Lord Jim wrote:After all the recent cricket postings, I look forward to hearing about something far more interesting and exciting like the obscure details of arcane insurance law provisions...
There's nothing quite so bracing as a dissertation on statutory aspects of subrogation theory in policy and practice; it really get the blood pumping. (For quite a number of years I have been a speaker on these issues at seminars for lawyers, and even I have a hard time staying awake during my talks.)
I've got a lot on my desk today, so I'm going to take this piece by piece as I can. Let's start with some historical background:
Andrew D wrote:The injured person has been damaged to the tune of $500,000. The insurer has paid $100,000 of that. The injured person gets an award of $500,000. So the injured person gets $600,000 dollars -- $500,000 from the lawsuit plus $100,000 from the insurance company.
The injured person is entitled to the full amount of damages which he or she has suffered -- $500,000. But the injured person is not entitled to $100,000 more than the damages which he or she has suffered.
If someone wrongfully wrecks one of my pianos, and that piano is worth $20,000, I am entitled to $20,000. But I am not entitled to $30,000 for the wrongful wrecking of my $20,000 piano.
While your example has logical appeal,
Andrew, it is not the only way of looking at the issue and is not always the case. The modern insurance business developed largely out of 18th and 19th Century property and marine lines insuring against building fires and loss of goods/cargo. At common law, the "collateral source rule" holds that it is none of the tortfeasor's business whether I might have protected myself from loss by buying insurance; the tortfeasor is on the hook to compensate me for all the damages he caused, regardless of whether I have also received compensation for some or all of those losses from a collateral source of benefits (i.e., insurance). Likewise, at law it was held to be of no concern to the insurer whether I might receive compensation in tort for losses covered by its insurance under contract; the insurer had contracted to assume the risk of loss and was obligated to pay on the policy. If I had been prudent enough to purchase insurance and lucky enough to be damaged by a solvent tortfeasor, I could obtain a so-called "double recovery" for an insured loss -- which of course is not a "double recovery" at all, since I had actually paid a premium for the insurance coverage in a commercial exchange with a business enterprise specifically organized for that purpose; that was the the bargain made, and I would be getting no more than I had bargained for.
But with the development of concepts of indemnity, surety and constructive trust in the insurance context, the equity courts began articulating principles of subrogation (although that term wasn't used until the mid-19th Century) as a kind of natural transfer of rights based on the practices of the business, since insurers were commonly acting on behalf of and in the name of their insureds. Initially, insurers' claims against third parties to recoup insured losses were justified on an equitable theory of contribution. Eventually, because insurers were considered to be putting themselves in the place of their insureds by absorbing the insureds' risk, they were deemed to succeed to the rights of their insureds once they had themselves incurred their insured's losses (i.e., paid on the contract) -- including the right to seek compensation (whether styled contribution in equity or damages at law) from the party responsible for causing the loss.
However, this succession of rights resulted in situations where insurers were competing with their insureds in claims against an at-fault party when the insurance didn't cover the full value of the loss, either because the amount of the policy was insufficient to fully compensate for the property insured or because losses included other property that was not insured. This was particularly problematic when the at-fault party didn't have the means to fully compensate all of the losses. As a result, the "made-whole doctrine" began to appear in the early 20th Century as another rule of equity to temper an insurer's subrogation rights, holding that an insurer could not seek recovery until the insured had been fully compensated (made whole) for all uninsured losses, and then only from whatever excess funds might be available. But not every jurisdiction has even ruled on the made-whole doctrine, and some that have have chosen not to adopt it (Maryland and Illinois off the top of my head). Other states apply it only as a default rule where the contract does not expressly provide otherwise; some jurisdictions apply it only as a rule of interpretation if the contract is first determined to be ambiguous.
Over the last century, subrogation has been incorporated into the law of unjust enrichment on the equity side and into contract law on the law side. No longer limited to property and casualty policies, it has expanded throughout the insurance industry into health and disability coverage as well. In addition, there are various statutory applications of subrogation theory with respect to, for example, hospital and medical provider payments and governmental health and welfare programs (particularly Medicare and Medicaid).
Some jurisdictions, however, have taken a dim view of subrogation, particularly in the context of health and disability policies. For example, Arizona has outlawed it by judicial decision, considering it to be in substance an alienation of rights to a personal injury claim, and therefore prohibited on public policy grounds. A number of states have specific anti-subrogation statutes that apply in personal injury cases (
see, e.g. the Pennsylvania motor vehicle statute that was the subject of the 1990 US Supreme Court case
FMC Corp. v. Holliday and New York General Obligations Law currently at issue in
Wurtz v. The Rawlings Company, (EDNY 2013)). As I noted in my previous post, Montana has effectively outlawed subrogation by constitutionally guaranteeing an injured party's right to be made whole.
On the other hand, a number of states also enacted collateral source statutes, which prohibit an injured party from recovering as damages any loss that has already been compensated by way of a collateral source of benefits. These statutes were an early effort in the "tort reform" drive and were primarily intended to benefit the liability insurance industry, which was complaining that it was forced to bear the costs of "double recoveries." The collateral source statutes, by abrogating the common-law collateral source rule, also effectively fixed the burden of loss within the insurance industry and relieved liability carriers from any responsibility for losses covered by health and disability payers.
Although subrogation is by definition a third-party claim, over the last 20 years, insurers (especially health and disability insurers) have also been including reimbursement clauses in their policies' subrogation and third-party recovery provisions, requiring the insured to repay the insurer if he obtains any recovery at all on a personal injury claim -- regardless of whether it was sufficient to make him whole for other losses, and regardless of whether any compensation from a third party was obtained for medical expenses. Some states allow these provisions. My state has held such clauses to be a violation of the legislative policy articulated by the state collateral source statute, and has prohibited or voided them.
That's all I have time for now. Gotta go.
