Judge: Insurer must reimburse fault-free insureds for deductible
The Washington State Supreme Court holds that insurers must cover fault-free insureds’ deductibles before retaining subrogation proceeds.
The Supreme Court of Washington has ruled that a first-party insurer, upon obtaining a partial recovery in a subrogation action, must reimburse its fault-free insureds for the full amount of their deductibles before any portion of the subrogation proceeds can be allocated to the insurer.
The case details
On July 25, 2015, Lazuri Daniels was involved in a three-vehicle wreck near Federal Way, Washington. At the time, Daniels was insured by State Farm Mutual Automobile Insurance Company with a policy that included a $500 deductible.
Daniels’ vehicle was at the center of the wreck; the driver of the car that hit her from behind was insured by GEICO, and the driver in front of her was insured by Liberty Mutual.
State Farm paid the portion of the repair costs that exceeded Daniels’ deductible. State Farm then sought recovery of its payment from GEICO, which agreed that its insured was 70% at fault and reimbursed State Farm for that portion of the total cost of the repairs. From these proceeds, State Farm reimbursed Daniels for 70% of her deductible.
Daniels brought a lawsuit and sought class action status against State Farm, alleging that, under both its own policy and Washington law, State Farm was entitled to recoup its money only after its insureds were fully compensated for their losses, including the full deductible, and that by allocating subrogation recoveries to itself before it returned its insureds’ full deductibles, State Farm violated this requirement.
The trial court dismissed Daniels’ action, an appellate court affirmed, and the dispute reached the Supreme Court of Washington.
The court reversed
In its decision, the court addressed the following issues:
- Whether Washington’s made-whole doctrine required that insurers allocate subrogation proceeds to the full reimbursement of its insureds’ deductibles prior to allocating any portion of the proceeds to itself.
- Whether, in the absence of an acknowledgement that an insured bore comparative fault, WAC 284-30-393 required an insurer to recover and return its insured’s full deductible.
- Whether State Farm’s policy language required that it allocate subrogation proceeds to the full reimbursement of its insureds’ deductibles prior to allocating any portion of the proceeds to itself.
With respect to the first issue, the court ruled that, whether in the context of a reimbursement request, offset, or direct subrogation action, “a fault-free insured must be made whole” for its “entire loss” before an insurer could offset or recover its own payments. Stated another way, the court said, 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.” The court decided that Daniels’ complaint asserted that State Farm failed to abide by this requirement and that it stated a valid claim supported by the common law made whole doctrine and survived State Farm’s motion to dismiss.
Next, the court ruled that Daniels stated a valid claim under WAC 284-30-393, a regulation that requires an insurer to seek recovery of its insured’s deductible as part of any subrogation claim against a third party and that requires the insurer to return some portion of the deductible to the insured.
The court interpreted the regulation the way the Washington Office of the Insurance Commissioner interpreted it, namely, that the regulation’s final four words — “less applicable comparable fault” — meant that an insurer may reduce the reimbursement of deductibles based on the insured’s fault.
The court decided that Daniels raised a valid claim regarding violation of the regulation because, accepting the facts alleged in her complaint as true, there appeared to have been no assertion that she bore any fault for the wreck, yet State Farm withheld 30% of her deductible.
Finally, the court found that Daniels’ claim regarding State Farm’s policy language also should not have been dismissed.
The policy provided:
If we are obligated under this policy to make payment to or for a party who has a legal right to collect from another, then the right of recovery of such party passes to us. . . .
Our right to recover our payments applies only after the insured has been fully compensated for the bodily injury, property damage or loss.
The court held that the only “reasonable interpretation” of the policy language was that it prohibited State Farm from allocating subrogation proceeds to itself until its insured was fully compensated for its loss, which included “full reimbursement” for the insured’s deductible.
The court concluded that this interpretation was consistent with the made whole doctrine and the basic principles of subrogation, which emphasize the loss suffered by the insured.
The case is Daniels v. State Farm Mutual Automobile Ins. Co., No. 96185-9 (Wash. July 3, 2019).
Steven A. Meyerowitz, Esq., (smeyerowitz@meyerowitzcommunications.com) is director of FC&S Legal and editor-in-chief of Insurance Coverage Law Report.
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