Insurance companies’ subrogation departments are rarely faced with class action lawsuits regarding their practices, but such cases occasionally arise. The Pennsylvania Supreme Court recently upheld the dismissal of a class action focusing on whether an insurer was entitled to reimburse only 90% of the insured’s deductible where the insurer had recovered 90% of its loss payment. The court held that this pro rata reimbursement was appropriate under Pennsylvania law and therefore upheld the lower courts’ dismissal of the case. This was an auto case, but it raises some interesting issues in my mind about whether the same result might apply to property insurance.
In Jones v. Nationwide Property & Casualty Insurance Company, 2011 Pa. LEXIS 3088 (Pa. Dec. 21, 2011), the insured was involved in an auto accident and made a claim under her policy’s collision coverage for damage to her vehicle. Nationwide paid for the full amount of the damage less the $500 deductible, and then pursued a subrogation claim against the other driver involved, and recovered 90% of its payout from the other driver’s insurer. Nationwide then reimbursed the insured in the amount of $450 (90% of the $500 deductible). This “pro rata” reimbursement was in accordance with an insurance department regulation. The insured filed a class action suit, claiming that this practice violated Pennsylvania’s common law “made whole” doctrine, under which an insured generally must be made whole before an insurer can recover in subrogation. The trial court dismissed the case, citing the insured’s failure to exhaust administrative remedies in the insurance department, as well as the insurance department regulation approving this practice. The Pennsylvania Superior Court (that state’s intermediate appellate court) affirmed, but premised its decision solely on the insurance department regulation. The insurance commissioner filed an amicus curiae brief in support of Nationwide’s position in the state supreme court.
The Pennsylvania Supreme Court did not reach the issue of the insurance department regulation. Instead the court relied in part on a state statute governing deductibles for collision coverage, which required deductibles of no less than $100, required that insurers offer lower premiums for higher deductibles, also required lenders to accept deductibles of up to $500. The court explained that “application of the make whole doctrine would require the insured to recover the entire deductible from the proceeds of any action against the tortfeasor prior to the insurance company’s recovery, thus in essence creating a no-deductible policy, in the limited circumstances of cases involving subrogation recoveries, in violation of [the statute].” Id. at *27. The court further explained that:
Application of the made whole doctrine to deductibles would not only be contrary to the relevant [statutory] provisions but, when considering the inherent nature of deductibles, would run counter to the equitable principles underlying the made whole doctrine and subrogation. “The equitable principle underlying the made whole rule is that the burden of loss should rest on the party paid to assume the risk, and not on an inadequately compensated insured, who is least able to shoulder the loss.” 16 Couch on Insurance §223:136. While the made whole doctrine is consistent with equity in other types of first-party insurance cases where the insurer has been paid to assume the risk, it is not in the case of collision coverage insurance involving deductibles.
As discussed at the beginning of this opinion, a primary difference between collision coverage policies utilizing deductibles and other first-party insurance [referring to UM/UIM coverage] is that with collision coverage, the insured contracts to accept the risk of the first portion of any loss by way of the deductible and to pay the insurer premiums to assume the risk for the entire amount of the loss above the deductible up to the fair market value of the vehicle. See Black’s Law Dictionary 285 (6th Ed. 1991) (defining “deductible” as “[t]he portion of an insured loss to be borne by the insured before he is entitled to recover from the insurer”). In contrast, in cases involving other first-party insurance coverage, the insurer has accepted premiums in exchange for assuming the risk of the first dollar of coverage up to the policy limits, but any amount above the policy limits is an uninsured risk not attributable to the insurer.
As noted by the Commissioner, the deductible in a collision coverage policy is a “thin layer of first dollar liability retained by the consumer (and specifically not transferred to the insurer) to ensure risk-sharing and loss avoidance.” Commissioner’s Brief at 4 (emphasis omitted). The insurer, thus, accepted only the risk of paying if the loss exceeded the amount of the deductible, with premiums calculated based upon the amount of first dollar liability accepted by the insured. Application of the made whole doctrine in such a case would force the insurer essentially to cover the risk of the deductible where the insured has not paid premiums to cover that risk. It follows that the insured should not get preferential treatment in a collision coverage case, when he or she accepted the risk of paying the deductible in the event of an accident. We conclude that the made whole doctrine does not apply in cases involving collision coverage policies, and accordingly, that the practice of pro rata reimbursement of the insured’s deductible from the insurer’s subrogation recovery does not violate the made whole doctrine.
Id. at *27-29 (emphasis added).
One first-party coverage that the court does not expressly reference, but that likely involves the largest area of subrogation recoveries, is property coverage. Without studying all of the other case law in Pennsylvania on this issue, I think an argument could be made that this decision should apply to property subrogation, at least where there is no uninsured loss. Deductibles under property policies generally operate in the same manner as auto collision coverage, and in some cases, especially on commercial property policies, the amount of the deductible can be much larger (and thus a pro rata reduction much larger). While those deductibles may not be governed by statute, the presence of the Pennsylvania statute, while relevant, does not seem essential to the result. The only difference I see is that property policies have policy limits where auto collision coverage does not, but that may be a distinction without a difference. As a practical matter, auto collision coverage effectively has a limit because values of used vehicles are fairly well-established and the insurer knows with reasonable certainty (and the insured can find out without much difficulty) the approximate maximum amount they will have to pay for a total loss. The situation is potentially different only where the loss is large enough that there is an uninsured loss above the limit under a property policy. This issue is certainly not unique to Pennsylvania – the court notes in its opinion that other states have agreed with its position, but that there is a split of authority.