Maximizing the Net Recovery for the Plaintiff: Recurring Themes in Automobile Claims and Litigation


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.

Typical Examples Where The Sapiano Rule Arises:
  • Example #1:
    Plaintiff is involved in an accident with an underinsured third party, who carries only $5,000 in collision coverage. Plaintiff’s vehicle is rendered a total loss, and has a (pre collision) value of $26,500. Plaintiff has “full coverage” and her carrier pays out the $26,000 to plaintiff (their insured) less plaintiff’s $500 deductible. In addition to her vehicle, it is undisputed that client also had $4000 in personal property (i.e.,crystal, a new widescreen television, etc.) which she had just purchased before the accident, and was transporting it home. Due to the severity of the collision, Plaintiff’s personal property was also destroyed due to the negligence of the third party. At this point, plaintiff is “out of pocket” $4,500 ($4,000 in personal property, and $500 deductible). The underinsured third party is determined to be at fault. Plaintiff’s insurance carrier lays claim to the $5,000 collision coverage/policy limits of the underinsured driver, as subrogation/ reimbursement for the $26,000 it paid out. This is incorrect as a matter of law. Of the available $5,000 from the responsible third party, the plaintiff should get $4,500, and the plaintiff’s carrier’s reimbursement is limited to whatever is left, if anything (in this case $500). The plaintiff’s insurer should not take anything until the insured is “made whole.”
  • Example #2
    Plaintiff is involved in accident with third party. Plaintiff’s property damage to vehicle is $25,000. Plaintiff incurs car rental charges of $500 (i.e.,Plaintiff is “out of pocket” $500) Plaintiff’s insurer pays $25,000 to lienholder on vehicle. Underinsured third party tortfeasor has property damage limits of only $5,000. Plaintiff is offered $100 or 2% of $5,000 as her pro rata share, and plaintiff’ s insurer is offered $4,900 or 98% of $5,000 as insurer’s pro rata share.[Total property damage losses are $25,500. Plaintiff’s out of pocket loss is $500, or 2% of the $25,500; Plaintiff’s insurer is out $25,000, or 98% of the $25,500] This proposed distribution of the $5,000 is wrong. The plaintiff should receive $500 for her out of pocket car rental charges, and her insurer should then receive $4,500. Again, the plaintiff’s insurer should not take anything until the insured is “made whole.”
  • Example #3
    Plaintiff is involved in an accident with a third party. Plaintiff’s property damage is $12,000, which is paid by client’s insurer, less client’s deductible of $1,000. Third party has ample insurance to cover the property damage loss to plaintiff’s vehicle, but through intercompany arbitration, plaintiff is determined to be 80% at fault, and third party is deemed only 20% at fault. Plaintiff’s deductible is $1,000, so plaintiff is “out of pocket” $1,000. Plaintiff’s insurer recovers $2400 (20% of $12,000), and sends Plaintiff a check for $200 (or 20% of $1,000.) Adjusters will argue that because of the insured’s comparative fault, this result is proper. While there is no published opinion addressing this exact issue, counsel for the insured should argue that the insured is still not “made whole” and yet the insurer is still participating in the recovery from the third party carrier. Also, as between insured and insurer, the insured’s comparative fault is of no moment, especially since the insured did not participate in the intercompany arbitration. Further Sapiano, and subsequent decisions discussing the issue, do not mention comparative fault in their analysis. Finally, because the insurer has been paid a premium to bear the loss, the equities favor the insured and the insurer should relinquish its interest since its insured still has not been “made whole.”On the other hand, language in Allstate Insurance v Superior Court (2007)151 Cal App 4th 1512, 1523,(review granted, not citeable) suggests that the “Sapiano Rule” is a “principle of priority” limited to situations “where the wrongdoer has a fixed amount of assets.” Since in the above scenario, the wrongdoer does not have a policy limits issue, the analysis may be misplaced. Also, assuming the intercompany arbitration is accurate and it really is a comparative fault situation, is not the insured “made whole” anyway if paid in accordance with his comparative negligence? The Sapiano Rule likely does not apply to make the insure “whole” in Example #3.

