This article is a companion piece this video

In this episode of RG’s educational YouTube series on subrogation laws and litigation, On Subrogation: Made Whole Doctrine, subrogation attorney Jason Sullivan unpacks the Made Whole Doctrine: an ever-present, ever-changing piece of state subrogation laws.

The Made Whole Doctrine: Jurisdictional Confusion & Legal Opacity

The Made Whole Doctrine can be a confusing and frustrating issue when handling a subrogation claim; yet, it impacts any subrogating insurer assessing a file to determine the value of pursuing legal action. Because the Made Whole Doctrine varies so much from state to state, it is impossible to simply lay out a unified legal principal that subrogation professionals, specialists and attorneys can rely on. So instead, we will look at the doctrine as a whole, as well as some helpful strategies for getting a handle on the made whole doctrine in your jurisdiction.

The concept of the made whole doctrine itself is fairly simple. It is the idea that an insurance carrier who covered the costs of an injury under the terms of a policy cannot recovery those amounts unless and until the injured party is first fully compensated. 

In practice, it’s a bit more complicated; each state treats this issue slightly differently, and rarely is there a black and white conclusion. The case law is often muddled and contradictory, and relevant statutes, where they exist, can be vague. In some cases, the doctrine may result in no ability to recover losses in a subrogation claim. In fact, this doctrine often times limits the amount of recovery possible.

Realistically, it seems relatively easy for an insured’s attorney to declare that their client has not been made whole. What follows are 7 important questions for subrogating lawyers to answer in crafting an effective legal response to a made whole claim:

Question 1: What is the basis of your claim for subrogation?

Subrogation is based in a theory of equity. The right of subrogation exists because an insurance carrier pays for a claim. This resolves their insured’s loss. But the insurer still needs to recover their loss from paying out the claim. As well, the tortfeasor must be held responsible for the damages they caused. In equitable subrogation, the carrier steps into the shoes of the insured and pursues the tortfeasor directly in order to recover what they paid out in the claim. 

There are generally two contexts to the right of an insurer to submit a subrogation demand letter: 

  • Legal subrogation arises under the terms of a legally-binding contract. An insurance policy is a contract, and frequently there are provisions that grant subrogation rights to the insurer upon payment of a claim. 
  • Subrogation rights can be statutory. This is common in states requiring PIP (personal injury protection) benefits. Those benefits are legally defined, so in these states, they often also define the right to insurance subrogation.

When you are faced with an assertion that the insured is not made whole, make sure you know where your right of subrogation derives from in the first place. That will then lead you to what subrogation law should apply to determine the applicability of the made whole doctrine.  

Question 2: Is there precedential law in the state that applies to your case?

Not all state courts have directly addressed the made whole issue; however, a number of jurisdictions have state supreme court case precedence for the made whole doctrine. Still, a surprisingly-high number of states have not recorded a single decision that discusses the made whole doctrine in the context of auto insurance subrogation claims.

Unfortunately, this absence of case law may create legal uncertainty and opportunity to assert that the made whole doctrine bars recovery for a subrogating insurer. The good news is that these claims are clearly negotiable, and the doctrine does not immediately foreclose a right of recovery in this subrogation context.

Question 3: The made whole doctrine exists in my jurisdiction. Does it completely bar subrogated recovery?

In states such as Montana, Arkansas, Washington, Wisconsin, and others, a finding that an insured was not made whole potentially acts to bar any subrogation claim. The case law in these states has developed such that a right of subrogation does not arise until after the injured party is made whole. 

However, in other states, if the insured is not made whole, a proportional reduction rule applies to subrogating insurance companies. Rather than requiring every dollar be paid to the injured party until they are compensated, these proportional reduction states allow an insurance carrier to subrogate a claim in order to recover a reduced amount.  

An example of a state that has codified the made whole doctrine in insurance law is Ohio. Under O.R.C. § 2323.44, if an injured party is not fully compensated, the subrogating insurer still has a right to subrogate, but the claim is diminished in the same proportion as the injured party’s interest is diminished.

