The Made Whole Doctrine and the Future of Subrogation ____________________________________________ ‘The appearance of organization, IS organization,’ is a concept they teach in college business school. This means there is no strict formula to follow, or criteria necessary, to define organization other than any attempt to introduce or leverage a ‘rational design or structure.’ This structure often times will work as a tool for us. Phone book entries are listed alphabetically and street addresses are assigned chronologically. The order saves us time and allows us to quickly locate the information we seek. People like to feel organized, the writer of this article being no exception. Not only does organization in our routines provide practical value, it also provides peace of mind. We prefer a little certainty and predictability in our lives, a smidgen of order. That’s why we arrange our albums alphabetically! Speaking of which, how are we supposed to arrange albums by the ‘Artist Formerly known as Prince,’ when the name is technically a love symbol with no pronunciation? Organization can also be aesthetically compelling. After all, who prefers a messy garage? Both the art world and music world seem to place great value on the language and structure of mathematics. We’re not chemists, but you have to admit the Periodic Table of Elements is a work of art! What elegance and structure! In the world of Subrogation, there are numerous reference materials designed to help claim handlers quickly find information, tables or charts to summarize, and organize the relevant issues. One such reference table designed to clarify issues around recovery allocation is what we’d like to call the Priority Table of Allocation. For anyone handling insurance claims – from auto liability to property subrogation – we’ve all seen them, and we’ve all used them, especially now that we have the internet at our fingertips. Unlike ‘The Table’ for chemical elements, though, there is no one authoritative reference table for subrogation allocation. In fact, there are many such reference tools available. To the degree the approaches vary, the content thus varies. In large part, though, there are similarities in how the information is categorized, and it’s been this way for years. Developments in common law, however, might change how these ‘tables’ classify issues. For this reason, we highlight these cases to help you understand the significance. Insurance is a regulated industry governed by state laws. Reference materials, therefore, generally categorize an over‐all approach to recovery allocation by jurisdiction. The approach used to distribute recovered funds between the carrier and their insured is generally defined as either ‘pro‐rata’ or ‘made‐whole.’ 
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Pro‐rata allocation means recovered funds are apportioned between the insured and carrier at the same percentage their share compares to the total amount of damages. Insured‐made‐whole allocation means funds are allocated first to the insured up to their total amount of damages, before the carrier collects. While there is much legislation around insurance, there is limited direction contained within the legislation on how recovered funds are to be allocated, particularly for property insurance. Some states have borrowed from the Unfair Property/Casualty Claims Settlement Practices Model Regulation, specifically from Section 8, Standards for Prompt, Fair and Equitable Settlements Applicable to Automobile Insurance. (e.g. Kentucky: 806 Ky. Admin. Reg. 12: 12:095 §7(d)(5)) The model regulation, in part, indicates the following: Insurers shall, upon the claimant’s request, include the first party claimant’s deductible, if any, in subrogation demands. Subrogation recoveries shall be shared on a proportionate basis with the first party claimant, unless the deductible amount has been otherwise recovered. …. Policy language is a logical source for direction on how the funds are to be allocated, but most auto and property policies are silent on allocation, particularly so for personal insurance products. 1 | P a g e There are several fundamental principles from which subrogation developed. Subrogation is founded upon principles of equity, or fairness. These principles are more often expressed in case law versus statute. Where the carrier is compelled to make payment to an insured under a policy contract, any legal rights to pursue a recovery transfer from the subrogor insured over to the subrogated carrier. The carrier may then pursue a responsible third party to the extent of their payment. These rights, generally set forth in the policy, are supported by case law. A principle not often articulated, though frequently demonstrated, is the insured maintains the right to pursue recovery for his or her incurred damages for which the carrier has not paid, if the insured so chooses. Plenty of cases on record demonstrate insured’s pursuing recovery for out‐of‐pocket uninsured damages. In fact, much of the case law highlighting where a court embraced the made‐
whole doctrine derives from cases where the insured initiated their own recovery action. A component of the case law – and reference tables – that continues to be of interest, is how the approach to allocation of recovered funds might differ in the following two scenarios: 1. the measure of insured’s out‐of‐pocket damages is limited to the policy deductible amount 2. the insured’s out‐of‐pocket damages include items not covered under the ’scope of coverage.’ Courts have been asked to specifically weigh‐in on how deductibles factor into the made‐whole discussion, and this is the nature of ‘development’ we wish to share. 