Comment: Since property damage amounts are often small, and/or because contingent fee plaintiff’s attorneys typically don’t charge for helping their clients recover property damage claims, plaintiff’s counsel tend to ignore the Sapiano issue, all to their client’s detriment. This is arguably malpractice. When resolving an auto property damage claim and the responsible third party has minimal limits, make sure the client is “made whole” with regard to all elements (car repair, car rental, loss of personal property damaged in the collision) before advising the client to sign any property damage release, particularly a release allocating any reimbursement/subrogation to the client’s auto insurer.


What the Jury Should Receive In Evidence vs. What The Plaintiff Actually Receives - The Nishihama Issue

Plaintiffs medical bills are in excess of $17,000. Plaintiff’s medical insurer negotiates with the medical provider, and the medical provider agrees to accept $3,600 as payment in full for the $17,000 plus initially billed. Prior to trial, the defense files a motion in limine to preclude the admission of the $17,000 in medical specials $17,000 and to limit such evidence to the $3,600 actually paid by plaintiff’s insurer. Such a motion should be opposed and denied. In the foregoing example, taken from Nishihama v. City and County of San Francisco (2001) 93 Cal. App. 4th 298, the court allowed into evidence the amount billed ($17,000) for the jury’s consideration of general damages. The jury returned a verdict for $99,000. The court thereafter reduced the verdict by approximately $14,000 (the difference between the amount billed,$17,000 plus and the amount actually paid, $3,600) from $99,000 to $85,000. Had the defense been allowed to limit the jury’s consideration of plaintiffs medical bill to only $3,600 instead of $17,000, plaintiffs general damage award and ultimate verdict would have likely been substantially reduced.

Insurers and defendants often attempt to limit plaintiff’s recovery by arguing that the “reasonable value of medical services” is limited to the amount actually paid by plaintiffs insurer, as opposed to amount that was initially billed by the medical provider. In support of their position the defense often cites Nishihama,supra, and thereafter contends that because the special damages are thus limited to the discounted or reduced amount negotiated by the plaintiffs private medical insurer (or by Medi Cal or Medi Care), that the general damages are to based only on the discounted amount. The latter part of this defense, often raised in both negotiations and motions in limine, is inaccurate.

While Nishihama does hold that an injured plaintiff in a tort action cannot recover more than the amount of medical expenses plaintiff (or her insurer) actually paid or actually incurred, Nishihama also states that the plaintiff is allowed to submit evidence of the full amount charged by the medical provider to the jury for its consideration in determining general damages. Id, at 309. General damages compensate the plaintiff for noneconomic injuries resulting from past and future physical, mental, and emotional suffering. Greater Westchester Homeowners’ Assn. v. City of Los Angeles (1979) 26 Cal 3d 86, 103. In determining general damages “the cost of medical care often provides both attorneys and juries in tort cases with an important measure for assessing the plaintiff’s general damages.” (Helfend v. Southern Cal. Rapid Transit Dist. (1970 ) 2 Cal 3d 1,11. Moreover, there is no reason to assume the usual rates charged by the provider are a less accurate indicator of the extent of the plaintiff’s injuries than the lower rates negotiated by the insurer (or plaintiff’s counsel.) Nishihama, supra, 93 Cal.App.4th at p. 309.

In spite of the plain language of Nishihama, adjusters still argue it incorrectly in negotiations, and defense counsel still misconstrue it, both at trial in motions in limine and on appeal.

