. § 26-13-113. If the deductible exceeds the recovery made by the insurer, the entire recovery must be paid to the insured.
And so, it goes that 23 states have enacted insurance regulations or statutes specifically governing the duties of a subrogated carrier in subrogation settings. Of the other 27 states, 21 have no applicable statute, provision, or case law. In light of the fact that most of the states which have enacted regulations appear to apply a pro-rata reimbursement philosophy, an advisable policy with regard to reimbursement of deductibles in states which have not made any pronouncement, is to follow the pro-rata reimbursement formula.
Seven states have specific case law which governs procedures in these situations. The South Dakota Supreme Court has held that an insured can collect even if its insured has not been made whole by deductible reimbursement. Julson v. Federated Mut. Ins. Co., 562 N.W.2d 117 (S.D. 1997). Washington follows the blanket rule that an insured must be made whole before an insurer can collect any excess, and the Washington Department of Insurance advises that it relies on this case law to establish that a deductible must be reimbursed in full before a carrier can collect. Daniels v. State Farm Mutual Auto. Ins. Co., 444 P.3d 582 (Wash. 2019); Thiringer v. American Motorist, Inc., 855 P.2d 191 (Wash. 1978). Alabama has left the issue to be governed by the terms of the insurance policy. Ex Parte State Farm & Cas. Co., 764 So.2d 543 (Ala. 2000). It is possible that the 21 undecided states may fall in line at some point on either side of the fence – either requiring a deductible to be reimbursed in full before any subrogation recovery can be had or allowing a carrier to subrogate either without regard to reimbursement of the deductible or after reimbursement of a pro-rata share of the deductible.
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 confusing issue for subrogation professionals. Even experienced subrogation professionals and lawyers simply get it wrong when it comes to understanding and employing the law surrounding the obligation of a subrogated carrier to reimburse an insured a deductible. 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 little to do with the Made Whole Doctrine in most states. A chart depicting the law regarding deductible reimbursement in all 50 states can be found HERE.
Under-Deductible Subrogation and Reimbursement
What happens, however, when an insurance claim falls completely within the insured’s deductible or self-insured retention and a third-party tortfeasor is responsible for causing the loss? A self-insured retention requires that the insured make payments up to the SIR limit first, before the carrier makes any payments towards the claim. In contrast, a deductible policy usually requires the insurer to cover your losses immediately, and then it must collect the policy deductible back from the insured afterward. MWL pursues deductible reimbursement from larger corporate insureds on behalf of its client. But less frequently, the situation arises where MWL is called on to pursue a claim on behalf of an insured which has fallen completely within a large deductible and for which the loss has been borne completely by the insured.
Insurers are battling for clients’ insurance premiums dollars. In an effort to distinguish themselves from other carriers, some insurers are offering their insureds services intended to save them money. Some insurers are offering services to their insureds such as programs to recover insurance deductibles and self-insured retentions.
Many states require that subrogation carriers demand the insured’s deductible as part of a pre-suit subrogation demand. For example, in California the Insurance Code requires that subrogating carriers include the insured’s deductible in any demand to a third party tortfeasor, and share subrogation recoveries on a proportionate basis with the insured, unless the insured already recovered the whole deductible amount. California Code of Regulations, Title 10, Chapter 5, Subchapter 7.5Section 2695.7(q) states in part:
Every insurer that makes a subrogation demand shall include in every demand the first party claimant’s deductible. Every insurer shall share subrogation recoveries on a proportionate basis with the first party claimant, unless the first party claimant has otherwise recovered the whole deductible amount. No insurer shall deduct legal or other expenses from the recovery of the deductible unless the insurer has retained an outside attorney or collection agency to collect that recovery.
However, case law holds that a subrogating insurer does not have standing to include the deductible as part of the insurer’s claimed damages in suit. Pacific Gas & Electric Co. v Superior Court (2006) 144 Cal.App.4th 19, 26-27. Therefore, an insurer must demand it pre-suit, but lacks standing to recover it post-suit. If a carrier encounters this problem in litigation, a simple solution may be to intervene the insured into the lawsuit to obtain standing. However, you must be mindful of whether the statute of limitations has passed. In many states, an insurance company’s intervention relates back to the date of the original filed complaint by the insured. In California, as long as the original action is timely filed, a complaint in intervention based on the right of subrogation is timely, even if filed after the expiration of the statute of limitations. County of San Diego v. Sanfax Corp. (1977) 19 Cal.3d 862, Harrison v. Englebrick (1967) 254 Cal.App.2d 871, 874-875. However, an insured’s intervention might not relate back to the date of the original filed complaint by the insurance carrier. If the statute of limitations poses an issue, and the insured’s deductible is significant, it may be wise to enter into a joint prosecution agreement with the insured at the commencement of litigation in order to ensure the deductible is recoverable in litigation.
Some insurers—like Travelers—offer an Under Deductible Subrogation service designed to help commercial property insurance customers pursue reimbursement for damages when the loss falls below their property insurance policy deductible. According to its website, Under-Deductible Subrogation is available to qualified Commercial Property policyholders with a deductible of $50,000 or greater. The carrier and the insured come to a decision to move forward only after discussing challenges, anticipated litigation expenses and likely outcomes. The insurance company usually charges the insured a fee (a percentage of any deductible recovered) to help pay for the cost of subrogation counsel such as MWL to aggressively pursue the tortfeasor for information
Most carriers make an effort to recover the insured’s deductible if they have made a claim payment and are pursuing subrogation. State Farm, for example, attempts to recover the insured’s deductible as a routine part of its subrogation efforts. Unlike Travelers, however, State Farm advises that they can only attempt to recover a deductible when they have paid for a covered loss.
Even Insurtech companies such as Lemonade Insurance Company advise that filing a subrogation claim happens behind the scenes—the insured doesn’t have to do anything. If the insurance company’s subrogation efforts are successful, the insured could receive a reimbursement for some of deductible.
If an insurance company does not have an Under Deductible Program in place, MWL will still work with the insured of a client in order to pursue claims which have fallen squarely under the Deductible amount. If you have any questions regarding property subrogation or the reimbursement of an insured’s deductible or the cost-effectiveness of under-deductible efforts for an insured, please contact Lee Wickert at [email protected].
Lee R. Wickert is a senior associate attorney in our Austin, Texas branch office. Lee was located in in our Wisconsin office, but transferred to our Austin, Texas branch office when it was opened in May 2019. Lee’s practice focuses on insurance litigation, subrogation, workers’ compensation, health insurance and ERISA, automobile insurance, property and casualty, and insurance coverage. Lee is a graduate of the University of Wisconsin-Milwaukee and obtained his law degree at Marquette Law School and his M.B.A. at Marquette University. Lee is licensed to practice in Texas and Wisconsin.