Daniels v. State Farm Mut. Auto. Ins. Co.

Citations: 444 P.3d 582; 193 Wash. 2d 563Docket: No. 96185-9

Court: Washington Supreme Court; May 7, 2019; Washington; State Supreme Court

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The case involves whether a first-party insurer must reimburse its fault-free insureds for the full amount of their deductibles before allocating any subrogation proceeds to itself. Lazuri Daniels filed a lawsuit seeking class action status against State Farm, claiming that the insurer's practice of only partially reimbursing deductibles after recovering from a third party violated Washington law and the insurance policy. After a three-vehicle accident in which State Farm paid for damages above Daniels's $500 deductible, the insurer recovered a portion of those costs from GEICO and reimbursed Daniels for 70% of her deductible. Daniels alleged that State Farm should fully compensate her for the deductible before keeping any subrogation proceeds, asserting claims of breach of contract, bad faith, and conversion.

State Farm moved to dismiss the claims, citing a previous case that ruled the made whole doctrine does not apply to this type of subrogation, as well as a regulation requiring insurers to return deductibles "less applicable comparable fault." The trial court dismissed the case, and the Court of Appeals affirmed the dismissal. Daniels petitioned for review, which was granted. The key legal issues are whether the made whole doctrine necessitates full reimbursement of insureds' deductibles before the insurer retains subrogation proceeds, whether WAC 284-30-393 mandates full deductible recovery in the absence of acknowledged comparative fault, and whether State Farm's policy language requires such reimbursement before allocating subrogation proceeds to itself. The Supreme Court reversed the lower courts' decisions and remanded for further proceedings.

Subrogation is defined as the right of one party to pursue a third party for payment after fulfilling a legal obligation that the third party should have met. This principle, rooted in common law as an equitable doctrine, aims to ensure appropriate distribution of payment responsibilities. In insurance, it allows insurers to recover payments made to insured parties by claiming against the responsible third party. Insurers typically include this right in their policies.

There are two primary methods for an insurer to recover from a third party: (1) the insured files a claim against the third party, and the insurer seeks reimbursement from the insured’s recovery, or (2) the insurer directly pursues the third party by stepping into the insured's position. This situation can lead to conflicts of interest, especially when insured parties have outstanding claims for damages while insurers seek reimbursement, creating competition for limited resources.

Daniels contends that insured parties' rights to full compensation—including deductibles—should take precedence over insurers’ rights to recover payments. She claims that State Farm's actions violate both its policy and Washington law. Three legal theories are presented to require State Farm to return full deductibles before claiming any subrogation proceeds: (a) the common law made whole doctrine, (b) Washington insurance regulations, and (c) specific policy language from State Farm. The trial court dismissed her claims under CR 12(b)(6), which was upheld by the Court of Appeals, with a dissenting opinion arguing that her theories should survive the dismissal.

The dismissal under CR 12(b)(6) is a legal question reviewed de novo, where it is deemed appropriate only if the complaint lacks any facts to support a claim or if no conceivable facts could support a legally sufficient claim. This high standard means such motions should be granted cautiously. The analysis will begin with the common law made whole doctrine claims presented by Daniels.

The Made Whole Doctrine establishes that in conflicts between subrogated insurers and injured insureds, the interests of the insureds take priority. This doctrine, articulated in *Thiringer v. American Motors Insurance Co.*, asserts that an insurer can only recover amounts from the insured after the insured has been fully compensated for their loss, ensuring that the insured does not experience double recovery. The insurer is entitled to reimbursement only when the insured has received excess compensation from both their first-party insurer and a third party responsible for the damages.

The discussion highlights a disagreement regarding the application of the made whole doctrine. Daniels argues for a broad application, suggesting that any subrogation scenario should prioritize the insured’s recovery, meaning the insurer must first cover any uncompensated losses before claiming proceeds for itself. In contrast, State Farm contends that the doctrine is limited to instances where an insurer seeks reimbursement from the insured's recovery and does not extend to direct subrogation actions.

Supporting State Farm's position, the trial court ruled that the made whole doctrine does not grant Daniels a claim for relief in this context, referencing the *Averill* case, where the Court of Appeals determined that the doctrine only applies when an insurer seeks reimbursement from the insured, not in direct subrogation scenarios. The court emphasized that allowing recovery of a deductible in such cases would alter the contractual agreement regarding risk retention. Ultimately, the court disagreed with this prior ruling, suggesting a need for further clarification of the doctrine's application.

