Justia.com Opinion Summary: Appellant Brenda Jones was involved in an automobile accident with another driver that caused damage to her vehicle. Appellant's insurance policy with Nationwide Property and Casualty Company (Nationwide) included collision coverage for the vehicle involved, subject to a $500 deductible. The policy also provided Nationwide with the right of subrogation. Nationwide paid Appellant for all damage to the vehicle, reduced by the $500 deductible. Nationwide then filed a subrogation claim against the other driver and recovered under the other driver's liability coverage. The recovery, while in excess of Appellant's deductible, was only ninety percent of the amount Nationwide paid Appellant under the collision coverage policy. Nationwide paid Jones a pro rata share of the subrogation award by reimbursing her for ninety percent of her deductible, which amounted to $450. Appellant filed a class action against Nationwide claiming that Nationwide's uniform practice of pro rating reimbursements of deductibles violated the "made whole" doctrine. All claims were based upon Appellant's conclusion that Nationwide should have reimbursed her for her entire $500 deductible, despite the provision in the policy granting Nationwide subrogation rights. Appellant also sought injunctive relief to stop Nationwide's practice of pro rata deductible reimbursement. The Supreme Court concluded that the "made whole" doctrine did not apply to the collision coverage at issue in this case, the Court affirmed the dismissal of Appellant's class action.
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[J-41-2011]
IN THE SUPREME COURT OF PENNSYLVANIA
EASTERN DISTRICT
CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, ORIE MELVIN, JJ.
BRENDA JONES, INDIVIDUALLY AND
ON BEHALF OF ALL OTHERS
SIMILARLY SITUATED
v.
NATIONWIDE PROPERTY AND
CASUALTY INSURANCE COMPANY
APPEAL OF: BRENDA JONES
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No. 61 EAP 2010
Appeal from the judgment of Superior
Court entered on May 24, 2010, at No.
3051 EDA 2008 affirming the order
entered on October 17, 2008, in the Court
of Common Pleas, Philadelphia County,
Civil Division at No. 1599 July Term 2008
995 A.2d 1233 (Pa. Super. 2010)
ARGUED: May 10, 2011
OPINION
MR. JUSTICE BAER
DECIDED: December 21, 2011
We granted review in this case to consider an issue of first impression regarding
the legality of an insurance company’s practice of reimbursing, on a pro rata basis only,
an insured’s deductible from funds obtained in an insurer’s subrogation action against a
third-party tortfeasor. The insured argues that this practice violates the common law
“made whole doctrine.” As discussed in more detail below, the made whole doctrine
provides generally that an insurance company cannot exercise its right of subrogation
until its insured has been fully compensated or “made whole.” As we conclude that the
made whole doctrine does not apply to the collision coverage at issue in this case, we
affirm the dismissal of appellant-insured’s class action.
Although this Court regularly addresses questions involving uninsured and
underinsured motor vehicle coverage (UM/UIM) and other types of bodily injury
coverage under the Motor Vehicle Financial Responsibility Law (MVFRL), 75 Pa.C.S.
§§ 1701-1799.7, we have not reviewed a question involving collision coverage in recent
years. Accordingly, we briefly review the basics of this coverage.
As most vehicle owners understand, with collision coverage, an insured typically
contracts with an insurance company to cover the cost of any damage to the vehicle
above the amount of an agreed upon deductible. A deductible clause is defined as “[a]
clause in an insurance policy exempting the insurer from paying an initial specified
amount after an accident.” The American Heritage Dictionary 227 (4th Ed. 2001); see
also Black’s Law Dictionary 285 (6th Ed. 1991) (“The portion of an insured loss to be
borne by the insured before he is entitled to recover from the insurer.”). Likewise, the
policy at issue in this case defines a deductible as “the amount of loss to be paid by the
insured.
We pay for covered loss above the deductible amount shown in the
Declarations.” Nationwide Auto Policy, dated October 19, 2005, at D1. Accordingly,
unlike a UM/UIM claim where the insured is not responsible for paying a deductible prior
to recovery but may recover only up to the policy’s specified coverage limits, an insured
recovering under a collision coverage policy may recover the entire amount of the
damage up to and including the total value of the vehicle, after subtracting the amount
of the deductible that the insured contracted to pay.
