The Supreme Court of New Jersey recently held that the made whole doctrine does not apply to deductibles or self-insured retentions. In City of Asbury Park v. Star Insurance Company, a case of first impression in New Jersey, the United States Court of Appeals for the Third Circuit certified the following question: “Whether, under equitable principles …, the made-whole doctrine applies to first-dollar risk that is allocated to an insured under an insurance policy, i.e., a self-insured retention or deductible.” By answering in the negative, New Jersey placed itself in line with other jurisdictions like Pennsylvania and Connecticut, which do not per se require an insured to be made completely whole before an insurer recovers its subrogated loss from a third-party tortfeasor.
In Asbury Park, a workers compensation insurer paid $2,607,227.50 for an injured firefighter’s claim, and the employer-insured (the city) paid its $400,000 self-insured retention. After the firefighter settled his claim against a third-party torfeasor for $2.7 million, $935,968.25 was set aside for satisfaction of the applicable lien. Accordingly, the insurer claimed entitlement to the entire sum, because the made whole doctrine did not apply to a self-insured retention (the deductible); whereas the insured-city claimed priority to the funds in full, i.e., the $400,000, before the insurer could even assert its subrogation claim.
After discussing the dictates of the made whole doctrine and New Jersey case law, the Asbury Park court concluded that it was necessary to analyze the question by reviewing both equitable principles and the plain language of the insurance policy. In doing so, the Court noted that to apply the made whole doctrine to a self-insured retention would essentially rewrite the insurance policy, which was unacceptable. “Where the award from a subrogation action against a third party is insufficient to reimburse both the insured’s self-insured retention and the carrier’s loss in excess of the self-insured retention, to place priority of recovery with the insured would, in effect, convert the policy into one without a self-insured retention.” The Court found that result unacceptable based on both the policy’s language and equitable principles. In sum, such a result would give the insured a benefit greater than what it bargained for.
Significantly, the Court in Asbury Park found that the made whole doctrine does apply to the insured’s uninsured losses in excess of the applicable policy limits. Thus, when the insured’s loss is only its deductible or self-insured retention, the made whole doctrine does not apply, and the insurer has priority in full to the subrogation recovery proceeds. However, if the insured’s losses are in excess of the policy’s limits, or if the insured’s losses are outside of the coverages provided, the made whole doctrine gives the insured priority in full to all recoveries for those particular uninsured losses. Thus, the nature of the loss, i.e., a deductible loss as opposed to a completely uninsured loss, determines how the made whole doctrine is ultimately applied. This distinction can also, potentially, impact for formation of pro rata joint prosecution agreements between insurers and insureds, because the made whole doctrine will provide the insured with priority to some, but not all of the uninsured loss.