Case Title: Peggy Paulson v. Allstate Insurance Company

Citation: 2003 WI 99

Docket Number: 2001AP000991

State: wisconsin

Court: Wisconsin Supreme Court

Date: 2003-07-08T00:00:00Z

Document:
2003 WI 99 
 
 
 
SUPREME COURT OF WISCONSIN 
 
 
 
 
 
CASE NO.: 
01-0991 
 
 
COMPLETE TITLE: 
 
 
Peggy Paulson, Douglas Paulson, husband and 
wife, and Michelle Wagner, a minor, by her 
guardian ad litem, Jim Schernecker,  
 
Plaintiffs-Appellants, 
 
v. 
Allstate Insurance Company  
 
Defendant-Respondent-Petitioner, 
Cheryl Schacht,  
 
Defendant-Respondent, 
Group Health Cooperative of South Central  
Wisconsin,  
 
Subrogated-Defendant. 
 
 
 
 
REVIEW OF A DECISION OF THE COURT OF APPEALS 
2002 WI App 168 
Reported at:  256 Wis. 2d 892, 649 N.W.2d 645 
(Ct. App. 2002-Published) 
 
 
OPINION FILED: 
July 8, 2003   
SUBMITTED ON BRIEFS: 
        
ORAL ARGUMENT: 
February 11, 2003   
 
 
SOURCE OF APPEAL: 
 
 
COURT: 
Circuit   
 
COUNTY: 
Columbia   
 
JUDGE: 
Daniel George   
 
 
 
JUSTICES: 
 
 
CONCURRED: 
WALSH BRADLEY, J. concurs (opinion filed).   
 
DISSENTED: 
        
 
NOT PARTICIPATING:         
 
 
 
ATTORNEYS: 
 
For the defendant-respondent-petitioner there were briefs 
by Richard G. Niess and Coyne, Niess, Schultz, Becker & Bauer, 
S.C., Madison, and oral argument by Richard G. Niess. 
 
For the plaintiffs-appellants there was a brief by Jim 
Schernecker and Action Law, S.C., Sun Prairie, and oral argument 
by James G. Schernecker. 
 
 
 
2
An amicus curiae brief was filed by Edward E. Robinson and 
Cannon & Dunphy, S.C., Brookfield, and Brian H. Sande and Doar, 
Drill & Skow, S.C., Baldwin, on behalf of the Wisconsin Academy 
of Trial Lawyers. 
 
An amicus curiae brief was filed by Michele M. Ford, Agatha 
K. Kresa, and Crivello, Carlson & Mentkowski, S.C., Milwaukee, 
on behalf of the Civil Trial Counsel of Wisconsin. 
 
2003 WI 99 
NOTICE 
This opinion is subject to further 
editing and modification.  The final 
version will appear in the bound 
volume of the official reports.   
No.  01-0991  
(L.C. No. 
99 CF 301) 
STATE OF WISCONSIN  
 
 
   : 
IN SUPREME COURT 
 
 
Peggy Paulson, Douglas Paulson, husband  
and wife, and Michelle Wagner, a minor,  
by her guardian ad litem, Jim  
Schernecker,  
 
          Plaintiffs-Appellants, 
 
     v. 
 
Allstate Insurance Company  
 
          Defendant-Respondent-Petitioner, 
 
Cheryl Schacht,  
 
          Defendant-Respondent, 
 
Group Health Cooperative of South Central  
Wisconsin,  
 
          Subrogated-Defendant. 
 
FILED 
 
JUL 8, 2003 
 
Cornelia G. Clark 
Clerk of Supreme Court 
 
 
 
 
 
REVIEW of a decision of the Court of Appeals.  Reversed.   
 
¶1 
JON 
P. 
WILCOX, 
J.   Allstate 
Insurance 
Company 
(Allstate) petitions this court for review of a published 
decision of the court of appeals, Paulson v. Allstate Insurance 
Company, 2002 WI App 168, 256 Wis. 2d 892, 649 N.W.2d 645.  The 
No. 
01-0991   
 
2 
 
court of appeals affirmed in part, reversed in part, and 
remanded with directions the decision of the Columbia County 
Circuit Court, Daniel S. George, Judge.  Only one issue 
addressed by the court of appeals has been raised by Allstate in 
its petition for review before this court and we limit our 
decision strictly to that issue.   
¶2 
Peggy Paulson (Paulson) was injured and her car 
damaged in a car accident.  Paulson's insurer, Midwest Security 
Insurance Company (Midwest), after paying the car repair bill, 
settled with Allstate, the insurer for the other driver involved 
in the accident.  Midwest and Allstate reached a settlement 
agreement regarding the repair bill under which Allstate paid 70 
percent of the bill based upon the companies' consideration of 
Paulson's contributory negligence in the accident.  The Paulsons 
have asserted that they are entitled to the difference, the 30 
percent Allstate did not have to pay to Midwest.  The circuit 
court refused to award the Paulsons the 30 percent difference.  
The court of appeals reversed and remanded that issue to the 
circuit court with instructions to enter judgment for that 
amount in favor of the Paulsons.  We accepted Allstate's 
petition for review and now reverse the decision of the court of 
appeals on this subrogation issue. 
¶3 
We note that the material facts presented to this 
court are significantly different from those presented to the 
circuit court or the court of appeals.  Most of the claims in 
this case have now been settled.  As we interpret this case, 
only one issue remains for our determination.  If plaintiff's 
No. 
01-0991   
 