Not surprisingly, if an insured is willing to bear the risk of paying a higher
deductible, her premiums will be reduced to reflect that the insurer will be responsible
for covering less risk. Indeed, the MVFRL requires this reduction in premiums. 75
Pa.C.S. § 1792(b)(4) (“With the purchase of a $500 or greater deductible, there shall be
an immediate commensurate reduction in rate for collision and comprehensive
[J-41-2011] - 2
coverages. The reduction in rate shall be based on the insured's existing deductible
level.”).1 Additionally, the MVFRL forbids insurers from issuing policies that do not
include deductibles, and provides that policies must include a $500 deductible unless
the insured “signs a statement indicating the insured is aware that the purchase of a
lower deductible is permissible and that there is an additional cost of purchasing a lower
1
The MVFRL provides in full in regard to deductibles as follows:
(b) Mandatory deductibles.-(1) Every private passenger automobile insurance policy providing
collision coverage issued or renewed on and after the effective date of this
subsection shall provide a deductible in an amount of $500 for collision
coverage, unless the named insured signs a statement indicating the
insured is aware that the purchase of a lower deductible is permissible
and that there is an additional cost of purchasing a lower deductible, and
the insured agrees to accept it.
(2) Under no circumstances may a private passenger automobile
insurance policy provide a collision deductible in an amount less than
$100.
(3) Any person or entity providing financing to the purchaser of a motor
vehicle or otherwise holding a security interest in a motor vehicle shall not
be permitted to require the purchase of a deductible for less than $500 for
collision and comprehensive coverages. Any financial institution, insurer,
agent or other person or entity found to have violated this provision shall
be required to reimburse the policyholder in an amount equal to the
difference in premium and, in addition, shall be required to pay a civil
penalty of $500 to the Department of Transportation for each violation.
(4) With the purchase of a $500 or greater deductible, there shall be an
immediate commensurate reduction in rate for collision and
comprehensive coverages. The reduction in rate shall be based on the
insured's existing deductible level.
75 Pa.C.S. § 1792.
[J-41-2011] - 3
deductible”.
75 Pa.C.S. § 1792(b)(1).
With these basic parameters in mind, we
consider the case at bar.
On December 10, 2005, Appellant Brenda Jones was involved in an automobile
accident with another driver that caused damage to Jones’s vehicle.
The facts as
presented to this Court do not address any bodily injury resulting from the accident.
Jones’s insurance policy with Nationwide Property and Casualty Company (Nationwide)
included collision coverage for the vehicle involved, subject to a $500 deductible. The
policy also provided Nationwide with the right of subrogation.2 Nationwide paid Jones
for all damage to the vehicle, reduced by the $500 deductible.
Nationwide filed a subrogation claim against the other driver and recovered
under the other driver’s liability coverage. The recovery, while in excess of Jones’s
$500 deductible, was apparently only ninety percent of the amount Nationwide paid
Jones under the collision coverage policy.3 Pursuant to its practice, which mirrors an
2
In relevant part, the Subrogation provision of the insurance contract provides:
Subrogation. We have the right of subrogation under the: (a) Physical
Damage . . . coverages in this policy and its endorsements. This means
that after paying a loss to you or others under this policy, we will have the
insured’s right to sue for or otherwise recover such loss from anyone else
who may be liable. Also, we may require reimbursement from the insured
out of any settlement or judgment that duplicates our payments. These
provisions will be applied in accordance with state law. . . . We are not
entitled to recover under Uninsured or Underinsured Motorist coverage
until the insured has been fully compensated for damages.
Insurance Contract at G3.
3
As the Superior Court observed in its decision, the record, which does not
include the subrogation proceedings between the relevant insurance companies, is
silent regarding how or why the subrogation award amounted to less than Jones’s total
loss. The parties suggest that during subrogation proceedings the relevant percentage
of each driver’s fault is often determined and the subrogation award is based thereupon.
(…continued)
[J-41-2011] - 4
Insurance Department regulation, Nationwide paid Jones a pro rata share of the
subrogation award by reimbursing her for ninety percent of her deductible, which
amounted to $450.
Jones filed a class action against Nationwide claiming that Nationwide’s uniform
practice of pro rating reimbursements of deductibles violated the made whole doctrine.
