Washington Supreme Court Strengthens the State’s Made Whole Doctrine – Drawing Lines as to Where an Insured has Truly Been “Made Whole.”

From the desk of Bill Taaffe: The Washington Supreme Court recently addressed the State’s longstanding “made whole” doctrine, which requires that before an insurer can exercise its right to recover payments from an insured’s recovery (aka subrogation), the insured must first have been made whole. Only when the insured has been “made whole” is the insurer allowed to seek subrogation for payments made under its plan. If an insured takes a settlement for less than the tortfeasor’s policy limits, what can the insurer do with regard to its subrogation right? In this case, the Court clarifies that exact question. 

Case Pointer: In this matter from the Washington Supreme Court, an insured settled a complex claim for, arguably, less than the amount required to “make [him] whole” under Washington’s longstanding made whole doctrine. Group Health Cooperative (GHO), the insurer, sought subrogation from the insured’s settlement in the amount it had paid on his claims. The Court undertook a discussion of the 40+ year-old “made whole” doctrine as it relates to an insurer’s right to seek subrogation after one of its insureds accepts a settlement offer which is below policy limits. What did the Court decide? Read on to find out.  

Grp. Health Coop. v. Coon, 193 Wn.2d 841 (Aug. 22, 2019). 

The primary issue on appeal to the Washington Supreme Court was whether an insured’s acceptance of a settlement under policy limits created a presumption that the insured was made whole as a matter of law. Secondarily, the Court addressed whether an insured’s breach of insurance contract automatically forfeits their rights under the policy. 

The underlying case involved Stephen Coon, an active young man who suffered a knee injury that required surgery. Instead of healing, Mr. Coon’s knee worsened and became more and more painful. It had become infected by an exceedingly rare fungus that was resistant to antifungal agents. After significant treatment at top medical laboratories, Coon’s leg required amputation. The clinic that performed the initial knee surgery initially worked cooperatively with Mr. Coon and paid $322,645 in various economic expenses.  The Coon family then commenced litigation against TEC.  During the course of litigation, GHO requested that it be kept apprised of settlement negotiations and that it be contacted prior to final settlement to confirm its subrogation amount. GHO alleged that although it was informed of the mediation to resolve the matter, it was not consulted during the mediation negotiations that led to settlement, which amounted to $2,000,000.  In total, the Coon family received $2,322,645 from TEC. GHO sought subrogation from the Coons in the amount of $372,634 – the amount it had paid in medical expenses. The Superior Court granted GHO’s motion for summary judgment, but the Court of Appeals reversed. GHO petitioned the Supreme Court and the following discussion ensued. 

Washington’s made whole doctrine requires that insureds be fully recompensed for their losses before the insurer can pursue any amount in a subrogation action, even though it paid money under its policy. The doctrine was developed in Thiringer v. Am. Motors Ins. Co., 91 Wn.2d 215, 588 P.2d 191 (1978), and has been applied ever since. GHO asserted that it was entitled to subrogation from the Coon family because, by accepting a settlement below the policy limits of TEC there existed a presumption that the made whole doctrine had been satisfied. That is, GHO’s insured cleared the bar that allowed GHO to pursue a subrogation action. 

The Washington Supreme Court disagreed wholeheartedly with GHO’s position (and also the position of the Superior Court, which granted summary judgment in GHO’s favor). First, GHO argued that the made whole doctrine did not apply to this case because there was “no third party liable for the insured’s losses.” In support of its argument, GHO pointed to Cook v. USAA Casualty Insurance Co., 121 Wn. App. 844, 90 P.3d 1154 (2004). In short, the Cook court held that “when the insured has no basis in tort or contract for a recovery … Thiringer does not apply.” Id. However, the Cook case differed in three significant ways: 

1. Cook involved a litigated determination of nonliability. By contrast, the Coons had pursued claims of liability against the surgical clinic and settled based on a calculated risk decision involving the difficulty of proving a res ipsa theory at trial; 

2. The Cooks received the full benefit of their policy because they received and retained, in full, their insurance proceeds. By contrast, applying Thiringer “would deprive the Coons of the full benefit of their Group Health policy”; and  

3. The Cooks attempted to use Thiringer to recover money that they had no legal right to recover. In contrast, the Coon family never made a recovery to which Thiringer could apply in the first place. 

The Supreme Court explained that a settlement for less than policy limits (and potentially even less than what recovery could be at trial) could not create a presumption of full compensation. See e.g. British Columbia Ministry of Health v. Homewood, 93 Wn. App. 702, 970 P.2d 381 (1999) (a $3 million settlement accepted in a case with an estimated $10 million in damages did not fully compensate the insured for their loss and therefore did not make them whole by presumption or otherwise). Instead, such a settlement is merely some evidence that full compensation may have occurred. Essentially, the Coon family made a calculated decision to accept a settlement based on the risks of going to trial – that determination, the Supreme Court decided, cannot result in a presumption of full compensation. 

Secondly, the Court addressed GHO’s argument that, because the Coon’s did not inform it of the ultimate settlement prior to its occurrence, the Coons had breached their contract and therefore had forfeited their rights under the insurance agreement. While the notice requirement may have been breached, in the context of insurance agreements, such breaches only give rise to a remedy when the insurer can establish it was prejudiced by the lack of notice. 

Could GHO prove it was so prejudiced? No. GHO had incorrectly maintained that no such showing was required, as it did not believe Thiringer applied to the case. The Court could find no evidence that GHO was prejudiced by the Coons’ lack of settlement notice. The evidence showed that notice would not have changed GHO’s position on the made whole doctrine and that GHO would not have done anything to obtain a larger settlement if it had been notified. 

Ultimately, the Court of Appeals was affirmed on both issues. Summary judgment to GHO was improper. The Coon’s settlement did not create a presumption of full compensation under the made whole doctrine. The Coons had a contractual and common law right to receive their full measure of damages, and they had presented enough evidence to overcome a motion for summary judgment claiming they had been “made whole.” Finally, GHO did not present the required showing of prejudice necessary to sustain a breach of contract claim. In light of this decision, it is critical to remember that a settlement is merely a calculated litigation decision. It is evidence, but not an admission or presumption to establish that “full compensation” has taken place or that the insured has been “made whole” as required by the Thiringer doctrine.