Opinion ID: 1953826
Heading Depth: 1
Heading Rank: 9

Heading: Is Full Compensation a Prerequisite to Subrogation?

Text: Although we have not previously addressed the precise issue presented in Frohlich's case, we have stated that [w]here the assured, as in case of partial insurance, sustains a loss, in excess of the reimbursement or compensation by the underwriter, he has an undoubted right to have it satisfied by action against the wrong-doer. But if, by such action, there comes into his hands, any sum for which, in equity and good conscience, he ought to account to the underwriter, reimbursement will, to that extent, be compelled in an action by the latter, based on his right in equity to subrogation. But the assured will not, in the forum of conscience, be required to account for more than the surplus, which may remain in his hands, after satisfying his own excess of loss in full, and his reasonable expenses incurred in its recovery; unless the underwriter shall, on notice and opportunity given, have contributed to, and made common cause with him, in the prosecution. (Emphasis supplied.) United Services Automobile Assn. v. Hills, 172 Neb. 128, 133, 109 N.W.2d 174, 177-78 (1961) (quoting Newcomb et al. v. Cincinnati Ins. Co., 22 Ohio St. 382, 10 Am.R. 746 (1872)). Accord Krause v. State Farm Mut. Auto. Ins. Co., supra . This brings us to the question: Is an insured's full compensation for a loss a prerequisite to subrogation? Shelter cites only one appellate decision to support its contention that full compensation is unnecessary for an insurer's right of subrogation. See Alabama Farm Bureau Mut. Cas. Ins. Co. v. Anderson, 48 Ala.App. 172, 263 So.2d 149 (1972). On the other hand, research indicates that nearly every appellate court that has considered the question has recognized that unless an insurance policy contains a provision to the contrary, an insurer's right to recover under a subrogation clause of an insurance policy requires that the insured must have been fully compensated for the loss covered by the policy. See, e.g., Shelter Mut. Ins. Co. v. Bough, 310 Ark. 21, 834 S.W.2d 637 (1992) (the full compensation rule was inapplicable on the facts of the case but, in an appropriate factual setting, applies to an insurer's right of subrogation); Powell v. Blue Cross and Blue Shield, 581 So.2d 772 (Ala.1990) (a subrogation right does not exist until an insured has been fully compensated for a loss); Westendorf by Westendorf v. Stasson, 330 N.W.2d 699 (Minn.1983) (notwithstanding the insurer's payment of an insured's medical expenses, an insurance policy's subrogation clause does not entitle the insurer to reimbursement from the insured's settlement proceeds when the recovery failed to fully compensate the insured); Rimes v. State Farm Mut. Auto. Ins. Co., 106 Wis.2d 263, 316 N.W.2d 348 (1982) (an insurance policy subrogation clause for reimbursement of medical expenses paid on behalf of an insured does not entitle the insurer to reimbursement when the insured's settlement was for an amount less than the total damages sustained by the insured); Southern Farm Bureau Cas. Ins. v. Sonnier, 406 So.2d 178 (La.1981) (when an insurer pays its insured only part of the damages caused by a tort-feasor, the insurer is only partially subrogated to the insured's right to compensation, and the insured, in preference to the insurer-subrogee, is entitled to seek the balance of the partially paid claim against the tort-feasor); Ortiz v. Great Southern Fire & Cas. Ins. Co., 597 S.W.2d 342 (Tex.1980) (summary judgment is improper in a suit on a fire insurance policy covering a structure when the record failed to disclose what portion of the insured's settlement was allocated to the loss of real property); Wimberly v. Am. Cas. Co. of Reading, Pa., 584 S.W.2d 200 (Tenn.1979) (insurer has no subrogation right in the insured's recovery from a tort-feasor where the insured has not been fully compensated for the loss); Skauge v. Mountain States Tel. & Tel., 172 Mont. 521, 565 P.2d 628 (1977) (when an insured has sustained a loss exceeding the amount paid by the insurer, the insured is entitled to full compensation for the entire loss before the insurer can assert its right of legal subrogation against the insured or the tort-feasor); Lyon v. Hartford Accident and Indemnity Company, 25 Utah 2d 311, 480 P.2d 739 (1971), overruled on other grounds, Beck v. Farmers Ins. Exchange, 701 P.2d 795 (Utah 1985) (an insured must make a full recovery for a loss before the insurer is entitled to any part of a recovery from the tort-feasor); Mattson v. Stone, 32 Wash.App. 630, 648 P.2d 929 (1982) (if an insured has recovered all damages by a tort-feasor, the