Posted by J. Brothers on 5/02/07

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Texas insureds and their attorneys have long relied on the
made whole doctrine, but today one would be ill advised to
place unqualified confidence in its protection. First,
the burden is, and always has been on the insured to prove
that they have not been made whole. While this is more
easily accomplished when expenses are clearly in excess of
insurance payments, a more difficult question arises in
the context of unliquidated damages. Secondly, The Texas
Supreme Court has recently heard oral arguments for a case
in which one of the issues is whether or not the equitable
doctrine is applicable to contractual subrogation,
notably, after the United States Supreme Court answered
the aforementioned question in the negative. In this
environment, a practitioner can still assert the
doctrine’s protection while negotiating with insurance
companies, but should be aware of the doctrines limits and
prepared to overcome insurer’s speculative objections.

The made whole doctrine is an equitable canon which states
that an insurer is not entitled to subrogation when the
insured’s loss exceeds the amount recovered by insurance
and the third party causing the loss. Ortiz v. Great S.
Fire and Casualty Ins. Co, 597 S.W.2d 342, 243 (Tex.
1980). “In other words the insurer’s right of subrogation
may not be exercised until the insured has been made
whole.” Esparza v. Scott & White Health Plan, 909 S.W.2d
548, 552 (Tex. App.—Austin 1995, no writ (citing Ortiz).
A recurring rationale for the doctrine is that the purpose
of insurance is to insure and if anyone should go unpaid
it should be the insurer. Id. at 551. However, while the
doctrine favors the insured, it nonetheless places the
burden on the insured to prove as a matter of law that
they have not been made whole. AIG Life Ins. Co. v.
Federated Mut. Ins. Co., 200 S.W.3d 285 (Tex. App.—Dallas
2006, pet. denied).

Where there is no contractual subrogation clause in an
insurance agreement the made who doctrines stands as a
strong defense. For example, in Ortiz, and insurer paid
$4,000 to the Ortiz family who suffered more than $15,000
in person and real property damage resulting from the
negligence of a carpet company. The family settled for
$10,000 with the carpet company and the insurance company
sought equitable subrogation. The court denied the
subrogation claim stating there was no evidence of a
double recovery and the trial court was within its
discretion not to enforce the insureds to remit payment to
the insurers. Id. at 343-344.

Although many cases involve liquidated damages and
contractual subrogation, Esparza is illustrative because
it involves unliquidated damages and contractual
subrogation. Esparza was a medical malpractice case in
which the plaintiffs negotiated a 1.6 million dollar
settlement after their insurance company had paid over
$250,000 in medical expenses. There was evidence
presented that this settlement was never intended to
include these medical expenses. However, as opposed to
Ortiz, the policy in this case involved a subrogation
clause in the insuring agreement and the insurers
attempted to distinguish Ortiz on this ground. Despite
this clause the court found that contractual subrogation
interests “confirm but do not expand the equitable right
to subrogation”. Id at 552. In clarifying their ruling
the court held that the basic principles which the made
whole doctrine embodied “cannot be summarily overcome by a
boiler plate provision in an insurance contract that
purports to entitle the insurer.” Id. at 551-552.
Nonetheless, the court was unimpressed by the insured’s
conduct during the settlement negotiations and found that
they had acted improperly by settling for less than the
policy limit thereby compromising the rights of the
subrogee insurers. Id. at 552. As a result, the insurer
was entitled to subrogation for half of the medical
expenses it had paid. Id. Despite the ultimate result,
Esparza strongly supports the invocation of the made whole
doctrine even when there are unliquidated damages and
contractual subrogation.

Nonetheless, there are some instances where an insured is
precluded from arguing that he had not been made whole.
First, one trap for the unwary is when the subrogation
provision relied upon by the insurer is found in a
contract executed after the payment of benefits giving
rise to the subrogation claim, i.e. a settlement
agreement, the parties waive the made whole doctrine.
Rosa’s Café Inc., v. Wilkerson, 183 S.W.3d 483, 488 (Tex.
App.—Eastland 2005, no pet.). Secondly, a jury verdict on
the issue of damages conclusively establishes the amount
necessary to make the insured whole. As a result, the
insured is collaterally estopped from arguing otherwise.
State Farm Mut. Auto Ins. Co. v. Perkins, 2006 (Tex. App.
Lexis 6030(Tex. App.—Eastland, 2006). While these
exceptions have limited the doctrine, a more radical
departure may be in the near future.

In Fortis Benefits v. Cantu, the intermediate appellate
court found a life care plan which estimated future
medical expenses was not hearsay and that the plan, couple
with an affidavit from the insured’s attorney as to past
medical expenses, were sufficient to establish that the
insured had not been made whole. 170 S.W.3d 755 (Tex. App.
Waco 2005, pet. granted). The court further held that the
subrogation and reimbursement clauses in the insuring
agreements were not assignments. Id. at 759. This was
significant because if they were, the made whole doctrine
would not apply. The insurance company petitioned, and
the Texas Supreme Court granted, review. Notably the
insured’s argued in their appellate brief that the
subrogation and reimbursement clause were not restricted
by the made whole doctrine. This argument was supported
by a recently decided United States Supreme Court
Decision, Sereboff v. mid Atlantic Medical Services, Inc,
in which the court found that equitable defenses were not
applicable to contractual subrogation claims. 547 U.S.__,
No 05-260 (U.S. May 15, 2006). Oral argument was heard in
the Fortis Benefits case in November of 2007, but a
decision has yet to be issued.

Today, the law in Texas remains that an insured has a
right to be made whole, despite a subrogation clause in an
insuring agreement which may assert otherwise. However,
there are several exceptions that have been engrafted on
the doctrine that should be recognized. More importantly,
practioners should be aware of Sereboff, and prepared for
Fortis Benefits.

Made Whole Doctrine in Texas, 5/02/07, by J. Brothers.

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