3 
 
insurance company pays 100 percent of the repair costs, then 
subsequently settles its subrogation claim with the tortfeasor's 
insurer for a reduced amount based on plaintiff's alleged 
contributory negligence, may a plaintiff collect the difference 
under the collateral source rule?  We now reverse the court of 
appeals and answer the above question in the negative. 
I.  FACTS AND PROCEDURAL BACKGROUND 
¶4 
The facts involved in this case are somewhat complex.  
In August 1998, Peggy Paulson and Cheryl Schacht (Schacht) were 
involved in a car accident.  Paulson was injured and her car 
damaged when the car driven by Schacht collided with the car 
driven by Paulson at an intersection.  Paulson presented a claim 
to her insurer, Midwest, for the vehicle repair costs.  The 
repair bill from Zimbrick, Inc., was $7,542.44.  By October 31, 
1998, Midwest, Paulson's insurer, paid $7,042.44, the total cost 
of the repairs less a deductible of $500. 
¶5 
On October 11, 1999, Paulson, her husband Douglas, and 
her daughter Michelle Wagner (collectively, the Paulsons), filed 
suit against Schacht and Schacht's insurer, Allstate, in 
Columbia County Circuit Court.  The Paulsons named Group Health 
Cooperative, which had paid Paulson's medical bills, and 
Midwest, which had paid the collision loss, as subrogees.  Peggy 
Paulson claimed property damages, medical expenses, lost wages, 
and pain and suffering, while her husband and daughter alleged 
loss of society, companionship, and loss of services and 
consortium.  Douglas Paulson also claimed lost wages. 
No. 
01-0991   
 
4 
 
¶6 
Before 
the 
Paulsons' 
suit 
was 
filed, 
Midwest 
negotiated a settlement agreement with Allstate relating to the 
original car repair bill.  Under the agreement, Allstate paid 
Midwest $4,929.71, or 70 percent of the $7,042.44 Midwest paid 
for the repairs.  Midwest agreed to the reduced payment based on 
Paulson's comparative negligence in the accident. 
¶7 
The Paulsons agreed to dismiss Midwest from the case, 
since Midwest's interest in the case as a subrogee for the 
amount it had paid was eliminated with the settlement agreement. 
¶8 
At the circuit court level, an issue arose regarding 
the timeliness of Allstate's answer to the complaint.  Schacht's 
answer was timely filed.  The parties later stipulated to 
Schacht's dismissal from the action.  Months after its own 
answer was due, Allstate filed a motion to dismiss, asserting 
insufficiency of service of the summons and complaint.  Soon 
thereafter, Allstate withdrew this motion.  On January 26, 2001, 
the circuit court denied Allstate's motion for an enlargement of 
time and granted Paulsons' motion to strike Allstate's answer 
and enter default judgment.  The Paulsons later moved for 
statutory sanctions against Allstate, which the circuit court 
denied. 
¶9 
On February 8, 2001, in preparation for the hearing on 
damages, the circuit court heard various motions in limine.  
Allstate argued that the Paulsons should not be allowed to 
present evidence regarding property damages of $8,105.93 or 
more, because Midwest had already settled any claims for 
property damages with Allstate.  The Paulsons argued that the 
No. 
01-0991   
 
5 
 
property 
damages 
incurred 
were 
higher 
than 
the 
damages 
originally paid by Midwest.  The Paulsons argued that, in 
addition to the charges paid by Midwest, the car needed a new 
steering box which cost $559, and brake parts had to be replaced 
three times, costing $600.  The Paulsons claimed they were 
entitled to the entire amount.   
¶10 The circuit court agreed with Allstate and held the 
Paulsons had no claim for property damages aside from the $500 
deductible, because of Midwest's subrogation interest.1  
¶11 On June 18, 2001, the circuit court entered judgment 
in favor of the Paulsons.  Ms. Paulson was awarded a total of 
$9,677.13 for all her personal injury and property damage 
claims.  Douglas Paulson was awarded $2,450.64, and Michelle 
Wagner was awarded $900.32.  The Paulsons appealed. 
¶12 The court of appeals addressed several issues.  First, 
the 
court 
remanded 
the 
case 
to 
the 
circuit 
court 
for 
reconsideration of the imposition of sanctions, finding that the 
record strongly supported sanctions.  Second, regarding the 
issue of excluding the evidence of property damages, the court 
held that the Paulsons were entitled to pursue Allstate for 
damages exceeding $7,542.44.  The court of appeals also found 
                                                 