In an unpublished 2007 opinion, Fong Her v. Gallegos C053672, Superior Court No. 04AS02982 (California Court of Appeal, Third District, Sacramento) plaintiff was injured in a motor vehicle collision caused by defendant running a red light. Plaintiff’s hospital bill was $15,705. Medi-Cal paid the hospital $418. A motion in limine motion was filed to exclude evidence of charges in excess of $418. The court ruled that the amount of the lien ($418) was inadmissible to prove the reasonable value of the medical expenses because the “nominal” amount paid by Medi Cal was misleading, and the hospital’s “total charges” ($15,705) “was a more accurate indicator of the extent of [plaintiff’s] injuries…” The jury returned a special verdict for $119,875 which included the $15,705 hospital bill. In a post verdict hearing, the court reduced the award to $104, 589 per Hanif v Housing Authority (1988) 200 Cal App 3d 635, which limits the award for medical expenses to the amount paid by Medi-Cal. On appeal, defendant argued per Smalley v.Baty (2005) 128 Cal App. 4th 977, evidence of the amount Medi Cal paid was relevant to rebut the inference that the amount charged by the hospital was reasonable. The Court of Appeal affirmed, holding that the circumstances in Smalley were not present:

“There may be any number of reasons for nonpayment of a bill. In the case of an insurer, the reason may be a negotiated rate or lack of coverage. Here, however, Gallegos failed to present any evidence as to why Medi-Cal paid such a nominal portion of the University’s bill or that the University performed unnecessary tests or other procedures or charged excessive fees for the ones it performed…In the absence of such evidence, the meager amount of the lien, which is less than two percent of the charges billed, had little if any probative value to prove the reasonableness of those charges, much less the extent of Her’s injuries”

In another unpublished opinion from the same district, Katiuzhinsky v. Perry C050376, Superior Court No. 02SA07690 (California Court of Appeal, Third District, Sacramento) the trial court went the other way and did not allow plaintiffs to introduce evidence of medical expenses above the discounted rate paid to the medical providers. The Court of Appeal reversed, holding, inter alia, that neither Hanif, supra or Nishihama, supra, preclude “…the jury from considering the amounts billed by the provider as evidence of the reasonable value of the services.”

Consequently, it is important for the personal injury practitioner to object to efforts by insurance companies and defense attorneys to improperly limit plaintiff’s general damages, by insisting upon a proper reading of Nishihama.

Defense Counsel Can ``Waive`` The Reduction If The Special Verdict Form Is Too General!

It is equally important for defense attorneys to be astute enough to prepare an appropriate special verdict form, to list medical expenses as a separate line item, in order to allow the court to subsequently reduce the jury verdict to accurately reflect the medical specials to amount actually paid. Failure to do so constitutes a waiver! Greer v. Buzgheia (2006) 141 Cal. App. 4th 1150.

In Greer, supra, plaintiff was injured when defendant’s pickup truck ran a red light and collided with plaintiff’s pickup truck. Plaintiff’s medical bills were $216,000; the medical providers had accepted $132,984 as payment in full. Prior to trial, defendant filed a motion in limine to prevent the jury from hearing evidence of medical expenses that exceeded the amount actually paid to the medical providers, and cited both Hanif, supra, and Nishihama, supra, in support thereof. The trial court denied the motion with the condition that if the amount of medical expenses awarded exceeded the amount paid, the court would entertain a motion for reduction. The jury received evidence of the amount of medical expenses billed by plaintiffs medical providers, i.e., $216,000. However, the special verdict form, agreed to by defendant, lumped medical expenses together with wage loss and other economic damage, with a single line item for “Past economic loss, including lost earnings/medical expenses.” The damages portion of the verdict form was as follows:

“Question No. 3:

What are Plaintiff[‘s] damages?

a. Past economic loss, including lost earnings/medical expenses: $ 260,000
b. Future economic loss, including lost earnings/medical expenses: $ 11,500
c. Past non-economic loss: $ 50,000
d. Future non-economic loss: $ -0-
TOTAL $ 321,500″

The trial court stated that while it would entertain a motion for a “Hanif/Nishihama reduction,” the trial judge ” wondered how such a motion would work in practice, since the special verdict form, which defense counsel had approved, did not list medical expenses as a separate line item” id, at 1155. On appeal, defendant contended, inter alia, that the verdict was excessive and the court should have reduced the verdict by the $78,000 difference between the amount of expenses billed and the amount actually paid The Court of Appeal held that defendant’s failure to request a separate entry for medical expenses on the verdict form was a waiver.

