Orden v. United Services Automobile Ass'n

February 19 2014
OP 13-0430

IN THE SUPREME COURT OF THE STATE OF MONTANA

2014 MT 45

ROBERT VAN ORDEN,

Plaintiff,

v.

UNITED SERVICES AUTOMOBILE ASSOCIATION;
USAA CASUALTY INSURANCE COMPANY;
USAA GENERAL INDEMNITY COMPANY; and
GARRISON PROPERTY AND CASUALTY
INSURANCE COMPANY,

Defendants.

APPEAL FROM: Certified Question, United States District Court,
District of Montana, Great Falls Division, Cause No. CV-11-69-GF-SEH
Honorable Sam E. Haddon, Presiding Judge

COUNSEL OF RECORD:

For Plaintiff:

Allen Page Lanning (argued), Lanning, Harris & Conklin, P.C.,
Great Falls, Montana

For Appellee:

David M. McLean (argued), M. Christy S. McCann, Browning, Kaleczyc,
Berry & Hoven, P.C., Missoula, Montana

Paul L. Stoller, Gallagher & Kennedy, P.A., Phoenix, Arizona

Argued and Submitted: December 11, 2013
Decided: February 19, 2014

Filed:

__________________________________________
Clerk
Justice Beth Baker delivered the Opinion of the Court.

¶1 The United States District Court for the District of Montana, Helena Division, the

Honorable Sam E. Haddon presiding, certified the following question to this Court:

¶2 Does Montana law prohibit an insurer from exercising its rights of subrogation to
seek payment from the separate property damage coverage of the liable third-party’s
automobile insurance for the discrete amounts paid by the insurer for property damage
where:

(a) the insured has suffered both bodily injury and property damage in an accident;
(b) the insurer’s property damage payments were made under separate, optional
collision coverage for physical damage to the insured’s vehicle;
(c) the amounts sought from the liable third-party’s automobile insurance are covered
by separate property damage liability coverage that is not exhausted by the
amounts sought by subrogation;
(d) the insured has been fully compensated by payment from his insurer for the
property damage loss—including all costs associated with the property damage
loss—and made whole as to the property damage loss that he insured as a result
of the accident; and
(e) the insured contends he has not been made whole from the separate personal
injury liability coverage of the liable third-party’s automobile insurance and the
underinsured motorist coverage of his own automobile insurance policy?

¶3 We accepted the certified question and now answer that Montana law does not

prohibit an insurer from exercising its right of subrogation under the specific listed

conditions.

PROCEDURAL AND FACTUAL BACKGROUND

¶4 We summarize the undisputed facts from the U.S. District Court’s certification

order. On October 26, 2009, Robert Van Orden (Van Orden) was involved in a motor

vehicle accident caused by another driver. Van Orden carried an automobile insurance

policy (the USAA Policy) through United Services Automobile Association General

Indemnity Company (USAA). The USAA Policy included separate, optional collision
2
coverage (Part D). Part D applied to losses suffered by Van Orden’s vehicle as a result of

a collision. It covered the actual cash value of the loss minus a $500 deductible. The

USAA Policy defined “loss” as:

direct and accidental damage to the operational safety, function, or
appearance of, or theft of, your covered auto or equipment and accessories
that are not permanently installed in your covered auto. Loss includes a
total loss, but does not include any damage other than the cost to repair or
replace. Loss does not include any loss-of-use, or diminution in value that
would remain after repair or replacement of the damaged or stolen property.

Other provisions of the USAA Policy included underinsured motorist (UIM) coverage

with bodily injury limits of $25,000 per person and $50,000 per accident.

¶5 The at-fault driver maintained automobile insurance coverage at the time of the

accident through Alpha Property & Casualty Insurance Company (the Alpha Policy)

which was underwritten by Unitrin Specialty Insurance (Unitrin). The Alpha Policy

included liability limits of $25,000 per person for bodily injuries and a separate limit of

$25,000 for property damage per accident.

¶6 As a result of the accident, Van Orden sustained both bodily injury and property

damage. His property damage included $12,261.75 in vehicle repair costs and $720 for

the use of a rental car. The parties agree that this $12,981.75 is the total amount of

property damage incurred by Van Orden as a result of the accident. USAA paid the

vehicle repair and car rental costs directly to the merchants who supplied those services

for Van Orden. Because the at-fault driver carried an active insurance policy, USAA

waived Van Orden’s $500 deductible; Van Orden incurred no out-of-pocket expenses for

his property damage.
3
¶7 For the bodily injuries suffered because of the accident, Van Orden recovered

$24,430.19 from Unitrin under the bodily injury liability limits of the Alpha Policy and

$50,000 from USAA under the UIM coverage of the USAA Policy. Van Orden claims

that his bodily injury damages and costs to recover those damages exceed both the

payments he has received and the limits of the bodily injury liability coverage of the

Alpha Policy and the UIM coverage of his Policy.

¶8 USAA sought subrogation for the property damage expenses from Unitrin on

November 24, 2009. On December 8, 2009, Unitrin paid USAA $12,981.75 out of the

property damage liability limits of the Alpha Policy.

