Daniels v. State Farm Mut. Auto. Ins. Co.

193 Wash.2d 563

444 P.3d 582

Lazuri DANIELS, individually, and on behalf of all those similarly situated, Petitioner,

v.STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Respondent.

No. 96185-9

Supreme Court of Washington.

Filed JULY 03, 2019

May 7, 2019

Matthew James Ide, Ide Law Office, 7900 SE 28th Street, Suite 500, Mercer Island, WA 98040-6004, for Petitioner.

Frank Falzetta, Jennifer Hoffman, Shephard Mullin Richter & Hampton LLC, 333 South Hope Street, 43rd Floor, Los Angeles, CA 90071, Joseph D. Hampton, Betts, Patterson & Mines, P.S., 701 Pike Street, Suite 1400, Seattle, WA 98101-3927, for Respondents.

Linda Blohm Clapham, Michael Barr King, Carney Badley Spellman PS, 701 5th Avenue, Suite 3600, Seattle, WA 98104-7010, for Amicus Curiae (American Property Casualty Ins. Association, National Association of Mutual Insurance Companies).

Valerie Davis McOmie, Attorney at Law, 4549 NW Aspen Street, Camas, WA 98607-8302, Daniel Edward Huntington, Richter-Wimberley PS, 422 W. Riverside Avenue, Suite 1300, Spokane, WA 99201-0305, for Amicus Curiae (Washington State Association for Justice Foundation).

Marta Uballe DeLeon, Office of the Attorney General, 1125 Washington Street SE, P.O. Box 40100, Olympia, WA 98504-0100, for Amicus Curiae (Washington State Insurance Commissioner).

JOHNSON, J.

¶1 This case concerns whether a first-party insurer, upon obtaining a partial recovery in a subrogation action, is required to reimburse its fault-free insureds for the full amount of their deductibles before any portion of the subrogation proceeds can be allocated to the insurer. Lazuri Daniels brought claims and sought class action status in a lawsuit against State Farm Mutual Automobile Insurance Company arguing that by failing to fully reimburse its insureds for their deductibles after recovering in a subrogation action, State Farm violates both Washington law and its own insurance policy. The trial court dismissed the claims under CR 12(b)(6), and the Court of Appeals affirmed the dismissal. We reverse and remand to the trial court for further proceedings.

FACTS

¶2 On July 25, 2015, Daniels was involved in a three-vehicle wreck near Federal Way, Washington. At the time of the wreck, Daniels was insured by State Farm with a policy that included a $500 deductible. Daniels’s vehicle was at the center of the wreck; the driver of the car that hit her from behind was insured by GEICO, and the driver in front of her was insured by Liberty Mutual. State Farm paid the portion of the repair costs that exceeded Daniels’s deductible. State Farm then sought recovery of its payment from GEICO, which agreed that its insured was 70 percent at fault and reimbursed State Farm for that portion of the total cost of the repairs. From these proceeds, State Farm reimbursed Daniels for 70 percent of her deductible.¹

¶3 Daniels brought a lawsuit and sought class action status against State Farm alleging that, under both its own policy and Washington law, State Farm is entitled to recoup its money only after its insureds are fully compensated for their losses, including the full deductible, and that by allocating subrogation recoveries to itself before it has returned its insureds’ full deductibles, State Farm violates this requirement. Daniels asserted claims for breach of contract, bad faith, and conversion. State Farm filed a motion to dismiss under CR 12(b)(6),² relying on Averill v. Farmers Insurance Co. of Washington, 155 Wash. App. 106, 229 P.3d 830 (2010), where the Court of Appeals held that the made whole doctrine does not extend to this type of subrogation action, as well as WAC 284-30-393, which requires subrogated insurers to return deductibles "less applicable comparable fault." Finally, State Farm argued that nothing in its policy language required it to return the full amount of deductibles before allocating to itself the proceeds of a direct subrogation action.

¶4 The trial court granted State Farm’s motion to dismiss, and the Court of Appeals affirmed.

Daniels v. State Farm Mut. Auto. Ins. Co., 4 Wash. App. 2d 268, 421 P.3d 996 (2018). Daniels petitioned this court, and we granted review.³ Daniels v. State Farm Mut. Auto. Ins. Co., 192 Wash.2d 1001, 430 P.3d 261 (2018).

ISSUES

1. Whether Washington’s made whole doctrine requires that insurers allocate subrogation proceeds to the full reimbursement of its insureds’ deductibles prior to allocating any portion of the proceeds to itself.

2. Whether, in the absence of an acknowledgement that an insured bears comparative fault, WAC 284-30-393 requires an insurer to recover and return its insured’s full deductible.