“We need not address these claims individually, for we find they have all been forfeited by defendant’s failure to request a verdict form containing a separate entry for plaintiff’s past medical expenses. To preserve for appeal a challenge to separate components of a plaintiff’s damage award, a defendant must request a special verdict form that segregates the elements of damages.”

141 Cal App 4th 1150, 1158

It is significant to note that defense counsel complained on appeal that the verdict form was “was taken directly from the model verdict forms contained in the Judicial Council of California Civil Jury Instructions (2003-2004) (CACI). (See CACI No. VF-401.)” The Court of Appeal’s response was that “the use note to the CACI No. VF-401, which states, “The special verdict forms in this section are intended only as models. They may need to be modified depending on the facts of the case.” (Italics in original.) Id, at 1159. In other words, be cautious when using the Judicial Council Civil Jury Instructions!

Defendant Must Also Present ``Clear`` Evidence of What Was Actually Paid, and By Whom

In Olsen v Reid 2008 DJDAR 9727, No. G038478, (June 23, 2008) , the Fourth Appellate District held that a Nishihama reduction must be based upon “clear” evidence of “what amounts were actually paid and by whom.” The jury awarded $250,000 based upon $62,475 in medical bills admitted into evidence. In the post trial hearing, defendant claimed the verdict should be reduced by $57,394, based upon a 22 page bill from a medical provider which contained two cryptic line items for A46,270″ and A8,024,” “Total payments & adjustments” listed as A55,094,” and “handwritten notes from an unclear source.” The trial court agreed with defendant, stating A[t]he write – offs, to this courts way of thinking, are clear” and reduced the verdict by $57,394. The Court of Appeal reversed, stating “The cryptic notations the court relied upon may reflect payments, or write – downs or write – offs; we cannot know, and if any evidence revealed the actual facts, they are not present in the record.”

Comment- The Nishihama/Hanif Limitation on Special Damages Still Violates the Spirit, If Not The Letter, of the Collateral Source Rule

The collateral source rule states that “… if an injured party receives some compensation for his injuries from a source wholly independent of the tortfeasor, such payment should not be deducted from the damages which the plaintiff would otherwise collect from the tortfeasor.” Lee v State Farm Mut. Ins. Co. (1976) 57 Cal App 3d 458, 464.

The collateral source rule represents the concept that a person who pays for medical insurance should receive the benefits of his investment. The tortfeasor should not benefit because his victim had the providence to buy insurance. The collateral source rule encourages people to buy health insurance. By allowing the tortfeasor to mitigate damages with payments from plaintiff’s insurance, plaintiff is placed in a position inferior to that of not having purchased insurance, because his payment of premiums have yielded no benefit. Id, 464. Stated another way, an insured buys insurance for peace of mind through protection in the event of a calamity (Progressive West Insurance v. Superior Court 135 Cal App 4th 263, 277); an insured does not buy insurance with the intent of benefitting an unknown person who causes them injury in the future. The defendant should not be allowed to avoid paying full compensation for the damages and injuries he caused simply because the victim had the foresight to purchase insurance.

To this extent, the Nishihama/Hanif reductions violate both the spirit and letter of the collateral source rule. It allows the wrongdoer to reap the benefits of any discount or reduction that the victim’s insurer negotiated with the injured victim’s medical providers. Its one thing when the insured’s own insurance company argues against “double recovery” and requests reimbursement. Its another thing to allow a third party tortfeasor who is not in privity of contract with either the injured plaintiff or plaintiff’s insurer to benefit from plaintiff’s payment of health insurance of premiums. Nevertheless, that is exactly what Nishihama does.

Interestingly, Justice Moore, in her concurring opinion in Olsen v Reid, supra, 2008 DJDAR 9727, No. G038478, (June 23, 2008), echoed this editor’s opinion regarding the eradication of the collateral source rule by opinions such as Hanif and Nishihama and their progeny.