¶9 On February 24, 2011, Van Orden filed an action in Montana’s Eighth Judicial

District Court, Cascade County, on behalf of himself and a putative class of plaintiffs.

He alleged that USAA violated Montana law by seeking subrogation for property damage

loss from a tortfeasor’s automobile liability insurer before its insured had been made

whole with respect to related personal injuries. USAA removed the action to the U.S.

District Court for the District of Montana and filed a motion for summary judgment;

following a hearing, the U.S. District Court certified its question to this Court.

STANDARD OF REVIEW

¶10 When answering a certified question from another qualifying court as permitted by

M. R. App. P. 15(3), our review is “purely an interpretation of the law as applied to the

agreed facts underlying the action.” BNSF Ry. Co. v. Feit, 2012 MT 147, ¶ 6, 365 Mont.

4
359, 281 P.3d 225 (quoting State Farm Fire & Cas. Co. v. Bush Hog, LLC, 2009 MT

349, ¶ 4, 353 Mont. 173, 219 P.3d 1249).

DISCUSSION

¶11 Subrogation is the “substitution of one party for another whose debt the party

pays, entitling the paying party to rights, remedies, or securities that would otherwise

belong to the debtor.” Black’s Law Dictionary 1563-64 (Bryan A. Garner ed., 9th ed.,

West 2009). Subrogation acts as an equitable device “designed to compel the ultimate

payment of a debt by the one who in justice, equity and good conscience should pay it.”

Skauge v. Mt. States Tel. & Tel. Co., 172 Mont. 521, 524, 565 P.2d 628, 630 (1977). “‘It

is an appropriate means of preventing unjust enrichment.’” DeTienne Assocs. Ltd. Partn.

v. Farmers Union Mut. Ins. Co., 266 Mont. 184, 188, 879 P.2d 704, 707 (1994) (quoting

Youngblood v. Am. States Ins. Co., 262 Mont. 391, 866 P.2d 203 (1993)). An insurer

who has indemnified its insured usually is subrogated to the insured’s rights of recovery

against a third party who is responsible for the loss. Skauge, 172 Mont. at 524, 565 P.2d

at 630. The policy underlying this equitable right of subrogation is that “absent

repayment of the insurer the insured would be unjustly enriched by virtue of recovery

from both the insurer and the wrongdoer, or in the absence of such double recovery by

the insured, the third party would go free despite his legal obligation in connection with

loss.” Skauge, 172 Mont. at 524-25, 565 P.2d at 630.

¶12 An insurer’s right to subrogation is limited, however, by the recognition that an

insured is entitled to be fully compensated for his or her damages. Known as the “made

5
whole doctrine,” this principle was explained in Skauge, where we held that “when the

insured has sustained a loss in excess of the reimbursement by the insurer, the insured is

entitled to be made whole for his entire loss and any costs of recovery, including

attorney’s fees, before the insurer can assert its right of legal subrogation against the

insured or the tort-feasor.” Skauge, 172 Mont. at 528, 565 P.2d at 632. The plaintiffs in

Skauge suffered fire damage in excess of the $4,000 policy limit paid out under their fire

insurance policy through Unigard Insurance Group. Skauge, 172 Mont. at 523, 565 P.2d

at 629. Seeking the remainder of their damages, Plaintiffs commenced a negligence

action against the parties they believed to be responsible for the fire. Skauge, 172 Mont.

at 523, 565 P.2d at 529. Because the Skauges had not yet been fully compensated for

their losses, this Court reversed the district court’s determination that Unigard was

entitled to subrogation for the $4,000 paid under the insurance policy. Skauge, 172 Mont.

at 528-29, 565 P.2d at 632.

¶13 The made whole doctrine is consistent with the equitable principles underlying

subrogation because plaintiffs who are not yet compensated for their loss are not unjustly

enriched by recovering from both parties, and third-party tortfeasors are not relieved of

their legal obligation for the loss. “When the sum recovered by the Insured from the

Tortfeasor is less than the total loss and thus either the Insured or the Insurer must to

some extent go unpaid, the loss should be borne by the insurer[,] for that is a risk the

insured has paid it to assume.” Skauge, 172 Mont. at 528, 565 P.2d at 632 (quoting St.

6
Paul Fire & Marine Ins. Co. v. W.P. Rose Supply Co., 198 S.E. 2d 482, 484 (N.C. App.

1973)) (emphasis in original).

¶14 This Court has affirmed application of the made whole doctrine in numerous

subsequent decisions. We held that the equitable subrogation principles articulated in

Skauge control an insurer’s subrogation rights over standard insurance policy language

mandating repayment of all money paid out under the policy. DeTienne, 266 Mont. at

184, 879 P.2d at 704. We later answered “yes” to a certified question asking, “[i]s it the

public policy in Montana that an insured must be totally reimbursed for all losses as well

as costs, including attorney fees, involved in recovering those losses before the insurer

can exercise any right of subrogation, regardless of contract language to the contrary?”

