The Connecticut Supreme Court handed insurers a big win, ruling that insurance carriers’ claims, in subrogation cases, have priority over their insureds’ deductible reimbursement claims when dividing up limited recovery funds. In Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., the court held that insureds’ deductible losses are excluded from “make-whole” (or “made-whole”) analysis. While the decision clarified that the “make-whole” doctrine is Connecticut law, it expressly carved out policy deductibles from the doctrine, and explained in detail why insureds are not entitled to the recovery of their deductibles until after their insurers are “made-whole.”
The court thoughtfully considered and examined the law of other jurisdictions, and ultimately endorsed the rationale set forth in Jones v. Nationwide Property & Casualty Ins. Co. In Jones, the court agreed that collision deductibles in the auto insurance context need not be fully reimbursed in order for insureds to be deemed "made-whole". The rationale advocated in Jones, and which underlies the Fireman’s Fund decision, is that if the insured is reimbursed for its deductible before the insurer recovers completely, then the insured receives an unbargained-for, unpaid-for windfall. Under the terms of any insurance policy with a deductible, the insured implicitly agrees to be self-insured for the entire amount of its deductible.
In Fireman’s Fund, the court clearly defined the priority of payment in subrogation recoveries as follows:
- to the insured for all uninsured or underinsured losses (these are losses above or in addition to the policy limits of the first-party insured);
- to the subrogating insurer for up to the full amount paid on the insured’s claim; and finally
- the insured’s deductible.
Although the Connecticut Supreme Court affirmed the “make-whole” doctrine’s application, this does not come as a surprise to those who practice in Connecticut, as the doctrine had been applied by prior appellate courts and federal courts in the state.
The application of the “make-whole” doctrine to deductibles varies significantly from jurisdiction to jurisdiction and can even vary from product line to product line within a single jurisdiction at times. For example, in Connecticut, there is specific legislation that addresses automobile collision insurance deductible reimbursement. Under Connecticut’s § 38a-351a, if an insurer chooses to exercise its right of subrogation pursuant to the terms of an automobile insurance policy, such insurer shall include in its subrogation demand the amount of any collision deductible paid by its insured and the insurer is required to divide up any recoveries with its insured on a proportionate basis. This statutory law is not limited by the Fireman’s Fund decision. As the court established, the default rules for the “make-whole” doctrine applies in the absence of other governing statutory law.
It will be interesting to see how insurance carriers providing coverage in Connecticut responds to the decision. While subrogating carriers can legitimately limit their efforts to include their insureds’ deductible claims along with their subrogation claims (where not required by the collision coverage statute) as well as strongly argue against sharing subrogation recoveries with insureds, broader business goals may dictate otherwise. Some carriers use deductible reimbursements as a component of their direct marketing efforts towards their customers as a way to demonstrate stronger customer service and claims handling. Similarly, agreements to divide recoveries with an insured often assist in gaining such insured’s greater cooperation in the recovery process. In turn, while the decision provides a slightly more favorable legal priority to subrogation claims and clarifies how courts will resolve similar disputes, carriers and subrogation professionals must continue to make individual company by company and case by case decisions as to what is in their broader best interests.
On a related note, there has been a spate of class action litigation against insurance carriers concerning pro rata reimbursement and/or non-reimbursement of deductibles in recent years. Class action plaintiffs’ claims have typically arisen from auto insurance claims where subrogation recoveries have been insufficient to fully reimburse both the carrier and the insured. Class plaintiffs have often alleged bad faith and other extra-contractual claims based on insufficient deductible reimbursements, asserting that the carriers’ subrogation business practices violated the jurisdictions’ common law equitable “made-whole” doctrine. Based upon the broadly-supportedFireman’s Fund decision, insurance carrier litigants in other jurisdictions will find stronger support for some of their defenses in the guidance provided in the court’s legal arguments.