Opinion ID: 2198326
Heading Depth: 1
Heading Rank: 3

Heading: Subrogation and Offsets.

Text: Farm Bureau acknowledges it is responsible for the amount of damages not recovered by Wilson's estate from the driver of the automobile that struck and killed Wilson. The estate concedes Farm Bureau is entitled to offset from that amount some portion of the $5000 previously paid by Farm Bureau under the medical payment coverage provision of the insurance contract. The estate maintains, however, the $5000 offset is a subrogation interest and should be reduced according to two different principles applicable to subrogation interests. The estate first points to the axiom that the rights of a subrogee are the same as, but no greater than, those of the person for whom the subrogee is substituted. Employers Mut. Cas. Co. v. Chicago & N.W. Transp. Co., 521 N.W.2d 692, 696 (Iowa 1994). Relying on that principle, the estate argues Farm Bureau's rights as a subrogee can be no greater than Wilson's rights, for whom it is substituted. Consequently, as the argument goes, Farm Bureau's subrogation interest must be reduced by Wilson's twenty percent comparative fault. Second, the estate argues the offset should be reduced by a pro rata share of attorney fees and expenses attributable to Farm Bureau. The estate points to Iowa Code section 668.5(3), which is part of our comparative fault statute and requires, in comparative fault cases, contractual or statutory subrogated persons shall be responsible for a pro rata share of the legal and administrative expenses incurred in obtaining the judgment or verdict. The principle is also an equitable one applicable in all subrogation contexts. Principal Cas. Ins. Co. v. Norwood, 463 N.W.2d 66, 68 (Iowa 1990) (recognizing the insurer should pay pro rata attorney fees and expenses because it `should not be entitled to enjoy the fruits of the assured's judgment against a tortfeasor without contributing in any way to the costs or burdens of litigating that claim' (quoting Hedgebeth v. Medford, 74 N.J. 360, 378 A.2d 226, 230 (1977))). Farm Bureau argues both of those principles are inapplicable because Farm Bureau is not a subrogee; in other words, the offset is not a subrogation interest but a contractual one. Our cases have previously discussed subrogation rights, including in the insurance context. Subrogation is a doctrine that originated in equity to give relief to a person or entity that pays a legal obligation that should have, in good conscience, been satisfied by another. Allied Mut. Ins. Co. v. Heiken, 675 N.W.2d 820, 824 (Iowa 2004). Subrogation refers to both a legal right and a legal action. Id. at 824 n. 1. The term comes from the Latin `subrogare,' which means to substitute or put in place of another. Id. The subrogee's rights are derivative of the rights held by the insured against the tortfeasor. Id. at 824. In the insurance context, the doctrine permits an insurer who has paid a loss to an insured to become `subrogated in a corresponding amount to the insured's right of action against any other person responsible for the loss.' Id. (quoting 6A John A. Appleman & Jean Appleman, Insurance Law and Practice § 4051, at 103 (rev. ed. 1972)). Subrogation rights often arise by contract, but even when the insurance contract does not explicitly provide for them, [t]he insurer's right to subrogation attaches by operation of law upon payment of the loss based on principles of equity. Id. at 824-25 n. 2. Because the subrogated insurer is being substituted for the insured for reasons of contract or equity, the subrogated insurer's rights are subject to all defenses the tortfeasor could assert against the insured. Id. at 825. The estate relies on this principle to argue Farm Bureau's right to set off the previously paid medical expenses should be reduced by Wilson's twenty percent fault. Apparently, the argument is that the estate would have no right to the entire $5000 in medical expenses against the tortfeasor because Wilson was twenty percent at fault. The argument asserted by the estate ignores the basis for the offset in this case. This case does not arise from any of the typical subrogation contexts. This is not a case in which the insurer pays its insured then seeks to assert contractual or equitable subrogation rights against the responsible tortfeasor. Nor is this a case in which the insurer pays its insured some amount, then the insured sues the tortfeasor to collect more damages. In this latter case, the insurer is subrogated to the portion of its insured's claim that it paid. Id. at 824. However, the subrogation interestbeing derived from