In resolving automobile claims, insurance adjusters often violate the “made whole” rule when recouping the insurer’s pro rata reimbursement/subrogation from an underinsured third party tortfeasor. The “made whole” rule (or Sapiano rule) states “It is a general equitable principle of insurance law that, absent an agreement to the contrary, an insurance company may not enforce a right to subrogation until the insured has been fully compensated for [his or] her injuries, that is, has been made whole.” Sapiano v. Williamsburg Nat. Ins. Co. (1994) 28 Cal App 4th 533, 536 33 Cal.Rptr.2d 659.
In Sapiano, plaintiff Anthony Sapiano was insured by Williamsburg. The policy provided extended collision coverage on plaintiff’s vehicle in the amount of $15,000, minus a $500 deductible. Plaintiff’s vehicle was “totalled” in a collision with another vehicle operated by Valdepena. Just prior to the accident, Sapiano’s vehicle had a value in excess of $20,000. (Sapiano had purchased the vehicle for $25,000.) Williamsburg paid Sapiano $14,500 for the damage to his vehicle, which was the maximum coverage limits of $15,000 less the $500 deductible. Thereafter, Sapiano filed an action against Valdepena for personal injury and property damage. Valdepena had insurance with liability limits of $10,000 for property damage, which Valdepena’s carrier offered to Sapiano to settle the property damage portion of the claim.
A dispute arose as to the interests of Sapiano and Williamsburg in the $10,000 available from Valdepena’s carrier. Sapiano contended that Williamsburg’s subrogation rights were subordinate until Sapiano was fully compensated for his property loss exceeding $20,000. (Sapiano was still “out of pocket” anywhere from $5,500 to $10,000). Williamsburg asserted that it had the right to the whole $10,000 pursuant to the transfer of rights clause in Sapiano’s insurance policy (for the $14,500 Williamsburg paid out). Williamsburg would not waive its subrogation rights to facilitate the proposed settlement of the property damage claim between its insured and the third party carrier.
In the ensuing declaratory relief action, Sapiano prevailed. The trial court held that Williamsburg had no right to the third party carriers payments until Sapiano was fully compensated for the fair market value of his vehicle. The trial court stated:
“The fair market value of the insured vehicle in question exceeded the total amount paid by defendant Williamsburg and the amount tendered by or on behalf of Mr. Valdepena …. [&] [D]efendant Williamsburg has no right to assert its contractual repayment provisions unless and until its insured, Plaintiff Sapiano, is fully compensated for all property damage incurred from the loss of his insured vehicle. [&] … Plaintiff Sapiano has priority to collect and retain any proceeds received from any third party as payment for said property damage and any conflicting claim by defendant is unenforceable.”
28 Cal App 4th at 536.
The Court of Appeal affirmed, citing three insurance treatises:
“Discussing automobile collision insurance specifically, Couch states, “Where a collision insurer settles with the insured and the latter recovers from the wrongdoer in an action of which the insurer has knowledge but in which it does not participate, the insured is not entitled to receive more than indemnity for his loss, but if the total amount received does not exceed his actual loss he may retain the full amount so received, and the insurer is not entitled to any return.” (16 Couch, Insurance (2d ed. 1983) ‘ 61:241, p. 300, fn. omitted.) Appleman states, “But where the loss was greater than the insurance, and the insured settled with the wrongdoer for damages which, when added to the insurance, were less than the loss, the insurer could recover nothing from the insured.” (6A Appleman, Insurance Law and Practice (1972) ‘ 4094, p. 265, fn. omitted; id., ‘ 4095, p. 275.) Keeton states that the rule reimbursing the insured first “has the greatest support … among the more recent judicial precedents. The application of this rule maximizes the prospect of ‘making the insured whole,’ which is consonant with the equitable origins of the subrogation doctrine.” (Keeton & Widiss, Insurance Law (Practitioner’s ed. 1988) ‘ 3.10, p. 236.)”
28 Cal App 4th at 537.
Williamsburg argued that well developed rules of subrogation should be ignored because the contractual language in its policy gave the insurer priority irrespective of whether its insured, Sapiano, was “made whole.” The policy stated: “Transfer of Rights of Recovery Against Others to Us: If any person or organization to or for whom we make payment under this Coverage Form has rights to recover damages from another, those rights are transferred to us. That person or organization must do everything necessary to secure our rights and must do nothing after ‘accident’ or ‘loss’ to impair them.” The Court, in rejecting Williamsburg’s argument, held that this language was too general to subordinate the rights of the insured.
The Sapiano Court distinguished Samura v Kaiser Foundation Health Plan, Inc. 17 Cal App 4th 1284, where the Kaiser plan included specific language, to the effect that Kaiser was entitled to reimbursement and subrogation regardless of whether the insured was made whole. [“Health Plan (or its designee) shall be entitled to the payment, reimbursement, and subrogation as provided in this Section C(1) regardless of whether the total amount of the recovery of the Member (or his or her estate, parent or legal guardian) on account of the injury or illness is less than the actual loss suffered by the Member (or his or her estate, parent or legal guardian).” ] (Italics in original.)
The Sapiano Court also distinguished Travelers Indem. Co. v. Ingebretsen (1974) 38 Cal App 3rd 858, where (1) the insurer and the insured executed a detailed subrogation agreement after the loss and at the time the insurer paid the insured, and (2) where the insurer’s attorneys assisted the insured in the prosecution of the claim against the third party. In contrast, in Sapiano, “Williamsburg sat back without assisting while Sapiano prosecuted the suit against Valdepena, then, after Sapiano negotiated a proposed settlement, demanded all the proceeds for itself.” id, at 858.