3. Whether State Farm’s policy language required that it allocate subrogation proceeds to the full reimbursement of its insureds’ deductibles prior to allocating any portion of the proceeds to itself.

ANALYSIS

¶5 "Subrogation is the right that one party has against a third party following the payment, in whole or in part, of a legal obligation that ought to have been met by such third party." 2 ALLAN D. WINDT, INSURANCE CLAIMS AND DISPUTES § 10:5, at 10-23 (6th ed. 2013). Its common law foundation applies as an "equitable doctrine the essential purpose of which is to provide for a proper allocation of payment responsibility." Mahler v. Szucs, 135 Wn.2d 398, 411, 957 P.2d 632 (1998). In the insurance context, the "doctrine of subrogation enables an insurer that has paid an insured's loss pursuant to a policy ... to recoup the payment from the party responsible for the loss." Elaine M. Rinaldi, Apportionment of Recovery between Insured and Insurer in a Subrogation Case, 29 TORT & INS. L.J. 803, 803 (1994). The right to pursue such a claim against the at-fault party is often included in insurance policies, as it was in this case.

¶6 Generally two means exist through which a subrogated insurer can recover from a responsible third party: (1) the insured brings a claim against the third party and the insurer seeks reimbursement from the insured’s recovery, or (2) the insurer can "stand in the shoes" of its insured and pursue a claim against the responsible party directly. In either situation, "[t]he potential for conflict of interest abounds." Mahler , 135 Wash.2d at 414, 957 P.2d 632. This is because if the insured still has uncompensated injuries, both the insurer and insured will generally be looking to recover from the same third party, and that party’s own insurance and assets are not always sufficient to cover both claims. In such circumstances, there is a high potential for conflict between insureds who wish to be compensated for the full extent of the damages they have suffered, and first-party insurers who expect to be reimbursed for amounts they have advanced to the insured.

¶7 Daniels argues that insureds’ right to be fully compensated for their losses, including full reimbursement for deductibles, takes priority over an insurer’s interest in recouping its payments through a direct subrogation action. Daniels asserted in her complaint that State Farm’s conduct violates both its own policy as well as Washington law. Three separate legal theories are presented for requiring State Farm to return its insureds’ full deductibles prior to allocating to itself any portion of subrogation proceeds. These include (a) the common law made whole doctrine, (b) Washington insurance regulations, and (c) State Farm’s own policy language. The trial court dismissed all of Daniels’s claims under CR 12(b)(6) and the Court of Appeals, in a divided opinion, affirmed. Daniels , 4 Wash. App. 2d at 278, 421 P.3d 996. Judge Becker dissented, asserting that Averill was wrongly decided and should be disavowed, and concluding that all three of Daniels’s theories should survive a motion to dismiss under CR 12(b)(6).

¶8 Whether a case is properly dismissed under CR 12(b)(6) is a question of law that we review de novo. San Juan County v. No New Gas Tax , 160 Wash.2d 141, 164, 157 P.3d 831 (2007). Such a dismissal is appropriate where "there is not only an absence of facts set out in the complaint to support a claim of relief, but there is no hypothetical set of facts that could conceivably be raised by the complaint to support a legally sufficient claim." Worthington v. Westnet, 182 Wash.2d 500, 505, 341 P.3d 995 (2015) (citing No New Gas Tax, 160 Wash.2d at 164, 157 P.3d 831 ). Given this high standard, CR 12(b)(6) motions should be granted " ‘sparingly and with care’ " where "plaintiff’s allegations show on the face of the complaint an insuperable bar to relief." No New Gas Tax, 160 Wash.2d at 164, 157 P.3d 831 (quoting Tenore v. AT &T Wireless Servs., 136 Wash.2d 322, 330, 962 P.2d 104 (1998) ). Here, dismissal under CR 12(b)(6) was proper only if there is no set of facts that could conceivably be drawn from the complaint to support any one of the three legal theories involved. We begin our analysis with Daniels’s claims under the common law made whole doctrine.

The Made Whole Doctrine

¶9 In addressing conflicts between subrogated insurers and injured insureds, we have generally established priority for the interests of the insureds through the made whole doctrine. In Thiringer v. American Motors Insurance Co., we articulated this doctrine as a general rule that

while an insurer is entitled to be reimbursed to the extent that its insured recovers payment for the same loss from a tort-feasor responsible for the damage, it can recover only the excess which the insured has received from the wrongdoer, remaining after the insured is fully compensated for his loss.

91 Wash.2d 215, 219, 588 P.2d 191 (1978). In other words, an insurer can obtain reimbursement from an insured who has been more than fully compensated for their injuries and has actually received excess compensation from having received payments from both the first-party insurer and a third party. In these circumstances an insurer can seek reimbursement from its insured, as the insured is not entitled to a double recovery. But an insurer generally...