Subrogation and the Right to First Priority in Settlement Proceeds
| Publication year | 1993 |
| Pages | 71 |
| Citation | Vol. 22 No. 1 Pg. 71 |
1993, January, Pg. 71. Subrogation and the Right to First Priority in Settlement Proceeds
It is an unfortunate and all too common scenario. The insured suffers a catastrophic loss resulting from the actions of another person. Under its policy with the insured, the insurer pays medical expenses---sometimes running in the hundreds of thousands of dollars---before the case goes to trial. Then, on the steps of the courthouse, the insured reaches a settlement with the tortfeasor. The insurer claims it is entitled to first priority in the settlement proceeds as reimbursement for the medical benefits it has paid on behalf of the insured. The insured balks, arguing that the settlement did not fully compensate the insured for the losses suffered.
As to who wins, the answer varies from state to state (and sometimes varies within a state), depending on the wording of the insurance policy in question. This article summarizes the results of a national survey on the issue of whether the insurer is entitled to first priority in proceeds from a settlement between the insured and the tortfeasor.
The doctrine of subrogation entitles the insurer to step into the shoes of the insured in order to pursue recovery from a third person legally responsible to the insured for a loss paid by the insurer. There are two broad categories of subrogation: (1) legal (equitable) subrogation, which arises by operation of law, and (2) conventional subrogation, which arises by virtue of an agreement between the parties.(fn1) While a few courts have held equitable subrogation to be inapplicable,(fn2) the majority of courts apply both equitable and conventional subrogation to personal injury cases.(fn3)
Occasionally, a court will be called on to construe a provision entitling the insurer to reimbursement for benefits paid the insured, rather than subrogation to the insured's rights against the tortfeasor. While such a distinction may become important in certain contexts, courts typically apply principles of subrogation to reimbursement clauses.(fn4)
As a general rule, when an insured recovers a judgment for the full amount of the insured's damages from the tortfeasor, the insurer is entitled to reimbursement for payments made on the policy, minus a proportionate share of attorney fees and costs.(fn5) This rule reflects the following underlying rationale for subrogation: (1) the insured should not recover twice for a single injury, and (2) the insurer should be reimbursed for payments it made that, in fairness, should be borne by the wrongdoer.(fn6)
The first priority problem arises when the insured has suffered extensive injury due to the actions of another. The insurer, pursuant to its policy with the insured, is then obligated to pay the insured's medical expenses. In this context, the insurer is viewed as a partial subrogor: while the insurer may have paid the insured the full medical benefits provided for under the policy, such payment may constitute only a small portion of the insured's total loss.
In the classic subrogation action, the insurer would then proceed against the tortfeasor to recoup its cash outlays. However, when the insured settles with the tortfeasor, the insurer then looks to the insured for reimbursement of medical benefits paid on behalf of the insured.
The majority of jurisdictions hold that the insurer's subrogation rights do not arise until the insured has been made whole for his or her losses.(fn7) A case often cited in support of the majority view is Westendorf v. Stasson.(fn8) In this case, the insured, who suffered quadriplegic injuries in an automobile accident, settled with the...
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