insurer has a subrogation interest in the recovery); Oss v. United Services Auto. Ass'n, 807 F.2d 457 (5th Cir.1987) (summary judgment is unavailable in the absence of a factual finding concerning the expected amount of medical costs or the ability of the tort-feasor to pay beyond the amount received in a settlement). See, generally, 3 John A. & Jean Appleman, Insurance Law and Practice § 1675 (Supp.1992); 16 George J. Couch, Cyclopedia of Insurance Law, ch. 61, Subrogation (rev. ed. 1983). Thus, in the absence of a valid contractual provision or statute to the contrary, an insurer may exercise its right of subrogation only when the insured has obtained an amount that exceeds the insured's loss. Although courts have expressed various rationales for the conclusion that an insured must be fully compensated for a loss before the insurer is entitled to subrogation, the underlying premise seems to be that, under principles of equity, an insurer is entitled to subrogation only when the insured has received, or would receive, a double payment by virtue of an insured's recovering payment of all or part of those same damages from the tort-feasor. As observed in Rimes v. State Farm Mut. Auto. Ins. Co., 106 Wis.2d at 276-77, 316 N.W.2d at 355; [W]here 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. [Quoting Garrity v. Rural Mut. Ins. Co., 77 Wis.2d 537, 253 N.W.2d 512 (1977).] .... ... [W]e find it difficult to justify the position of the insurer, which has already been paid a premium for the risk it assumed and which would have been obligated to make the medical payments irrespective of its insured's negligence and irrespective of whether or not a culpable third party could have been found. Also, in Rimes the court noted that [subrogation is to be allowed only when the insured is compensated in full by recovery from the tortfeasor. The insured is to be made whole, but no more than whole. 106 Wis.2d at 272, 316 N.W.2d at 353. Accord, Powell v. Blue Cross and Blue Shield, 581 So.2d 772 (Ala.1990); Skauge v. Mountain States Tel. & Tel., supra . Moreover, as the court expressed in Oss v. United Services Auto. Ass'n, 807 F.2d at 460: [T]he subrogation clause would not be regarded, even by a careful and intelligent reader, as qualifying the basic promise to pay, and to give it that effect is to enforce provisions drafted by the insurer that are inherently deceptive. This is good reason for holding that the [subrogation] clause must be subordinated to the basic insurance promise and that the insurer should not recover sums received by the insured from the tort source until the insured has been fully indemnified. Allowing an insurer to subrogate against an insured's settlement when an insured has not been fully compensated would mean that all the insured's settlement could be applied to a medical payment subrogation claim with nothing left to compensate the insured for excess medical bills or personal injuries. Insurance companies accept premiums in exchange for medical payment coverage and may be obligated to pay medical expenses regardless of their insured's negligence or whether a third-party tort-feasor is liable and, therefore, must pay damages. In addition, there is little empirical substantiation that possible reimbursement through successful subrogation is considered in determining insurance premiums for medical payment coverage. See Rimes, supra . Because the record in Frohlich's case fails to answer the question whether Frohlich has been fully compensated as the result of the settlement with the Denbestes and Farmers Mutual, there is a genuine issue of material fact concerning compensation for Frohlich's loss from the automobile accident; hence, the court erred by granting summary judgment to Shelter. Whether Shelter's subrogation right can be enforced against Frohlich requires resolution of factual issues, such as the amount of medical costs incurred by Frohlich and other damages sustained by her. See, Skauge v. Mountain States Tel. & Tel., supra ; Oss v. United Services Auto. Ass'n, supra . Additionally, other factors affecting enforceability of a subrogation right may include the tort-feasor's ability to pay beyond the amount of the subrogor's settlement and whether the settling parties have stipulated that the settlement satisfies all damages sustained by the subrogor. See Rimes, supra . If Frohlich's damages, as later determined at the trial level, exceed the amount which she received in settlement of her claim against Denbestes, Frohlich has not been fully compensated for her loss, and, consequently, Shelter is not entitled to any part of the proceeds from settlement of Frohlich's claim against the Denbestes.