Insurance companies in Texas are one of the most litigious entities, filing lawsuits and making tort subrogation claims after paying policyholders for first-party property damage claims. Claims departments incentivize and promote the collection of subrogation amounts to make claims departments more profitable. It is amazing that the Texas "tort reform" advocates do not lobby to do away with this—but then again the "tort reform" advocates are the insurers themselves.
Policyholders are the customers of insurance companies. You would think that customer interests would come first and that their insurers would stand behind that premise and make contracts reflecting that notion. In some states, that is mandated, but Texas insurers are increasingly making contracts that have unique wording that the Texas Department of Insurance should find against public policy and courts should as well.
Policyholders under traditional common law doctrines following a loss are generally granted the right to be "made whole:"
The common law made whole doctrine is an equitable principle which generally limits the ability of an insurer to exercise its right of subrogation until the insured has been fully compensated or made whole. Under this conceptualization, in the event of a subrogation dispute between the insurer and its insured, the insured has priority of rights to collect from the responsible third party. Thus, where the insured’s recovery from both the insurer and tortfeasor is less than or equal to its loss, the insurer forfeits its right to subrogation.1
A law review article discussed the Texas twist to this common law principal:
The made whole doctrine is firmly entrenched in Texas’ law of insurance subrogation. However, the rules pertaining to the doctrine are distinguishable on the basis of legal and contractual subrogation. In the context of legal or equitable subrogation, ‘[a]n insurer is not entitled to subrogation if the insured’s loss is in excess of the amounts recovered from the insurer and the third party causing the loss.’ Reasonable expenses in making the recovery, including attorneys’ fees, are included in the calculation of the insured’s total loss. In determining whether the insured has been made whole only that portion of the recovery attributable to the insured loss is relevant. Thus, an insurer, after a deduction of its share of the cost of collection, is entitled to subrogation to the extent that the total of insurance collected plus the amount recovered from the tortfeasor for the insured’s losses exceeds the amount of the total insured loss.
[A Texas] court of appeals addressed the issue of whether a contractual agreement providing for the right of subrogation completely removes the issue of subrogation from the realm of equity. According to the court, ‘[w]hile an insurance contract providing expressly for subrogation may remove from the realm of equity the question of whether the insurer has a right to subrogation, it cannot answer the question of when the insurer is actually entitled to subrogation or how much it should receive.’
In essence, express subrogation provisions ‘confirm but [do] not expand, the equitable subrogation rights of insurers. To avoid injustice, the equities must still be balanced in deciding what amount, if any, the subrogee is entitled to receive in a given case.’
Pursuant to the balancing of the equities analysis, which is applicable to contractual subrogation disputes, the made whole rule is not absolute. Consequently, the court may consider not only whether the insured has been made whole, but also whether (1) the insured acted to circumvent or compromise the subrogee’s interest, and (2) the subrogee failed to protect its own interest by waiting until a settlement had been achieved in determining the equities of the case. The equation for determining whether the insured has been made whole however, is the same as that used in legal subrogation disputes.2
I will write more about this topic in the near future, but the bottom line is this:
Texas policyholders always are entitled to "good faith" treatment and honest evaluation by their insurers. When insurers start to interpret policy language and cases without fairly, and especially honestly, explaining all the equities available under Texas law because they want to get more money for themselves and their subrogation attorneys that are usually paid on a contingency fee, policyholders must do something. Statutory civil remedy complaint letters should be sent to the Texas Department of Insurance and policyholders should stand up for their rights—even if it means filing suit for bad faith regarding the handling of their under or uninsured amounts.
Quote of the Day:
The place where we don’t agree is on whether there should be some restraint on insurance companies and whether they should be allowed to run wild. We believe there should be some restraint; some on the other side don’t think so.
— David Axelrod
Positive Thought For The Day:
“Knowing what’s right doesn’t mean much unless you do what’s right.”
— Theodore Roosevelt
1 70 Mo. L. Rev. 723, 737 (2005).
2 Id. at 766-67.