This article was originally published in the Southern Loss Association (SLA) October 2020 Newsletter. Legal opinions may vary when based on subtle factual differences. All rights reserved.
After paying out a claim, insurers often pursue a subrogation recovery from a responsible third party. In evaluating the potential for recovery, subrogation specialists consider many issues including proof of liability, applicable contract provisions, statutory limitations, and the cost of pursing a recovery. Well informed insurers also work with their subrogation specialist to ask the question: Who is entitled to the recovery if we collect? In other words, who has priority over the funds recovered? Answering this question requires an understanding of the Made Whole Doctrine. The purpose of this article is to discuss the basic concepts surrounding the Made Whole Doctrine and identify some areas where application of the doctrine may be different across jurisdictions.
The Made Whole Doctrine Balances Equities and Sometimes Limits an Insurer’s Subrogation Rights
The Made Whole Doctrine (sometimes referred to as the Made Whole Rule), is a common law doctrine that states a subrogee/insurer is not entitled to recover from an at-fault party unless and until the subrogor/insured has been, or can be, “made whole.” The doctrine is an equitable defense that an insured can utilize to bar or limit an insurer’s subrogation rights so that the insured has priority over any recovery from the at-fault party. As a common law doctrine, it is equitable in nature and was created to prevent insurers from exercising subrogation rights when the result would be inequitable. The thought being that if one of the two parties must be left with uncompensated damage, it should be the insurer and not the insured. Thus, the doctrine applies in situations where there is a limited pool of funds from which the insured and the insurer are both seeking to recover, with the goal being to balance the competing equities. Although the made whole doctrine is generally defined the same throughout the United States, its application widely varies depending on jurisdiction.
The Balancing of Equities May Depend on the Context of the Loss
Some states, including Alabama, Florida, North Carolina, and Texas, have issued opinions applying the made whole doctrine to claims involving property damage. Other jurisdictions, including Kentucky and Mississippi have generally only applied the doctrine in the context of health insurance or medical benefits implying that the doctrine may not apply in all contexts. Some states have expressly rejected the doctrine in specific contexts, while a handful of jurisdictions do not yet have any major opinions regarding the doctrine. To properly evaluate whether the made whole doctrine applies to a specific case, a subrogation specialist must look not only to see whether the jurisdiction has adopted the made whole doctrine, but must also look to what contexts the doctrine has historically been applied. The balancing of equities, and thus the application of the equitable doctrine, may be different in the context of a property loss than it would be in a situation involving personal injury.
See Shumpert v. Time Ins. Co., 329 S.C. 605, 616, 496 S.E.2d 653, 658 (S.C. App. 1998).
“Made Whole” Does Not Always Mean Made Happy
When the made whole doctrine does apply, the question to ask is “has the insured been made whole?” If the answer is no, the insured may be entitled to recover from the at-fault party first, because the made whole doctrine gives the insured priority over any recovery until it has been “made whole.” But, being “made whole” generally means being compensated for legally recoverable tort damage. See Tampa Port Auth. v. M/V Duchess, 65 F. Supp. 2d 1299 (M.D. Fla. 1997). Items of damage for which the insured wishes to be paid, but would not be recoverable from the at-fault party in a lawsuit are not to be considered when determining whether the insured has been “made whole.” For example, an insured who has been paid the actual cash value for its damaged property is likely to be deemed “made whole,” even though the insured may seek the full cost to replace from the at-fault party. This is because an at-fault party in tort is only responsible for the difference in fair market value and would not be required to pay for depreciation. See Global Int’l Marine, Inc. v. US United Ocean Servs., LLC, 2011 WL 2550624, *17 (E.D. La. 2011).
Additionally, the majority of courts have considered the amount of costs and attorneys’ fees incurred by the insured in pursuing a recovery when deciding whether the insured has been “made whole.” See e.g., Ortiz v. Great Southern Fire & Cas. Inc. Co., 597 S.W. 2d 342, 343 (Tex. 1980); St. Paul Fire & Marine Ins. Co. v. W.P. Rose Supply Co., 198 S.E. 2d 482 (N.C. App. 1973). On the other hand, a handful of courts have declined to do so explaining that the American legal system generally requires a litigant to bear his/her own cost of prosecution and that this concept should be no different when applying the made whole doctrine. See CNA Ins. Co. v. Johnson Galleries, 639 So. 2d 1355, 1359 (Ala. 1994). Whether costs and fees are considered may depend on whether the insured chose to participate in the recovery efforts. If one party (either the insured or the insurer) bore all costs then a court is more likely to look to a net recovery figure when applying the doctrine. If both parties pursued recovery (together or independently), there is unlikely to be an inequity in requiring each party to bear its own expenses.
The Terms of the Policy May Override the Common Law Made Whole Doctrine
When asserting a subrogation claim, an insurer may be exercising its equitable rights in common law or exercising contractual subrogation rights provided to the insurer pursuant to a provision in the policy itself. Some jurisdictions hold that if an insurer is exercising contractual subrogation rights, the common law made whole doctrine does not apply. See Nat. Union Fire Ins. Co. of Pittsburg, P.A. v. Riggs Nat’l Bank of Washington, D.C., 646 A.2d 966, 971 (D.C. 1994). But, most jurisdictions continue to apply the made whole doctrine regardless of how the insurer’s right to subrogation arises. See Allstate Ins. v. Hugh Cole Builder, Inc., 772 So. 2d 1145, 1146-47 (Ala. 2000); Florida Farm Bureau Ins. Co. v. Martin, 377 So. 2d 827 (Fla. 1st DCA 1979).
In order to avoid uncertain application of the made whole doctrine, many insurers have chosen to include a subrogation section in the insurance policy that expressly sets forth how a recovery will be split between the insurer and insured. The majority of jurisdictions allow these provisions to override the common law doctrine, so as to favor the language of the contractual agreement between the parties.
See Wine v. Globe Am. Cas. Co., 917 S.W.2d 558 (Ky. 1996). But see, Hare v. State of Miss., 733 So. 2d 277 (Miss. 1999) (holding that parties cannot avoid application of the common law made whole doctrine via a contract provision). In jurisdictions that also allow for modifications of the common law doctrine, those modifications can also be made after a loss via a joint prosecution agreement or other similar document. Regardless of the type of contract or agreement utilized, the document must expressly provide for something contrary to the common law principles so that it is clear that the parties both intended to modify the common law. If the agreement can be read in such a way as to be consistent with the common law made whole doctrine, then it is not sufficient to avoid the normal application of the doctrine. See Wolfe v. Alfa Mutual Ins. Co., 880 So. 2d 1163 (Ala. Civ. App. 2003).
When Priority Is Not Clear, Preparation Is Important
There are significant jurisdictional variations and multiple factors at play in evaluating the question of “Who Has Priority? When the answer is not clear, the best practice is to try and address any made whole doctrine concerns during the first party claim, if possible. Protracted litigation can be avoided by dealing with made whole issues early. For example, an insurer can include a waiver of made whole doctrine claims in any release or settlement agreement with the insured. For compromised claims or policy limit situations, an insurer can take extra steps to designate how much is being paid for each type of loss under the policy so that it is clear what damages were compensated and what might remain. This detail is helpful when determining whether the insured has been fully compensated for legally recoverable tort damages. Understanding the made whole doctrine and take steps to address concerns early can help the insurer keep its subrogation recovery. At the very least, a better understanding of the doctrine will help an insurer know when subrogation efforts are worthwhile and when a recovery may need to be shared with the insured.