Swanson v. Hartford Ins. Co., 2002 MT 81, ¶ 14, 309 Mont. 269, 46 P.3d 584.

¶15 The dissent to Swanson urged the Court to adopt a more narrow interpretation of

when an insured is made whole—limiting the definition to all compensation, including

costs and attorney’s fees, for only that element of damage for which the insured

purchased insurance. Swanson, ¶ 36 (Leaphart, J., concurring in part and dissenting in

part). The majority dismissed this interpretation, stating, “[s]eldom to never do we find

such perfect symmetry in an award or settlement. Typically, as here, the ultimate

settlement (or judgment amount) is for a gross amount, without allocation for each

particular element of loss.” Swanson, ¶ 26.

¶16 Van Orden argues that this passage demonstrates that the Swanson court expressly

declined to adopt the more narrow interpretation that USAA now asks us to embrace.

7
Such a reading of Swanson ignores the fact that those circumstances were not before the

Court at that time. The Court there acknowledged, “If a plaintiff recovered a discrete

amount from her insurer for a particular element of loss, and then recovered the identical

amount from a third party, plus her costs and attorney fees associated with that recovery,

and the amounts of each were specifically and separately determined either by agreement

or in a judgment, then, in theory, subrogation should proceed.” Swanson, ¶ 25. The

Court declined to adopt this as a blanket rule, however, for fear that “we would be left to

speculate as to whether the insured did recover the identical amount of the loss for which

the insurer seeks subrogation.” Swanson, ¶ 26.

¶17 Under the conditions set forth in the certified question, there is no need for

speculation as to whether Van Orden is fully covered for the loss USAA seeks to recover.

It is undisputed that Van Orden sustained $12,981.75 in total property damage, USAA

paid that full amount under a separate and optional property damage portion of his policy,

and USAA received that amount from a separate property damage liability limit of the

at-fault driver’s insurance policy. Now faced with the precise situation acknowledged in

Swanson, we agree with our statement there that subrogation may proceed in these

circumstances. The insured has been made whole for the element of damage for which

he purchased insurance.

¶18 To hold otherwise would not give effect to § 33-23-203(2), MCA. The legislature

revised this statute in 1997 to allow an insurer to include reasonable subrogation clauses

in its contracts “to prevent duplicate payments for the same element of loss under the

8
motor vehicle liability policy . . . .” “When interpreting a statute, we first look to the

plain meaning of its words.” Hendershott v. Westphal, 2011 MT 73, ¶ 20, 360 Mont. 66,

253 P.3d 806. When the language of a statute is clear, it “speaks for itself and we will

not resort to other means of interpretation.” Wolf v. Wolf, 2011 MT 192, ¶ 11, 361 Mont.

324, 258 P.3d 995. Van Orden argues that duplicate payments do not arise under

§ 33-23-203(2), MCA, until an insured has been made whole for all damages—even

those not covered under the policy at issue. He contends that the Court in Swanson

specifically rejected the idea that the viability of the made whole doctrine was affected by

the legislative adoption of § 33-23-203(2), MCA. USAA counters that Van Orden’s

interpretation ignores the plain language of the statute.

¶19 The statute expressly states that an insurer may prevent duplicate payments for the

same element of loss. In Swanson, the insurer argued that § 33-22-203(2), MCA, as

amended, limits the application of the made whole doctrine. Swanson, ¶ 22. We

disagreed that the statute substantively altered the made whole doctrine, noting that “the

common law and the statute jointly establish two rules of subrogation.” First, “an insured

should not receive duplicate payments for the same element of loss,” and second, “the

insurer may not assert subrogation rights until the insured has been fully compensated for

his damages, including attorney fees and costs.” Swanson, ¶ 23.

¶20 The record was unclear in Swanson as to whether the plaintiffs were fully

compensated for any particular element of loss. Swanson, ¶ 41 (Leaphart, J., concurring

in part and dissenting in part). Our recent cases, however, make clear that an insured’s

9
receipt of duplicate payments for the same element of loss may constitute a windfall to

the insured if the coverage is limited to a discrete item, such as payment of medical

expenses. See Conway v. Benefis Health Sys., 2013 MT 73, ¶ 35, 369 Mont. 309, 297

P.3d 1200 (citing Newbury v. State Farm Fire & Cas. Ins. Co., 2008 MT 156, ¶ 38, 343

Mont. 279, 184 P.3d 1021). In Conway, we held that “medical payments coverage is for

the payment of medical expenses only; it does not provide for the payment of additional

or excess sums to the insured.” Conway, ¶ 35. We rejected the insured’s argument that

he was entitled to pocket the difference between the medical payment coverage and his

health insurance’s contractual reimbursement rate. Conway, ¶ 35. In Newbury, the

Plaintiff argued that a provision in his automobile insurance policy—disallowing

coverage when medical expenses are payable by workers’ compensation benefits—

violated Montana public policy. Newbury, ¶ 43. While we agreed with Newbury that he

paid valuable consideration to have his medical expenses paid, we held that because his

medical expenses were paid through workers’ compensation benefits, receiving in

“excess of the total amount of his medical expenses would result in a windfall to

Newbury.” Newbury, ¶ 47.