In any event, plaintiff’s counsel, in order to minimize the effect of Nishihama on the net verdict, should ensure that the full amount charged or billed gets before the jury (and thereafter let the court make the adjustment after the jury is discharged.) Defense counsel, on the other hand, should make sure that the special verdict form has a separate entry for medical expenses only (as opposed to one entry for all special damages), and be prepared for the post trial hearing with clear, unambiguous evidence of both the amounts paid and who paid it.



Plaintiff is injured in an automobile collision caused by third party and plaintiff incurs medical bills. Plaintiff’s auto policy includes medical payments coverage and a medical reimbursement clause. The medical reimbursement clause requires the insured to reimburse the insurer for medical bills paid on her behalf in the event the insured receives a settlement or judgment from the person responsible for the injuries. Plaintiff’s auto insurer pays $3000 of plaintiffs medical bills. Plaintiff later sues and then settles her personal injury claim with the third party that caused the collision for an amount in excess of $3,000. Plaintiff’s auto insurer did not participate in the underlying action against the responsible third party. Thereafter, plaintiff’s auto insurer demands that plaintiff reimburse them for the $3,000. What result ?

The reimbursement clause in the auto policy is valid and enforceable. However, any recovery by plaintiff’s auto insurer “must be reduced proportionately to reflect the attorney fees defendant paid to her attorney in the underlying action” Hartford Accident and Indemnity Co v Gropman (1984) 163 Cal App 3d. Supp. 33, 39. An insurer’s reimbursement from its insured is subject to the insurer bearing a pro rata portion of the insured’s attorney fees and costs incurred to obtain the recovery from the third party Progressive West Insurance Company v. Superior Court (2005) 135 Cal App 4th 263, 275-276; Lee v State Farm Mut. Auto. Ins. Co. 57 Cal App 3d 458, 467. If the plaintiff’s attorney charged a 33 1/3 % or 40 % contingency fee, plus costs, the recovery due to the plaintiff’s auto insurer for “subrogation/reimbursement” should be reduced accordingly.

This equitable result is derived from the common-fund doctrine, which in addition to the “Sapiano doctrine” discussed above, is a second limitation on an insurance company’s ability to recover funds from its insured when the insured subsequently obtains a judgment or settlement from the third party tortfeasor.

Under the common-fund rule, ‘[W]hen a number of persons are entitled in common to a specific fund, and an action brought by a plaintiff or plaintiffs for the benefit of all results in the creation or preservation of that fund, such plaintiff or plaintiffs may be awarded attorney’s fees out of the fund.'(citation omitted)

…Under this rule, an insurance company that does not participate in the underlying action must pay a pro rata share of the insured’s attorney fees and costs when it seeks reimbursement from its insured out of funds obtained by the insured from the responsible third party. (Id. at p. 469.) That is, the insurance company’s reimbursement must be reduced proportionately to reflect the attorney fees paid by the insured. (Hartford Accident & Indemnity Co. v. Gropman (1984) 163 Cal.App.3d Supp. 33, 39-40 [209 Cal.Rptr. 468].)

Progressive West Insurance Company v. Superior Court (2005) 135 Cal App 4th 263, 275-276.

Counsel should always “charge” or reduce the reimbursement/subrogation due to the non participating insurer by a pro rata basis of attorneys fees and costs.

Comment: Some ERISA (“Employee Retirement Income Security Act”)plans contain language that preclude a discount/reduction for pro rata attorneys fees and costs. In this instance, the ERISA “plan” (or “self funded employee medical benefit program”as distinguished from an “insurer”) will assert that ERISA preempts State Law and contend that the plan is not bound by California law and the opinions cited above, and will not “automatically” give a reduction/discount. In practice, the adjuster seeking reimbursement for the ERISA plan will look at it on a case by case basis and try to balance the equities to determine what the plan member will “net” given the amount of the settlement or verdict, and then consider a discount.