Opinion ID: 2144926
Heading Depth: 1
Heading Rank: 4

Heading: Purpose and History of Subrogation

Text: ¶ 16. Our analysis leads us to believe that the made whole doctrine should be reaffirmed. As part of our analysis we review the development of the subrogation doctrine. Subrogation has its genesis in the principle of indemnity. Although an insured is entitled to indemnity from its insurer pursuant to coverage provided under a policy of insurance, the insured is entitled only to be made whole, not more than whole. Subrogation prevents an insured from obtaining one recovery from the insurer under its contractual obligations and a second recovery from the tortfeasor under general tort principles. The subrogation doctrine also advances an important policy rationale underlying the tort system. It forces a wrongdoer who has caused a loss to bear the burden of reimbursing the insurer for indemnity payments made to its insured as a result of the wrongdoer's acts and omissions. See Elaine M. Rinaldi, Apportionment of Recovery Between Insured and Insurer in a Subrogation Case, 29 Tort. & Ins. L.J. 803 (1994). ¶ 17. Another author traces the development of subrogation from cases involving the liability of a surety. Harriette R. Flinn, Subrogation  Insured Must Be Paid In Full For Loss Before Insurer Is Entitled To Subrogation Against Tortfeasor, 10 Mem. St. U. L. Rev. 161, 162-63 (1979). Where an insurer pays its full obligation under the policy, but that amount is less than the insured's entire loss, the insurer's liability is nonetheless limited by the policy amount. Id. The question then arose whether the common law which developed to protect creditors in a surety situation should apply to the situation where the insurer has already paid in full compliance with his policy but the insured's loss exceeds the insurance payment. In the absence of an express agreement to the contrary, the traditional rule has been that the common law rule prevails and the insurer has no subrogation rights until the insured is made whole, that is, until the insured has been compensated for the entire loss sustained. Author Flinn also noted, however, that it has become standard practice for indemnity contracts to contain express provisions subrogating the insurer who has paid a claim to all of the rights of the insured against a wrongdoer. Id. ¶ 18. In 1977, this court held that a subrogation clause in an indemnity insurance contract did not change the common law rule that a subrogated insurer has no right to share in the funds recovered from the tortfeasor until the insured is made whole. Garrity v. Rural Mutual Ins. Co., 77 Wis. 2d 537, 546-47. The insureds suffered a fire loss to their dairy barn and other property, for which they were paid the limits under their Rural Mutual fire insurance policy. Id. at 539. The parties stipulated that the insureds' total loss exceeded the fire policy limits. Id. In other words, the Garritys were not made whole. Id. at 543. The Garritys then sued the owners of a feed mill, alleging that negligent operation of a feed truck caused the fire. Id. at 539. The alleged tortfeasors were also insured by Rural Mutual for liability coverage limits of $25,000. Id. ¶ 19. The Garritys executed a subrogation receipt under their fire policy granting to Rural Mutual a right of recovery against any party found liable for their loss. Because Rural Mutual also insured the alleged tortfeasors, it sought a declaration of its rights of subrogation against itself. Id. at 539-40. ¶ 20. The circuit court entered an interlocutory judgment granting Rural Mutual the right of priority in any recovery of money from defendants or their insurer, up to the amount paid under the fire policy. Id. at 540. Under that ruling, Rural Mutual would not have had to pay any more money to plaintiffs even if its insured tortfeasors were found negligent. Id. ¶ 21. This court disagreed with the circuit court ruling which incorrectly gave the contractual language primacy over the common law rule that an insured must be made whole before the insurer may recover from the tortfeasor. Id. at 541. The court focused on the distinction between the right of recovery provided in the subrogation clause and the common law rule dictating priority of payment to an insured who has not been made whole. Id. at 544-46. In Garrity, the court relied upon the following rationale for the made whole rule: [t]he owner of the policy should be first to make good his own loss; where 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. Id. at 542. [7] In other words, the insurer has no right of reimbursement against the insured where the total compensation received by the insured is less than his loss. Id. at 543. Garrity involved only a claim for property damage. ¶ 22. As the Garrity decision demonstrates, subrogation rights are common under policies of property or casualty insurance, wherein the insured sustains a fixed financial loss and the purpose is to place that loss ultimately upon the wrongdoer. 