¶21 Van Orden argues that because he has not yet recovered all of his personal injury

damages, the amount USAA recovered under the tortfeasor’s property liability limit must

go toward making him whole for those damages. Other than pointing to the broad rule

articulated in Swanson, however, Van Orden fails to present authority for the proposition

that a sum received from a separate property liability portion of a tortfeasor’s insurance

10
policy may be received as compensation for his personal injury damages. Similar to

Newbury and Conway, he paid consideration to cover a potential loss and he received the

benefit of that premium when USAA paid for all the costs associated with his property

damage. He has not demonstrated how he could recover additional amounts directly

from the property damage portion of the tortfeasor’s policy. See Conway, ¶ 37. Even

assuming that Van Orden’s damages exceeded the combined payouts from USAA and

Unitrin, under no circumstances would the remaining money available under the property

damage coverage of the Alpha Policy spill over into the bodily injury pool of money, or

be subject to attachment for the payment of attorney’s fees or costs. Because this

additional property damage money would not be available to Van Orden whatever the

situation, USAA is clearly not asserting an interest in sums that Van Orden otherwise

would be able to recover from the tortfeasor’s policy. USAA is not taking any money out

of Van Orden’s pocket.

¶22 The Dissent’s criticism of this conclusion is premised on its theory that “all

available insurance coverage proceeds, from whatever source, go into one pot.” Dissent,

¶ 42. Seemingly, this would mean that the Alpha Policy’s property damage coverage,

from which USAA is seeking recovery, should be available along with any other

insurance proceeds to make Van Orden whole. Yet, the Dissent asserts that it is not

advocating for this outcome. Dissent, ¶ 42. We therefore cannot understand what would

be the effect of the Dissent’s “one pot” proposal, nor has the Dissent explained how—by

denying USAA its limited subrogation right—the pot of money available to make Van

11
Orden whole would somehow expand. It bears repeating that we have refused to permit

subrogation in those cases where the sums the insurer is attempting to collect would

deplete the sum of money otherwise available to the injured party from the liable third

party.1 The Dissent cites Allstate Ins. Co. v. Reitler, 192 Mont. 351, 628 P.2d 667 (1981)

and Youngblood for the proposition that we have refused to enforce contract provisions

allowing subrogation before an insured is made whole. Dissent, ¶ 32. These cases

pre-date the operative language in § 33-23-203(2), MCA, and involved an insurer

attempting subrogation against any liability coverage the insured might have had against

the third party. Allstate, 192 Mont. at 353, 628 P.2d at 668; Youngblood, 262 Mont. at

399, 866 P.2d at 207. As indicated, that is not the case here.

¶23 Newbury and Conway support our determination that access to additional

payments for property damage under the Alpha Policy would result in a double recovery

for the same element of loss. See also Forsman v. United Fin. Cas. Co., 2013 U.S. Dist.

LEXIS 118893 (D. Mont. Aug. 21, 2013) (No. CV 12-157-M-DWM) (Plaintiffs who had

recovered their collision damages from third-party tortfeasor’s coverage failed to make a

1
Compare Swanson, ¶ 5 (Hartford sought to invoke a subrogation clause granting it the right to
recover any payments to the insured under the insured’s personal injury protection coverage if
the insured recovers damages from a third party); DeTienne, 266 Mont. at 186-92, 879 P.2d at
706-09 (insurer sought subrogation rights for sums paid under a “special multi-peril insurance
policy” based on language in policy that insurer “shall be subrogated to all the insured’s rights of
recovery against any third person”); Skauge, 172 Mont. at 523, 565 P.2d at 629 (policy language
provided for assignment of “all right of recovery against any party for loss to the extent that
payment therefore [sic] is made by this Company”); with Newbury, ¶¶ 38-39, 47 (insured not
entitled to seek payment under medical payments portion of his policy when his employer’s
workers’ compensation carrier already had paid his medical expenses); and Conway, ¶ 35
(relying on Newbury, holding that insured could not recover under medical payments coverage
when his medical expenses already had been paid).
12
plausible claim that they were denied any “recoverable” damages under their own

collision coverage in policy that denied duplicate recovery for same element of loss).

That Van Orden is not yet made whole as to his personal injury damages does not control

our analysis because Part D of the USAA Policy provided coverage for property loss

only. “What [Van Orden] paid valuable consideration for in this case was to have his

[property damage] expenses paid and it is undisputed that his [property damage] expenses

were paid.” Newbury, ¶ 47.

¶24 The Dissent acknowledges that “the subrogated insurer stands in no better position

than the insured . . . .” Dissent, ¶ 40 (quoting DeTienne, 266 Mont. at 189, 879 P.2d at

707). The point the Dissent concedes is that, standing in his own position, Van Orden

could not recover directly from the third-party tortfeasor’s property damage policy

coverage any more than he already recovered from USAA. USAA recovered only the

amount of property damage suffered by Van Orden, which it had wholly covered for him

under Part D of the policy.

