The Ninth Circuit Court of Appeals affirmed the District Court for the Central District of California's dismissal without prejudice of plaintiff's class action suit brought against his insurer arising from the insurer's refusal to reimburse plaintiff for rental car expenses collected by the insurer from the third-party tortfeasor's insurer. The plaintiff argued that the insurer's refusal to reimburse these expenses violated the "made whole" rule. The district court dismissed plaintiff's suit because plaintiff lacked standing and his claims were unripe because plaintiff had not yet established an inability to recover directly from the third-party tortfeasor.
Plaintiff was involved in an accident in which his car was rear-ended. Plaintiff's auto policy issued by defendant State Farm Mutual Automobile Insurance Company ("State Farm") provided it would reimburse policyholders 80% of their out-of-pocket rental car costs while their automobiles are being repaired following covered accidents. Plaintiff rented a car, and State Farm, in turn, reimbursed him 80% of the rental costs.
State Farm immediately sought to recoup its 80% payout to the plaintiff from the third-party tortfeasor's insurer, which agreed to reimburse State Farm. Plaintiff subsequently sought payment of the remaining 20% of his rental costs from the third-party insurer, which refused. Plaintiff next demanded that State Farm reimburse the unpaid 20% of his rental car expenses from the funds State Farm received from the third-party tortfeasor's insurer. State Farm refused.
Plaintiff filed suit against State Farm, alleging he was entitled to reimbursement from State Farm under the "made whole" rule which bars insurers from recouping its payments from third parties unless and until the insured is "made whole." At the time, plaintiff had not filed suit against the third-party tortfeasor. State Farm moved to dismiss plaintiff's claim for lack of standing and ripeness.
The district court noted that California courts had not addressed whether the "made whole" rule applies in situations where the insured has not yet sued the third-party tortfeasor, but the insurer has already obtained reimbursement of the policy payout from the third-party tortfeasor's insurer. The district court, therefore, looked to general principles of subrogation and the "made-whole" rule for guidance.
Subrogation is an equitable doctrine that permits an insurer to assert the rights and remedies of an insured against a third-party tortfeasor. The "made-whole" rule is a common law exception to the insurer's right to subrogation, which precludes an insurer from recovering any third-party funds unless and until the insured has been made whole for the loss. It does not apply in all circumstances, however.
For instance, in Winkelmann v. Excelsior Ins. Co., 650 N.E.2d 841 (N.Y. 1995), the plaintiffs owned a building that was damaged by a fire allegedly caused by the negligence of a roof repairman. Plaintiffs' insurer paid plaintiffs the amount it was obligated to pay under the insurance policy (which was less than the total amount of property damage). Turning to the repairman's insurer, plaintiffs sought the remaining amount of damages, and plaintiffs' insurer sought to recoup its payout. When the repairman's insurer offered to settle, plaintiffs refused, but their insurer accepted the offer. As a result, plaintiffs sued their insurer, alleging their insurer's settlement hindered their rights and ability to prosecute their claim against the repairman. At the time, plaintiffs had not yet filed suit against the repairman.
The New York court held plaintiffs' claims were premature because plaintiffs had not shown that they could not recover the balance of their losses from the repairman directly. The court held an equitable subrogee (i.e., plaintiffs' insurer) need not delay seeking recovery from a third-party tortfeasor until the insured has exhausted her efforts to collect from the third-party tortfeasor. The court reasoned that if the insurer is required to forego its rights while the insured delays in asserting its claims against the tortfeasor, the delay may result in a stale claim or the action being time-barred.
The district court in this case found the Winkelmann reasoning and holding to be persuasive. A rule requiring insurers to make insureds whole before subrogating themselves to the insureds' claims would confer greater rights on the insured than provided for in the policy and would eliminate any incentive on the part of the insured to seek reimbursement from the tortfeasor. Such a rule would also undermine a fundamental public policy – the principle that the person ultimately responsible for causing the damage should pay for it. Thus, the district court held the insurer can recoup its payout before the insured is made whole unless and until the insured attempts and fails to recover from the third-party tortfeasor. For these reasons, the district court granted State Farm's motion to dismiss on the grounds that plaintiff lacked standing and his claims were unripe.
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