1 At oral argument, counsel for Allstate conceded that this 
decision by the circuit court was erroneous and agrees with 
Paulson that, under Koffman, the Paulsons are entitled to seek 
recovery from Allstate for property damages not paid for by 
Midwest.  We agree.  See Koffman v. Leichtfuss, 2001 WI 111, 
¶43, 246 Wis. 2d 31, 630 N.W.2d 201.  However, these claims have 
now been settled. 
No. 
01-0991   
 
6 
 
that, under the court of appeals' decision in Reed v. Bradley, 
2000 WI App 165, 238 Wis. 2d 439, 616 N.W.2d 916, the collateral 
source rule applied and entitled the Paulsons to collect the 
reasonable value of the damages.  Here, the court found that the 
Paulsons would be able to collect at least the $2,112.73 
difference between the amount paid by Midwest and the negotiated 
payment by Allstate.  Finally, the court of appeals affirmed the 
circuit court's findings regarding costs and fees.  Allstate 
then filed a petition for review with this court, which we 
accepted on September 26, 2002.   
¶13 As we have noted, material facts of this case have 
changed since the court of appeals issued its opinion.  It was 
represented to this court at oral argument that since the court 
of appeals' opinion was released, all other claims, including 
all property damages exceeding the original $7,542.44 figure, 
have been settled.  We thus address only the issue of the 
plaintiff's claim to the $2,112.73 difference between the amount 
Midwest paid to the plaintiff and the amount Allstate paid to 
Midwest as part of a negotiated settlement agreement. 
¶14 On August 2, 2002, Peggy and Douglas Paulson and their 
attorney signed a "Limited Release of All Claims."2  This 
document makes clear that the only amount remaining in dispute 
is the amount constituting the difference between the original 
$7,042.44 amount Midwest paid on the repair bill and the amount 
                                                 
2 This court allowed Allstate to supplement the record with 
the "Limited Release of All Claims" in an order dated November 
20, 2002. 
No. 
01-0991   
 
7 
 
of the Midwest-Allstate negotiated agreement, $4,929.71.  The 
negotiated agreement split, 70 percent to 30 percent, the 
$7,042.44 amount Midwest paid on behalf of the Paulsons.  The 
negotiated agreement did not cover the $500 deductible, which 
Allstate subsequently paid.   
¶15 In exchange for a payment by Allstate of $6,500, the 
Paulsons agreed to release Schacht and Allstate from all claims 
except the claim for $2,112.73 and any additional 
amounts the Wisconsin Supreme Court may award to the 
undersigned, the $2,112.73 representing the claim for 
the difference between the $7,042.44 paid by Midwest 
Security 
to 
Douglas 
and 
Peggy 
Paulson 
and 
the 
$4,929.71 paid by Allstate Property & Casualty Company 
to Midwest Security, which claim remains pending, is 
expressly reserved by the releasing parties, and is 
currently the subject of a Petition for Review with 
the State of Wisconsin Supreme court in Case Number 
01-0991. 
"Limited Release of All Claims" (emphasis in original).  
The agreement goes on to clarify: 
 
It is understood and agreed that the claims 
released 
by 
the 
undersigned 
include 
claims 
for 
sanctions against Allstate, claims for additional 
statutory costs and disbursements, and claims for 
property 
damage 
not 
previously 
paid 
by 
Midwest 
Security, all as set forth in the Court of Appeals 
decision in Case Number 01-0991.   
 
¶16 Given the above agreement, this court decides, based 
on the facts as they now stand, the only remaining issue:  
whether Paulson is entitled to the difference between the amount 
Midwest paid and the amount for which Midwest negotiated a 
settlement.  Accordingly, claims related to other amounts 
already settled do not factor into our analysis. 
II.  ANALYSIS 
No. 
01-0991   
 
8 
 
¶17 This case raises arguments involving the interaction 
of the collateral source rule, subrogation, and the "made whole" 
doctrine.  This court has dealt with each of these issues on 
prior occasions and, as those precedents make clear, the 
application of the principles involved depends heavily upon the 
facts presented.  See, e.g., Koffman v. Leichfuss, 2001 WI 111, 
¶20, 246 Wis. 2d 31, 630 N.W.2d 201.  This case is no exception.   
¶18 This court is asked to decide whether Paulson may 
recover the amount of money representing the difference between 
the amount Paulson's insurer paid and what her insurer settled 
for in negotiations with the tortfeasor's insurer upon its 
subrogation claim.  Because allowing the plaintiff to recover 
this sum would amount to double recovery, we find that Paulson 
may not recover that difference as damages.  We find that 
Paulson has already collected the amount of property damages to 
which she is entitled and is not entitled to any additional 
recompense.   
¶19 Whether an insurer's 
subrogation 
rights limit a 
plaintiff's right to recovery is a question of law that this 
court reviews "independently of the determination of the circuit 
court."  See Koffman, 246 Wis. 2d 31, ¶20 (citing Ellsworth v. 
Schelbrock, 2000 WI 63, ¶6, 235 Wis. 2d 678, 611 N.W.2d 764; 
Miller v. Thomack, 210 Wis. 2d 650, 658, 563 N.W.2d 891 (1997)).  
Whether the collateral source rule applies in a particular case 
is a question of law reviewed independently, "although aided" by 
the analyses of the circuit court and the court of appeals.  See 
Ellsworth, 235 Wis. 2d 678, ¶6. 
No. 
01-0991   
 
