Allstate Insurance Company v. Superior Court (Delanzo)
(Cal.App. 2007) ___ Cal.App. 4th___, 07 C.D.O.S. 6840

Attorney Fees And Costs Should Not Be Deducted When Calculating "Made-Whole" Amount Under Insured's No-Fault Medical Payments Coverage.

The California Court of Appeal for the Fourth Appellate District granted an insurer's petition for a writ of mandate and directed the trial court to vacate its order overruling the insurer's demurrer and enter a new order sustaining the demurrer. The Court of Appeal held that attorney fees and costs incurred to obtain compensation from a third party tortfeasor are not deducted when calculating the insured's total recovery under the "made-whole" doctrine when determining a first-party insurer's right to reimbursement of benefits once the insured recovers from the third party wrongdoer.

Allstate Insurance Company ("Allstate") issued an automobile insurance policy to Tony Delanzo that included first party, no-fault medical payments ("med-pay") insurance coverage. The med-pay policy contained a subrogation provision stating that "[w]hen 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." Delanzo suffered injuries in a car accident with a third party and Allstate paid Delanzo $4,203.36 in accordance with the med-pay policy provisions. Delanzo settled his claim against the third party for $11,000, but incurred $5,926.84 in attorney fees and costs to obtain that settlement. Allstate requested reimbursement of its $4,203.36 payment. Delanzo paid Allstate $1,696.13 and Allstate agreed that this satisfied its reimbursement claim.

Delanzo filed a complaint against Allstate alleging causes of action for (1) violation of the Business and Professions Code section 17200, (2) conversion, (3) unjust enrichment, and (4) declaratory relief. Delanzo alleged that Allstate's reimbursement claim was improper because Allstate did not take into account the amount Delanzo spent obtaining the $11,000 settlement reached with the wrongdoer. Delanzo filed suit both on his own behalf and as purported representative of all similarly situated California Allstate insureds.

Allstate demurred. The trial court overruled the demurrer, stating that an insurer who does not participate in the litigation against a third party is only entitled to reimbursement when the attorney fees and costs incurred by the insured are less than the amount the carrier paid.

The Court of Appeal framed the issue as the "appropriate allocation of funds received by an insured from a third party tortfeasor as between the insured and insurer." The Court first considered the broader context of an insurer's subrogation and reimbursement rights. Unlike true subrogation, an insurer's reimbursement right is contingent upon actual recovery by the insured from a third party. A personal injury claim is not subject to subrogation in California because it cannot be assigned. However, California courts have held that an insurer may be reimbursed for payments under a personal injury claim by enforcing policy provisions that specifically entitle the insurer to reimbursement. The Court noted that Allstate's policy had such a reimbursement provision.

Next, the Court discussed the made-whole rule, noting that the rule "generally precludes an insurer from recovering any third party funds unless and until the insured has been made whole for the loss." While the rule is typically applied in property loss claims, one California court recently held that it applies in a personal injury (reimbursement) context under no-fault med-pay insurance coverage. See Progressive West Ins. Co. v. Superior Court (2005) 135 Cal.App.4th 263. That court, however, did not address the proper calculation of total recovery under the rule for the purposes of determining an insurer's reimbursement rights.

After reviewing different rationales behind the made-whole rule, the Court of Appeal noted that the common-fund doctrine was an additional limitation on the subrogation / reimbursement right. The doctrine provides that an insurer seeking reimbursement has to bear a percentage of the insured's total attorney fees and costs proportionate to the total amount recovered from the third party. The Court highlighted that the made-whole exception and the common-fund doctrine "are not mutually exclusive."

The proper calculation of the insured's recovery under the made-whole rule is therefore an issue of first impression in the California courts. The issue was mentioned in Plut v. Fireman's Fund Ins. Co. (2000) 85 Cal.App.4th 98, but the Court of Appeal found that the Plut court's ultimate determination on the issue was unclear. Outside of California, there is conflicting authority between jurisdictions on whether attorney fees and costs should be deducted from the total recovery when calculating whether the insured was made whole.

The Court examined the doctrinal rationales for California's subrogation and reimbursement rules, as well as the made-whole exception to those rules and the purpose of med-pay coverage. The Court noted that the made-whole doctrine is derived from tort law to compensate for total losses after an injury is suffered. California follows the "American" rule which provides that each party bears its own costs in litigation absent a statutory, contractual, or other specifically applicable exception. Therefore, under California law, the made-whole concept of full recovery for tortious conduct has never been construed to include recovery for attorney fees. Because full compensation for tort damages under the American rule does not include costs of obtaining damages, the Court concluded that the total amount of fees and costs should not be deducted when evaluating whether the insured has been made whole. To include such costs in the calculation would give the insured an advantage which was never bargained for: insurer funding of litigation expenses to obtain recovery from a third-party tortfeasor.

The Court found that a ruling for Delanzo would have been inconsistent with the general rule that an insurance company is only obligated to pay attorney fees to its insured in disputes between the insured and the insurer under very limited circumstances. The Court also disagreed with Delanzo's suggestion that the doctrine should be interpreted by what is "equitable" under the circumstances, finding there is no reason to "rewrite the parties' contract merely because an insurer has more resources than its insured." Here, there was no valid basis for precluding the insurer from reimbursement after the insured has "twice recovered" for the same loss.

The Court of Appeal noted that a federal district court applying California law reached the opposite conclusion in Chong v. State Farm Mutual Automobile Insurance Co. (S.D. Cal. 2006) 428 F.Supp.2d 1136. The Court of Appeal determined that the reasoning in Chong was unpersuasive in the specific context of med-pay insurance coverage and noted the Chong court was "reluctant" to decide the issue and had suggested certification of this question to the California Supreme Court. The Court of Appeal rejected Chong's description of unfairness, stating that it is not unfair to require the insured to bear the legal expenses for collecting uninsured losses because the insured has not paid a premium for coverage of those legal expenses.

The dissent agreed with Chong and the "strong majority of jurisdictions" which have ruled that attorney fees and costs must be deducted from total recovery to determine if the insured was made whole. In addition, the dissent noted that the American rule simply precludes recovery of attorney fees as damages in a lawsuit and is not relevant to issues involving third parties such as insurance companies.

In sum, the Court of Appeal held that under California law an insured's attorney fees and costs from litigation with a third party should not be deducted from the insured's total recovery for the purpose of the made-whole doctrine under med-pay coverage.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.

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