TORT REPORT: Made-whole doctrine can be effectively disclaimed in policy

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By Patricia Stone

In Wisconsin, the made-whole doctrine has provided the insured with a legal right to pursue money from a tortfeasor to cover his or her losses.

The doctrine, in a nutshell, is an equitable defense to subrogation or reimbursement rights of an insurance carrier (or another party) and requires the insured be made whole for all of his or her damages by the subject tortfeasor before reimbursement or subrogation will be allowed by the insurance carrier.

A recent Wisconsin Supreme Court case, Steffens v. BlueCross BlueShield of Illinois, 2011 WI 60 (July 8, 2011), concluded that in matters where the made-whole doctrine is expressly disclaimed in a policy, however, an insurer is entitled to fully recover disbursed funds under a subrogation claim.

This occurs against those funds recovered by the insured and applies even when the remaining recovered funds do not ultimately make the injured party “whole” through the settlement.

In subrogation matters, prior to Steffens, insurance carriers could typically not recover anything until the damaged party was compensated for all of his or her damages. This, at times, resulted in subrogated interests being able to recover little-to-nothing from the tortfeasor, for having to expend money in compliance with a given insurance policy.

In the Steffens case, which involved an Employee Retirement Income Security Act benefits plan, the contract included a “reimbursement, subrogation and/or right of reduction” clause. The clause stated that BlueCross was entitled to reimbursement for expenses arising out of an accident when a third party “may be liable” for those expenses and the beneficiary obtains a settlement. Further, the insurance contract stated that any “so-called ‘make-whole’ or ‘full compensation’ rule or doctrine is hereby explicitly rejected and disavowed.”

Based on this language, the benefits plan administrator found that BlueCross was entitled to those expended funds recovered by plaintiff through the settlement with the tortfeasor.

The question before the Wisconsin Supreme Court was whether the applicable ERISA medical plan negates the “made-whole” doctrine and whether the benefits plan administrator acted reasonably when it interpreted the medical benefits plan contract in favor of the full reimbursement to BlueCross.

After reviewing the plan language, it was clear to the court that the plan administrator’s decision regarding the subrogation reimbursement was reasonable and should therefore not be reversed. The court also explained that clauses such as those included in this ERISA plan do, in fact, trump the Wisconsin make-whole doctrine. The court furthered its precedence by stating that clauses such as this are consistent with “the principle of contract law that parties are entitled to the benefits of their bargain.” Steffens, 2011 WI 60, ¶52.

As a result of this case, the Supreme Court clearly affirmed its continued stance that insurance policies are contracts, under which parties are entitled to negotiate and retain coverage that meets their needs.

Attorneys involved in cases where subrogation rights are claimed should closely analyze the policy language to determine the rights of both the insurer and the policyholders. Only when insurance contracts are silent in areas otherwise covered by common law doctrines, can those doctrines be imputed into such contracts.

Patricia Stone is an associate at McCoy Law Group SC, Waukesha.  The firm has a civil litigation practice that includes insurance defense, construction disputes and commercial/business litigation.