A recent California Supreme Court decision, 21st Century Insurance Co. v. Superior Court (Quintana), S154790 (Aug. 24, 2009), clarifies the rules governing an insurer’s right to reimbursement for payments to its insured, after the insured obtains a recovery from the responsible third party. The Court held that while the insured has right to be “made whole” before the insurer can assert its reimbursement rights, the made whole rule only applies to the insured’s non-covered damages, not his attorney’s fees. While the decision is favorable to insurers, it only applies to auto insurers seeking to recover small payments made pursuant to the standard “med-pay” coverage in their policies. See id. at n. 1. By circumscribing its holding so narrowly the Court may be signaling that, in other contexts, it would reach a different result.
“When an insurance company pays out a claim on a first-party insurance policy to its insured, the insurance company is subrogated to the rights of its insured against any tortfeasor who is liable to the insured for the insured’s damages.” Progressive West Ins. Co. v. Sup. Ct., 135 Cal. App. 4th 263, 272 (2005). Virtually all first-party (and most third-party) insurance policies contain a subrogation or reimbursement provision. When the insurer pays a claim, these provisions entitle the insurer carrier to recoup its payments from a responsible third party.
In cases involving property damage claims, the insurer may pay the insured’s claim and proceed directly against the third party tortfeasor. Alternatively, if the insured has brought an action against the responsible third party (for example, to recover uninsured losses), the insurer may intervene in that lawsuit. See Hodge v. Kirkpatrick, 130 Cal. App. 4th 540, 551 (2005). However, personal injury claims are non-assignable in California. Therefore, an insurer may not recover a bodily injury or medical insurance payment directly from the tortfeasor. Rather, the insurer must wait for the insured to obtain a recovery from the responsible third party, then request reimbursement out of that recovery. See Progressive West, 135 Cal. App. 4th at 272.
In either context, California recognizes the common law “made whole” rule:
The general rule is that an insurer that pays a portion of the debt owed to the insured is not entitled to subrogation for that portion of the debt until the debt is fully discharged. In other words, the entire debt must be paid. Until the creditor has been made...