the insured's interestis subject to any defenses available against the insured. Id. at 824-25. In this case, Farm Bureau asserts a contractual offset. The pertinent contract of insurance at issue provides: Any payment [under the medical payment coverage provision] shall be applied toward ... the payment of a money judgment of bodily injury for any insured under ... Part IV [underinsured motorist coverage provision]. While underinsured motorist coverage is mandatory in Iowa, see Iowa Code § 516A.1, offsets and other limitations are permissible for the purpose of avoiding duplication of coverage. See Iowa Code § 516A.2 (providing underinsured forms of coverage may include terms, exclusions, limitations, conditions, and offsets which are designed to avoid duplication of insurance or other benefits); Leuchtenmacher v. Farm Bureau Mut. Ins. Co., 461 N.W.2d 291, 295 (Iowa 1990) (approving an identical offset). The offset sought by Farm Bureau is not an attempt to claim its subrogation interest in money paid to the estate by the tortfeasor. Instead, Farm Bureau is seeking to enforce a bargainedfor contract provision allowing it to avoid paying duplicative benefits by reducing its underinsured-motorist-coverage payment by the amount already paid pursuant to the medical-payment-coverage section of the policy. Because the interest asserted is not a subrogation interest, the typical equitable reductions are not applicable. The reductions of subrogation interests provided for in Iowa Code section 668.5(3) are treated the same. The estate argues Iowa Code section 668.5(3) requires the offset to be reduced by Wilson's fault and a pro rata share of attorney fees and expenses attributable to Farm Bureau. Iowa Code section 668.5(3) applies to subrogation rights. [2] Again, there is no subrogation right involved here, so section 668.5(3) should not be applied to reduce the contractual offset. Additionally, Farm Bureau points to our past precedent holding chapter 668 does not apply to underinsured motorist claims based on contract. Indeed, we addressed the question of whether chapter 668 applies to lawsuits if an injured party sues its insurer for underinsured motorist claims. In Vasquez v. LeMars Mutual Insurance Co., 477 N.W.2d 404 (Iowa 1991), we confronted the issue of whether the interest provision of section 668.13 governs in such a lawsuit. In Vasquez, we based our holding on the section 668.13(1) provision that the subsection applied only to `actions brought pursuant to' chapter 668. 477 N.W.2d at 408-10 (emphasis omitted) (quoting Iowa Code § 668.13). We recognized that chapter 668, which governs comparative fault, applies only to claims `involving the fault of more than one party to the claim.' Id. at 409 (quoting Iowa Code § 668.3(2)). We held the underinsured motorist claim was a contractual one, and consequently did not involve the fault of more than one party to the claim. Id. Simply put, the underinsured motorist claim did not trigger chapter 668 because the requirements of section 668.3(2) were not met. Id. at 410. The underinsured motorist claim here was similarly not brought pursuant to chapter 668. Still further, the equitable principle underlying the requirement of the insurer to pay a pro rata portion of the attorney fees and expenses is inapposite to the facts of this case. Farm Bureau is not seeking a free ride on the coattails of the estate's counsel. With regard to Farm Bureau's demand to reduce the judgment by the $5000 it paid pursuant to the medical payment coverage provision, Farm Bureau is not benefiting from the estate's efforts to recover money from the tortfeasor. Instead, Farm Bureau is seeking to enforce the contract clause allowing the insurer to set off the $5000 of medical payment coverage Farm Bureau itself paid voluntarily from a subsequent payment under the underinsured motorist coverage provision. Thus, we refuse to read section 668.5(3) and our past cases dealing with equitable subrogation to require an insurer to pay for the insured's attorneys' efforts to recover the medical payments the very same insurer paid voluntarily. See Crabtree ex rel. Kemp v. Estate of Crabtree, 837 N.E.2d 135, 142 (Ind.2005) (refusing to hold the legislature intended the Subrogation Statute to compel an insurer to pay attorney's fees to recover the amount of its medical payments from itself). Farm Bureau is entitled to a full $5000 offset of the amount it owes under the underinsured motorist coverage provision. That amount will be influenced by our review of the district court's award of interest, from which both parties have appealed, and to which we now turn.