The proposed class included “all Pennsylvania residents who are or have been insured
under Pennsylvania policies of insurance issued by defendant that have deductibles
applicable to collision damage coverage.” Complaint at 3. Jones’s complaint included
several counts. First, Plaintiff claimed that the pro rata reimbursement constituted a
breach of contract, arguing that the contract was subject to common law equitable
principles such as the made whole doctrine. Jones also brought claims of bad faith
pursuant to 42 Pa.C.S. § 8371, conversion, and unjust enrichment. All claims were
based upon Jones’s conclusion that Nationwide should have reimbursed her for her
entire $500 deductible, despite the provision in the policy granting Nationwide
subrogation rights. Jones also sought injunctive relief to stop Nationwide’s practice of
pro rata deductible reimbursement.
Nationwide filed preliminary objections in the nature of a demurrer. It observed
that Nationwide’s procedure of using pro rata reimbursement was consistent with a
regulation of the Insurance Commissioner, 31 Pa. Code § 146.8(c), which provides in
relevant part,
(c) Insurers shall, upon the request of the claimant, include the first-party
claimant's deductible, if any, in subrogation demands. Subrogation
recoveries shall be shared on a proportionate basis with the first-party
claimant, unless the deductible amount has been otherwise recovered.
(continued…)
Additionally, the parties do not discuss the total amount paid by Nationwide to Jones
under the collision coverage policy for the damage to Jones’s vehicle.
[J-41-2011] - 5
31 Pa. Code § 146.8(c).
Moreover, Nationwide asserted that the pro rata
reimbursement was consistent with the equitable principles underlying subrogation. It
claimed that subrogation is allowed “to prevent double recovery and ensure that the
party at fault, rather than an innocent party, be held responsible for the injury claimed.”
Preliminary Objections at 7 (quoting Thompson v. W.C.A.B. (USF&G Co.), 781 A.2d
1146, 1153 (Pa. 2001)). Finally, it contended that the language of the policy provided
Nationwide subrogation rights. See Insurance Contract at G3, supra note 2.
The trial court sustained Nationwide’s preliminary objections without issuing an
opinion. After Jones filed an appeal and her Pa.R.A.P 1925(b) concise statement of
matters complained of on appeal, the trial court issued an opinion supporting its
decision on a basis not raised by Nationwide. It concluded that Jones failed to exhaust
administrative remedies under the Unfair Insurance Practices Act (UIPA), without
identifying what those remedies entailed, and instead merely referenced the title section
of the UIPA, 40 Pa.C.S. § 1171.1. Tr. Ct. Slip Op. at 3.
In the alternative, the trial court considered the merits of the case. It observed
that the United States District Court for the Eastern District of Pennsylvania recently
addressed a very similar argument in Harnick v. State Farm Mutual Auto Insurance,
2009 WL 579378 (E.D. Pa. Mar 5, 2009).4 The district court in Harnick acknowledged
that the common law made whole doctrine “requires that an insured recover the full
amount of his losses before his insurer may demand reimbursement for any payments
previously made to the insured under an insurance policy,” id. at *3, but implicitly found
that Pennsylvania’s regulatory scheme controlling automobile insurance modified the
4
Although the plaintiff in Harnick appealed the decision to the United States Court
of Appeals for the Third Circuit, that court decided to hold the case pending the appeal
of the case at bar. Harnick v. State Farm Mut. Auto Ins. Co., No. 09-1942 (3d Cir. Dec.
4, 2009).
[J-41-2011] - 6
common law doctrine. The federal court concluded that 31 Pa. Code § 146.8(c), which
provided for the pro rata subrogation distribution procedure, was within the authority
delegated to the Insurance Department by the General Assembly pursuant to the UIPA.
The court held that because the procedure is “specifically permitted by Pennsylvania's
insurance regulations, [it] cannot violate the common law ‘made whole’ doctrine even
assuming that the doctrine would in fact support a claim like that of [the] plaintiffs.” Id.
The federal court then reasoned, “[b]ecause the behavior does not violate the ‘made
whole’ doctrine, the plaintiffs have failed to state a basis on which the Court could find a
breach of the parties' contract.” Id. Accordingly, based in part upon the federal district
court’s decision in Harnick, the trial court dismissed Jones’s complaint in the matter now
before us. Jones filed a supplemental Pa.R.A.P. 1925(b) statement challenging the trial
court’s ruling based on the UIPA issue that had not been raised by Nationwide. The
trial court did not file a supplemental opinion.
