United States: Insured Made Whole After Subrogation Recovery

A property insurer, having paid for covered damage, can recover the loss by seeking reimbursement from its insured where the insured has recovered funds from a responsible third-party, or the insurer may pursue a claim directly against the third-party. If the insurer makes a direct claim against the responsible party, to what extent must the insurer allocate the money it recovers to reimburse the insured for its deductible? In an opinion issued on July 3, 2019, the Washington Supreme Court held that a fault-free insured must receive the full amount of its deductible before the insurer may allocate any of the recovered funds to itself. Daniels v. State Farm Mutual Automobile Insurance Co., Wash., No. 96185-9, 2019 WL 2909308 (July 3, 2019).

Lazuri Daniels' vehicle was the middle car in a three-vehicle accident. Her automobile policy with State Farm had a $500 deductible. State Farm paid the repair cost that exceeded the deductible. It was agreed that the car that hit Daniels from behind was 70% at fault, and State Farm recovered 70% of the repair cost from the insurer of that car. State Farm then reimbursed Daniels for 70% of her deductible, allocating to itself the rest of the recovery. Daniels sued State Farm, arguing that a subrogated insurer could retain money recovered directly from an at-fault party only after its insured was fully compensated for its loss, including the full deductible.

In making its 70% payment for Daniels' deductible, State Farm relied on a 2010 Washington Court of Appeals decision that held that the so-called "made whole doctrine" does not apply to a subrogated insurer's direct action against an at-fault party. Averill v. Farmers Ins. Co. of Washington, 155 Wn.App. 106, 229 P.3d 830 (2010). It also relied upon a Washington insurance regulation that requires subrogated insurers to reimburse deductibles "less applicable comparable fault." WAC 284-30-393. In Daniels' lawsuit, the trial court approved of State Farm's 70% reimbursement, and the Court of Appeals affirmed. However, the Washington Supreme Court reversed, holding that the made whole doctrine applied to any loss recovery, whether pursued by the insured or by the subrogated insurer.

The court in Averill limited the made whole doctrine to the insurer's reimbursement from a loss recovery made by the insured from a responsible third-party. The court reasoned that allowing the insurer to allocate recovery to itself, before its insured, was consistent with the purpose of the deductible, which represented the amount of risk retained by the insured. Allowing an insured to recover its deductible, after enjoying a lower premium because of the deductible, would give the insured a windfall.

In Daniels, the Washington Supreme Court rejected the reasoning of Averill. It noted that another purpose of the deductible was to shift coverage for small losses to the insured, thus saving the insurer administrative expenses in handling small claims. Charging higher premiums for lower deductibles made up for increased administrative costs, a valid purpose. Enforcement of the made whole doctrine in subrogation recoveries did not interfere with this valid purpose. The Supreme Court also stated that it had never distinguished between reimbursement of the insurer from funds recovered by the insured, and recovery of loss amounts directly from third-parties by the insurer. The made whole doctrine applied equally in both circumstances.

The court also held that the regulation, WAC 284-30-393, did not support State Farm in this instance. The regulation allows for a deduction of the reimbursement to the insured for "applicable comparable fault," meaning any comparable fault of the insured. Because there was no finding of comparative fault on the part of Daniels, State Farm could not reduce the amount it reimbursed her for her deductible.

Regardless of how recovery is made, "a fault-free insured must be made whole for their entire loss before an insurer may offset or recover its own payments. Stated another way, the proceeds of any recovery from a third-party tortfeasor, whether in a subrogation action or otherwise, must be allocated in such a way as to first make the insured whole." Daniels, slip op. at 14.

The Daniels court held that the made whole doctrine prevailed over State Farm's arguments, and by so doing overruled the Averill decision.

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