The California Court of Appeal has held that, when a first-party insurer asserts a claim for reimbursement, the issue of whether the insured has been “made whole” is determined without deducting the attorney fees and costs the insured incurred in pursuing recovery against a third-party tortfeasor. ( Allstate Insurance Company v. Superior Court (2007) WL 1704017)
Facts
Tony Delanzo suffered injuries in an automobile accident with a third party. Delanzo’s own insurer, Allstate, paid Delanzo $4,203.36 in first-party medical payments benefits. Delanzo then settled his claim against the third-party tortfeasor for $11,000.00, but incurred attorney fees and costs of $5,926.84 in this process.
Allstate’s policy contained the following provision: “Subrogation Rights When we pay, your rights of recovery from anyone else become ours up to the amount we have paid. You must protect these rights and help us enforce them.” Allstate initially requested that Delanzo repay the entire $4,203.36 under this provision. However, Allstate offered to accept a reduced amount of $1,696.13. Allstate’s willingness to accept this reduced amount was based on the common-fund rule, which requires an insurer to reimburse a pro rata portion of the insured’s attorney fees and costs incurred to recover covered losses against a third party tortfeasor when the insurer had knowledge of, but did not participate in, the litigation against the tortfeasor.
Delanzo sued Allstate for (1) violation of Business and Professions Code section 17200, (2) conversion, (3) unjust enrichment, and (4) declaratory relief. Delanzo did not dispute that the $11,000.00 settlement amount constituted full compensation for his injuries from the third party, but alleged he was not “made whole” by this amount because his total gross recovery of $15,203.36 (i.e., $4,203.36 paid by Allstate plus $11,000.00 paid by the third party) minus $5,926.84 (the attorney fees and costs Delanzo incurred to obtain this settlement) was less than $11,000.00.
Allstate asserted that, on these facts, Delanzo had not stated any cause of action, but the trial court disagreed. Allstate then sought relief in the Court of Appeal, which found in favor of Allstate.
Holding
An insurer that pays benefits to its insured under a first-party policy generally is entitled to reimbursement from funds a third-party has paid. The right of reimbursement may arise by statute, by contract or by equity. If the insured incurs attorney fees and costs in pursuing recovery, and if the insurer does not participate in seeking that recovery, the common fund rule obligates the insurer to reimburse the insured a pro rata portion of those fees and costs. One exception to the rule in favor of reimbursement is the common law “made whole” doctrine, which provides that an insurer is not entitled to these funds unless the insured first has been made whole by the recovery from the third-party tortfeasor.
In this case, the Court of Appeal held that the issue of whether the insured has been “made whole” must be determined without regard to attorney fees and costs the insured incurred in obtaining the recovery against the third party. Because Allstate already had borne a pro rata portion of the fees and costs Delanzo incurred in obtaining the recovery, Delanzo had been made whole, and Allstate was entitled to reimbursement of $1,696.13.
Comment
Courts in many jurisdictions, including California, hold that parties may avoid the made-whole exception by contract. However, the contractual language must clearly specify that the parties intend to permit the insurer to obtain reimbursement even if the insured has not been made whole. Here, Allstate did not claim the reimbursement provision in Delanzo’s insurance contract was sufficiently clear and specific to negate the made-whole rule.
Additionally, the made-whole exception does not apply if the insurer participated in prosecuting the claim against the third party. Here, Allstate did not claim it had participated with Delanzo in the lawsuit against the third-party tortfeasor.
The Court of Appeal’s ruling in this case directly conflicts with a recent ruling by the Ninth Circuit Court of Appeals in Chong v. State Farm Mut. Auto. Ins. Co. (S.D. Cal. 2006) 428 F.Supp.2d 1136.