Question 4: Can the made whole doctrine can be overridden by policy language?

There are a number of states where the made whole doctrine is the default rule, meaning that until such time as the insured is made whole, the carrier has no subrogation right. However, in some states, the case law has determined that the contractual language of the insurance policy can override the common law rule. 

In Indiana, for instance, the made whole rule may be changed by express and unambiguous language in the policy which grants the insurer the right to submit a subrogation claim and pursue recovery even if their insured was not made whole.

This ties back to Question 1: it is vital to understand the basis of your subrogation claim. If your right of subrogation is rooted in the contractual language of the policy at issue, and there is clear language that the subrogation claim exists without regard to whether the insured is fully compensated, then in some states, like Indiana, the right of subrogation may be upheld even if the insured is not made whole, because the express terms of the contracting parties govern the terms of subrogation.

Question 5: How does your jurisdiction determine if the insured is made whole? 

Every insurance company has received a letter from a plaintiff’s attorney stating – with very little explanation or support – that their client has not been made whole, and therefore the law offers no right of subrogation. As a subrogation professional, these letters can be difficult to handle. Certainly there are cases where a tortfeasor’s full liability policy limit will never fully compensate a person for the level of injury and pain sustained in an automobile collision. 

That said, how can a carrier assess the merits of the claim without some explanation of the type of injury sustained, the total medical bills incurred, and the amount of recovery from the adverse party? An insured who sustains a broken bone or requires surgery may not be compensated if the other party has $25,000 in policy limits.

First, the carrier’s subrogation counsel must determine what it means to be made whole in their specific jurisdiction. Some states, like Montana, include damages as well as the cost of pursuing recovery. Others only count damages. Still other states separate economic vs non-economic damages. Understanding these state-specific parameters going into the subrogation lawsuit is vital to maximizing potential for recovery.

In this type of situation, it is wise to attempt to evaluate the nature of the claim and the feasibility of the injured party being made whole by assessing all relevant factors. Consider the type and severity of injury, the actual bills incurred, and the amount of the settlement funds. When it isn’t possible to obtain sufficient information to assess the claim, consider the relevant jurisdiction. What is the process to assert or challenge whether the insured is made whole?

This is where subrogation professionals need a thorough understanding of each jurisdiction. In some states, like Wisconsin and Arkansas, there is a hearing process for the court to assess whether an individual has been made whole. In other states, like Ohio, the judicial system requires the filing of a separate declaratory judgment action, where the court considers whether the injured party has been made whole. 

Rathbone Group’s subrogation attorneys and claims specialists are licensed in dozens of jurisdictions just for purposes like these, because every subrogation claim is different, and so is every jurisdiction in which a subrogation claim is brought. Naturally, anticipated litigation costs and expenses should always be balanced against the potential lien recovery amount when determining if proceeding to enforce your subrogation right is fiscally prudent.

Question 6: How does a state define when an insured is made whole? 

Given the specific subrogation claim at issue, examine the facts and circumstances determined in your investigative process. It is now time for the subrogation professional to analyze the file with regard to the laws of a particular state.

Montana is perhaps one of the most difficult states for this type of practice, in that, the injured party must be made whole before there can be a right of subrogation, and an insured is not made whole until they are compensated fully. 

In Swanson v. Hartford, the Montana Court stated that a party is not made whole until full recovery is received, including the cost and fees incurred in obtaining the recovery. So, in Montana, an insurer will not have a right to subrogation if their insured has not first received compensation for damages and cost of pursuit.

Other states do not consider the cost and expense required to obtain the recovery, but will require the insurer to share in a proportionate amount of those expenses. This is generally known as the common fund doctrine. Even among states accepting the common fund doctrine, there is variation in the formula applied to determine whether an insured is made whole.