9 
 
¶20 Paulson's main argument to this court is that Allstate 
has no valid subrogation claim because Paulson was not made 
whole before Midwest and Allstate settled, and that under the 
Rimes/Garrity precedents of this court, Paulson must be made 
whole before a subrogation claim exists.  Because Paulson was 
prevented from arguing damages in excess of those Midwest paid, 
and because there has been no Rimes hearing, there has not yet 
been any determination of damages or finding that Paulson has 
been made whole.  We reject Paulson's argument and find that the 
made whole doctrine is inapplicable to this case. 
¶21 Although this court's precedents in Garrity v. Rural 
Mutual Insurance Company, 77 Wis. 2d 537, 253 N.W.2d 512 (1977), 
and Rimes v. State Farm Mutual Automobile Insurance Company, 106 
Wis. 2d 263, 316 N.W.2d 348 (1982), do hold that under certain 
circumstances, a plaintiff must be made whole before an insurer 
has a right to subrogation, those circumstances do not exist in 
this case.   
¶22 In 
Garrity, 
77 
Wis. 2d at 
539-40, 
the 
insureds 
suffered a fire loss and the damages from the fire were found to 
exceed the limits under their fire insurance.  The very issue 
addressed in the case highlights the fundamental difference 
between that case and the case at hand.  There, the court began 
stating the issue:  "The question is:  When an insured's loss 
exceeds the amount recoverable under a standard [] insurance 
policy . . . "  Garrity, 77 Wis. 2d at 538 (emphasis added).  
The court in Garrity found that the general rule was that "where 
either the insurer or the insured must to some extent go unpaid, 
No. 
01-0991   
 
10 
 
the loss should be borne by the insurer for that is a risk the 
insured has paid it to assume."  Id. at 542 (internal citation 
omitted).  Similarly, in Rimes, 106 Wis. 2d at 264-65, the 
insureds' losses far exceeded the money obtained from the 
tortfeasors in settlement.  Citing Garrity, the court found that 
the insurer was not entitled to subrogation until the insured 
was made whole.  Rimes, 106 Wis. 2d at 276.   
¶23 Neither of these cases apply to the facts of this 
case.  Rimes and Garrity deal with the situation of competition 
between an insured and his or her insurer for a limited pool of 
money.  See Schulte v. Frazin, 176 Wis. 2d 622, 631-32, 500 
N.W.2d 305 (1993) (discussing Wisconsin precedents on the made 
whole rule and noting that the equitable factor in Rimes and 
Garrity was "the prospect of an insurer competing with its own 
insured for funds which are insufficient to make the insured 
whole"); Oakley v. Fireman's Fund of Wisconsin, 162 Wis. 2d 821, 
831, 470 N.W.2d 882 (1991). 
¶24 In 
Vogt 
v. 
Schroeder, 
129 
Wis. 2d 3, 
14, 
383 
N.W.2d 876 
(1986), 
this 
court 
made 
clear 
that 
equitable 
principles were at work in Rimes and Garrity and that in both 
cases, "this court was presented with the inequitable prospect 
of insurance companies attempting to take the funds that should 
have gone to the insured."  The issue in these cases, according 
to Vogt, is one of priority.  Id. at 14-15 ("Garrity and Rimes, 
although involving different types of insurance, were basically 
the same case——who was to have priority, the insured or the 
No. 
01-0991   
 
11 
 
insurer, 
where 
the 
total 
payments, 
including 
possible 
subrogation recovery, still would not make the insured whole.").   
¶25 Other Wisconsin cases continue in this strain.  In 
Leonard v. Dusek, 184 Wis. 2d 267, 275-76, 516 N.W.2d 453 (Ct. 
App. 
1994), the court of 
appeals 
again 
noted 
that the 
circumstance where an insurer is not competing with its insured 
for limited funds is to be treated differently under the 
principles of subrogation.  In Valley Forge Insurance Company v. 
Home Mutual Insurance Company, 133 Wis. 2d 364, 396 N.W.2d 348 
(Ct. App. 1986), the court of appeals held that a victim's 
insurer was not entitled to subrogation where the victim 
recovered less than his total loss.  Again, the situation was 
one of the insurer competing with the insured for funds.  That 
is not the case here. 
¶26 Couch on Insurance also supports this interpretation 
of the made whole rule.  In a section discussing the made whole 
rule, Couch's very first statement raises the threshold issue of 
insufficient funds:  "In many instances, the insurer and insured 
both have rights of recovery against the third party primarily 
liable for the loss, yet the amount recoverable from the third 
No. 
01-0991   
 
