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Made-Whole Doctrine Does not Apply to Deductibles or Self-Insured Retentions (NJ)

July 30, 2020

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<div style="text-align: justify;">The Supreme Court of New Jersey recently determined that the made-whole doctrine does not apply to first-dollar risk allocated to the insured.  In <em><a href="https://www.wcmlaw.com/wp-content/uploads/2020/07/City-of-Asbury-Park-v.-Star-Insurance-Company.pdf">City of Asbury Park v. Star Insurance Company</a>,</em> the plaintiff filed a declaratory judgment action against a workers’ compensation insurer seeking determination that it was entitled to full reimbursement before the insurer could assert subrogation rights to settlement proceeds.</div>
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<div style="text-align: justify;"><span class="Apple-tab-span"> </span>The underlying incident involved a firefighter for the Asbury Park Fire Department who suffered injuries on the job. The injured party filed a Workers’ Compensation claim against the City of Asbury, which paid him its full self-insured retention limit of $400,000.00.  Star Insurance Company (“Star”) supplemented that payment in the amount of $2,607,227.40.  These two payments created a Workers’ Compensation lien entitling the City of Asbury and Star to reimbursement on any recovery against a third party.</div>
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<div style="text-align: justify;"><span class="Apple-tab-span"> </span>Eventually, the injured party pursued legal action against a third party surrounding the same incident.  The parties reached a settlement agreement for $2,700,000.00.  Thereafter, the City of Asbury and Star agreed that $935,968.25 of the settlement proceeds would be set aside for the workers’ compensation lien.  Subsequent to this agreement, Star demanded the entire $935,968.25 amount claiming that, pursuant to its policy, it was entitled to reimbursement in full before the City of Asbury could recover anything paid on the self-insured retention.  Conversely, the City of Asbury argued that it was entitled to reimbursement in full before Star could assert its subrogation right under the made-whole doctrine.  In response, Star argued that the made whole doctrine did not apply to self-insured retentions as such application would unjustly enrich the self-insured party.  Both parties moved for summary judgment on the issue.</div>
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<div style="text-align: justify;"><span class="Apple-tab-span"> </span>The District Court reasoned that an insured’s right to be made whole before the insurer can recover anything from a third-party tortfeasor can be altered by the insurance contract.  As such, the Court found that the policy’s subrogation provision altered the City of Asbury’s right to be made whole.  Additionally, the Court determined that the made-whole doctrine did not apply to first-dollar coverage such as deductibles or self-insured retentions because to hold otherwise would convert the policy to an insurance policy without a deductible.  This, the Court concluded, would result in the City of Asbury gaining “an unbargained-for windfall at the expense of [Star].”  The City of Asbury appealed the District Court’s decision and the Third Circuit eventually determined that the issue should be resolved under New Jersey Law.</div>
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<div style="text-align: justify;">In its opinion, the Supreme Court of New Jersey relied on both the equitable principles of subrogation, such as the made-whole doctrine, as well as the rights agreed upon in the contract.  The Court pointed out that it had never addressed the issue of whether the doctrine applies to first-dollar risk, such as deductibles and self-insured retentions, borne by insureds.  The Court referenced similar case law in Connecticut, Pennsylvania, and Washington to ultimately determine that the made-whole doctrine does not apply to first-dollar risk allocated to the insured.  Specifically, the Court noted that a self-insured retention or deductible is an amount of risk that the insured assumed in exchange for a lower premium cost.  As such, where the award from a subrogation action against a third party is insufficient to reimburse both the self-insured and the excess carrier, to place priority to the self-insured would convert the policy into one without a self-insured retention.  The Court determined that an interference like that would result in a windfall to the self-insured party and declined to find “that the equity dictates a departure from the terms of the insurance contract into which the parties voluntarily entered under such circumstances.”  Overall, the Court opined that if the policy unambiguously provided Star with all of the City of Asbury’s rights to recovery against third-party tortfeasors in the event Star makes a payment under the policy, the made-whole doctrine would not apply to override that agreement.</div>
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<div style="text-align: justify;">Thanks to Zhanna Dubinsky for this post.  Please contact <a href="mailto:vterrasi@wcmlaw.com">Vincent Terrasi</a> if you have any questions or comments.</div>

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