Mastering the Made Whole Rule by Steven Theesfeld, Esq., Yost & Baill LLP, Minneapolis, Minnesota

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1 Mastering the Made Whole Rule by Steven Theesfeld, Esq., Yost & Baill LLP, Minneapolis, Minnesota One of the more unusual barriers to subrogation is the concept that the insured must be made whole before subrogation is permitted. While not yet followed in enough states to be considered a majority rule, there are nevertheless a surprising number of states that do not allow subrogation against a tortfeasor unless the insured has first received enough money to fully compensate him. 1 1 THE MADE WHOLE RULE IS FOLLOWED IN ONE FORM OR ANOTHER IN THE FOLLOWING STATES: SEE, E.G., POWELL V. BLUE CROSS & BLUE SHIELD, 581 SO.2D 772, 777 (ALA.1990); MARQUEZ V. PRUDENTIAL PROPERTY & CAS. INS. CO., 620 P.2D 29, (COLO.1980) (INTERPRETING STATUTE TO BE CONSISTENT WITH INSURED WHOLE RULE); MAGSIPOC V. LARSEN, 639 SO.2D 1038, 1042 (FLA.DIST.CT.APP.1994); HARDWARE DEALERS MUT. FIRE INS. CO. V. ROSS, 129 ILL.APP.2D 217, 262 N.E.2D 618, 621 (1970); CAPPS V. KLEBS, 178 IND.APP. 293, 382 N.E.2D 947, 951 (1978)(CONSTRUING STATUTE AS INTENDING TO CONFER RIGHT OF SUBROGATION ONLY IN EVENT THE INSURED HAS BEEN FULLY COMPENSATED FOR HIS OR HER ADJUDGED LOSSES); LUDWIG V. FARM BUREAU MUT. INS. CO., 393 N.W.2D 143, (IOWA 1986) (UPHOLDING MADE WHOLE RULE, BUT PERMITTING SUBROGATION REIMBURSEMENT WHERE AMOUNTS RECOVERED BY INSURED FROM TORTFEASOR CAN BE IDENTIFIED AND CREDITED TOWARD SUBROGATED CLAIMS); SOUTHERN FARM BUREAU CAS. INS. CO. V. SONNIER, 406 SO.2D 178, 180 (LA.1981); WESCOTT V. ALLSTATE INS., 397 A.2D 156, 169 (ME.1979); FROST V. PORTER LEASING CORP., 386 MASS. 425, 436 N.E.2D 387, (1982)(WHERE INSURANCE POLICY CONTAINED NO SUBROGATION CLAUSE, COURT UNWILLING TO EXTEND IMPLIED RIGHTS OF SUBROGATION TO INSURANCE FOR PERSONAL INJURIES); UNION INS. SOC Y V. CONSOLIDATED ICE CO., 261 MICH. 35, 245 N.W. 563, 564 (1932); WESTENDORF V. STASSON,N 330 N.W.2D 699, 703 (MINN.1983); HOME INS. CO. V. HARTSHORN, 128 MISS. 282, 91 SO. 1, 3 (1922); SKAUGE V. MOUNTAIN STATES TEL. & TEL. CO., 172 MONT. 521, 565 P.2D 628, 632 (1977)(HOLDING THAT INSURED IS ENTITLED TO BE MADE WHOLE FOR HIS OR HER ENTIRE LOSS AND ANY COSTS OF RECOVERY, INCLUDING ATTORNEY FEES, BEFORE INSURER CAN ASSERT ITS RIGHT OF LEGAL SUBROGATION); PROVIDENCE WASHINGTON INS. CO. V. HOGGES, 67 N.J. SUPER. 475, 171 A.2D 120, 124 (N.J. SUPER.CT.APP.DIV.1961); ST. PAUL FIRE & MARINE INS. CO. V. W.P. ROSE SUPPLY CO., 19 N.C.APP. 302, 198 S.E.2D 482, (1973) CERT. DENIED, 284 N.C. 254, 200 S.E.2D 655 (1973); LOMBARDI V. MERCHANTS MUT. INS. CO. 429 A.2D 1290, 1292 (R.I.1981); WIMBERLY V. AMERICAN CAS. CO. OF READING, PA., 584 S.W.2D 200, 203 (TENN.1979); ORTIZ V. GREAT SOUTHERN FIRE & CAS. INS. CO. 597 S.W.2D 342, 344 (Tex.1980); HILL V. STATE FARM MUT. AUTO. INS. CO., 765 P.2D 864, 868 (UTAH 1988); VERMONT INDUS. DEV. AUTH. V. SETZE, 157 VT. 427, 600 A.2D 302, 307 (1991); THIRINGER V. AMERICAN MOTORS INS. CO., 91 WASH.2D 215, 588 P.2D 191, (1978); KITTLE V. ICARD, 185 W.Va. 126, 405 S.E.2D 456, 464 (1991); RIMES V. STATE FARM MUT. AUTO. INS. CO., 316 N.W.2D 348 (WIS. 1982). The million dollar question then becomes: when has an insured been fully compensated? In many cases, a carrier may have paid every loss documented in the insured s medical or property records, and still the insured will claim they are owed additional sums for pain and suffering or for that undocumented Picasso they kept in the attic. More troubling is when the insured settles for less than a carrier s policy limits, but still claims that she has not been fully compensated. And this is nothing compared to the problem of when an insured settles for a third-party tortfeasor s policy limits and still claims to be less than fully compensated. The battle over subrogation and the made whole rule can thus rear its ugly head in many situations, and a battle can develop over whether the insured or the carrier is entitled to the first of the limited dollars of a tortfeasor. Unfortunately, these made whole or squeeze-out type rules are commonly adopted by wellmeaning courts in judicial opinions dripping more with sympathy than logic. This means the uniform application of a rule that normally comes from thoughtful consideration and adoption by a

