Opinion ID: 894884
Heading Depth: 1
Heading Rank: 2

Heading: Subrogation and the Made Whole Doctrine

Text: This Court recognized the made whole doctrine twenty-seven years ago in Ortiz v. Great Southern Fire & Casualty Insurance Co. [2] The Ortiz family had a fire insurance policy from Great Southern on their home, but not the contents. [3] A fire caused damages of $4,000 to the home and $11,614 to personal property, and Great Southern paid $4,000 for home repairs. [4] The Ortizes then sued Stacy-Mason, Inc., alleging that one of its employees negligently started the fire. Great Southern intervened, claiming a right of equitable subrogation. [5] After the Ortizes settled with Stacy-Mason for $10,000, the trial court awarded, and the court of appeals affirmed, $4,000 of that settlement to Great Southern. [6] We reversed, holding, An insurer is not entitled to subrogation if the insured's loss is in excess of the amounts recovered from the insurer and the third party causing the loss. [7] We reasoned that one justification for equitable subrogation is to prevent the insured from receiving a double recovery, first from the insurer, then from the third party. [8] We also recognized, however, that if the insured's total recovery is less than his or her losses, equity cuts the other way: when `either the insurer or the insured must to some extent go unpaid, the loss should be borne by the insurer for that is a risk the insured has paid it to assume.' [9] Because the settlement in Ortiz encompassed both covered and noncovered items, we remanded for a determination of how much of the $10,000 related to house damage. [10] Ortiz would govern if Fortis were merely asserting a claim for equitable subrogation. But Fortis is not citing principles of equity to recover its money; its policy with Cantu conferred on Fortis two separate contractual rights of recovery, one styled subrogation and one styled reimbursement. [11] Fortis argues that these provisions authorize recovery from Cantu's $1.445 million settlement with the defendants, and that neither provision is displaced by the made whole doctrine. We agree.
Our Ortiz decision addressed the made whole doctrine in the context of equitable subrogation, but it did not discuss how the doctrine applies, if at all, to contractual subrogation. Other courts, however, have discussed whether the doctrine applies in the face of a contract that grants the insurer greater subrogation rights. For example, in Oss v. United Services Automobile Ass'n, [12] the Fifth Circuit, applying Texas law in a diversity case, was confronted with facts similar to those in this case. The insured was not made whole by the settlement following a car wreck, yet insurer USAA sought enforcement of its contractual subrogation rights under the policy. [13] Like Fortis, USAA urged the Fifth Circuit to reject the made whole doctrine by distinguishing Ortiz as involving equitable rather than contractual subrogation. [14] The Fifth Circuit, relying on the El Paso Court of Appeals' decision in Means v. United Fidelity Life Insurance Co., refused because it believed that, in Texas, the same principles govern both equitable and contractual subrogation. [15] In Means, the insureds had challenged the validity of United Fidelity's contractual subrogation right to foreclose on their 200-acre property. [16] The court noted, Whether we have a purely equitable subrogation or, as here, a purely contractual one where both Mr. and Mrs. Means agreed to the subrogation, the principles are the same, and the rights of United Fidelity Life Insurance Company after the payment were superior to the homestead rights of Mr. and Mrs. Means. [17] Read in context, the court's discussion in Means does little more than affirm a subrogee's basic rights, whether they arise via contract or equity. Moreover, Means no-where addressed the made whole doctrine that we first articulated in Ortiz, nor could it have, since Ortiz was decided three years later. When the El Paso Court of Appeals declared in Means that the principles are the same in contractual and equitable subrogation, it did so against a legal landscape that did not yet include the made whole doctrine. [18] For this reason, Means is not particularly instructive, nor is Oss, which relies predominantly on Means. Other Texas courts of appeals have addressed the difference between equitable and contractual subrogation. For example, the Austin Court of Appeals in Lexington Insurance Co. v. Gray recognized the distinction between legal and conventional subrogation. [19] The former is governed by equity; the latter by contract. [20] The court (1) observed that Texas courts have given substance to the distinction, (2) noted the unusually `hospitable' treatment that the right of subrogation has historically received in Texas, especially express subrogation agreements, which are given considerable weight and are governed by general