The Averill analysis contradicts established principles regarding the made whole doctrine, which is not limited to reimbursement situations involving the insured. The doctrine, as articulated in Sherry v. Financial Indemnity Co., applies broadly to any instance where an insurer seeks "offset, subrogation, or reimbursement" for paid personal injury protection (PIP) benefits. The cases of Thiringer and Sherry demonstrate that the doctrine encompasses more than mere reimbursement claims. In Thiringer, the insured was entitled to allocate third-party recovery towards general damages before seeking compensation for special damages from his insurer. The insurer's attempt to deny payment based on the allocation of recovery was rejected, affirming the insured’s right to be made whole.

In Sherry, the insurer sought to offset underinsured motorist (UIM) payments by previously paid PIP benefits, which was disallowed until the insured was fully compensated, emphasizing that full compensation must account for all actual damages without reductions for comparative fault. Both cases confirm that the made whole doctrine applies regardless of whether the insurer is seeking reimbursement from a third party. The Averill court's claim that allowing recovery of a deductible from subrogation would alter the insurance contract is flawed, as it does not adequately address the made whole doctrine's relevance to subrogation claims.

An insured's premium is partly determined by the deductible amount, which represents the risk the insured retains. If Averill were to receive her deductible back without a premium adjustment, it would constitute a windfall since her premium already reflects that risk. Deductibles also serve to limit insurance coverage for smaller losses that are more economically borne by the insured due to high administrative costs for insurers. Reimbursing deductibles under the made whole doctrine does not alter the original policy terms regarding deductibles; claims below the deductible amount yield no policy benefits. 

The Averill analysis contradicts the made whole doctrine's principles, and the Court of Appeals' limitation of this doctrine to reimbursement claims is overruled. There is no distinction in applying the made whole doctrine based on who initiates a claim against a third party, and a fault-free insured must be fully compensated for their loss before an insurer can recover payments. Daniels's claim against State Farm, alleging a violation of this requirement, is valid and withstands dismissal.

Regarding insurance regulations, specifically WAC 284-30-393, the regulation mandates that insurers must include the insured’s deductible in subrogation demands and allocate recoveries to cover deductibles incurred by the insured. Both parties acknowledge that this regulation requires insurers to seek recovery of the insured's deductible as part of subrogation claims and mandates the return of a portion of the deductible to the insured.

The dispute centers on the interpretation of "less applicable comparable fault" in a regulation. Daniels asserts that this phrase refers specifically to fault attributed to the insured, suggesting the regulation applies only when the insured is found partially at fault. Conversely, State Farm argues that "applicable comparable fault" should not be limited to fault attributed to the insured, suggesting the insurer is only required to reimburse a portion of the deductible equivalent to the fault of the liable party. 

The Office of the Insurance Commissioner (OIC), in an amicus brief, supports Daniels’ interpretation, noting that Farmers Insurance requested an amendment to allow for the deduction of an insured's comparative fault from deductible reimbursements. The OIC indicates that the amendment aims to clarify claim resolutions when the policyholder is partially at fault.

The court agrees with the OIC's interpretation, acknowledging that Daniels has a valid claim under the regulation. It notes that Daniels alleges she bore no fault in the incident, yet State Farm withheld 30% of her deductible, which suggests a violation of WAC 284-30-393.

Daniels further argues that State Farm's policy language supports her claim regarding subrogation rights. The policy states that State Farm's right to recover payments occurs only after the insured is fully compensated. Daniels contends that the wording implies State Farm can only reclaim its payments after ensuring the insured has been fully reimbursed, including amounts covered by the deductible. This interpretation suggests a broader recovery right for State Farm, limited by the requirement to first compensate the insured for any losses.

The trial court determined that Daniels was fully compensated for her property loss when she accepted payment from State Farm, thereby transferring her claim to the insurer. The Court of Appeals majority supported this view, focusing on when State Farm could pursue recovery rather than how proceeds would be allocated. However, the reviewing court disagreed, emphasizing that insurance policy language is interpreted as a matter of law, aiming for practical and reasonable interpretations rather than strained constructions. It was concluded that only one reasonable interpretation exists, aligned with the common law made whole doctrine, which asserts that State Farm cannot allocate subrogation proceeds to itself until Daniels is fully compensated, including reimbursement for her deductible. This interpretation supports Daniels's valid claims against State Farm for violating policy terms. Consequently, the dismissal of her complaint under CR 12(b)(6) was deemed improper, leading to a reversal and remand for further proceedings. Additionally, the record did not clarify fault attribution, and the applicability of WAC 284-30-393 regarding the made whole doctrine was not addressed due to its irrelevance for fault-free insureds. Amicus briefs were submitted by various organizations, but some arguments were deemed unnecessary to consider.