2 legislature, is nowhere to be found when dealing with the made whole rule. Indeed, the rule has undergone vast interpretation from state to state and continues to morph as time goes by. Thus, the rule s own changing nature defies rigid application and it has become a pitfall for unwary subrogation professionals who too often relent to the made whole argument rather than fight for full recovery. So what s a good subrogation professional to do? First, he or she should be aware of the problem and have a basic understanding of whether the made whole rule is something he or she has to worry about in the state where his or her claim has originated. (The endnotes provide a list of states where the made whole rule is currently applied.) Educating oneself with the state of the law where the claim originates is the key to developing an effective response. Second, for those subrogation professionals unlucky enough to confront the made whole rule in their state, there are a few themes that are developing in the courts, which serve to answer the question of whether an insured has been fully compensated, or better yet, may prevent the application of the rule altogether. The main problem posed by the made whole rule is how to determine when someone has been fully compensated. When an insured takes a tortfeasor to trial and receives a 100 percent verdict against the tortfeasor, it is easy to see what amount made the insured whole for his loss the amount the jury decided to award. The more difficult problem is in those cases where the insured is also found partly at fault, or worse yet, those cases that never make it to the jury, but settle for some amount prior to reaching the end of a trial. Few states have addressed how a jury s finding that an insured is comparatively at fault affects the calculation of whether an insured has been fully compensated. One of the leading states on this issue is Wisconsin. In that state, the amount needed to compensate an insured for his or her total loss must be reduced by a reduction for the insured s own contributory negligence. 2 2 SORGE V. NATIONAL CAR RENTAL SYSTEM, 470 N.W.2D 5 (WIS. APP. 1991) BUT SEE, IVES V. COOPERTOOLS, A DIV. OF COOPER INDUSTRIES, INC 208 WIS.2D 55, 559 N.W.2D 571 (WIS.,1997)(PER CURIAM, WITH THREE JUSTICES JOINING ONE CONCURRING OPINION AND THREE JUSTICES JOINING ANOTHER CONCURRING OPINION THAT WOULD OVERRULE SORGE V. NATIONAL CAR RENTAL SYSTEM, INC., 182 WIS.2D 52, 57, 512 N.W.2D 505.) Thus if an insured was found 60 percent at fault, the insured s perceived loss total would have to be reduced by 60 percent. Accordingly, the smart subrogation professional will always advocate for a comparative fault reduction in total insured damages where an insured may be found partly at fault for his or her own damages. Likewise, an insured s claim of less than full compensation is also called into question where an insured settles for less than the available policy limits. In such context, most courts will find that the insured has impliedly admitted that the amount received in settlement has made him whole for all of his losses. (For example, in New Hampshire, when an insured settles within the policy limits it is automatically assumed that the settlement covers all of the insured s medical expenses.) In contrast, when an insured settles for a third party s policy limits, it is impossible to tell by the settlement alone, if the insured has been made whole for her loss, unless the settlement documents specify how much of the sum paid is for what particular type of damage or it states straightforwardly that it provides full compensation. Most often, the settlement documents provide no guidance and a