¶25 When a settlement or judgment does not allocate payment for separate elements of

loss under discrete portions of a policy for which a premium separately has been paid,

subrogation may not proceed until the insured is made whole for all of his or her

damages. But when, as here, damages are discrete, readily-ascertainable, and completely

covered under a separate policy or portion of the policy for which a separate premium has

been paid, subrogation may proceed as to that element of loss only. According proper

deference both to the plain language of the applicable statute and to this Court’s prior

13
rulings, this holding balances an insurer’s statutory right to prevent double recovery and

an insured’s right to be made whole for all of his or her damages.

¶26 Based on the foregoing, we answer the certified question “no”: Montana law does

not prevent an insurer from exercising its right to subrogation under the limited, specific

circumstances presented in the certified question.

/S/ BETH BAKER

We concur:

/S/ MIKE McGRATH
/S/ PATRICIA COTTER
/S/ JIM RICE
/S/ LAURIE McKINNON
/S/ MIKE SALVAGNI
District Court Judge
sitting in for former Justice Brian M. Morris

Justice Michael E Wheat dissents.

¶27 I would answer yes to the certified question. For over thirty-five years, this Court

has uniformly upheld the strong public policy protecting injured persons when insurance

companies seek subrogation. What the majority does, here, is create an exception that

erodes the strength of this precedent.

¶28 Montana case law prohibits subrogation in this case because Van Orden asserts he

has not been made whole. See Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d

vol. 16, § 223:149, 223-168 (West 2005) (“When the make whole rule is applied to a

14
circumstance in which the insurer and insured are not in agreement as to whether the

insured has, in fact, been made whole so as to allow the insurer to make some recovery of

its payment, there must be a legal determination of that fact.”); see also Skauge v. Mt.

States Tel. & Tel. Co., 172 Mont. 521, 528, 565 P.2d 628, 632 (1977) (“[T]he insured is

entitled to be made whole for his entire loss and any costs of recovery, including

attorney’s fees, before the insurer can assert its right of legal subrogation against the

insured or the tort-feasor.”) (emphasis added); Youngblood v. Am. States Ins. Co., 262

Mont. 391, 396, 866 P.2d 203, 206 (1993) (“With some exceptions, subrogation against

an insured is allowed if that insured has been made whole and has been fully

compensated, which compensation includes costs and attorney’s fees.”) (emphasis

added); DeTienne Assocs. Ltd. Partn. v. Farmers Union Mut. Ins. Co., 266 Mont. 184,

191, 879 P.2d 704, 708-09 (1994) (“[A]n insured must be totally reimbursed for all losses

as well as the costs involved in recovering those losses. The insured has paid premiums to

be insured.”) (emphasis added); Swanson v. Hartford Ins. Co., 2002 MT 81, ¶ 28, 309

Mont. 269, 46 P.3d 584 (“[I]t is the public policy in Montana that an insured must be

totally reimbursed for all losses as well as costs, including attorney fees, involved in

recovering those losses before the insurer can exercise any right of subrogation,

regardless of any contract language providing to the contrary.”) (emphasis added).

Following in the footsteps of the U.S. District Court for the District of Montana in

Forsman v. United Fin. Cas. Co., CV 12-157, ___ F. Supp. 2d ___ (Mont. Aug. 21,

2013), the majority now dissects the insurance coverages in such a way that our long-

15
standing made whole doctrine is undermined. The majority’s reasoning paints the injured

party as recovering a windfall, even though the injured party paid for the coverage the

insurance company seeks to subrogate, before a total made whole determination has

occurred. “Any change in the law that results in the insurer avoiding transfer of part or

all of the risk for which it accepted premiums is destructive to the very foundation and

purpose of insurance.” Greg Munro, Medical Pay Coverage, Bodily Injury Coverage,

and the Group Health Plans: Who is Going to Pay Tort Medical Expenses and When?,

Trial Trends 16, 17 (Winter 2014). The majority’s departure from all of our precedent

regarding subrogation undermines the made-whole doctrine to the detriment of insured

Montanans.

¶29 We have long recognized in the field of liability insurance that it is good public

policy to protect and defend the injured person’s right to be made whole before an

insurance company is allowed to subrogate, especially when the injured person has paid

for the coverage at issue. Skauge, 172 Mont. at 528, 565 P.2d at 632; DeTienne, 266

Mont. at 190, 879 P.2d at 708; Swanson, ¶ 28. It is also a longstanding principle that if

someone must suffer a loss, it should be the insurance company, not the injured person.

Skauge, 172 Mont. at 528, 565 P.2d at 632; DeTienne, 266 Mont. at 190, 879 P.2d at 708;

Swanson, ¶ 27. “The only practical way we can satisfy this principle is to allow full

compensation to the plaintiff first, before subrogation is allowed.” Swanson, ¶ 27.