12 
 
party is insufficient to completely satisfy the claims of both."3  
Couch on Insurance, § 223.133, at 223-145 (3d ed. 2000). 
¶27 The circumstances described by Couch and in these 
Wisconsin cases show that the made whole rule is inapplicable in 
this case.  While Paulson argues that she had damages beyond 
those paid by her insurer and that Midwest and Allstate settled 
before there was any finding of the extent of damages, she has 
made no assertion that there was an insufficient pool of money.  
The specter of an insurer competing with the insured for a 
limited amount of funds is simply not raised by the facts of 
this case.  There has been no discussion of policy limits or a 
limited pool of funds for which Midwest and Paulson are 
competing.  Here, Midwest paid $7,042.44 for a car repair bill 
and settled with Allstate regarding that bill.  At this stage of 
the case, all amounts aside from that particular bill have been 
settled.4  Although Midwest agreed to a lesser amount in its 
                                                 
3 In discussing the rule, we note that Couch cites, in a 
footnote, a particularly aptly named article in the University 
of Chicago Law Review, entitled:  Comment:  Insurance and 
Subrogation:  When the Pie Isn't Big Enough, Who Eats Last?. 
Couch on Insurance, § 223.133, at 223-145 n.80 (3d ed. 2000); 
see also JA Greenblatt, When the Pie Isn't Big Enough, Who Eats 
Last?, 64 U. Chi. L. Rev. 1337 (1997).  This title illustrates 
the exact situation in which we find that the Rimes/Garrity 
cases apply; if there is no doubt that the "pie" is big enough, 
we find that the Rimes/Garrity issue does not arise. 
4 It is true that Allstate initially argued that it was 
excused from all property damages other than the deductible on 
the basis of its settlement agreement with Midwest, but Allstate 
has since paid the $500 deductible and paid $6,500 for a 
settlement on all other claims, including property damage which 
exceeded the $7,042.44 repair bill paid by Midwest. 
No. 
01-0991   
 
13 
 
settlement with Allstate based on the insurers' assessment of 
Paulson's contributory negligence, this agreement in no way 
decreased Paulson's recovery.  She has already received, through 
payment by her insurer or by Allstate, the $7,542.44 requested 
for the original repair bill.  She cannot now recover more upon 
that bill. 
¶28 We now delve into the matters related to application 
of subrogation and the collateral source rule.  As has been 
noted by this court, the interaction of these principles can 
lead to confusion.  See Koffman, 246 Wis. 2d 31, ¶33.   
¶29 Wisconsin 
case 
law 
has 
clearly 
provided 
that 
application 
of 
subrogation 
is 
controlled 
by 
equitable 
principles.  See Ruckel v. Gassner, 2002 WI 67, ¶15, 253 
Wis. 2d 280, 646 N.W.2d 11; Vogt, 129 Wis. 2d at 12-13.  This 
court has held that subrogation "deals with the right of the 
insurer to be put in the position of the insured in order to 
pursue recovery from third parties, legally responsible to the 
insured, for a loss paid by the insurer to the insured."  
Cunningham v. Metro. Life Ins. Co., 121 Wis. 2d 437, 443-44, 360 
N.W.2d 33 (1985).  In Vogt, 129 Wis. 2d at 17 n.6 (citations 
omitted), this court has noted:  "The general rule is that an 
insurer, on paying a loss, is subrogated in a corresponding 
amount to the insured's right of action against any other person 
responsible for the loss."  Ruckel, 253 Wis. 2d 280, ¶15, holds 
that one of the purposes of subrogation law is to avoid unjust 
enrichment via double recovery.  Its application in a particular 
case depends on facts.  Beacon Bowl Inc., v. Wis. Elec. Power 
No. 
01-0991   
 
14 
 
Co., 176 Wis. 2d 740, 776, 501 N.W.2d 788 (1993); Leonard, 184 
Wis. 2d at 272 (quoting Vogt, 129 Wis. 2d at 15).   
¶30 The collateral source rule is also grounded in 
equitable policies.  In Koffman, 246 Wis. 2d 31, ¶29, this court 
reiterated the explanation of the policy behind the rule given 
in Ellsworth, 235 Wis. 2d 678, ¶7, stating:   
The tortfeasor who is legally responsible for causing 
injury is not relieved of his obligation to the victim 
simply because the victim had the foresight to 
arrange, or the good fortune to receive, benefits from 
a collateral source for injuries and expenses. 
As such, if any windfall arises in a case, the benefit is to 
inure to the plaintiff, not the tortfeasor.  Koffman, 246 
Wis. 2d 31, ¶30.  Thus, as in both Ellsworth and Koffman, where 
the plaintiff's insurer receives discounts for medical expenses, 
the tortfeasor is still held responsible for the reasonable 
value of the services provided.5 
¶31 Paulson correctly acknowledges that, under Lambert v. 
Wrensch, 135 Wis. 2d 105, 121, 399 N.W.2d 369 (1987), if 
subrogation exists, the collateral source rule is inapplicable.  
See also Gurney v. Heritage Mut. Ins. Co., 183 Wis. 2d 270, 280-
                                                 