In a unanimous published opinion, the Superior Court affirmed the trial court’s
order but on different grounds. Jones v. Nationwide Prop. and Cas. Ins. Co., 995 A.2d
1233 (Pa. Super. 2010). The appellate court concluded that the trial court erred in
finding that Jones should have pursued an administrative remedy under the UIPA,
because the UIPA does not provide a private remedy. It additionally recognized that
Jones did not seek relief under the UIPA. Nonetheless, the Superior Court adopted the
analysis of the Eastern District Court’s decision in Harnick and affirmed the trial court’s
order dismissing Jones’s complaint because it concluded that she failed to assert a
viable cause of action.
Jones appealed to this Court, and we granted review of the following issues:
(1) Does Pennsylvania law require that a party suffering damages
be made whole before an insurer is entitled to subrogation?
[J-41-2011] - 7
(2) Does the Pennsylvania Insurance Commissioner have the
authority to promulgate a regulation regarding allocation of subrogation
proceeds between an insurance company and its insured following
subrogation recovery?
(3) Is the Pennsylvania Insurance Commissioner's regulation
allowing insurers to allocate subrogation proceeds on a pro rata basis void
because it violates Pennsylvania substantive common law, the “made
whole” doctrine?
Jones v. Nationwide Prop. and Cas. Ins. Co., 8 A.3d 311 (Pa. 2010).
Jones’s first issue presents a pure question of law regarding whether the pro rata
reimbursement of the insured’s deductible from the insurer’s subrogation recovery in a
collision coverage case violates the common law made whole doctrine.5 As with all
questions of law, this Court's review is plenary. See Bilt-Rite Contractors, Inc. v. The
Architectural Studio, 866 A.2d 270, 274 (Pa. 2005). Given that the underlying decision
involves the dismissal of the case on preliminary objections, we further observe “the
standard of review for preliminary objections in the nature of a demurrer is limited; the
question presented by the demurrer is whether, on the facts averred, the law says with
certainty that no recovery is possible” Id.
Jones reasserts her claim that Nationwide’s practice of reimbursing the insured’s
deductible from the insurer’s subrogation only on a pro rata basis calculated upon the
percent of the insurer’s recovery from a third party violates the common law made
whole doctrine.
Relying on Superior Court and federal court cases applying
Pennsylvania law, Jones asserts, “Pennsylvania law provides that an insurance
5
The question as framed by Jones is whether “Pennsylvania law require[s] that a
party suffering damages be made whole before an insurer is entitled to subrogation?”
As noted by all parties and set forth below, Pennsylvania has applied the “made whole”
doctrine repeatedly, and thus there is no dispute in this case that the doctrine applies,
generally, as part of Pennsylvania common law. The interesting question raised by this
case is whether the made whole doctrine applies to the case at bar, involving the pro
rata reimbursement of the insured’s deductible from the insurer’s subrogation recovery.
[J-41-2011] - 8
company cannot exercise its right of subrogation until the insured has been fully
compensated or ‘made whole.’” Brief at 6 (citing inter alia, Gallop v. Rose, 616 A.2d
1027, 1031 (Pa. Super. 1992); Nationwide Mut. Ins. Co. v. DiTomo, 478 A.2d 1381,
1383 (Pa. Super. 1984); Walls v. City of Pittsburgh, 436 A.2d 698, 701 (Pa. Super.
1981) (holding insurer’s right to subrogation arises “only upon the insurer’s showing that
the sum of the insured’s recovery from the insurer and from persons legally responsible
for the injury exceeds the insured’s loss.”)).
She observes that in Valora v. Pa.
Employees Benefit Trust Fund, 939 A.2d 312, 321(Pa. 2007), this Court recognized the
use of the made whole doctrine in other states. She further asserts that we held in
Valora that, because subrogation is based in equity, even contractual subrogation rights
are subject to equitable principles. Id.
Although Jones acknowledges that Pennsylvania courts have yet to apply the
made whole doctrine to collision coverage deductibles, she observes that because we
have not spoken to the question, we have also not determined that it does not apply.
