Connecticut Supreme Court Determines that the Make Whole Doctrine Does Not Apply to Insurance Policy Deductibles


    The Connecticut Supreme Court, in a much anticipated subrogation decision, recently held that an insurer has priority over a policyholder in the context of a recovery for insurance policy deductible losses.  See Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 309 Conn. 449, --- A.3d ----, 2013 WL 3818112 (Conn. July 30, 2013).  A copy of the Supreme Court’s decision is available here.

    In Fireman's Fund Ins. Co., the court addressed issues of paramount importance to the area of subrogation law in Connecticut.  Subrogation, “[i]n its simplest form, … allows a party who has paid a debt to step into the shoes of another … to assume his or her legal rights against a third party to prevent that party's unjust enrichment,” enabling “an insurance company that has made a payment to its insured to substitute itself for the insured and to proceed against the responsible third party.”  Id. at *3 (citations omitted).  Subrogation thus “promotes equity by preventing an insured from receiving more than full indemnification as a result of recovering from both the wrongdoer and the insurer for the same loss, which would unjustly enrich the insured.”  Id. (citation omitted).

    Although outside the scope of the court’s opinion in Fireman's Fund Ins. Co., a right of subrogation is generally and most often invoked in areas of insurance such as property insurance, but is not necessarily available in all instances in the absence of an express contractual or statutory provision.  See generally, e.g., Wolters v. American Republic Ins. Co., 149 N.H. 599, 827 A.2d 197 (N.H. 2003) (summarizing that “[c]ourts have generally found an implied right of subrogation to exist in policies, such as those for fire insurance, covering property damage,” but that “[w]here, however, a contract is one of personal insurance, such as a policy providing benefits for medical or hospital expenses, equitable subrogation is not applicable; there must be a contractual or statutory right for the insurer to be entitled to subrogate.”) (citations omitted).

    Where an insurer’s right to subrogation is available, a concern sometimes arises when “the amount recoverable from the responsible third party is insufficient to satisfy both the total loss sustained by the insured and the amount the insurer pays on the claim . . . .”  Fireman's Fund Ins. Co., 2013 WL 3818112, at *4 (citation omitted).  The make whole doctrine attempts to address this concern, by “restricting” the enforcement of an insurer’s right to subrogation until after the insured has been fully compensated for the loss.  Id. (noting “[t]he equitable principle underlying the [make] whole [doctrine] is that the burden of loss should rest on the party paid to assume the risk, and not on an inadequately compensated insured, who is the least able to shoulder the loss.”) (citation omitted).

    The dispute in Fireman's Fund Ins. Co. arose in 2006 when an insurer and policyholder settled a third-party errors and omissions claim brought against the policyholder (an insurance agent) for $354,000.  Out of the $354,000 settlement, the policyholder contributed $150,000 (its single claim deductible), and the insurer contributed the $204,000 remainder.  Following the settlement, however, the insurer obtained a $208,000 subrogation recovery.  Subsequently, a priority dispute arose in federal court between the insurer and policyholder over whether the policyholder was entitled to first receive its deductible back from the recovery before the insurance company was entitled to its right of subrogation.

    In response to a certified question from the Second Circuit Court of Appeals, the Connecticut Supreme Court initially determined that the make whole doctrine operates as the “default rule” in the context of Connecticut insurance contracts.  The court then turned to the question of whether the make whole doctrine should apply to insurance policy deductibles under Connecticut law.  The policyholder, relying in part on a law review article, argued that it was.  In response, the insurer argued that the deductible is “not part of the loss to which the make whole doctrine applies,” and that “to conclude otherwise would essentially convert the policy into one without a deductible, thereby providing TD Banknorth with an unbargained for windfall at the expense of Fireman's Fund.”  Id. at *2.  Prior to certifying the question to the Connecticut Supreme Court, the Second Circuit had noted that there “are strong arguments on both sides of the issue,” but that “Connecticut law is currently silent on the matter.”  See Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency Inc., 644 F.3d 166, 173 (2d Cir. 2011).

    The Connecticut Supreme Court ultimately sided with the insurer, reasoning in part as follows:

    [W]e conclude that the equitable considerations supporting the make whole doctrine are inapplicable to deductibles. … If we were to decide otherwise, as TD Banknorth urges, we would effectively disturb the contractual agreement into which TD Banknorth and Fireman's Fund entered, thereby creating a windfall for TD Banknorth for a loss that it did not see fit to insure against in the first instance when it contracted for lower premium payments in exchange for a deductible. …

    Fireman's Fund Ins. Co., 2013 WL 3818112, at *9.

    At the close of the opinion, however, in a footnote, the court was also careful to point out that its holding was “merely the default rule and that parties are free to provide differently in their contract, provided they do so expressly.”  Accordingly, in the absence of other governing statutory law, insurers and policyholders are potentially free to contract as they see fit with respect to the issue of priority for subrogation recoveries.

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