Unfortunately, in this case the majority has opened the door for insurance companies to

16
start chipping away at the made whole doctrine under the guise of allowing subrogation

between “discrete” coverages, even if the injured person has not been made whole.

¶30 The majority’s approach effectuates a change in the law by allowing insurance

companies to divide what it means to be “made whole” into discrete elements of loss.

There are essentially two approaches to what it means to be made whole. Jeffrey A.

Greenblatt, Insurance and Subrogation: When the Pie Isn’t Big Enough, Who Eats Last?,

64 U. Chi. L. Rev. 1337, 1343-44 (Fall 1997). The first approach, which this Court has

traditionally followed, is to allow subrogation only when the insured has been

compensated “for all the elements of damage, not merely those damages for which the

insurer has indemnified him.” Greenblatt, 64 U. Chi. L. Rev. at 1344 (emphasis added);

see Russ & Segalla, Couch on Insurance 3d at § 223:133, 223-146 to 223-149. The

second will allow separate elements of a damage award to be identified and credited to

the subrogated claims, even if the insured has not been made whole with regard to his

other claims. Greenblatt, 64 U. Chi. L. Rev. at 1344. The second approach generally

relies on principles of contract law to allow insurers to contract around the traditional

made whole doctrine. See e.g. Gibson v. Country Mut. Ins. Co., 549 N.E.2d 23 (1990);

Forsman; see also Russ & Segalla, Couch on Insurance 3d at § 223-147, 223-163 to

223-165. Courts adhering to the first approach have generally held that the equitable

principles underlying subrogation override contract terms of this nature. Russ & Segalla,

Couch on Insurance 3d at § 223:148, 223-166 to 223-167. Adopting the second view,

now, is a shift in the law.

17
¶31 This Court’s precedent has generally emphasized the equitable principles

underlying subrogation in the context of the made whole doctrine. We have explained

that subrogation, at its origin, is a device of equity which is designed to compel the

ultimate payment of a debt by the one who in justice, equity and good conscience should

pay it. Skauge, 172 Mont. at 524, 565 P.2d at 630. Accordingly, we held that:

[W]hen the insured has sustained a loss in excess of the reimbursement by
the insurer, the insured is entitled to be made whole for his entire loss and
any costs of recovery, including attorney’s fees, before the insurer can
assert its right of legal subrogation against the insured or the tort-feasor.

Skauge, 172 Mont. at 528, 565 P.2d at 632. We elaborated in Youngblood that

“[s]ubrogation is an equitable doctrine which is not dependent on any contractual

relationship between the parties and is not dependent on privity.” Youngblood, 262

Mont. at 395, 866 P.2d at 205. In DeTienne we clarified the purpose of the Skauge ruling

“is the adoption of the equitable principle that an insured must be totally reimbursed for

all losses as well as the costs involved in recovering those losses.” DeTienne, 266 Mont.

at 191, 879 P.2d at 708. We explained that the purpose of subrogation “is not to ensure

that the risk-taker, the insurer, be compensated for all money it paid to policy holders[.]”

DeTienne, 266 Mont. at 189, 879 P.2d at 707 (emphasis added).

¶32 Relying on these equitable principles, we have declined to enforce contract

provisions that would allow subrogation before an insured has been made whole. In

Swanson, we held:

[I]t is the public policy in Montana that an insured must be totally
reimbursed for all losses as well as costs, including attorney fees, involved

18
 in recovering those losses before the insurer can exercise any right of
subrogation, regardless of any contract language providing to the contrary.

Swanson, ¶ 28 (emphasis added). We have allowed subrogation only after the insured

has been fully made whole and declined to enforce contract provisions that would beg a

different result. For instance, in Youngblood we overturned the contract-based reasoning

we had used in Allstate Ins. Co. v. Reitler, 192 Mont. 351, 628 P.2d 667 (1981),

explaining that we had reached the correct result “not because there was a prohibited

assignment of a personal injury claim, but because of the public policy reasons expressed

therein . . . and because Allstate’s right to reimbursement via subrogation was dependent

upon the ability of the indemnified party to sue the tortfeasor.” Youngblood, 262 Mont.

at 397, 866 P.2d at 206. In DeTienne we cited Youngblood in refusing to strictly

interpret a subrogation clause, instead emphasizing the equitable “purpose of

subrogation.” DeTienne, 266 Mont. at 189, 879 P.2d at 707. Transitioning to an

approach that allows parties to contract around the made whole doctrine by splitting what

it means to be “made whole” into discrete elements of loss, we open Pandora’s box of

potential contract-based arguments for eroding the equitable foundations of subrogation.

¶33 USAA does not cite a single case in which we have held that a made whole

determination may be segmented into discrete elements of loss. Instead, USAA relies on

Justice Leaphart’s concurrence and dissent in Swanson and on a case from Louisiana. To

support its contention that we should now allow such segmentation, USAA quotes

language from Swanson, where we explained that “an insured should not receive

duplicate payments for the same element of loss . . . .” Swanson, ¶ 23. Conveniently,
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USAA omits the rest of the sentence following the quoted language: “[A]nd the insurer

may not assert subrogation rights until the insured has been fully compensated for his

damages, including attorney fees and costs.” These two principles, we explained in

Swanson, are two rules of subrogation jointly established by the common law and statute.