She urges this Court to apply the doctrine broadly, as equity would demand.
As
support, she observes that the Supreme Court of Montana recently certified a class of
automobile insureds seeking recovery of unrecovered losses, including deductibles,
from their insurer’s subrogation recovery. Reply Brief for Jones at 8 (citing Ferguson v.
Safeco Ins. Co. of America, 180 P.3d 1164, 1168 (Mont. 2008) (opining that when
“either the [i]nsured or the [i]nsurer must to some extent go unpaid, the loss should be
borne by the [i]nsurer for that is a risk the [i]nsured has paid it to assume.”)). She
argues that where Nationwide “brings a subrogation claim - her subrogation claim - in
order to recover funds it has paid to its own insured, it must, upon recovery, make sure
that she is ‘made whole’ by repaying any deductible before Nationwide dips its own
hand into the recovery.” Reply Brief for Jones at 11. She asserts that the insurer has
[J-41-2011] - 9
assumed the risk of loss regardless of the deductible and that the insurer cannot
consider her potential fault in determining the amounts distributed from the subrogation
recovery, because her policy provides for payment regardless of fault.
Jones also
claims that the violation of the made whole doctrine, through the pro rata distribution
process, results in a breach of contract.
In response, Nationwide avers that the made whole doctrine does not apply to
this case because Jones is attempting to seek reimbursement from insurer’s recovery
for an uninsured loss - her deductible.
It argues that Jones cannot provide any
precedent for her claim that the made whole doctrine has been applied to allow the
recovery of uninsured losses, including deductibles. Instead, Nationwide directs our
attention to other jurisdictions that have rejected the application of the made whole
doctrine in similar cases, as discussed below.
Specifically, Nationwide observes that Florida courts have rejected complaints
brought by insureds seeking reimbursement of their collision deductible and other
uninsured losses under the made whole doctrine. Brief of Nationwide at 7-8 (citing
Schonau v. GEICO Gen. Ins. Co., 903 So.2d 285, 287 (Fla. Dist. Ct. App. 4th Dist.
2005) (Appellant’s “proposed application of the ‘made whole’ doctrine would effectively
eliminate this entire body of Florida subrogation law, by forcing an insurer to cover
uninsured losses before the insurer can pursue a subrogation claim.”); Monte de Oca v.
State Farm Fire & Cas. Co., 897 So. 2d 471 (Fla. Dist. Ct. App. 3rd Dist. 2004)).
Nationwide also discusses a decision from the Court of Appeals for the Ninth Circuit,
where the court held that an insurer that pursues subrogation against a tortfeasor has
no obligation to make the insured whole out of the proceeds, if the insured has not filed
suit herself to recover from the tortfeasor. Brief of Nationwide at 8 (citing Chandler v.
State Farm Mutual Ins. Co., 598 F.3d 1115 (9th Cir. 2010)). Relying upon Chandler,
[J-41-2011] - 10
Nationwide claims that “an insured may not sit back and do nothing to assert its rights
against the responsible party, and then expect to be made whole by the insurer who
enforces its right of subrogation.” Brief of Nationwide at 8. Nationwide also looks to a
decision from Washington State, holding that the made whole doctrine does not apply
where the insurer pursues a subrogation action and the insured seeks reimbursement of
a deductible from the proceeds, in part because the deductible represents the amount
of risk retained by the insured.
Brief at 9 (citing Averill v. Farmers Ins. Co. of
Washington, 229 P.3d 830 (Wash. Ct. App. 2010)). 6
Nationwide further asserts that the application of the made whole doctrine to
deductibles would undermine the public policy expressed in the MVFRL, which forbids
the issuances of insurance policies without deductibles. Nationwide observes that 75
6
Although we affirm the courts below based upon our conclusion that the made
whole doctrine does not apply to collision coverage cases, we recognize that the parties
devote substantial briefing to Nationwide’s argument that the made whole doctrine does
not apply to cases where the insurer, rather than the insured, is the party pursuing the
subrogation action against the third-party tortfeasor. In support of its argument,
Nationwide contends that the made whole doctrine typically applies where the insured
takes on the risk of litigation and sues the tortfeasor; in such a case, the insured must
be made whole before the insurer can make its subrogation claim against the insured’s
recovery from the tortfeasor. Nationwide argues that equity does not require the
application of the made whole doctrine when the insured has not asserted a claim
against the tortfeasor, as in this case where the action was brought by the insurer.
