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Understanding made-whole doctrines: my insured's loss exceeds our limits. Now what?


No other relationship is as sacred in our business as the insurer-insured relationship. It should be considered on every claim we handle, and subrogation is no exception.

In subrogation, the most important aspect of that relationship is the relation of the insured's total loss to the amount the insured received under the policy. This, by definition, is the scope of your subrogation claim. What happens when your insured is not fully reimbursed by the insurance payout, though? The answer depends on what jurisdiction your claim arises from and the type of underinsured loss your insured is claiming, as that determines how you must handle your subrogation claim.

In recent months, no subject in subrogation has been as discussed and debated as much as the intersection of the insured's underinsured claim and the insurer's subrogation claim. That intersection involves the three made-whole doctrines, which we will discuss below.

The Insured and the Underinsured Loss

On every subrogation claim, subrogation adjusters should always consider whether the insured has been fully compensated to the extent allowed by law for his loss under the terms of the insurance policy. It is only after making that determination, and the subsequent determination as to which made-whole doctrine applies, that an insurer should proceed with settlement negotiations or a lawsuit against potential tortfeasors. Even in non-insured, made-whole States, you could jeopardize or even preclude your insured's claim for uninsured/underinsured losses by giving the third-party tortfeasor technical legal defenses against his claims (i.e. res judicata or collateral estoppel).

What losses are to be considered for the purposes of the made-whole doctrine? Unfortunately, that can vary from jurisdiction to jurisdiction. In Pennsylvania, there are currently two appellate courts--the 3rd Circuit Federal Court of Appeals and the Pennsylvania Superior Court--in which cases pending before them boil down to the question of whether the insured's deductible in an automobile property damage case should be considered for made-whole purposes.

A similar question, although not exactly on point, was answered by a Florida Court in the case Monte de Oca v. State Farm, 897 So.2d 471 (Fla.Dist. Ct.App.2004). The court determined that the deductible was not to be considered for made-whole purposes. Additionally, in the realm of subrogation where there are underlying issues of personal injury, and the underlying liability limits on the other side are low, this answer can be more complex, and one should consult an attorney with relevant experience in the area when faced with such challenges.

A good rule of thumb, especially in the first-party property context is this: If the policy limits were paid or there was a co-insurance penalty applied, look for made-whole issues. When all else fails, an insurer can always ask the insured whether they have any additional losses that were not covered by the policy (you should ask this anyway, in order to determine whether there are any other policies out there available to your insured and to find out whether the insured intends on filing his own lawsuit against the responsible parties).

That said, you will rarely find an insured who will be completely satisfied after a loss. This is especially true with an insured that has an actual cash value (ACV) policy, rather than a replacement cost value (RCV) policy. Keep in mind that the ACV versus RCV distinction is really only an insurance construct and not applicable in litigation against a third party.

In other words, if you are in a State that does not allow for the recovery of depreciation of property against a third-party tortfeasor, neither you as the subrogee nor your insured as subrogor could make a claim against the tortfeasor for the depreciation. Therefore, your insured cannot claim that he is not "made whole" simply by being paid ACV value instead of a RCV value. The bottom line is that unless the item being alleged by your insured to be uninsured/underinsured is recoverable at law against a third-party, it should not be considered an item for the purposes of determining whether your insured is "whole."

Once the determination is made that your insured is less-than "whole," you must determine which of the three made-whole doctrines is used by the jurisdiction in which the loss is subject. The three doctrines are: 1) insured made whole; 2) pro-rata approach; and 3) insurer made whole (or as I like to call it, "insurer equal" rule).

Insured Made-Whole Doctrine

The insured made-whole doctrine is by far the most commonly used method by courts across the country in dealing with the underinsured insured. The insured made-whole doctrine is, by definition, a common law exception to the general subrogation rule.

Through equity--a system of law that remedies a wrong with no legally recognized common law or statutory remedy--subrogation gives an insurer the rights of its insured to collect from a third-party tortfeasor upon paying its insured an amount representing the third party's debt had the insured not been insured at the time of the loss. Without the equitable doctrine of subrogation, an insurer would have no direct cause of action against a third party to the insurance contract.

The insured made-whole doctrine, as noted, is the exception to that right and states, "When there are limited funds available from the third-party tortfeasor, equity then dictates that the insured be 'made whole' before the insurer makes its subrogation claim."

A leading treatise on insurance law describes the situation wherein the doctrine applies: "[I]n many instances, the insurer [through subrogation] and the insured both have rights of recovery against the third party primarily liable for the loss, yet the amount recoverable from the third party is insufficient to completely satisfy the claims of both" [See 16 Couch on Insurance [section] 223.133 (3rd Ed.)].

Accordingly, the insured made-whole doctrine, at its heart, is concerned with the priority of the distribution of settlement funds. It dictates that the insured's claim is given first priority over the insurers when faced with a tortfeasor who does not have enough funds to cover both.