contract law principles, [21] and (3) cited several cases holding that a subrogee invoking contractual subrogation can recover without regard to the relative equities of the parties. [22] Lexington did not specifically involve the made whole doctrine we had adopted a decade earlier in Ortiz, but it suggested that this equitable defense would not apply in the face of an express agreement whereby the parties agree in advance that the matter will be governed by contract principles rather than equitable principles. Where the policy's terms govern subrogation, the court added, there is no reason for the equitable principles usually found in subrogation cases to come into play. [23] A few years later, however, in Esparza v. Scott & White Health Plan, [24] the Austin Court of Appeals backed away from this interpretation. The Esparzas settled for an amount that did not make them whole, and Scott and White sought subrogation under an express provision in the parties' insurance contract, citing Lexington as holding that the made whole doctrine should apply only to equitable subrogation and not to contractual subrogation. [25] The court of appeals disagreed, stating: The distinction we drew between legal and conventional subrogation in Lexington simply means that under conventional subrogation no balancing of equities is necessary to determine whether the subrogee has a right to recover at all. While an insurance contract providing expressly for subrogation may remove from the realm of equity the question of whether the insurer has a right to subrogation, it cannot answer the question of when the insurer is actually entitled to subrogation or how much it should receive. . . . . . . To avoid injustice, the equities must still be balanced in deciding what amount, if any, the subrogee is entitled to receive in a given case. [26] The court adopted the reasoning from Oss that a boiler-plate subrogation provision does not automatically negate an insurance policy's fundamental purpose, which is to protect the insured by shifting the risk of loss to the insurer. [27] If anyone is to go unpaid, the court reasoned, it should be the insurance company. The court concluded that contracts `confirm, but [do] not expand, the equitable subrogation rights of insurers,' and the equities must still be balanced to achieve justice. [28] We do not disagree that equitable and contractual subrogation rest upon common principles, but contract rights generally arise from contract language; they do not derive their validity from principles of equity but directly from the parties' agreement. The policy declares the parties' rights and obligations, which are not generally supplanted by court-fashioned equitable rules that might apply, as a default gap-filler, in the absence of a valid contract. If subrogation arises independent of any contract, then an express subrogation agreement would be superfluous and serve only to acknowledge this preexisting right, a position we reject. [29] Contractual subrogation clauses express the parties' intent that reimbursement should be controlled by agreed contract terms rather than external rules imposed by the courts. The United States Supreme Court addressed this very point in a subrogation case decided shortly after we granted the instant case. In Sereboff v. Mid Atlantic Medical Services, Inc., [30] insurer Mid Atlantic was an ERISA plan fiduciary for the Sereboffs. When the Sereboffs were injured in an auto accident, Mid Atlantic paid the couple's expenses pursuant to the plan. [31] When the Sereboffs settled the tort claims that arose from the accident, Mid Atlantic filed suit under ERISA to collect the medical expenses it had paid. [32] Mid Atlantic sought reimbursement under an Acts of Third Parties provision in the plan. [33] The Sereboffs argued that the equitable defense of the made whole doctrine should apply, even though language in the plan document was to the contrary. [34] The Court disagreed, comparing an action under the Acts of Third Parties provision to an action to enforce an equitable lien established by agreement. [35] The Court refused to apply the made whole doctrine, deeming the Sereboffs' equitable defenses beside the point because Mid Atlantic's subrogation claims arose by written agreement. [36] This position was earlier adopted by the Fifth Circuit in another ERISA case, Walker v. Wal-Mart Stores, Inc. [37] That case, like today's case, concerned a subrogation clause that granted a right of recovery against any and all third-party settlements. Walker brought a malpractice action against her dentist, alleging he propped open her mouth excessively, resulting in three jaw surgeries and medical expenses of over $41,000. [38] Walker settled for $12,500, and the trial court awarded the insurer the entire settlement amount as first-money reimbursement for the medical benefits it paid. [39] The Fifth Circuit held that the Plan's