Until recently, Virginia courts had not applied or even discussed at length the equitable Made Whole Doctrine. Its application had been rejected in a 1998 unreported state circuit court ruling involving a self-funded medical reimbursement plan.[1] In the case of P.R.C., Inc. v. Jones Welding & Repair, Inc., Judge Jane Roush wrote:
O’Bryan’s reliance on the make whole doctrine is misplaced for three reasons. First, the make whole doctrine, by its terms, applies only to subrogation claims. Here, PRC is seeking to enforce its right to reimbursement from O’Bryan under the Reimbursement Agreement. See McIntosh v. Pacific Holding Co., 992 F.2d 882 (8th Cir.), cert. denied, 510 U.S. 965 (1993) (distinguishing subrogation and reimbursement). The distinction between subrogation and reimbursement is most clearly illustrated in Marshall v. Employers Health Ins. Co., 927 F. Supp. 1068 (M.D. Tenn. 1996). In that case, the plan participant was not made whole by her recovery from the third-party tort-feasor. The court ruled that the plan was precluded by the make whole doctrine from exercising its subrogation rights. Nevertheless, the plan was awarded all expenses it paid on behalf of the plan participant under its reimbursement agreement with the participant. The court noted that “the reimbursement and subrogation provisions must serve different purposes or they would be inexplicably duplicative.” 927 F. Supp at 1075.[2]
Importantly, Judge Roush properly distinguished between “subrogation” (either an equitable or a contractual/statutory right under which a subrogee insurer sues a tortfeasor to recovery insurance payments) and “reimbursement” (a contractual obligation set forth in the terms of the plan which require the insured/beneficiary to reimburse the insurer).[3] For as long as there have been laws, there has been a distinction between “conventional or contractual subrogation”, which is based on the contract between the parties, such as subrogation language contained in an insurance policy, and “equitable or legal subrogation”, which is a product of equity, and is not dependent on any contract, assignment, or privity. Even the Virginia Supreme Court has recognized the importance of protecting the important differences between contractual and equitable subrogation.[4]
On August 19, 2022, U.S. District Judge John Gibney, sitting in the Eastern District of Virginia, issued a ruling which seemingly releases the made whole virus as a viable defense to subrogation in that state. In Sustainable Sea Products v. American Empire Surplus Lines Insurance Company, a fire destroyed a seafood processing plant and the insured (SSPI) filed suit against American Empire Surplus Lines Insurance Company seeking a declaration that SSPI may recover in full all uninsured losses before AESLIC may recover any amount in subrogation.[5] The insurer argued that the Made Whole Doctrine did not exist in Virginia, but Judge Gibney mistakenly conflated equitable subrogation with contractual subrogation, and held that Virginia law has long recognized the “basic equitable proposition” it stands for.[6] Although the P.R.C., Inc. case above was the only case in Virginia to have addressed the Made Whole Doctrine by name up to that point, Judge Gibney blurred the distinctions between purely “equitable” subrogation, which arises automatically by operation of common law and “contractual subrogation”, which is provided for in the agreed-upon terms of the property insurance policy and negotiated for in the setting of insurance premiums. The parties had agreed to terms within the insurance contract which provided for a right of reimbursement for the insurer without reference to whether or not the insured has been ”made whole.”
Previous federal courts decisions in Virginia have also conflated equitable and contractual subrogation. The case of Schwarz & Schwarz of Virginia, LLC v. Certain Underwriters at Lloyds supports the proposition that Virginia law requires an insured to be made whole prior to any subrogation but did so referencing only vague “equitable” principles.[7] The defendant insurer in Schwarz had paid out the full amount of the limit on the insurance policy, and there was no dispute over whether the insurer had fully satisfied its contractual obligations arising from the policy.[8] Even still, the United States Magistrate Judge recommended that the district court find that the insurer had no right to subrogation because its insured had not been made whole. Even the Virginia Supreme Court has embraced the Made Whole Doctrine’s equitable underpinnings while ignoring the legal or contractual form of subrogation which it has also recognized in the past.[9] This blurring by the Virginia Supreme Court is evident in a ninety-year-old decision:
The right of subrogation cannot be enforced until the whole debt is paid, and until the creditor be wholly satisfied there ought to be and can be no interference with his rights or his securities which might, even by bare possibility, prejudice or embarrass him in any way in the collection of the residue of his claim.[10]
The Obici court applied the doctrine to deny the petitioner the right of subrogation, holding that “it would be neither just nor equitable” to allow the potential subrogee, the insurer in this context, to compete with the subrogor.[11] Notably, none of these decisions refer to the contractual right of reimbursement referenced in P.R.C., Inc. v. Jones Welding & Repair, Inc. This right of reimbursement is included in the insurance contract by agreement and its function is considered in the establishing of insurance premium rates. Nonetheless, it is being altered and/or ignored by judges who confuse the important differences between equitable principles and contractual rights.
The federal judge in his 2022 ruling in Sustainable Sea Products International, LLC concluded that a property insurer has a right to subrogation before it settled the first-party property claim risks creating the competition warned against in Obici. Although Virginia courts seem not to refer to the Made Whole Doctrine by name, the Sustainable Sea Products ruling says that the doctrine is alive and well in the Commonwealth and bars insurers from subrogation until their insureds are fully compensated for their losses.
[1] P.R.C., Inc. v. O’Bryan, 1998 WL 972277 (Va. Cir. Ct. 1998) (unpublished opinion).
[2] Id.
[3] Judge Roush cited the case of Marshall v. Employers Health Ins. Co., 927 F. Supp. 1068 (M.D. Tenn. 1996), in which the plan participant was not made whole by her recovery from the third-party tortfeasor. The court ruled that the plan was precluded by the Made Whole Doctrine from exercising its “subrogation” rights. Nevertheless, the plan was awarded all benefits it paid on behalf of the plan participant under its “reimbursement” agreement with the participant. The court noted that “the reimbursement and subrogation provisions must serve different purposes, or they would be inexplicably duplicative.”
[4] Collins v. Blue Cross of Virginia, 193 S.E.2d 782 (Va. 1973).
[5] Sustainable Sea Products Intl., LLC v. Am. Empire Surplus Lines Ins. Co., 32022 WL 3573247 (E.D. Va. 2022).
[6] The judge cited to Title Ins. Co. of Richmond v. Indus. Bank of Richmond, Inc., 157 S.E. 710, (Va. 1931) (“Until the insurer settles the claim no right of subrogation arises.”); Thomas v. Gov’t Emps. Ins. Co., 1991 WL 33250477 (Va. Cir. 1999) (“The right of subrogation does not arise until an injured party has received full compensation of a judgment.”); White v. Nationwide Mut. Ins. Co., 361 F.2d 785 (4th Cir. 1966) (applying Virginia law to declare that “no paramount right of subrogation arises until the insured has received full satisfaction of his judgment against [the tortfeasor]”).
[7] Schwarz & Schwarz of Virginia, L.L.C. v. Certain Underwriters at Lloyd’s London Who Subscibed to Police No. NC959, 2009 WL 2882034 (W.D. Va. Aug. 31, 2009), report and recommendation adopted sub nom. Schwartz & Schwartz of Virginia, LLC v. Certain Underwriters at Lloyd’s, London who Subscribed to Policy No. NC959, 677 F. Supp. 2d 890 (W.D. Va. 2009).
[8] Id.
[9] Collins v. Blue Cross of Virginia, 193 S.E.2d 782 (Va. 1973).
[10] Obici v. Furcron, 168 S.E. 340 (Va. 1933).
[11] Id.
