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    Post: Made Whole Doctrine in Texas

    Posted by J. Brothers on 5/02/07

    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.

    Posts on this thread, including this one
  • Made Whole Doctrine in Texas, 5/02/07, by J. Brothers.

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