While we do not decide the merits of this argument, we acknowledge that Jones
presents an argument refuting Nationwide’s claim by noting that any rights Nationwide
has in subrogation are based entirely on her own and not Nationwide’s rights. As in any
subrogation claim, the insurer steps into the shoes of the insured-subrogee, and can
only claim the rights of the insured-subrogee. She further argues that Nationwide
cannot divide the claim against the tortfeasor into Nationwide’s claim for the amount
above the deductible and Jones’s claim for the amount of the deductible, pursuant to
caselaw asserting that a cause of action for negligence cannot be split or divided. See
Fitzpatrick v. Branoff, 470 A.2d 521, 523 (Pa. 1983). We make no determination
regarding whether the made whole doctrine applies when an insurer brings the litigation
against the third party tortfeasor.
[J-41-2011] - 11
Pa.C.S. § 1792(b)(2) provides, “[u]nder no circumstances may a private passenger
automobile insurance policy provide a collision deductible in an amount less than $100.”
In Nationwide’s view, application of the made whole doctrine to require insurers to
reimburse insureds for their deductible in full from any subrogation recovery would
create, in essence, a no-deductible policy contrary to the policy language and the
MVFRL, which require insureds to shoulder some of the risk of collision coverage.
Instead, Nationwide contends that the pro rata reimbursement procedure utilized by the
insurance company and provided for by Section 146.8(c) of the regulations
appropriately balances the policies of the made whole doctrine and the deductible
requirement by requiring the reimbursement of the insured’s deductible from
subrogation recoveries on a proportionate basis.
The Acting Pennsylvania Insurance Commissioner filed an amicus curiae brief in
support of Nationwide.7 The Commissioner asserts that the made whole doctrine is
inapplicable to cases involving collision coverage insurance. He explains, “The ‘made
whole’ doctrine was developed to give consumers with excess damages priority over
their insurer when there is a shortfall in the amount of first-party coverage (e.g.,
Uninsured or Underinsured Motorist (‘UM/UIM’) coverage) and there are limited funds
available
from
any
third-party
source
(i.e.,
the
tortfeasor
or
his
insurer).”
Commissioner’s Brief at 4. It is also intended, the Commissioner observes, to prevent
double recovery by the insured from both the insurer and the tortfeasor. Id. at 9. In
contrast to insurance such as UIM, which involves coverage limits, the Commissioner
notes, “Collision coverage, however, is fundamentally different from other first-party
7
We additionally note that Harleysville Preferred Insurance Company; the
Pennsylvania Defense Institute, Inc.; Insurance Federation of PA, Inc.; and National
Association of Subrogation Professionals, Inc. filed amicus curiae briefs in support of
Nationwide.
[J-41-2011] - 12
coverages because it does not have a coverage limit.” Id. at 4 (emphasis omitted). As
a result, the Commissioner argues, collision coverage cannot result in a shortfall
because the insured is paid the full value of the damage to the vehicle by the insurer, or
if totaled, the vehicle’s replacement value.
Unlike other first-party benefit insurance, where the insurer is liable from the “first
dollar,” the Commissioner explains that a deductible is a “thin layer of first dollar liability
retained by the consumer (and specifically not transferred to the insurer) to ensure risksharing and loss avoidance.” Id. at 4 (emphasis omitted). Under the policy, the insured
agreed to pay the deductible as a first dollar obligation prior to implicating the insurer’s
obligation to cover the damages. Therefore, the loss of the deductible is not a “shortfall”
in the insurance coverage.
The Commissioner argues that requiring the insurer to
refund the deductible in full to insured prior to recovering its own payment would render
the deductible meaningless and would convert the policy into a deductible-free policy,
which is prohibited by the MVFRL.
Additionally, the Commissioner observes that,
pursuant to the MVFRL, premiums are based upon the contractually determined
deductible, such that applying the made whole doctrine would “negate any differentials
in premiums paid by consumers electing higher or lower deductibles and undermine”
the rate structures approved by the Commissioner. Id. at 14.
