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Legal Landmine: What you don’t know about your policy could hurt you

When you sign your insurance contract, there are likely many boilerplate clauses that go unquestioned.  Situated among the standard clauses might be a “Right of Subrogation” clause that affects how a policyholder can recoup after a loss or accident.

What does “subrogation” even mean?

Subrogation is a legal concept that allows for one party to “step into” another party’s shoes so as to assume the rights and claims of that party against a third-party.  Applying that abstract concept to the insurance context, subrogation permits an insurance company to recoup money paid to the policyholder from a third party responsible for the policyholder’s loss or claim.

Example of Subrogation Provision:

“In the event of any payment under the medical expense coverage of this policy, the company shall be subrogated to all the rights of recovery therefore which the injured person or anyone receiving such payment may have against any person or organization and such person shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights.  Such person shall do nothing after loss to prejudice such rights.”

How does this affect recovery?

What should concern people most is how the issue of subrogation affects recovery.

Consider the following scenario.  John is t-boned by Jane.  John makes a claim to his insurer for the damage to his vehicle and his medical injuries.  John’s insurance company pays 50% of his claim and asserts subrogation rights.  John then brings a negligence action against Jane, the negligent driver, to recoup the other 50% of his claim.  The jury awards John 50% of his total claim.  This is where the grey area of the law begins.  Who is entitled to the jury award?  How is the jury award to be divided?  Should it be divided?

Different Approaches:

State courts and federal courts follow a few different approaches in regard to subrogation rights.

The Made Whole Doctrine: The Made Whole Doctrine is an equitable defense to the rights of a subrogated insurance carrier or other party.  It requires that before subrogation can occur, the policyholder must be made whole for all its damages.  What being “made whole” means in practice will vary from state to state.

Pro Tanto Rule: Pro tanto subrogation entitles the insurer to subrogation rights even though the policyholder’s claim has only been partially paid.  Pro tanto has been adopted by a minority of jurisdiction.

Pro Rata Rule: Pro rata apportions money between the insurance company and policyholder in proportion to the percentage of the loss borne by each. The pro rata approach does not have widespread support with the courts.

Arizona’s Approach to Right of Subrogation:

State Court: Arizona courts have not explicitly applied the Made Whole Doctrine.  However, Arizona courts do follow the general rule of equity, which is most often invoked in cases of subrogation.

“He who seeks equity must do equity, and subrogation can only be granted when an equitable result will be reached.”  Mosher v. Conway, 45 Ariz. 463, 468 (1935).

Federal Court: The 9th Circuit, in which Arizona is included, has adopted the Made Whole Doctrine with regard to health insurance subrogation.  Barnes v. Indep. Auto. Dealers Ass’n Health & Benefit Plan, 64 F.3d 1389, 1394 (9th Cir.1995).

What does this mean for me?

There are many contractual issues with subrogation rights when dealing with an insurance company.  More complications will be added if ERISA, worker’s compensation, or other statutory framework is implicated.

If you’re a victim of injury and you’re trying to sort through the nuances of subrogation law, you should consult an attorney to guide you.  Being informed is the best way to ensure that your interests are protected.  If you or a loved one has suffered an injury, contact the personal injury attorneys at Oracle Law Group. (480) 704-0777