The Court of Appeals Revisits the Subrogation and Collateral Source Rules: Extends ‘Paulson v. Allstate Ins. Co.’ to Arbitration Context
In one of the few published insurance cases so far this year,
'Fischer v. Steffen', 2010 WI App 68 (2009AP1669), the court of
appeals revisited the interplay between two recurring issues in
insurance law: subrogation and the collateral source rule.
In ‘Fischer’, a subrogated insurer arbitrated its subrogation
claim and lost. Nonetheless, its insured went on to obtain a
jury verdict in excess of the amount of the subrogation claim.
On appeal, the plaintiff-insured argued that the insurer waived
its subrogation claim by arbitrating and that the collateral
source rule entitled him to all amounts awarded by the jury,
notwithstanding the amount of the subrogation claim. The court
of appeals, however, disagreed.
Plaintiff Fischer and Defendant Steffen were in an automobile
accident in which Fischer was injured. Fischer’s insurer,
American Family Insurance, paid $10,000 in medical expense
coverage, the full amount available under his automobile policy.
American Family then arbitrated its subrogation claim against
Steffen and her insurer, Wilson Mutual Insurance Company. Wilson
lost at arbitration after the panel found that Steffen was not
negligent.
Fischer nonetheless sued Steffen and Wilson Mutual. Fischer also
named American Family for the purpose of having American
Family’s interest determined, if any. American Family answered
and claimed a $10,000 subrogated interest. It also cross-claimed
against Steffen and Wilson Mutual for the $10,000.
Wilson Mutual then informed American Family’s counsel that
American Family had earlier submitted its subrogation claim to
binding arbitration and lost. American Family dismissed itself
from the lawsuit with prejudice. Fischer, however, proceeded to
trial.
The jury reached the opposite conclusion of the arbitration
panel, finding Steffen negligent for the accident. The court
found that the medical expenses were $12,157.14. Steffen and
Wilson Mutual requested that the trial court reduce the amount
for medical expenses by $10,000, in recognition of its winning
the arbitration. The trial court did so, citing ‘Paulson v.
Allstate Insurance Co.’, 2003 WI 99, 263 Wis. 2d 520, 665 N.W.2d
744. Fischer appealed.
On appeal, the court began by reviewing the collateral source
and subrogation rules. Under the “collateral source” rule, a
tortfeasor who is legally responsible for causing injury should
not be relieved from an obligation to the victim simply because
the victim had the foresight to arrange receipt of benefits for
injuries and expenses.
On the other hand, “subrogation” allows an insurer to stand in
the shoes of its insurer once it has paid its insured money for
a loss. A subrogated insurer may seek to recoup its payment from
the tortfeasor. Ordinarily, the insured is precluded from
seeking the same, or double, recovery from the tortfeasor. The
insurer assumes ownership of the right to seek recovery of that
amount from the tortfeasor. In this way, the court of appeals
explained, the subrogation right “trumps” the collateral source
rule.
There are exceptions to the rule that the subrogation rule
“trumps” the collateral source rule. One exception, not present
in Fischer, is when there is not enough money to make the
plaintiff whole (the “made whole” doctrine). Another exception
occurs when the subrogee insurer waives its right of
subrogation. Waiver can occur either by contract or by conduct
inconsistent with the right of subrogation.
Fischer argued that American Family waived its subrogation claim
by arbitration, and therefore, Fischer was allowed to recover
the amounts waived. Because the insurer had not recovered the
amount of its subrogation claim, Fischer claimed, the collateral
source rule allowed Fischer to do so.
The court of appeals disagreed, based on ‘Paulson v. Allstate
Insurance Co.’. In ‘Paulson’, Paulson’s insurance company paid
100 percent of the repair costs, then subsequently settled its
subrogation claim with the tortfeasor’s insurer for a reduced
amount based on plaintiff’s alleged contributory negligence. The
supreme court held that the plaintiff could not collect the
difference under the collateral source rule.
In ‘Fischer’, the court of appeals found arbitration similar to
the decision of the Paulson’s insurer to negotiate with the
tortfeasor’s insurer. As the ‘Fischer’ court explained, once the
plaintiff has been made whole, the insurers are entitled to
decide which of the insurers bears the loss and how. According
to the court, this result encourages settlement of subrogation
claims among insurers, reduces litigation expenses, and promotes
freedom of contract. The “vehicle” – negotiation or arbitration
– is unimportant. What is important is that the insurers were
resolving a disputed issue between them.
Finally, the court emphasized, American Family never gave its
subrogation rights back to Fischer. Because American Family
continued to stand in the shoes of its insured, “it is no
business of the plaintiff” how the subrogated insurer goes about
seeking reimbursement for its outlay from the tortfeasor and the
tortfeasor’s insurer. Thus, the court of appeals affirmed the
trial court’s judgment reducing the judgment by $10,000 for
American Family’s subrogation claim.
Bottom Line: Once a plaintiff has been made whole, the
collateral source rule does not allow a plaintiffinsured to
recover the difference between the amount of its insurer’s
subrogation claim and the amount of the claim that the insurer
actually recovers through negotiation, arbitration, or other
means.
