Texas insureds and their attorneys have long relied on the made whole doctrine, but today one would be ill advised to place unqualified confidence in its protection. First, the burden is, and always has been on the insured to prove that they have not been made whole. While this is more easily accomplished when expenses are clearly in excess of insurance payments, a more difficult question arises in the context of unliquidated damages. Secondly, The Texas Supreme Court has recently heard oral arguments for a case in which one of the issues is whether or not the equitable doctrine is applicable to contractual subrogation, notably, after the United States Supreme Court answered the aforementioned question in the negative. In this environment, a practitioner can still assert the doctrine’s protection while negotiating with insurance companies, but should be aware of the doctrines limits and prepared to overcome insurer’s speculative objections.
The made whole doctrine is an equitable canon which states that an insurer is not entitled to subrogation when the insured’s loss exceeds the amount recovered by insurance and the third party causing the loss. Ortiz v. Great S. Fire and Casualty Ins. Co, 597 S.W.2d 342, 243 (Tex. 1980). “In other words the insurer’s right of subrogation may not be exercised until the insured has been made whole.” Esparza v. Scott & White Health Plan, 909 S.W.2d 548, 552 (Tex. App.—Austin 1995, no writ (citing Ortiz). A recurring rationale for the doctrine is that the purpose of insurance is to insure and if anyone should go unpaid it should be the insurer. Id. at 551. However, while the doctrine favors the insured, it nonetheless places the burden on the insured to prove as a matter of law that they have not been made whole. AIG Life Ins. Co. v. Federated Mut. Ins. Co., 200 S.W.3d 285 (Tex. App.—Dallas 2006, pet. denied).
Where there is no contractual subrogation clause in an insurance agreement the made who doctrines stands as a strong defense. For example, in Ortiz, and insurer paid $4,000 to the Ortiz family who suffered more than $15,000 in person and real property damage resulting from the negligence of a carpet company. The family settled for $10,000 with the carpet company and the insurance company sought equitable subrogation. The court denied the subrogation claim stating there was no evidence of a double recovery and the trial court was within its discretion not to enforce the insureds to remit payment to the insurers. Id. at 343-344.
Although many cases involve liquidated damages and contractual subrogation, Esparza is illustrative because it involves unliquidated damages and contractual subrogation. Esparza was a medical malpractice case in which the plaintiffs negotiated a 1.6 million dollar settlement after their insurance company had paid over $250,000 in medical expenses. There was evidence presented that this settlement was never intended to include these medical expenses. However, as opposed to Ortiz, the policy in this case involved a subrogation clause in the insuring agreement and the insurers attempted to distinguish Ortiz on this ground. Despite this clause the court found that contractual subrogation interests “confirm but do not expand the equitable right to subrogation”. Id. at 552. In clarifying their ruling the court held that the basic principles which the made whole doctrine embodied “cannot be summarily overcome by a boiler plate provision in an insurance contract that purports to entitle the insurer.” Id. at 551-552. Nonetheless, the court was unimpressed by the insured’s conduct during the settlement negotiations and found that they had acted improperly by settling for less than the policy limit thereby compromising the rights of the subrogee insurers. Id. at 552. As a result, the insurer was entitled to subrogation for half of the medical expenses it had paid. Id. Despite the ultimate result, Esparza strongly supports the invocation of the made whole doctrine even when there are unliquidated damages and contractual subrogation.
Nonetheless, there are some instances where an insured is precluded from arguing that he had not been made whole. First, one trap for the unwary is when the subrogation provision relied upon by the insurer is found in a contract executed after the payment of benefits giving rise to the subrogation claim, i.e. a settlement agreement, the parties waive the made whole doctrine. Rosa’s Café Inc., v. Wilkerson, 183 S.W.3d 483, 488 (Tex. App.—Eastland 2005, no pet.). Secondly, a jury verdict on the issue of damages conclusively establishes the amount necessary to make the insured whole. As a result, the insured is collaterally estopped from arguing otherwise. State Farm Mut. Auto Ins. Co. v. Perkins, 2006 (Tex. App. Lexis 6030(Tex. App.—Eastland, 2006). While these exceptions have limited the doctrine, a more radical departure may be in the near future.
In Fortis Benefits v. Cantu, the intermediate appellate court found a life care plan which estimated future medical expenses was not hearsay and that the plan, couple with an affidavit from the insured’s attorney as to past medical expenses, were sufficient to establish that the insured had not been made whole. 170 S.W.3d 755 (Tex. App. Waco 2005, pet. granted). The court further held that the subrogation and reimbursement clauses in the insuring agreements were not assignments. Id. at 759. This was significant because if they were, the made whole doctrine would not apply. The insurance company petitioned, and the Texas Supreme Court granted, review. Notably the insured’s argued in their appellate brief that the subrogation and reimbursement clause were not restricted by the made whole doctrine. This argument was supported by a recently decided United States Supreme Court Decision, Sereboff v. mid Atlantic Medical Services, Inc., in which the court found that equitable defenses were not applicable to contractual subrogation claims. 547 U.S.__, No 05-260 (U.S. May 15, 2006). Oral argument was heard in the Fortis Benefits case in November of 2007, but a decision has yet to be issued.
Today, the law in Texas remains that an insured has a right to be made whole, despite a subrogation clause in an insuring agreement which may assert otherwise. However, there are several exceptions that have been engrafted on the doctrine that should be recognized. More importantly, practioners should be aware of Sereboff, and prepared for Fortis Benefits.