Some states use a total damage formula which totals up all economic and non-economic damages.  If the amount paid by the tortfeasor and by the subrogated insurer exceeds the total claim, then the insured is made whole and the insurer has a right to recover to the extent there is a double recovery.

Other states assess the type of injury in determining whether and insured is made whole. Essentially, these courts separate the economic loss (medical bills) from the non-economic loss (pain and suffering). For instance, some states prioritize the insured’s economic damages first, but then prioritize the insurer’s right to recovery second, only considering the insured’s non-economic damages after these first two. This is about equitable recovery in circumstances where the policy limit does not cover total damages:

Suppose a motor vehicle collision results in the following situation: 

  • The insured has $15,000 in medical bills. 
  • $5,000 of those medical bills were paid by the subrogating insurer. 
  • The insured pursues a claim against the tortfeasor and wins an award of $45,000; with $15,000 allocated to economic damages and $30,000 allocated to non-economic damages. 
  • The tortfeasor only has $25,000 in liability coverage against the $45,000 judgment. 

With $45,000 in damages, the $25,000 liability coverage will not make the insured whole. In this circumstance, some states will divide the type of damage, consider the $15,000 in economic damages separate, and conclude that the insured has been made whole on the economic damages, and consequently will allow subrogation.

While this interpretation of the made whole doctrine may still allow a subrogation recovery, it also incentivizes plaintiffs to structure settlements to their advantage. In the above case, suppose the case never went to trial, and instead the parties settled for the tortfeasor’s $25,000 policy limits. If the settlement is structured to divide the limits and allocate $10,000 for economic damages and $15,000 for pain and suffering, then arguably the insured was only made whole on the economic damages and no right of subrogation would result in some states.

Here, it is paramount to contemplate when a made whole argument can be manufactured to stave off a subrogating party, and if possible take steps to insist on an accurate and fair allocation of damages.

Question 7: Have you reviewed your particular case with an attorney licensed in the state you are handling? 

Clearly, the made whole doctrine is not a singular legal theory uniformly applied and interpreted in all the states. Because it is complicated and varied, it is easy to make mistakes in an unfamiliar jurisdiction. This is yet another of the many reasons a carrier should work with a subrogation law firm with a team of attorneys licensed in many different states. You don’t want to pursue a subrogation claim if there’s no chance of having the right to subrogate in the first place. Similarly, you don’t want to give up the right to recover if you can use the made whole doctrine to your advantage. 

If you were to Google “Delaware Made Whole Doctrine”, you may find some references indicating that Delaware does not have any case law applying the made whole doctrine. This, in turn, might lead you to conclude that the doctrine has not been adopted in Delaware. 

However, PIP subrogation is governed by statute 2118 of the Delaware code, and section (g) states that subrogated rights shall be limited to the maximum amounts of the tortfeasor’s liability insurance coverage available for the injured party, after the injured party’s claim has been settled or otherwise resolved. This sounds a lot like a made whole rule, doesn’t it? 

So again, PIP subrogation is defined by statute in Delaware, and it requires that the injured party settle or otherwise resolve their claim. Practically speaking, this accounts for the Delaware’s dearth of case law, yet also operates as a de facto adoption of the made whole doctrine.

Whatever the legal issue, the made whole doctrine reminds us of the importance of utilizing a subrogation professional licensed in the jurisdiction at issue. State subrogation and insurance law vary so much that without in-depth knowledge of subrogation law in that specific jurisdiction, you risk your claim being denied even in a case where you do have a right to subrogate.

Rathbone Group on Subrogation Law, Theory & Education

If you would like to learn more about the subrogation process and how to best navigate insurance law, visit Rathbone Group’s YouTube channel and podcast library for more episodes of On Subrogation. Our talented attorneys break down important and nuanced subrogation topics in easy-to-understand ways. 

If you have a subject we have not yet covered, reach out at [email protected] to see your question featured on a future episode. And to learn more about our subrogation services, email us at [email protected].