5 We note that there has been some disagreement on the 
equity of the measure provided in Koffman and Ellsworth.  
Dissents in both cases asserted that the plaintiff should only 
be entitled to the amount actually paid for the services.  See 
Koffman v. Leichtfuss, 246 Wis. 2d 31 (J. Sykes, dissenting); 
Ellsworth v. Schelbrock, 2000 WI 63, 235 Wis. 2d 678, 611 
N.W.2d 764 (J. Sykes, dissenting);.  Nevertheless, today the 
rule in Wisconsin is that a plaintiff is entitled to the 
reasonable value of the expenses paid, regardless of the actual 
payment.  Koffman, 246 Wis. 2d 31, ¶¶2, 25. 
No. 
01-0991   
 
15 
 
81, 515 N.W.2d 526 (Ct. App. 1994).  This court in Koffman 
limited the applicability of Lambert, noting that the case 
should not be read to mean that wherever an insurer has a 
subrogated interest, the collateral source rule does not apply.  
Koffman, 246 Wis. 2d 31, ¶¶38-39. 
¶32 In the context of a case such as this, the Lambert 
rule makes sense.  Here, Midwest has divested itself of its 
subrogation interest by settling with Allstate.  This was 
recognized by the circuit court in this case, and Paulson agreed 
to Midwest's dismissal from the case.  As noted in Koffman, the 
effect of the Lambert rule is to reduce recovery by the amounts 
paid on his or her behalf in order to prevent double recovery.  
See id., ¶41.  We find that the subrogation trumps the 
collateral source rule under the facts of this case. 
¶33 Paulson's case does not raise the issue of whether a 
plaintiff is entitled to the reasonable value of the expenses or 
services.  The reasonable value rule has been established in 
Koffman and Ellsworth.  Under the facts presented here, the 
plaintiff-insured has received the $7,542.44 amount constituting 
the original repair bill.  All issues other than the $7,542.44 
repair bill have already been settled by the parties.  Allstate 
has paid the $500 deductible portion of the $7,542.44 repair 
bill, and Paulson has received the additional $7,042.44 to cover 
the repair bill.  The fact that Midwest and Allstate agreed to a 
settlement wherein Allstate paid 70 percent rather than 100 
percent does not affect Paulson's recovery.   
No. 
01-0991   
 
16 
 
¶34 In Ellsworth, 235 Wis. 2d 678, ¶17, this court noted 
that the collateral source rule is to "place upon the tortfeasor 
the full responsibility for the loss he has caused."  In this 
case, though, additional equitable considerations come into 
play.  This court has strongly encouraged and favored settlement 
agreements between parties.  See Schulte, 176 Wis. 2d at 634-35.  
Allowing the plaintiff to collect the difference between the 
reasonable value of the car repairs and the amount Midwest 
settled for would discourage settlement of subrogation claims.  
Allstate would have no incentive to settle with Midwest.  
Litigation 
of 
the 
subrogation 
claims 
would 
be 
the 
only 
alternative.   
¶35 Also, the freedom to contract must be considered.  
There is no reason to disturb the contract between Midwest and 
Allstate, because Paulson has already recovered $7,542.44, the 
value of the original car repair bill.  Paulson submitted a bill 
of $7,542.44 to Midwest.  Midwest paid the Paulsons $7,042.44 
for that bill.  Allstate paid the $500 deductible and settled 
with Midwest on the remainder of that original repair bill.  
Allstate also settled the claim for additional property damages 
with the Paulsons.  As noted in Koffman, 246 Wis. 2d 31, ¶43, an 
insured's right to recover amounts beyond those paid by the 
insurer is not extinguished by subrogation.  As the court of 
appeals found in this case, even if other bills remained besides 
the $7,042.44, the plaintiff could seek recovery of those bills 
from the defendant.  Thus, Paulson's recovery is not affected by 
the settlement agreement between Midwest and Allstate. 
No. 
01-0991   
 
17 
 
¶36 Finally, the court of appeals determined that the 
Paulsons were entitled to recovery on the basis of Reed, 238 
Wis. 2d 439.  This argument, too, relies upon a balance of 
equities.   
¶37 In the case at hand, the court of appeals stated that 
there is no valid distinction between the Reed and Paulson cases 
and, as such, the Paulsons are entitled to application of the 
collateral source rule and recovery of the 30 percent difference 
between the amount paid by Midwest and the amount Midwest took 
in settling its subrogation interest with Allstate.   
¶38 In Reed, 238 Wis. 2d 439, ¶1, the plaintiffs were 
injured in a car accident.  The plaintiffs' insurer paid for 
their medical expenses.  Before trial, the plaintiffs' insurer 
and the other driver's insurer negotiated a settlement under 
which the plaintiffs' insurer accepted payment of 75 percent of 
the stipulated medical expenses in exchange for assignment of 
the subrogation claim.  Id.  Liability in the case was 
stipulated.  Id., ¶2.  The court of appeals, analogizing the 
situation to others where the collateral source rule applies, 
held that the plaintiffs were entitled to the benefit of the 
insurers' bargain, the difference between the reasonable value 
of the services and the negotiated settlement, because a 
tortfeasor should not receive the "advantage of 'gratuities from 
third parties.'"  Id., ¶¶2-3.   
¶39 We agree with the court of appeals that the Reed case 
is indistinguishable from this case.  Because of the default 
judgment placing liability on the defendant in this case, the 
No. 
01-0991   
 