1. Jones v. Nationwide Property and Casualty Ins. Co. ,32 A.3d 1261 (Pa. 2011) The court reviewed this case to consider the “legality of an insurance company’s practice of reimbursing, on a pro rata basis only, an insured’s deductible from funds obtained in an insurer’s subrogation action against a third‐party tortfeasor.” The court concluded the made whole doctrine does not apply to the collision coverage. The Pennsylvania Superior Court decision, resulting in the instant appeal, held Nationwide’s practice of allocating an insured’s collision deductible on a pro‐rata basis was consistent with Pennsylvania's Unfair Insurance Practices Act ("UIPA"), specifically, §146.8. Standards for prompt, fair and equitable settlements applicable to automobile insurance. (31 Pa. Admin. Code § 146.8(c)) The section states, in part, (c) Insurers shall, upon the request of the claimant, include the first‐party claimant's deductible, if any, in subrogation demands. Subrogation recoveries shall be shared on a proportionate basis with the first‐party claimant, unless the deductible amount has been otherwise recovered. The court further stated: … if the carrier is acting in accordance with the regulation regarding recovery of the deductible portion of damages, it “cannot violate the common law ‘made whole' doctrine.” See Jones v. Nationwide Property and Casualty Ins. Co, 995 A.2d 1233 (Pa. Super. Ct. 2010). In the decision, the Court recognized this same logic was successfully argued in Harnick v. State Farm Mut. Ins. Co., 2009 U.S. Dist. LEXIS 43126 (E.D.Pa. Mar. 6, 2009). The Supreme Court recognized the acting Pennsylvania Insurance Commissioner declared the made whole doctrine is inapplicable to cases involving collision coverage insurance, stating a deductible is a “thin layer of first dollar liability retained by the consumer to ensure risk‐sharing and loss avoidance. The court stated the following, in support of that position: We cannot ignore that the legislature has set forth clear policy regarding deductibles generally. The MVFRL requires all motor vehicle insurance policies for collision coverage issued in this Commonwealth to contain a deductible of no less than $100. 75 Pa.C.S. § 1792(b)(2), … (and) … also directed insurers and the Commissioner to set premium rates based upon the deductible amount chosen by the insured. 75 Pa.C.S. § 1792(b)(4). … we agree with the Commissioner that applying the made whole doctrine to the distribution of subrogation recoveries in collision coverage cases would … (create) a no‐deductible policy, in the 2 | P a g e limited circumstances of a cases involving subrogation recoveries, in violation of the MVFRL, 75 Pa.C.S. § 1792(b)(2). 2. Fireman’s Fund Ins., Co. v. TD Banknorth Insurance Agency, Inc., 309 Conn. 448, 72 A.3d 36 (Conn. 2013) The Connecticut Supreme Court accepted the following certified question from the United States Court of Appeals for the Second Circuit: ‘‘Are insurance policy deductibles subject to Connecticut’s make whole doctrine?’’ Because Connecticut had not previously expressly adopted the make whole doctrine, the court reformulated the question in the following manner: (1) Is the make whole doctrine recognized as the default rule under Connecticut law; and, if so, (2) does the make whole doctrine apply to insurance policy deductibles under Connecticut law? The court concluded (1) to the extent that we have not previously done so, we now clarify that the make whole doctrine operates as a default rule in Connecticut insurance contracts, and that (2) the doctrine does not apply to insurance policy deductibles. Additionally: … with this subrogation priority policy in mind, we find 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.’’ (Citation omitted.) 2 A. Windt, supra, § 10:6, p. 10‐44. Accordingly, we conclude that the equitable considerations supporting the make whole doctrine are inapplicable to deductibles. Cf. 16 L. Russ & T. Segalla, supra, § 223:136, pp. 223‐
152 through 223‐153 If we were to decide otherwise, as TD Banknorth urges, we would effectively disturb the contractual agreement into which TD Banknorth and Fireman’s Fund entered, thereby creating a windfall for TD Banknorth 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 a deductible. See, e.g., Jones v. Nationwide Property & Casualty Ins. Co., supra, 613 Pa. 236; Averill v. Farmers Ins. Co. of Washington, 155 Wn. App. 114. 3. Woodcraft by MacDonald, Inc. v. Ga. Cas. & Sur. Co., 293 Ga. 9, 743 S.E.2d 373 (2013). In this case, the court rejected the position offered by plaintiff that the complete compensation rule or “made whole” doctrine requires an insured be fully compensated prior to an insurer's settlement of its subrogation rights with the tortfeasor. The court responded with the following: In the context of an insurance policy that grants subrogation rights to an insurer with respect to a claim for damage to a commercial building, the Legislature has specifically declined to include a “made whole” provision in the statute that directly governs such an insurance policy. See generally OCGA § 33–7–6 (detailing requirements for “real or personal property” insurance contracts). See also Morton v. Bell, 264 Ga. 832, 833, 452 S.E.2d 103 (1995) (“[I]f some things (of many) are expressly mentioned [in a statute], the inference is stronger that those omitted are intended to be excluded than if none at all had been mentioned”) (citations and punctuation omitted). As the ultimate arbiter of Georgia public policy, it is for the Legislature to determine whether the “made whole” doctrine would apply as a matter of law to a commercial property insurance policy that grants subrogation rights to an insurer. Commonwealth Inv. Co. v. Frye, 219 Ga. 498, 499, 134 S.E.2d 39 (1963) (“[T]he legislature ... [is] empowered by the 3 | P a g e Constitution to decide public policy, and to implement that policy by enacting laws”). Because no “made whole” provision exists in OCGA § 33–7–
6, we cannot by judicial fiat create one and invent a right for Coachcraft to be “made whole” before Georgia Casualty could properly pursue its subrogation rights under the insurance contract. (Woodcraft is d/b/a Coachcraft) Ford Motor Co. v. Carter, 239 Ga. 657, 663, 238 S.E.2d 361 (1977) (“[A]ppellate courts cannot, ‘by judicial opinion, enlarge upon or by construction grant rights or causes of action not clearly included in the statute itself’ ”). So, how do we respond to these state Supreme Court rulings that the made‐whole doctrine does not apply to deductibles? Well, for guidance we look to how we reacted when they reclassified Pluto from ‘planet’ to ‘plutoid,’ circa 2006: after a bit of complaining, we simply updated the text books, bought new flashcards and moved on! By the way, have you heard the latest about Pluto? It’s making a comeback! Joanne Welka, CSRP, Westfield Insurance Group ‐June 2014 4 | P a g e