Swanson, ¶ 23. In the sentence directly prior to paragraph 23 in Swanson, we explained

that “duplicate payments do not occur until the insured has been made whole for all

losses, as well as costs of recovery.”

¶34 The majority appears to accept USAA’s argument and now incorrectly reads

Swanson to permit segmenting a made whole determination, when that result is at odds

with Swanson’s holding. In Swanson, we affirmed application of the made-whole

doctrine based on the argument that it is difficult to tell whether an insured has been fully

reimbursed for a particular element of loss. See Swanson, ¶ 26. This, it should be noted,

is one of two common rhetorical devices courts used to reject insurers’ requests for

subrogation in the bodily injury context when precedent uniformly held that such

subrogation was barred as a matter of public policy. See Brendan S. Maher & Radha A.

Pathak, Understanding and Problematizing Contractual Tort Subrogation, 40 Loy. U.

Chi. L.J. 49, 71 (2008). It stands to reason that the purpose of our language in Swanson

was to cement the made whole doctrine, not to signal a situation in which the made whole

doctrine might not apply. The majority, however, distinguishes the instant case on the

basis that Van Orden has been reimbursed for the cost of his property damage. In

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distinguishing Swanson on that basis, the majority will now allow USAA to subrogate

before Van Orden has been made whole, ignoring Swanson’s unequivocal holding:

[I]t is the public policy in Montana that an insured must be totally
reimbursed for all losses as well as costs, including attorney fees, involved
in recovering those losses before the insurer can exercise any right of
subrogation, regardless of any contract language providing to the contrary.

Swanson, ¶ 28 (emphasis added).

¶35 The majority’s argument that its resolution of this issue in this manner is necessary

to give effect to § 33-23-203(2), MCA, allowing subrogation to prevent “duplicate

payments for the same element of loss,” also ignores Swanson. In Swanson this Court

addressed duplicate payments, explaining that since we presume that the legislature is

aware of the existing law, including our decisions interpreting individual statutes, the

statute should be read to provide that “duplicate payments do not occur until the insured

has been made whole for all losses, as well as costs of recovery.” Swanson, ¶ 22

(emphasis added). The majority, instead, distinguishes our reading of the statute in

Swanson on the basis that “[t]he record was unclear in Swanson as to whether the

plaintiffs were fully compensated for any particular element of loss.” Opinion, ¶ 20

(citing Swanson, ¶ 41 (Leaphart, J., dissenting)). This reasoning adopts an approach that

this Court specifically rejected in Swanson—engaging in a presumption that the insured

was fully compensated, without full fact-finding. Swanson, ¶ 26. Swanson provided that

it could not be determined whether the plaintiff had been fully compensated for any

particular element of loss until the plaintiff had been made whole for all losses, as well as

costs of recovery. That has not happened, here.
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¶36 The facts of the instant case are also distinguishable from those in Conway and

Newbury, on which the majority’s opinion relies. Both of those cases involved only

competing insurance policies carried by the insured injured party. The full extent of the

injuries at issue was known at the time the cases were determined. Neither case involved

a tortfeasor, or a tortfeasor’s insurance company. Thus, the public policy concerns

involved in subrogation where tort claims are at issue—compelling the ultimate payment

of a debt by the one who in justice, equity and good conscience should pay it—did not

arise. In contrast, the full extent of the injuries at issue here is not known at this time

because full fact-finding has not yet occurred. This case involves the injured party’s

insurer and the tortfeasor’s insurer, as well as the tortfeasor himself. Pursuant to our

decision in Swanson, it is inappropriate to allow subrogation until Van Orden has been

made whole for all of his losses, including the cost of recovery.

¶37 The majority’s approach to this issue is barred by the doctrine of stare decisis.

The majority makes much of the fact that Van Orden “has not demonstrated how he

could recover additional amounts directly from the property damage portion of the

tortfeasor’s policy.” Opinion, ¶ 21. If the result will be the same regardless of whether

we require that Van Orden be made whole for the full extent of his losses before

subrogation can occur, stare decisis suggests we should adhere to the approach set forth

in our precedent. See Certain v. Tonn, 2009 MT 330, ¶ 19, 353 Mont. 21, 220 P.3d 384

(“Faced with viable alternatives, stare decisis provides the preferred course.”) (citations

and quotation omitted). Indeed, stare decisis suggests we should follow our decisions

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unless they are “manifestly wrong.” Allstate v. Wagner-Ellsworth, 2008 MT 240, ¶ 39,

344 Mont. 445, 188 P.3d 1042. Allowing subrogation when Van Orden asserts he has

not been made whole disturbs the stability and predictability of the law. See Allstate,

¶ 39. Instead of arriving at the result our precedent requires, the majority’s approach

disregards decades of well-established law in Montana to undermine the made whole

doctrine.