3 court must determine if the insured has been made whole. Frequently this is done by a separate hearing where the court first determines the total amount of the insured s damages, including: her lost wages, pain and suffering, impairment of earning capacity and any other loss for which evidence is presented and then weighs those damages against the amounts received. In certain states, like Montana, an insured s costs and attorneys fees are included in the computation of her total amount of damages. 3 3 SKAUGE V. MOUNTAIN STATES TELEPHONE & TELEGRAPH CO., 565 P.2D 628 (MONT. 1977) However, in other states like Alabama, the fee the insured owes to its attorneys for their work in obtaining settlement from third party insurer can not be included in determining the insured s total loss. 4 4 CNA INS. COS. V JOHNSON GALLERIES, 639 SO 2D 1355 (1994, ALA) The wary subrogation professional will thus understand that until such a court determination is made, any claims of less than full compensation are simply opinions, subject to compromise, using the same weighing techniques employed by the courts. Thus, most subrogation professionals will continue to pursue subrogation vigorously until an insured forces a court determination, rather than agree to a settlement that encompasses all interested parties. Apart from competent valuation of an insured s damages, another way to thwart the made whole rule is to prevent its application in the first place. Several courts in California, Kentucky and New Jersey have looked to the contractual terms of the policy at issue to determine the application of the made whole rule. In those courts, it was held that if the carrier s policy clearly stated that the carrier had a primary right of recovery against a third party tortfeasor over its insured, the made whole rule was inapplicable. 5 5 SAPIANO V. WILLIAMSBURG NATIONAL INSURANCE CO., 33 CAL. RPTR 2D 659 (CAL. APP. 1994); BARNES V. INDEPENDENT AUTOMATIC DEALERS ASSOCIATION, 64 F.3D 1389 (9TH CIR. 1995); WINE V. GLOBE AMERICAN CASULATY CO., 917 S.W.2D 558 (KY. 1996); CULVER V. INSURANCE COMPANY OF NORTH AMERICA, 559 A.2D 400 (N.J. 1989) The debate, however, then arises as to how particular the policy language must be in order to defeat the made whole rule. In Ohio, it appears that even less-than-specific language will do the trick. There, a policy simply providing that an insurer had a right to the proceeds of any recovery entitled an insurer an unqualified right of subrogation. 6 6 RISNER V. ERIE INSURANCE CO, 633 N.E.2D 588 (OHIO APP. 1993) Additionally in Ohio, the courts allow policy provisions to govern apportionment in the event of a less than full recovery by the insured. Thus, all subrogation professionals should be reviewing their policies for help in establishing carrier priority over the made whole rule. In contrast, there are states like Colorado which prohibit any contract language from overriding the made whole rule. 7

4 7 WIEPRZKOWSKI V. STATE FARM MUT. AUTO INS. CO., 976 P.2D 891 (COLO. CT. APP. 1999). Nebraska and West Virginia take the idea of contract prevention one step further by also ruling that statutory language, as well as contract language can prevent application of the made whole rule. 8 8 SHELTER INSURANCE COMPANIES V. FROHLICH, 498 N.W.2D 74 (NEB. 1993); BUSH V. RICHARDSON, 199 W.VA. 374, 378, 484 S.E.2D 490, 494 (1997) Here again, subrogation professionals should mine the local laws to see if a statutory prohibition to the made whole rule exists. While the mining of statutes can grant success in certain states, sometimes the opposite is true. Some states seem to go out of their way to provide statutory protection of the made whole rule, rather than prevent its enforcement. For example, while Minnesota, allows contractual language to prevent application of the made whole rule in certain types of cases, 9 9 HERSHEY V PHYSICIANS HEALTH PLAN, INC. 498 NW2D 519 (1993, MINN APP). it also statutorily decrees that any health policy with a right of subrogation must specify that it is subject to full recovery M.S.A. 62A.095. THE ISSUE OF ERISA SUBROGATION AND THE MADE WHOLE RULE IS PARTICULARLY VOLATILE WITHIN BOTH THE STATE AND FEDERAL CIRCUITS WITH THE ISSUE OF WHETHER FEDERAL ERISA LAW PREEMPTS THE MADE WHOLE DOCTRINE ROUTINELY COMING UP FOR REVIEW. (However, even these rules can be preempted when dealing with an ERISA plan.) HUNT V. SHERMAN, 354 N.W.2D 750 (MINN. 1984)(IF AN ERISA PLAN PROVIDES THAT IT HAS PRIORITY TO ANY SETTLEMENT FUNDS, MINNESOTA LAW REGARDING FULL RECOVERY WILL BE PREEMPTED.) Another method for avoiding the application of the made whole rule is to focus on the conduct of the insured. Courts in both Texas and Ohio have held that even though subrogation is not generally available until the insured is made whole, if a tortfeasor and insured settle behind the insurance carrier s back, (despite being on notice of the carrier s interest) the courts will not then permit an insured to hide behind the made whole doctrine. Instead, courts will force the insured to share whatever sum is available from the tortfeasor, even if the insured claims he has not been fully compensated ESPARZA V. SCOTT AND WHITE HEALTH PLAN, 909 S.W.2D 548 (TEX. APP. 1995); AMERICAN STATES INSURANCE CO. V. FLETCHER, 591 N.E.2D 320 (OHIO APP. 1990) The made whole rule is just another of the roadblocks which can limit subrogation recoveries. The good news is that the made whole rule is an everchanging and evolving area of the law. This means new arguments against its application are being created, borrowed and adopted from state to state. The subrogation professional has the best chance to circumvent the made whole obstacle by looking

5 at strategy that has been successful in other states, implementing the same and continuing to fight for full recovery. This article appeared in the Spring/Summer 2002 Issue of the NASP Subrogator. NASP

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