Court: 'Made whole' doctrine does not apply

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The “made whole” doctrine does not apply where a couple whose store burned down settled with the contractor, who was responsible, for less than the policy limits.

However, the May 30 Wisconsin Supreme Court decision may be limited to property damage, and not apply to personal injuries.

Bruce and Karen Muller owned a sporting goods store in Milltown, Wisconsin, which was destroyed by a 2001 fire.

The claimed loss was almost $700,000, but the property was only insured for about $400,000.

Settled with Contractor

Their insurer, Society Insurance paid the policy limits. Society and the Mullers then pursued George Jerrick, an electrical contractor who had worked on the property, alleging negligence. Jerrick was insured for $1 million.

However, the Mullers settled with Jerrick’s insurer for only $120,000, leaving roughly $170,000 in uncompensated damages.

Society later settled with Jerrick’s insurer for $190,000.

Following the settlements, the Mullers and Society briefed whether the Mullers could recover the remainder of their uncompensated loss from Society’s subrogation settlement.

The circuit court ruled in favor of the Mullers, but the Court of Appeals reversed, holding that Society was entitled to retain its entire settlement. Muller v. Society Insurance, 2007 WI App 44, 300 Wis.2d 463, 730 N.W.2d 668.

The Supreme Court granted review and affirmed the Court of Appeals, in an opinion by Justice David T. Prosser. Chief Justice Shirly S. Abrahamson dissented, in an opinion joined by Justices Ann Walsh Bradley and Louis B. Butler, Jr.

Recovering Payments

As a general rule, an insurer is entitled to recoup payments it makes to its insured from payments from a third party responsible for the loss.

The made whole doctrine is an exception, providing that, unless the insured has recovered its losses in full, the insurer’s subrogation rights give way.

Here, because the Mullers unilaterally settled with the tortfeasor’s insurer, without securing enough funds to be compensated, the majority concluded the doctrine does not apply.

The $1 million liability policy was more than large enough to cover all claims. On this basis, the court distinguished cases in which the doctrine applied, because the tortfeasor’s liability policy was less than the damages.

The court also distinguished cases in which the insurer stipulated to its insured’s settlement with the tortfeasor for less than full damages.

Personal Injury Damages

In addition, the court noted that this case involved property damage, rather than personal injury.

Noting that estimation of personal injury damages is more imprecise than property claims, the court wrote, “The value of these types of damages can be difficult to ascertain, making settlement talks more combative and less likely to accurately reflect the amount necessary to fully compensate the plaintiff. By contrast, in this case, the value of the plaintiffs’ property loss was largely undisputed, making settlement negotiations between the plaintiffs and the tortfeasor hinge solely on the issue of the tortfeasor’s liability.”

The court also concluded that equitable considerations did not require application of the doctrine: “The Mullers settled with the tortfeasor, and their right to priority was preserved.

… It would be inequitable now to allow them to reap the benefits of their settlement and then try to capture all or part of Society’s settlement, in view of the fact that the Mullers were permitted to settle first.”

Finally, the court found that policy reasons militate against the doctrine in this case, because Society could have simply abandoned its claim after the Mullers settled. Had it done so, the Mullers could not have recovered any more anyway.

The court found that applying the doctrine would thus discourage subrogees from pursuing their claims, to the benefit of tortfeasors, with no corresponding benefit to injured parties.

Dissent

Three dissenting justices rejected the majority’s rationale that, because the tortfeasor had enough insurance to cover all losses, the doctrine should not apply.

Abrahamson wrote for the dissenters, “The simple truth is that we have no idea why the Mullers and Society Insurance were collectively unable to get more than $310,000 from the tortfeasor’s insurance company. Perhaps the amount of the Mullers’ damages was uncertain. Or perhaps it was uncertain whether the Mullers could prove the tortfeasor’s liability for their damages. In any case, the bottom line is the same: The tortfeasor’s insurance company agreed to pay only $310,000 to settle the Mullers’ and Society Insurance’s claims against the tortfeasor, and the Mullers and Society Insurance were necessarily in competition over this limited pool of funds.”

The opinion does not resolve an extremely important question — whether it is limited to cases involving property damage, or will be extended to personal injuries.

Joe Thrasher, of Thrasher, Doyle, Pelish & Franti, Ltd., in Rice Lake, who represented the defendant on appeal, acknowledged in an interview with Wisconsin Law Journal that he does not know whether it will be limited or extended.

On the one hand, the court’s opinion mentions that this is a property dispute, rather than a person injury claim, as one of the reasons for not applying the made whole doctrine.

On the other hand, all the rest of the court’s reasons in support of the holding could be equally applicable in a case involving personal injuries.

However, Brett A. Eckstein, of Cannon & Dunphy, S.C., in Brookfield, who wrote an amicus curiae brief on behalf of the Wisconsin Academy of Trial Lawyers, disagrees that the decision could be extended to personal injuries.

First, Eckstein noted the painstaking detail the court went to in differentiating that property damage is more susceptible to calculation.

Second, Eckstein noted that indemnification agreements are routine in personal injury actions, and the court’s decision expressly does not apply where such agreements exist.

Attorney William L. Norine, of the Norine Law Firm in Grantsburg, who represented the plaintiffs, is concerned about the breadth of the decision, although he thinks it would be difficult to extend the holding to personal injury cases.

Norine also fears it will complicate settlements.

“My fear is, how do you advise clients in the future. We need to streamline application of the made whole doctrine. If parties don’t know the state of the law, it will be difficult to explain to clients going into this situation.”