language is unambiguous. . . . We agree with the district court in holding that the `any and all' language plainly means the first dollar of recovery (any) and 100% recovery (all) of the funds received by the plaintiff in the settlement, up to the full amount of the benefits paid. [40] The three varieties of subrogationequitable, contractual, and statutoryrepresent three separate and distinct rights that, while related, are independent of each other. Independent, however, does not mean co-equal. We generally adhere to the maxim that equity follows the law, which requires equitable doctrines to conform to contractual and statutory mandates, not the other way around. Where a valid contract prescribes particular remedies or imposes particular obligations, equity generally must yield unless the contract violates positive law or offends public policy. This Court has long recognized a strong public policy in favor of preserving the freedom of contract. [41] And in Texas Ass'n of Counties County Government Risk Management Pool v. Matagorda County, we emphasized that insurers are well equipped to evaluate and reduce risk by, for example, drafting policies to specifically provide for reimbursement. [42] Fortis did exactly that, drafting two separate recovery provisions that replaced equitable rights with specific contractual rights. Neither subrogation nor reimbursement clauses violate Texas public policy. [43] As we have stated, `the State's public policy is reflected in its statutes,' [44] and Texas workers' compensation law specifically embraces an insurer's first-money right of subrogation, thus indicating no blanket legislative disfavor of such provisions. [45] It is indeed difficult to declare something contrary to public policy when state law, both statutory and regulatory, actually suggests approval. [46] In a subrogation case arising under the Labor Code, the Amarillo Court of Appeals distinguished statutory subrogation from equitable and contractual subrogation. [47] The court looked only at the statute's plain language in affirming the trial court's refusal to invoke its equitable powers to deny subrogation. [48] We agree with this modest, text-based approach. Given this insurance policy's plain language, we are loathe to judicially rewrite the parties' contract by engrafting extra-contractual standards that neither the Legislature nor the Texas Department of Insurance has thus far decided to promulgate. As we have said before, balancing dueling policy concerns is generally for non-judicial bodies, and it remains the better policy for the contracts of insurance to be changed by the public body charged with their supervision, the State Board of Insurance, or by the Legislature, rather than for this Court to contravene the express language of insurance contracts with equitable arguments. [49] The contrary, howeverreplacing equitable protections with specific contract languageis not unknown in Texas law. [50] Parties are thus free to negate the made whole doctrine contractually, and to do so before an event occurs that triggers medical benefits under the policy. [51] Leading insurance law treatises likewise recognize that specific policy terms can override equitable principles and that many jurisdictions, though not all, apply the made whole doctrine only in the absence of contrary reimbursement language in the contract. [52] We agree with those courts holding that contract-based subrogation rights should be governed by the parties' express agreement and not invalidated by equitable considerations that might control by default in the absence of an agreement. [53]
We turn now to the specific language of the policy in issue, which defines the parties' rights and obligations. It contains a section called Recovery, which includes a Subrogation Right provision and a separate (and broader) Right of Reimbursement provision. The former establishes a right of subrogation: Upon payment of benefits, We [Fortis] will be subrogated to all rights of recovery a Covered Person [Cantu] may have against any person or organization. [54] The provision continues: Such right extends to the proceeds of any settlement or judgment; but is limited to the amount of benefits We have paid. [55] Fortis thus retained an unfettered right to recover the proceeds from the settlement of the underlying suit, the only limitation being the amount of recovery what Fortis had paid under the contract. Nowhere does this provision suggest that Cantu must first be made whole for Fortis to recover. This provision does not use the modifier first money, but its meaning is not imprecise or ambiguous. The contract's specific language controls Fortis's right to subrogation, and the equitable defense of the made whole doctrine must give way. Accordingly, we hold that Fortis is contractually entitled to recover from the $1.445 million settlement the total amount of benefits it paid to Cantu. [56]