18 
 
facts are essentially the same.  In both cases, the plaintiffs' 
insurer reached a settlement agreement with the tortfeasor 
before trial on the plaintiffs' claims.  In Reed, as here, the 
defendants argued that the plaintiffs were "made whole," even 
without collecting the difference between the reasonable value 
of medical services and the settlement amount.6  In both cases, 
the plaintiffs' recovery of the amount not taken by the 
subrogated insurer would allow the plaintiff to collect over 100 
percent of the damages suffered.   
¶40 We believe the court of appeals' decision in Reed was 
in error and should now be overruled.  In Koffman, 246 
Wis. 2d 31, ¶56, this court held that a plaintiff is entitled to 
collect the reasonable value of the medical services he or she 
received, regardless of what an insurer actually paid for the 
services.  The court of appeals recognized that rule in Reed, 
238 Wis. 2d 439, ¶4.  The court there then went on to state: 
In our view, State Farm's agreement to settle its 
limited subrogation claim for less than its face value 
is analogous to the situation where a health care 
provider sets an injured plaintiff's broken bone for 
less than the reasonable cost.  While some may view a 
verdict for the plaintiff for the reasonable cost of 
such a procedure as a double recovery, under the 
collateral source rule it does not amount to unjust 
enrichment. 
Id.  The court of appeals then held that the plaintiffs were 
entitled to the "benefit of the insurers' bargain by virtue of 
                                                 
6 See Reed Def.-Appellant's Br. at 2 (stating that "there is 
no dispute that they [the plaintiffs] were made whole" (emphasis 
omitted)). 
No. 
01-0991   
 
19 
 
having paid premiums for health care coverage over time."  Id. 
at 5. 
¶41 We disagree with the analysis of the court of appeals 
in Reed and find that the balance of equities lies somewhat 
differently in cases such as Reed and Paulson.  Koffman lays out 
the policies followed by this court.  First, quoting Ellsworth, 
we noted that the tortfeasor is not relieved of liability simply 
because the victim had "the foresight to arrange, or the good 
fortune to receive, benefits from a collateral source for 
injuries and expenses."  Koffman, 246 Wis. 2d 31, ¶29.  Second, 
"[s]ubrogation exists to ensure that the loss is ultimately 
placed upon the wrongdoer and to prevent the subrogor from being 
unjustly enriched through a double recovery, i.e., a recovery 
from the subrogated party and the liable third party."  Id., 
¶33.  Our refusal to award the plaintiffs the amount not 
accepted by their insurer does not do harm to either of these 
policies.   
¶42 In the present case, as in Reed, the negotiated 
settlement related to the limited subrogation interest of the 
plaintiffs' insurer and in no way affected the plaintiffs' 
recovery.  Agreements like the one between Midwest and Allstate 
do not reduce the recovery of the plaintiffs.  Under the limited 
circumstances such as those presented here, the plaintiffs 
receive the reasonable value of their expenses and maintain the 
right of action over any other damages.  Unlike the situation 
where a health care provider agrees to set a broken bone for 
less than the reasonable cost, under the facts here and in Reed, 
No. 
01-0991   
 
20 
 
there is no "volunteer" offering the plaintiff the benefit of 
reduced costs and there is no danger to the plaintiff's recovery 
of the reasonable value of expenses.  There is no allegation of 
a limited pool of money here or that the insurer is competing 
with the plaintiffs for the same funds.  Here, the Paulsons 
submitted a repair bill to Midwest for $7,542.44.  Midwest paid 
the Paulsons $7,042.44, the total repair bill less a $500 
deductible.  Midwest negotiated a settlement with Allstate 
relating 
to 
the 
$7,042.44, 
agreeing 
to 
take 
70 
percent 
($4,929.71) of the total based on its assessment of its 
insureds' contributory negligence.  Allstate paid the Paulsons 
the $500 deductible and paid Midwest the agreed upon amount.  
The Paulsons have recovered the $7,542.44 they initially 
requested for the $7,542.44 repair bill.  As we have noted, the 
only amount at issue here is the difference between the amount 
Midwest paid on the $7,542.44 bill and the amount it settled for 
with Allstate, because all other claims have been settled.  
Refusing to recognize the agreement between Midwest and Allstate 
would inform insurers that there is no point to settlement 
negotiations, because if the subrogated insurer agrees to take 
less than the face value of its claim, the plaintiffs will 
simply get the rest from the tortfeasor's insurer.   
¶43 Finding recovery appropriate in these circumstances 
would allow plaintiffs double recovery and discourage settlement 
negotiations.  Where the plaintiff has recovered the reasonable 
value of his or her expenses and makes no allegation that the 
No. 
01-0991   
 
21 
 
agreement prevents such recovery, there is no reason to award 
the plaintiff the difference.   
¶44 Such a decision is particularly appropriate where, as 
here, the insurers have agreed that the insured plaintiff was 
contributorily negligent.  In the context of contributory 
negligence, the tortfeasor has paid the full amount of the 
damage caused and the plaintiff, by fully recovering for the 
repair costs, has received whatever "windfall" is created by the 
settlement.  
III. CONCLUSION 
¶45 For the foregoing reasons, we find that, under the 
limited circumstances presented by this case, Paulson is not 
entitled to the 30 percent difference between the amount Midwest 
paid for Paulson's car repairs and the amount it ultimately 
settled for in its agreement with Allstate.  Paulson has already 
received $7,542.44 to cover the original repair bill and, under 
the circumstances here, equity demands that she receive no more. 
By the Court.—The decision of the court of appeals is 
reversed. 
 
