(Article from Insurance Law Alert, July/August 2019)
For more information, please visit the Insurance Law Alert Resource Center.
The Supreme Court of Washington ruled that under the made-whole doctrine, state statutory law and applicable policy language, an insurer is obligated to reimburse a policyholder the full deductible amount before retaining any funds for its own payments. Daniels v. State Farm Mut. Auto. Ins. Co., 2019 WL 2909308 (Wash. July 3, 2019).
Daniels was involved in a three-car collision. State Farm, Daniels’ insurer, paid the repair costs that exceeded the policy’s $500 deductible. State Farm then sought recovery of its payment from GEICO, which had insured another driver involved in the accident. GEICO conceded that its insured was 70% at fault and reimbursed State Farm for that portion of the total cost of repairs. From those proceeds, State Farm reimbursed Daniels for 70% of her deductible.
Daniels brought a putative class action suit against State Farm, alleging that State Farm is not entitled to recoup its own costs unless its policyholder has been fully compensated, including the full deductible amount. A Washington trial court granted State Farm’s motion to dismiss and an appellate court affirmed. The Supreme Court of Washington reversed, ruling that Daniels stated a claim for relief for the entirety of the deductible payment under three legal theories:
The Made-Whole Doctrine: Under this common law doctrine, an insured party is generally entitled to full compensation before an insurer can recoup its own costs from a third-party. The Supreme Court of Washington rejected the argument that the doctrine was inapplicable under appellate precedent, declaring such case law unpersuasive and counter to the doctrine’s principles. The court also rejected State Farm’s argument that allowing an insured to recover the full deductible alters the terms of the insurance contract and results in a windfall payment to the insured.
State Statutory Law: Washington regulations provide that an insurer “must include the insured’s deductible, if any, in its subrogation demands. Any recoveries must be allocated first to the insured for any deductible(s) incurred in the loss, less applicable comparative fault.” WAS 284-30-393. The parties disputed the meaning of the phrase “less applicable comparative fault.” The court sided with Daniels’ interpretation, finding that because there was no assertion or finding that Daniels was at fault in the accident (the record was silent as to whom GEICO attributed the remaining 30% of fault), a valid claim existed that State Farm violated the statute by withholding 30% of the deductible.
Policy Language: State Farm’s policy includes a provision that allows the insurer to pursue subrogation claims on behalf of the policyholder. This provision states that “[o]ur right to recover our payments applies only after the insured has been fully compensated for the bodily injury, property damage or loss.” The trial and appellate courts concluded that State Farm did not violate this provision by refusing to reimburse the deductible payment, because Daniels had already been fully compensated for her “loss” when she accepted payment from State Farm. The Supreme Court of Washington disagreed, ruling that “loss” includes full reimbursement of the deductible.