The Commissioner also argues that allowing the insured to recover her entire
deductible prior to the insurer receiving any of the subrogation funds is inequitable for
two reasons. First, he notes that, in cases such as this, the insurer is bearing the cost
and risk of litigation. Second, the Commissioner observes that in collision coverage
subrogation cases where an insurer recovers only a portion of the damages it paid to
the insured, it usually does so because there has been an apportionment of fault to the
insured. For example, if the insured is ten percent at fault in the accident, the third-party
[J-41-2011] - 13
tortfeasor’s insurance company will only pay the insurer ninety percent of the insured’s
loss. The Commissioner asserts that it would be inequitable for the insured, who was
partially at fault for the accident, to recover in full for her deductible prior to the insurer
receiving any of the subrogation proceeds. Accordingly, an insured, who is partially at
fault for the accident, would recover all losses, when the insurer who pursued the
litigation and accepted the risks thereof, would recover only a portion of its losses.
The Commissioner observes that we need not consider Jones’s remaining issues
relating to the validity of the Department’s regulation because Jones has not
demonstrated a right to relief even in the absence of the Department’s regulation. If the
made whole doctrine does not apply to the pro rata distribution of subrogation
recoveries in cases involving deductibles, we need not consider the propriety of the
Insurance Department regulations providing for this practice.
In determining the legality of Nationwide’s practice of reimbursing Jones from its
subrogation recovery only a pro rated portion of the deductible, we must first consider
subrogation and the made whole doctrine generally. We have repeatedly held that
subrogation is an equitable doctrine intended to place the ultimate burden of a debt
upon the party primarily responsible for the loss. Valora, 939 A.2d at 320. Subrogation
allows the subrogee (in this case the insurer) to step into the shoes of the subrogor (the
insured) to recover from the party that is primarily liable (the third party tortfeasor) any
amounts previously paid by the subrogee to the subrogor (in this case, the amount of
damage to the vehicle less the deductible). See e.g. Ario v. Reliance Insur. Co., 980
A.2d 588, 594-95 (Pa. 2009). As well-stated by the Superior Court,
[W]hen an individual who has been indemnified for a loss subsequently
recovers for the same loss from a third party, equity compels that the
indemnifying party be restored that which he paid the injured party;
thereby placing the cost of the injury upon the party causing the harm
[J-41-2011] - 14
while preventing the injured party from profiting a “double recovery” at the
indemnifying party's expense.
Allstate Ins. Co. v. Clarke, 527 A.2d 1021, 1024 (Pa. Super. 1987). While subrogation
rights may be contractually determined, as in this case, those rights are still subject to
equitable principles. See Valora, 939 A.2d at 320.
Turning to the made whole doctrine, all the parties agree that the doctrine applies
generally in Pennsylvania. See e.g. Gallop, 616 A.2d at 1031. Couch on Insurance
describes the made whole doctrine as follows: “where an insured is entitled to receive
recovery for the same loss from more than one source, e.g. the insurer and the
tortfeasor, it is only after the insured has been fully compensated for all the loss that the
insurer acquires a right to subrogation, or is entitled to enforce its subrogation rights.”
16 Couch on Insurance § 223:134 (3d Ed.) (footnote omitted).
Our courts have
explained that the made whole doctrine both ensures that the insured is fully
compensated for his or her injury before the insurer recovers, in cases where there are
insufficient funds to satisfy both the insured and the insurer, and prevents the insured
from receiving dual recovery for the same loss from both the tortfeasor and the insurer.
Gallop, 616 A.2d at 1030.
The case at bar presents the question of whether the made whole doctrine, as
described above, applies to cases where the underlying collision coverage policy
includes a deductible. Although the General Assembly has not specifically spoken to
the question of reimbursement of an insured’s deductible from an insurer’s subrogation
recovery, we cannot ignore that the legislature has set forth clear policy regarding
deductibles generally. The MVFRL requires all motor vehicle insurance policies for
collision coverage issued in this Commonwealth to contain a deductible of no less than
$100. 75 Pa.C.S. § 1792(b)(2). This requirement ensures that insureds share with their
insurance companies the risk of damage to the vehicle. The legislature also directed
[J-41-2011] - 15
insurers and the Commissioner to set premium rates based upon the deductible amount
chosen by the insured. 75 Pa.C.S. § 1792(b)(4). Accordingly, the legislature provided a
system where an insured, who agreed to accept a higher percentage of the risk through
a higher deductible, would pay a lower premium to reflect that the insurer would cover
less risk. With these legislative directives in mind, we agree with the Commissioner that
applying the made whole doctrine to the distribution of subrogation recoveries in
collision coverage cases would undermine the MVFRL’s provisions related to
deductibles.