When faced with an insured made-whole situation, note that in most instances the subrogation claim has the lesser priority, and you may not be able to assert the claim until both the insurance payment has been made to the insured and the insured is determined to have been made whole.

the Pro-Rata Approach

Only two states have sanctioned the pro-rata approach to handling third-party distributions in which there is an insured with underinsured losses. Those two states are New Hampshire and New Mexico. However, neither state authorizes the pro-rata approach for all situations.

In fact, New Hampshire only sanctions it in situations where there is a reduced recovery "settlement." In other words, it is allowed in situations where the insured settles for less than his total claim with the third-party tortfeasor and thus forecloses even the possibility of a subrogation recovery by the insurer.

Meanwhile, New Mexico does not rely on direct pro-rata (in proportion with the respective losses of the insurer and insured). Rather, it sanctions an "equitable apportionment" approach, which dictates that the court sitting in equity makes the decision on how to best, in an equitable fashion, split up the proceeds of a third-party recovery. Unfortunately for the insurer, in situations where there is an underinsured innocent insured, equity will likely favor making the insured "whole" prior to providing the insurer with a subrogation recovery.

Insurer Made-Whole Rule

Only a few states follow the insurer made-whole rule, and only one opinion has truly stated it in its purest form. In Maryland, a retired judge who was specially assigned to the Stancil v. Erie Insuarnce Company case, set forth the pure essence of an insurer made-whole rule by stating that the insurer should have the right to recover prior to its insured because an insurer should not be precluded from recovering its proper subrogation claim because of the failure of an insured to adequately insure his property.

Unfortunately, although the underlying principle enunciated in the Stancil opinion has merit, the rule in its purest form is not applied very often, if at all, beyond the Stancil opinion. As you can imagine, without commenting on whether it is fair or not, more often than not a judge sitting in equity will have a hard time pronouncing that equity favors the insurer over the underinsured "innocent" as opposed to negligent or comparatively negligent insured.

Accordingly, if a court were to apply the principles of the rule, it would likely be done as it is in New York, as an "insurer-equal" scenario. In an "insurer-equal" state, the insurer's rights are divisible and independent from its insured. As stated by a New York Court in Winkelmann v. Excelsior Insurance Company, the insurer's subrogation claim arises, "upon payment to insured without regard to whether insured was made whole."

Accordingly, in an "insurer-equal" state, the rule is not that the insured gets first dollar from the third-party tortfeasor. Rather, it gives the insurer the right to make its claim against the third-party tortfeasor at any time after payment to the insured, regardless of whether the insured is underinsured or not.

Contractual Exceptions

When faced with the scenario of the underinsured insured, examine the policy. Does it include a provision for an insurer-first or pro-rata recovery that may circumvent the insured made-whole common law rule? Proceed with caution though. While states like Alabama, Kentucky, Ohio, and New Jersey allow for insurers to contractually circumvent the insured made-whole doctrine where there is a express policy provision that provides for an alternate arrangement, some states--including but not limited to Arkansas, Mississippi, and Tennessee--prohibit the use of such provisions and apply the insured made-whole doctrine even in the face of contrary contractual language.

Additionally, even if your policy does not provide for dealing with the insured made-whole doctrine, you may still be able to negotiate a joint recovery agreement with your insured, wherein you and your insured address how the proceeds of a recovery should be split between the parties. In some instances, your insured--who should be advised of their made-whole rights and given the opportunity to speak with their own attorney--may be willing to negotiate with an insurer for a pro-rata or insurer-first arrangement in exchange for the insurer's subrogation attorney to also represent his underinsured claim and/or for the insurer to pay for all litigation expenses.


When pursuing your subrogation claim, do not forget your insured, for he may have an interest that is legally on par or greater than yours. Should you come across the underinsured insured (pay particular attention to co-insurance penalty scenarios), you must first determine what rule your jurisdiction follows. Because there are many legal opinions regarding this topic emanating from the trial courts rather than the higher appellate courts, the rule may vary not only from state to state but also from county to county within the same state.

Accordingly, to be safe and, when in doubt, contact an experienced subrogation attorney and/or apply the principles of the insured made-whole rule. Remember, you are an insurer and, when dealing with an equitable doctrine, it is safer to err on the side of caution and with the more sympathetic party to the dilemma. In most cases, this will be your insured.


Although in some instances joining forces with your insured is not only advisable but also the best litigation strategy, in many instances it can be disastrous. Remember, when joining forces with your insured, you are bringing aboard another party with interests, although not immediately identifiable, that may be or may become adverse to yours. Once said conflict arises, it can put your attorney in an ethical bind that he cannot resolve without withdrawing from representing both parties; leaving you (and your insured) without an attorney or scrambling for a new one at a critical juncture.

Moreover, and is more commonly the case, the underinsured insured and its insurer value the "underinsured" amount differently. As such, it will be hard to put together a joint-recovery agreement with an insured with speculative or unliquidated damages.


William Sylianteng is a member of Bennett, Bricklin & Saltzburg, LLC and serves as co-chair of the firm's subrogation and recovery department. He can be reached at 267-654-1100,
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Copyright 2010 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Feature Story
Author:Sylianteng, William E.
Date:Apr 1, 2010
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