 
No.  01-0991.awb 
 
1 
 
 
¶46 ANN WALSH BRADLEY, J.   (concurring).  Given the odd 
procedural 
posture 
of 
this 
case, 
I 
write 
separately 
to 
underscore what the majority repeatedly notes:  the holding of 
this case is limited to the facts of this case.  See, e.g., 
Majority op., ¶¶32, 42, 45.  I also write separately to discuss 
the 
intersection 
between 
the 
collateral 
source 
rule 
and 
subrogation, which is critical to the outcome of this case. 
¶47 Under 
the 
collateral 
source 
rule, 
a 
plaintiff's 
recovery from a tortfeasor cannot be reduced by payments or 
benefits that the plaintiff receives from other sources.  
Koffman v. Leichtfuss, 2001 WI 111, ¶29, 246 Wis. 2d 31, 630 
N.W.2d 201.  The collateral source rule was developed not to 
provide the injured party with a windfall, but instead to 
prevent 
tortfeasors 
from 
escaping 
their 
obligations 
to 
compensate an injured party merely because a collateral source 
also compensated the injured party.  Id., ¶29 (citing Ellsworth 
v. Schelbrock, 2000 WI 63, ¶7, 235 Wis. 2d 678, 611 N.W.2d 764). 
¶48 The collateral source rule is grounded in the policy 
that "should a windfall arise as a consequence of an outside 
payment, the party to profit from that collateral source is 'the 
person who has been injured, not the one whose wrongful acts 
caused the injury.'"  Koffman, 246 Wis. 2d 31, ¶29 (citations 
omitted). 
¶49 Under principles of subrogation, a subrogated party, 
by virtue and to the extent of payments made on behalf of 
another, obtains a right of recovery in an action against a 
No.  01-0991.awb 
 
2 
 
third-party tortfeasor and is a necessary party in an action 
against such a tortfeasor.  Id., ¶33.  Subrogation affects the 
extent to which the collateral source rule applies.  Lambert v. 
Wrensch, 135 Wis. 2d 105, 113-121, 399 N.W.2d 369 (1987). 
¶50 In Lambert, the subrogated insurer had paid the 
entirety of the medical expenses that the plaintiff sought from 
the defendant.  The insurer was unable to exercise its 
subrogation rights because the statute of limitations had 
expired.  Id. at 118-119. 
¶51 Relying upon Heifetz v. Johnson, 61 Wis. 2d 111, 124-
25, 211 N.W.2d 834 (1973), the Lambert court concluded that the 
plaintiff could not recover the amount that was subject to the 
subrogation claim.  Lambert, 135 Wis. 2d at 118-119.  In doing 
so, it stated:   "[W]here subrogation is present, as here, the 
collateral source rule is inapplicable."  Id. at 121. 
¶52 As 
noted 
by 
the 
majority, 
this 
court 
had 
the 
opportunity to discuss and clarify Lambert in Koffman.  Majority 
op., ¶31.  Citing Voge v. Anderson, 181 Wis. 2d 726, 732, 512 
N.W.2d 749 (1994), the Koffman court recognized that Lambert is 
"properly characterized . . . as holding that 'where the insurer 
is barred from pursuing a claim [of subrogation], the tortfeasor 
is entitled to a reduction in judgment for the amount of that 
claim.'"  Koffman, 246 Wis. 2d 31, ¶39. 
¶53 Consistent with that narrow reading of Lambert, the 
Koffman court clarified that where "the risk for double recovery 
on the part of the plaintiff-insured does not exist because the 
insurer is not barred from pursuing its subrogation rights, 
No.  01-0991.awb 
 
3 
 
there is no justification for nullifying the collateral source 
rule."  Id., ¶40.  We emphasized that in the ordinary case, the 
"collateral source rule and the principles of subrogation work 
in tandem to further the goals of both parties."  Id. 
¶54 As 
the 
majority 
notes, 
the 
interaction 
of 
the 
principles of subrogation and the collateral source rule is 
dependent on the specific facts of this case.  Here, the parties 
altered the facts of this case which were presented in the 
circuit court and the court of appeals, when they entered into a 
settlement agreement after the petition for review had been 
filed in this court.  Based on the facts now before us, I agree 
with the analysis and conclusion of the majority opinion.  
Accordingly, I respectfully concur. 
 
 
 
No.  01-0991.awb 
 
 
 
1