Specifically, application of the made whole doctrine would require the
insured to recover the entire deductible from the proceeds of any action against the
tortfeasor prior to the insurance company’s recovery, thus in essence creating a nodeductible policy, in the limited circumstances of a cases involving subrogation
recoveries, in violation of the MVFRL, 75 Pa.C.S. § 1792(b)(2).
Application of the made whole doctrine to deductibles would not only be contrary
to the relevant MVFRL provisions but, when considering the inherent nature of
deductibles, would run counter to the equitable principles underlying the made whole
doctrine and subrogation. “The equitable principle underlying the made whole rule is
that the burden of loss should rest on the party paid to assume the risk, and not on an
inadequately compensated insured, who is least able to shoulder the loss.” 16 Couch
on Insurance §223:136. While the made whole doctrine is consistent with equity in
other types of first-party insurance cases where the insurer has been paid to assume
the risk, it is not in the case of collision coverage insurance involving deductibles.
As discussed at the beginning of this opinion, a primary difference between
collision coverage policies utilizing deductibles and other first-party insurance is that
with collision coverage, the insured contracts to accept the risk of the first portion of any
loss by way of the deductible and to pay the insurer premiums to assume the risk for the
[J-41-2011] - 16
entire amount of the loss above the deductible up to the fair market value of the vehicle.
See Black’s Law Dictionary 285 (6th Ed. 1991) (defining “deductible” as “[t]he portion of
an insured loss to be borne by the insured before he is entitled to recover from the
insurer”). In contrast, in cases involving other first-party insurance coverage, the insurer
has accepted premiums in exchange for assuming the risk of the first dollar of coverage
up to the policy limits, but any amount above the policy limits is an uninsured risk not
attributable to the insurer.
As noted by the Commissioner, the deductible in a collision coverage policy is a
“thin layer of first dollar liability retained by the consumer (and specifically not
transferred to the insurer) to ensure risk-sharing and loss avoidance.” Commissioner’s
Brief at 4 (emphasis omitted). The insurer, thus, accepted only the risk of paying if the
loss exceeded the amount of the deductible, with premiums calculated based upon the
amount of first dollar liability accepted by the insured. Application of the made whole
doctrine in such a case would force the insurer essentially to cover the risk of the
deductible where the insured has not paid premiums to cover that risk. It follows that
the insured should not get preferential treatment in a collision coverage case, when he
or she accepted the risk of paying the deductible in the event of an accident. We
conclude that the made whole doctrine does not apply in cases involving collision
coverage policies, and accordingly, that the practice of pro rata reimbursement of the
insured’s deductible from the insurer’s subrogation recovery does not violate the made
whole doctrine.
Given that we conclude that the practice of pro rata reimbursement of the
insured’s deductible from the insurer’s subrogation recovery does not violate the made
whole doctrine, and therefore is a valid practice for Nationwide and other insurers to
use, we agree with the Commissioner that we need not consider whether the regulation
[J-41-2011] - 17
providing for the same process is validly enacted, as the practice is valid with or without
the regulation. Accordingly, we do not address the second and third issues granted for
review, but instead affirm the decision to dismiss the class action based on our
conclusion that Nationwide did not violate the made whole doctrine in providing Jones
pro rata reimbursement of her deductible from Nationwide’s subrogation recovery from
the third party tortfeasor, such that dismissal of the class action was appropriate.
Although on different grounds than either of the courts below, we affirm the
decision to dismiss Appellant Jones’s class action based upon the preliminary
objections raised by Nationwide.
Mr. Chief Justice Castille, Mr. Justice Saylor, Madame Justice Todd, Mr. Justice
McCaffery, and Madame Justice Orie Melvin join the opinion.
Mr. Justice Eakin files a concurring opinion.
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