May 26, 2017
The doctrine of equitable subrogation basically says that our injured party is entitled to receive complete compensation, to be "made whole," before the insurer can get its money back. It reflects the idea that, as between the injured driver and the insurer, the injured driver has the primary loss and holds the claim with the greatest entitlement or priority to be paid. So the insurer has to wait until the injured driver is fully compensated before the insurer can start getting any reimbursement money from the negligent third party. Inherent in the doctrine of equitable subrogation is the idea that every situation has to be judged on its own merits. There aren't really any bright lines as to when you know for sure that an injured person has been made whole. It all depends on the nature and seriousness of the injuries. What if the injured person is a concert pianist and loses the pinky and ring finger of his non-dominant hand? His special and general damages will be much much greater than if I lose the pinky and ring finger on my non-dominant hand in the same accident. Arguably I could be made whole by payment of $50,000 from the negligent third party. But will the concert pianist? Not by a long shot.
There will be situations where even if the made whole rule is in place, an insurer will become entitled to be reimbursed after a certain amount of money is paid to the injured person. But, of course, personal injury attorneys being clever and working hard to protect their client's interests, they can usually come up with lots of plausible arguments and information to show that their client is not "made whole." Especially if there is a relatively low recovery from the negligent third party. And getting a "policy limits" recovery from a negligent third party–the maximum amount of money under the liability insurance policy of the careless driver who ran into you–that is far less than the amount of the loss the other car driver suffers, is very common in personal injury cases.
You can see why insurers dislike the doctrine of equitable subrogation. Health insurers routinely draft their policies to include specific language that says something like "we are entitled to be reimbursed for benefits we have paid from the first dollar of any money you receive from a third party for injuries caused by that third party. Furthermore, we have no obligation to pay attorney fees or share in the cost of any attorney fees you may incur in recovering that money from a third party." But many states have insurance laws and cases that resist enforcing this type of language. These states recognize that allowing insurers to strictly enforce this type of boilerplate language will cause a lot of injured folks to not pursue compensation from the negligent party in the first place if the numbers work out the way they do in my hypothetical.
In many jurisdictions the law is a bit unsettled. In my state the Supreme Court has ruled that equitable subrogation is the default rule but it has suggested that insurers may, if they are precise enough with the language they put in their insurance policy, be able to pursue reimbursement for money without the injured party being made whole. However, an informal opinion from the commissioner of the state insurance department some years ago disagrees and tells insurers that they cannot use one sided insurance policy language to skirt the doctrine of equitable subrogation. The effect of uncertainty in the law is to provide incentive to everyone involved in the situation to settle claims short of full blown litigation. The uncertainty ensures that neither side has a decisive upper hand. Generally the folks on all sides of the situation find it in their interests to negotiate some resolution that splits the difference.
So the likely scenario today for my hypothetical? The health insurer sends a letter to the injured person's attorney saying, "we want our $20K back." The attorney says, "well, not so fast" and lays out the facts as to why the injured person is not made whole. The insurer says "but we have language in our policy that says we get our money back from the first dollar." Attorney responds: "yea, but the Jones case in our jurisdiction says you don't get your money back until my guy is made whole and he's not close to being made whole. Go away." Insurer goes away. Alternatively, if the law is muddled, perhaps the attorney, the insurer and the injured party split the $25K recovery three ways. Neither insurer nor injured party is thrilled; everyone gets something; the injured party retains an incentive to go after the negligent third party in the first place. That last effect is critical. More in the next, final post on equitable subrogation.
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