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The Spanish philosopher George Santayana once said that, “Chaos is the name we give order which produces confusion in our minds.” With that definition in mind, the July 3, 2019 Washington Supreme Court decision of Daniels v. State Farm Mut. Auto. Ins. Co., 2019 WL 2909308 (Wash. July 3, 2019), is responsible for about as much chaos as you can possibly throw into one state’s body of subrogation law. It would stand to reason, however, that if we can eliminate the confusion, we also eliminate the chaos.
Subrogation professionals know well the disaster which befalls an anti-subrogation state like Montana when it sides with its trial lawyers and turns its back on small businesses. By extending an equitable Made Whole Doctrine on steroids to all lines of insurance subrogation, and declaring that an insured must be made whole and totally reimbursed for any and all losses, including attorneys’ fees, 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.
Washington is no Montana; but it just took a giant leap in that direction. On July 3, 2019, the high court issued a decision out of left field. In Daniels, the court addressed whether the Made Whole Doctrine applies to property subrogation. Specifically, it addressed whether a first-party auto insurer, upon obtaining a partial recovery in a subrogation action, must reimburse its fault-free insureds for their full deductibles before any portion of the subrogation proceeds can be allocated to the insurer. Lazuri Daniels was involved in a three-vehicle accident near Federal Way, Washington. At the time of the wreck, 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 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. The trial court dismissed the claims under CR 12(b)(6), and the Court of Appeals affirmed the dismissal. The Supreme Court reversed, and in the process turned auto subrogation in Washington into chaos. Daniels’ lawsuit alleged bad faith and argued that, under both its own policy and Washington law, State Farm could seek reimbursement of its property damage payments only after Daniels was fully compensated for her losses, including her full deductible, and that by allocating subrogation recoveries to itself before it reimbursed its insured’s full deductible, State Farm was liable for breach of contract, bad faith, and conversion. State Farm moved for dismissal of the ridiculous lawsuit under CR 12(b)(6), relying on Averill v. Farmers Insurance Co. of Washington, 229 P.3d 830 (Wash. App. 2010), in which the Court of Appeals had held that the Made Whole Doctrine does not extend to this type of subrogation action, and confirmed that WAC § 284-30-393 only required subrogated insurers to return a pro-rata portion of deductibles where the insured was partially responsible for the accident. State Farm argued that nothing in its policy language required it to return the full deductible before allocating to itself the proceeds of a direct subrogation action, and that the Made Whole Doctrine has not historically been applied to auto property subrogation.
The trial court granted State Farm’s motion to dismiss, and the Court of Appeals affirmed. Daniels appealed to the Supreme Court, despite the fact that only a little money was at play in this particular case. Turning it into a class action, however, the stakes became higher for the entire industry. The issues on appeal were:
- Whether Washington’s Made Whole Doctrine requires that insurers allocate subrogation proceeds to the full reimbursement of its insureds’ deductibles before allocating any portion of the proceeds to itself.
- Whether, in the absence of an acknowledgement that an insured bears comparative fault, WAC § 284-30-393 requires an insurer to recover and return its insured’s full deductible.
- Whether State Farm’s policy language required that it allocate subrogation proceeds to the full reimbursement of its insureds’ deductibles before allocating any portion of the proceeds to itself.
The July 3rd decision in Daniels was a major expansion of the Made Whole Doctrine in Washington, expanding it unambiguously to deductible reimbursement and more broadly to property damage recoveries generally, where it had never applied before. Prior to this, it was doubtful that the Made Whole Doctrine applied at all to auto property/collision subrogation in Washington. Now, whether in a reimbursement action or a direct subrogation action, a carrier subrogating under Washington law is bluntly precluded from any subrogation recovery unless and until the insured’s damages—including, arguably, the insured’s unliquidated bodily injury damages—are fully compensated. The Supreme Court wrote:
Whether in the context of a reimbursement request, offset, or direct subrogation action, a fault-free insured must be made whole for their entire loss before an insurer may offset or recover its own payments. Stated another way, the proceeds of any recovery from a third-party tortfeasor, whether in a subrogation action or otherwise, must be allocated in such a way as to first make the insured whole.
The Court made clear that a fault-free insured must be reimbursed for its entire loss before an insurer may offset or recover its own payments. Application of the Made Whole Doctrine to auto property/collision subrogation efforts is now clearly the law in Washington despite any contrary language in the insurance policy. The Supreme Court clearly stated that its interpretation of the policy language “is consistent, as it must be, with the Made Whole Doctrine and the basic principles of subrogation”. The cases of Thiringer v. American Motors Ins. Co., 91 Wash.2d 215 (1978) (where Washington first expressly adopted the Made Whole Doctrine) and Sherry v. Financial Indemnity Co., 160 Wash.2d 611 (2007) (where the Court ruled that the insured must be made whole regardless of comparative fault) were expressly approved.
Regarding the reimbursement of deductibles, the high court did appear to make an exception to allow a pro-rata reimbursement of deductibles when the insured had some percentage of comparative fault. However, given the breadth and severity of the opinion, cautious auto insurers will likely take the prudent approach and reimburse 100% of the insured’s deductible in the absence of a judicial determination of fault. In most cases, this will effectively eliminate any pro rata reduction of the deductible reimbursed where the matter settles without a judicial determination. Insurance companies would not be well-advised to make that determination independently, given the potential bad faith or conflict of interest considerations that could arise. This issue is now on the radar of every trial lawyer in Washington, not to mention trial lawyers in other states who will now attempt the same coup in other states across the country.
The Made Whole Doctrine has long been applicable to Med Pay and PIP subrogation in Washington. However, until now, property/collision subrogation has enjoyed an exemption. That all ended on July 3rd. The bottom-line is that deductibles must now be fully reimbursed “off the top” of any Washington subrogation recovery. The case of Averill v. Farmers, 155 Wash. App. 114 (2010), which previously held to the contrary, is now bad law. It is now more important than ever that no auto property subrogation recovery be made or even attempted before confirmation that any and all of the insured’s damages are satisfied and made whole.
Gary Wickert and MWL’s Washington local counsel, Eric Virshbo, will be presenting a 1-hour update on Washington auto subrogation on September 11, 2019. See HERE for more details and/or to register for this webinar event.
If you should have any questions regarding Washington subrogation or subrogation in general, please contact Gary Wickert at [email protected].