¶38 Even if our well-settled precedent did not preclude the majority’s approach, the

balance of equities favors Van Orden because he asserts he has not been made whole for

the full extent of his losses. As a matter of policy, subrogation in the tort context has,

essentially, three main purposes: (1) to prevent unjust enrichment of the tortfeasor; (2) to

deter future actors from engaging in similar torts; (3) to prevent unjust enrichment of the

injured party with respect to the insurer. Maher & Pathak, 40 Loy. U. Chi. L.J. at 55.

The first two are served simply by allowing an injured party to recover from the

tortfeasor or the tortfeasor’s insurer. At issue here is the third. Common arguments for

allowing an insurance company to subrogate amounts recovered from a tortfeasor are that

the injured party is “double recovering” or is recovering a “windfall.” See Munro, Trial

Trends at 16; Maher & Pathak, 40 Loy. U. Chi. L.J. at 57-59.

¶39 We have explained that no double recovery or windfall can occur unless and until

the injured person has been fully made whole for the full extent of his losses. See

Swanson, ¶ 22 (“duplicate payments do not occur until the insured has been made whole

for all losses, as well as costs of recovery.”). In addition, both the “double recovery” and

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“windfall” arguments—though initially attractive through their appeal to a sense of

fundamental fairness—suffer from fatal flaws.

¶40 The “double recovery” argument is premised on an assumption that the injured

party is only entitled to either proceeds from the insurance policy the party has paid for

or to recover from a tortfeasor. In fact, as we explained in DeTienne:

The insurer cannot assert any claim by way of subrogation unless the
insured has a claim against the third person to which the insurer can be
subrogated for the reason that the subrogated insurer stands in no better
position than the insured, and cannot recover over against the wrongdoer
unless the insured could have done so, for if the insured had no right of
action against the wrongdoer none can pass to the insurer by way of
subrogation. . . . Otherwise stated, subrogation by definition and of
necessity presupposes the existence of a right of the insured against some
third person or fund . . . .

DeTienne, 266 Mont. at 189, 879 P.2d at 707 (quoting G.Couch & R.Anderson, 16 Couch

Cyclopedia of Insurance Law, Subrogation, § 61:114, 183-84 (1983)) (emphasis added).

In subrogation, the insured injured party surrenders damages to which he is entitled to

reimburse his insurance company for benefits he has paid a premium to receive. In

reality, it is the insurance company seeking subrogation that is, potentially, unjustly

enriched, if the injured person has not been made whole for the losses caused by the

tortfeasor. See DeTienne, 266 Mont. at 192, 879 P.2d at 709 (a situation in which the

insured loses money—for instance, paid for litigation of excessive damage, plus

premiums paid to the insurer—is akin to unjust enrichment and is not equitable). To

ensure that the injured party is made whole, and to discourage the possibility that the

company might be unjustly enriched vis-a-vis the injured party, we have always required

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that the injured party be fully made whole before any subrogation can occur. See

Swanson, ¶ 28. Here, there is no danger of double-recovery at this time because Van

Orden has not been made whole for all his losses, including costs of recovery.

¶41 The windfall argument also fails pursuant to the rule from Swanson. In addition,

however, insurance companies often will have adjusted premiums to account for

subrogation recoveries, or lack thereof. Where that has occurred there is no “windfall” to

the insured, because the insured implicitly paid higher premiums for the right to keep tort

proceeds. Maher & Pathak, 40 Loy. U. Chi. L.J. at 58. It is not clear what USAA’s

practice is in this regard—which is precisely why further fact-finding is needed to

address Van Orden’s contention that he has not been made whole.

¶42 I would adhere to the approach to this issue set forth in our precedent. I am not

asserting that Van Orden would be entitled to the Alpha Policy’s property damage

coverage to pay for losses for which his USAA insurance policy had already reimbursed

him. To me, the process is simple. When a person is injured through no fault of his own,

all available insurance coverage proceeds, from whatever source, go into one pot. Only

after the injured person is made whole for the full extent of the damages he has suffered

may the insurance company take anything from that pot. The purpose of this approach is

to ensure that the primary concern in any case where the insurer seeks to subrogate is the

insured being made whole for the full extent of his losses—not merely for discrete

elements of damages. In Van Orden’s case, this means that while he may not be able to

recover additional amounts from the Alpha Policy to compensate him for his property

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damage, funds from that policy may be available to help cover his attorney’s fees, for

instance. I do not concede that Van Orden could not recover directly from the

tortfeasor’s policy any more than he already recovered from USAA—it is impossible to

determine whether that is true when Van Orden still asserts he has not been made whole.

¶43 The majority Opinion will now allow insurance companies to seek subrogation

before the injured person has been made whole. I fear that this Opinion represents an

incremental shift away from a state of law in which “the insured’s interests are the

primary concern,” DeTienne, 266 Mont. at 190, 879 P.2d at 708, and towards one in

which the Court will protect the financial interests of the insurance company to the

detriment of the injured person.

/S/ MICHAEL E WHEAT

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