3 Appleman, Insurance Law and Practice s 1675, at 495 (1967). The more recent disputes concerning the propriety of subrogation reimbursement have occurred in cases of personal injury. In Rimes, this court reviewed a procedure applying the made whole inquiry to a personal injury case. 106 Wis. 2d 263. There the majority reluctantly approved the circuit court's use of a post-settlement evidentiary mini-trial to determine the plaintiffs' total amount of damages and apportionment of negligence between plaintiff and tortfeasors. Id. at 276-79. ¶ 23. In Rimes, the plaintiff was injured in an automobile accident involving three other vehicles. Id. at 265. The plaintiff ultimately dismissed one of the defendants with prejudice, and on the second day of trial accepted settlement from the insurers of the remaining vehicle owners. Id. at 266-67. The settlement included the $50,000 policy limits of one policy, and $75,000 out of a total $300,000 limit from the other policy. Id. at 267. ¶ 24. The plaintiffs and their subrogated insurer then agreed to seek a trial concerning the insurer's claim to reimbursement for medical payments previously made on behalf of the injured plaintiff. Id. at 267. The circuit court held a two-day hearing, found no contributory negligence and found total damages of over $300,000. Id. at 268-69. The circuit court held that only the amount of total damages would make the plaintiffs whole. Because the settlement amount fell far short, the subrogated insurer was not entitled to reimbursement. Id. at 269. ¶ 25. On appeal, the insurer asserted that the plaintiffs' voluntary settlement and release in Rimes was the legal equivalent of being made whole. This court disagreed for several reasons. Id. at 273. There was no evidence of an acknowledgment by the plaintiffs that the settlement during trial had made them whole. Id. at 267-68, 273. No recital in the plaintiffs' stipulation evidenced an acknowledgment of wholeness. Id. at 273. The court particularly noted that the plaintiffs, in their general release, set aside an escrow fund in the amount of the insurer's subrogated claim. That escrow fund indicated to us that the plaintiffs did not consider themselves whole. Id. The court therefore refused to assume that the grantor of a release acknowledged full reimbursement for the wrong done. Id. By their settlement with the tortfeasors, the Rimes plaintiffs gave up their right of action against the defendants for consideration that may or may not have made them whole. Id. ¶ 26. Only where an injured party has received an award by judgment or otherwise that pays for all of his or her elements of damages, including those for which the insured has already been indemnified by an insurer, is there a right to subrogation reimbursement. Id. at 275. [8] In light of the facts in Rimes, and in accordance with the general principles of subrogation stated in Garrity, this court concluded that the settlement in Rimes did not make the plaintiffs whole. Id. at 276. ¶ 27. Four years later, this court cautioned that the made whole principle of Rimes and Garrity was not absolute. Vogt v. Schroeder, 129 Wis. 2d 3, 16-17, 383 N.W.2d 876 (1986). There we were asked, prior to a trial, to balance the equities between an underinsurer who had paid benefits and an underinsured tortfeasor who had not paid for the damages he caused. Id. at 17. In doing so, the court recognized the equitable principle derived from Garrity that the wrongdoer should be responsible for his conduct and not be allowed to go scot-free by failing to respond in damages while another, an indemnitor for the injured party, is required to do so. Id. at 13. The court concluded that once the injured plaintiff's underinsurance carrier paid at least the maximum amount obtainable from the underinsured motorist's carrier, the underinsurer could assert a subrogation reimbursement claim against the tortfeasor's insurer. The outcome in Vogt was based on this court's policy of promoting prompt settlement, and served to put the burden of final payment on the tortfeasor for the amount in excess of