State Farm Mutual Automobile Insurance Company stands accused of enriching itself with payments rightfully belonging to its insureds after a class action lawsuit was filed recently in U.S. Federal Court, Central District. The suit alleges that the insurer is operating in direct violation of California law, specifically the "Make Whole Rule."

The controversy began with a thud, or more precisely, a rear-end collision involving Stuart Chandler, a State Farm policyholder. After his car was rear-ended by another vehicle, the Fresno, Calif. man obtained a rental car--to which he was entitled under his personal automobile insurance policy -- while his car was being repaired. State Farm subsequently reimbursed 80 percent of the total rental bill of $317.45, leaving Chandler to pick up the remaining 20 percent, or $63.49.

State Farm then consulted the at-fault party's insurer to recoup the money it had paid for Chandler's claim. That insurance company reimbursed State Farm $70 for the rental car expenses. The complaint alleges that, pursuant to California's "Make Whole Rule," State Farm should have refunded Chandler the out-of-pocket expenses he incurred ($63.49) from that amount prior to retaining any funds for itself. This rule is a common exception to an insurance company's subrogation right. According to Stephen M. Garcia, the plaintiff's Long Beach, Calif. attorney, California common law basically provides that before any of the recovery can be allocated to the insurer, the policyholder suffering the loss from a car accident must be fully reimbursed for all the elements of damages, not just those for which the insurer has indemnified the policy holder.