MADE WHOLE DOCTRINE
You have probably heard that New Jersey is a "made whole" State. What really does that mean and how does it work?
The phrase arises in property insurance in the context of a subrogation claim in which the insurance company seeks to recoup its payment to the insured from the party responsible for the loss. Subrogation is an equitable remedy placing the burden of the loss on the party that rightly should bear it, i.e. the tortfeasor, Standard Accident Ins. Co. v. Pellechia, 15 N.J. 162 (1954). The insurance company acquires its right to subrogate by making a payment to its insured, Providence Washington Insurance Co. v. Hogges, 67 N.J. Super. 475 (App. Div. 1961). Often, the insurance payment will not fully compensate the insured for the loss. The "made whole" doctrine arises from the equitable view that the insured must be fully compensated for the loss before the insurance company can receive any money by way of recovery from the tortfeasor.
Significantly, this equitable principle can be modified by contract, Culver v. Ins. Co. of No. America, 115 N.J. 451 (1989). In many instances the insurance company will seek an agreement with the insured for them to share proportionally in any subrogation recovery. Before entering into any such contract, your insured must be aware of several important issues. Let's examine some of them.
First, what is the amount of the uncompensated loss? It is not the difference between what the insured initially sought from the insurer and the ultimately adjusted amount paid. The usual situation is one in which the loss exceeds the policy limits or where recovery was limited by the express language of the policy, i.e. insufficient debris removal coverage, a co-insurance penalty or an extended period of business interruption. Your insureds need to know the potential of their recovery in comparison to the potential recovery by the insurer in order to gauge the potential costs of the litigation, the likelihood of aggressive representation by the insurer's attorney, and the probable settlement range and the effect on their recovery.
Second, who is going to pay the costs of the subrogation lawsuit? Ordinarily, the insurer offers to front the money for the litigation expenses, which can become large especially if multiple tortfeasors are involved, numerous experts are needed for both liability and damages, many depositions are to be taken, etc. Where the insured has a small uninsured loss, the expenses can eat up the potential recovery. More importantly, when do "trial expenses" start? The insured should not pay for the insurer's expenses on the initial adjustment of its claim, when the experts do the bulk of their work. The caveat here is that regardless of who fronts the money, the litigation costs usually are going to be taken off the top from any recovery whether by way of settlement or judgment and thus they have to be defined at the outset. Depending on several considerations, in an appropriate case, your insured may even request the insurer to pay the expenses without contribution from them.
Third, who represents your insured in the subrogation lawsuit? The attorney for the insurance company cannot represent the insured unless there is an agreement in place between the insurance company and the insured; otherwise there is an inherent conflict of interest. In most instances, the insureds will do better to have their own attorney working with the insurance company's lawyer. Their interests will be fully protected. These suits are handled on a contingency basis with the attorney taking a percentage of the recovery. The net effect to the insured can change if their attorney agrees to handle the case for a lesser percentage than the insurer's attorney. Even if only one attorney represents both interests, the attorney's fee usually comes off the top (or the net after deduction of the litigation expenses).
Fourth, how is a settlement to be handled? This is the most difficult issue and should be resolved prior to the start of litigation. By definition, a settlement will not fully compensate both the insured and the insurer. An offer will be based upon the defendant's analysis of both liability and damages. Does the tortfeasor have a good defense? Are the damage proofs weak? The insured and insurer should agree beforehand who controls the decision and how any settlement is to be divided. Even if the insured has independent counsel, this eventuality has to be addressed at the outset of the matter. Many times the parties will agree to a proportional division of the net recovery, with each party paying its own attorney out of its share of the net recovery. This eliminates having to try the case in order to determine liability and the amount of damages, and also avoids a potential pitfall for the insured if the jury were to find that the uninsured damages are less than claimed. Sometimes, a defendant will have insufficient insurance coverage and insufficient other assets to pay the claims and will simply tender its policy in settlement of all claims. Does the insured take first money? The "made whole" doctrine would require that it does. This issue also should be agreed before the issue arises.
If the claim does go to judgment, the amount of the insured's excess loss is an arithmetic calculation. The result may be surprising and may upset the relations of the parties. At that point, however, the parties still have to pay the expenses, hopefully pay the attorneys and divide the net recovery. These matters also need to be addressed at the outset of the litigation. Equitable principles will apply in the absence of a written agreement.
The important point to remember is not to let your insureds enter into an agreement with the insurance company to pursue subrogation jointly without careful consideration and an analysis of the fairness of any agreement proposed. Your best course of action is probably to suggest that the insured consult with an attorney, like myself, who can handle the subrogation claim.
As always, if you or your insureds encounter this situation, please feel free to contact us by telephone at 973-538-4100 or by email at email@example.com. We are here to help!