his coverage. Id. at 19. Under Vogt, a plaintiff can take advantage of the defendant's settlement offer and an underinsurer can protect its right to subrogation reimbursement. Id. at 23. ¶ 28. In 1993 the court considered a claim for subrogation where the insurer sought subrogation recovery against the tortfeasor regardless of the answer to the made whole inquiry. Schulte v. Frazin, 176 Wis. 2d 622, 628. In Schulte, the injured plaintiffs and defendants entered into a $2,460,000 settlement of a medical malpractice claim. Id. at 626. The settlement agreement did not provide for any payment to the subrogated carrier. Id. The settlement agreement did provide that the plaintiffs would indemnify the defendants for any liability arising out of the incident. Id. at 626-27. Application of the subrogation principle depended upon the equities, and thus upon the facts at hand. Id. at 631. This court also recognized that any determination of rights to subrogation reimbursement must consider the realistic competition between an insured and the subrogated insurer for limited settlement funds. Id. at 633. ¶ 29. The ultimate holding in Schulte reiterated the Rimes rule and affirmed the need for a made whole inquiry. However, we also concluded in Schulte that where the plaintiffs settled with defendants, indemnified the tortfeasors and moved for a subrogation hearing, the plaintiffs not only extinguished their claim against the tortfeasors but also extinguished the subrogated insurer's claim against the tortfeasors. 176 Wis. 2d at 634-35. ¶ 30. Not long after Schulte this court confronted the effect of contributory negligence on the made whole inquiry. Sorge, 182 Wis. 2d 52. There, the parties asked us to determine whether an insurer had a right to subrogation reimbursement when the plaintiff settled before trial. Unlike the plaintiff in Rimes, however, the Sorge plaintiff admitted contributory negligence. Id. at 55. She settled for what she later stipulated would have been her recovery following a jury trial. Id. at 55-56. ¶ 31. It is clear that the Sorge case was brought to this court based on stipulated facts, and not following a trial or the traditional Rimes hearing. In our view, it is unfortunate that the Sorge stipulation did not provide us with the usual facts necessary for a made whole determination. The stipulation did not identify the amount of the plaintiff's total damages, that is, the amount that would have made her whole under Rimes and Garrity. Alternatively, the stipulation did not identify the particular percentage of plaintiff Sorge's negligence. Sorge's attorney represented that the stipulation did, however, provide that Ms. Sorge settled the case for an amount less than the total damages that she had, minus the total amount of the subrogatedthe subrogated carrier's liens, but in an amount which would have been equal to what she would have received from a jury after a reasonable deduction forfor her contributory negligence. Brief for Petitioner at App. F-4, Sorge, 182 Wis. 2d 52. [9] ¶ 32. Although the Rimes and Garrity decisions did not apply the made whole doctrine to a contributorily negligent injured person, in Sorge this court tried to satisfy the underlying policies behind both the doctrine of subrogation reimbursement and the made whole rule of those earlier cases. Sorge said that a contributorily negligent injured person is made whole such that her insurers may assert their reimbursement rights when the insured has been compensated for all of her losses less the amount corresponding to her contributory negligence. Sorge, 182 Wis. 2d at 58, 62. ¶ 33. This court ultimately concluded in Sorge that an injured plaintiff who is at most 50 percent negligent must reimburse the insurance company for the share of the medical bills it paid corresponding to the tortfeasor's share of negligence. Id. at 61-63. As we now read Sorge, that conclusion would lead to the following result: for example, if a jury finds a plaintiff to be 10 percent contributorily negligent, the plaintiff's net award is 90 percent of his or her awarded damages. Likewise, the subrogated insurer would recover 90 percent of the subrogated medical expenses rather than the full 100 percent. The Sorge court wrote that if no subrogated amounts were to be paid back until the insured had received 100 percent of his or her total damages, a plaintiff who conceded contributory negligence would never have to repay any subrogated medical expenses. [10] Id. at 60. We now are of the opinion that our conclusion in Sorge was erroneous.