Subrogation permits a party who has paid a debt to step into the shoes of another (usually the debtee) to assume his or her legal rights against a third party to prevent that party’s unjust enrichment where a loss has been paid by the party seeking subrogation. In the insurance context, under the common law doctrine of legal and/or equitable subrogation, an insurance company that has made a payment to its insured is enabled to substitute itself for the insured and to proceed against the responsible third party. See, e.g., Allstate Ins. Co. v. Mazzola, 175 F.3d 255, 258 (2nd Cir. 1999); Albany Ins. Co. v. United Alarm Services, Inc., 194 F.Supp.2d 87, 93 (D. Conn. 2002).
Situations can arise where the amount recoverable from the responsible third party is insufficient to satisfy both the total loss sustained by the insured and the amount the insurer pays on the claim. In this situation, permitting subrogation may lead to inequitable results. The make whole doctrine addresses this concern.
Under the make whole doctrine, the enforcement of the insurer’s subrogation rights are restricted until after the insured has been fully compensated for his or her injuries and made whole. See, e.g., Barnes v. Independent Auto. Dealers Ass’n of California Health and Welfare Benefit Plan, 64 F.3d 1389, 1394 (9th Cir. 1995). See also, J. Parker, The Made Whole Doctrine: Unraveling the Enigma Wrapped in the Mystery of Insurance Subrogation, 70 Mo. L. Rev. 723, 737 (2005) (“[I]n the event of a subrogation dispute between the insurer and its insured, the insured has priority of rights to collect from the responsible third party. Thus, [when] the insured’s recovery from both the insurer and [the] tortfeasor is less than or equal to its loss the insurer forfeits its right to subrogation.”) “The equitable principle underlying the [make] whole [doctrine] is that the burden of loss should rest on the party paid to assume the risk, and not on an inadequately compensated insured, who is the least able to shoulder the loss.” 16 L. Russ & T. Segalla, Couch on Insurance (3d Ed. 2005) § 223:136, pp. 223-152 through 223-153.
Recently the Connecticut Supreme Court in Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 309 Conn. 449, 457, 72 A.3d 36, 41 (2013) found that the make whole doctrine was sound judicial policy. One of the reasons supporting adoption of the make whole doctrine was the fact that “[s]ubrogation … promotes equity by preventing an insured from receiving more than full indemnification as a result of recovering from both the wrongdoer and the insurer for the same loss, which would unjustly enrich the insured.” TD Banknorth, 309 Conn. at 456, 72 A.3d at 40, citing 16 L. Russ & T. Segalla, Couch on Insurance (3d Ed. 2005) § 223:135, pp. 223-151 through 223-152; and E. Rinaldi, Apportionment of Recovery Between Insured and Insurer in a Subrogation Case, 29 Tort & Ins. L.J. 803, 804 (1994) (“Although an insured is entitled to indemnity from an insurer pursuant to coverage provided under a policy of insurance, the insured is entitled only to be made whole, not more than whole. Subrogation prevents an insured from obtaining one recovery from the insurer under its contractual obligations and a second recovery from the tortfeasor under general tort principles.”).
The Connecticut Supreme Court then turned its focus on the question of whether the make whole doctrine applied to deductibles, i.e., whether the insured was actually made whole if the insured had to pay its own deductible.
In the small number of cases that have addressed the issue, the courts generally agree that the make whole doctrine does not apply to deductibles. As an example, the Washington Court of Appeals in Averill v. Farmers Ins. Co. of Washington, 155 Wash.App. 106, 229 P.3d 830 (2010), rev. denied 169 Wash.2d 1017, 238 P.3d 502 (2010), explained that “a conclusion that the make whole doctrine does not apply to deductibles” is consistent with the purpose of the deductible. “A deductible indicates the amount of risk retained by the insured … the insurance company policy shifts the remaining risk of any damages above the deductible to the insurance company.”
In that situation, the insured contracts to be out of pocket for the amount of the deductible. The insurance company’s subrogation interest was for the amount of the loss it paid, not including the deductible amount. When the insurer pursues its subrogation interest, that interest generally does not include the insured’s deductible. Allowing the insured to recover his or her deductible from the insurer’s subrogation recovery would in essence change the insurance contract to one without a deductible. Therefore, the Court in Averill held that the make whole doctrine did not apply to deductibles.
In Jones v. Nationwide Property and Cas. Ins. Co., 613 Pa. 219, 32 A.3d 1261 (2011), the Court made the following relevant observation: “[a]pplication of the [make] whole doctrine to deductibles would not only be contrary to the relevant … provisions [of the state’s insurance regulations] but, when considering the inherent nature of deductibles, would [also] run counter to the equitable principles underlying the [make] whole doctrine and subrogation.”
The Court continued that it would unjustly enrich the insured because the insurer “accepted only the risk of paying if the loss exceeded the amount of the deductible, with premiums calculated based [on] the amount of first dollar liability accepted by the insured. Application of the [make] whole doctrine in such a case would force the insurer essentially to cover the risk of the deductible [when] the insured has not paid premiums to cover that risk.”
The Connecticut Supreme Court in TD Banknorth, held that the make whole doctrine did not apply to policy deductibles under Connecticut law. In reaching this conclusion, the Court drew from that where there are multiple layers of insurance applicable to a loss, atop a primary policy, that the highest level excess insurer should receive the first monies out of any subrogation pot. See, e.g., Travelers Property Cas. Ins. Co. of America v. National Union Ins. Co. of Pittsburgh, Pa., 621 F.3d 697, 716 (8th Cir.2010) (applying Missouri law and concluding that “[t]he industry practice, in short, is that excess carriers are the last insurers obligated to pay claims and the first insurers entitled to recover in subrogation”); Westchester Fire Ins. v. Heddington Ins. Ltd., 883 F.Supp. 158, 167 (S.D. Tex. 1995) (“Money recouped by insurers after paying a claim is first applied to the highest layer of coverage, or ‘ “off the top” ’ of the ultimate net loss.”); Century Indem. Co. v. London Underwriters, 12 Cal.App.4th 1701, 1710, 16 Cal.Rptr.2d 393 (1993) (“[When] the insurers’ coverage is in the nature of layers, the excess carriers should recover under subrogation before primary insurers can be reimbursed. One can look at a subrogation recovery as reducing the net loss in which case the excess carriers would not be obligated to pay the loss.”).
With the foregoing subrogation priority practice in mind, the Connecticut Supreme Court found persuasive the analogy that the deductible is, in effect, akin to “a primary layer of self-insurance underlying the [liability insurance] policy, which policy is, as a practical matter, the equivalent of an excess policy…. [W]hen there is a recovery, the ‘excess’ level of insurance is entitled to recover before a lower level of insurance/deductible can recover…. By the same token, the amount of the insured’s loss in excess of the insurance policy must be reimbursed before the insurer is reimbursed by virtue of the same principle: reimbursements go to the highest level of excess and work their way down to the lowest level.” TD Banknorth, 309 Conn. at 468, 72 A.3d at 47.
Accordingly, the Connecticut Supreme Court concluded that the equitable consideration supporting the make whole doctrine were inapplicable to deductibles. To find otherwise would create a windfall for the insured for a loss that it did not see fit to insure against in the first instance when it contracted for lower premium payments in exchange for the deductible.
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