IN THE COURT OF APPEALS FOR THE STATE OF WASHINGTON
LAZURI DANIELS, individually, and on )
behalf of all those similarly situated )
) No. 75727-0-1
Appellant,
) DIVISION ONE
v.
STATE FARM MUTUAL AUTOMOBILE)
INSURANCE COMPANY, ) PUBLISHED OPINION
Respondent. ) FILED: July 16, 2018
SPEARMAN, J. — When interpreting a term or phrase in an insurance
contract, we view the term or phrase in the context of the entire contract and not
in isolation. We consider the insurance policy as a whole, giving the policy a fair,
reasonable, and sensible construction as would be given to the contract by the
average person purchasing insurance. Where possible, we harmonize provisions
of the contract that appear to be in conflict to give effect to all of the contract's
provisions. But we avoid a literal, strained or forced interpretation which could
lead to absurd results. In this case, Lazuri Daniels purchased an automobile
insurance policy from State Farm Mutual Automobile Insurance Company (State
Farm). Under the terms of the policy, State Farm has the right to recover
payments it is obligated to make, but it may only exercise that right after Daniels
No. 75727-0-1/2
has been fully compensated for damage or loss. The policy also provides that
Daniels pay a deductible to cover the first $500 of the loss.
When Daniels' vehicle was damaged in a collision, she paid the deductible
and State Farm paid the remaining amount of the cost to repair her car. When
State Farm recovered 70 percent of the amount it paid for the repair from the
tortfeasor's insurance company, it also recovered 70 percent of Daniels'
deductible payment and paid it to her. Daniels contends State Farm violated the
policy because it did not pay her the full amount of the deductible. She claims
that before State Farm could exercise its right to recover the payments it made,
the policy requires that she be "fully compensated" for her loss which she argues
includes the full amo nt of the deductible. State Farm contends that it satisfied
the policy's terms be ause Daniels was fully compensated when it paid the cost
to repair her car. It disputes that, as that term is used in the policy, "fully
compensated" includes Daniels' deductible. The trial court agreed with State
Farm and dismissed aniels' claims.
We hold that tate Farm fully compensated Daniels for her loss when it
paid for the repairs o the car and properly exercised its right to recover that
payment. We affirm.
FACTS
Lazuri Daniels car was damaged in a three car accident. State Farm
insured her vehicle f r collision coverage with a $500 deductible. Daniels paid
the deductible and State Farm paid the remaining cost to repair the car.
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No. 75727-0-1/3
In subrogation, State Farm sought payment for the repairs from Geico,
which insured one of the other drivers. Attributing 70 percent fault to its client,
Geico agreed to pay70 percent of the cost to repair Daniels' car. Pursuant to
insurance regulation State Farm also sought reimbursement for Daniels'
deductible. It returned $350, or 70 percent, of her deductible to Daniels.
Daniels filed a complaint asserting that State Farm violated the insurance
policy by failing to fully reimburse her deductible with funds obtained in its
subrogation effort against Geico. She pleaded claims for breach of contract, tort
of bad faith, and conversion, and she requested class action certification.
State Farm moved to dismiss the complaint. Meanwhile, not satisfied with
the reimbursement amount from Geico, State Farm sought arbitration. The
arbitrator determined that Geico's client was 100 percent at fault for the accident.
State Farm recovere and gave Daniels the remaining $150 of her deductible.
The trial court granted State Farm's motion to dismiss. Daniels appeals.
DISCUSSION
Daniels argue that the trial court erred in dismissing her complaint. She
contends that State Farm did not comply with the terms of its policy when it failed
to return her full deductible before retaining money it received in subrogation.
We review a CR 12(b)(6) dismissal de novo. FutureSelect Portfolio Mgmt.,
Inc. v. Tremont Grp. Holdings, Inc., 180 Wn.2d 954, 962, 331 P.3d 29(2014).
Dismissal is warranted if the court concludes beyond a doubt that "the plaintiff
cannot prove any set of facts which would justify recovery." Tenore v. AT&T
Wireless Services, 136 Wn.2d 322, 330, 962 P.2d 104(1998).
3
No. 75727-0-1/4
Interpretation of an insurance contract is a question of law that we also
review de novo. Averill v. Farmers Ins. Co. of Wash., 155 Wn. App. 106, 118,
229 P.3d 830 (2010). Because they are generally contracts of adhesion, courts
look at insurance contracts in a light most favorable to the insured. Id. (Citing
Panorama Viii. Condo. Owners Ass'n Bd. of Dir. v. Allstate Ins. Co., 144 Wn.2d
130, 141, 26 P.3d 910 (2001)). A contract of insurance should be given a fair,
reasonable and sensible construction, consonant with the apparent object and
intent of the parties, a construction such as would be given the contract by the
average person purchasing insurance. Morgan v. Prudential Ins. Co. of Am., 86
Wn.2d 432, 545 P.2d 1193(1976)(citing Ames v. Baker, 68 Wn.2d 713,415
P.2d 74 (1966))."Where possible, we harmonize clauses that seem to conflict in
order to give effect to all of the contract's provisions." Kut Suen Lui v. Essex
Ins., Co., 185 Wn.2d 703, 710, 375 P.3d 596(2016). We also give the contract a
practical and reasonable rather than a literal, strained or forced interpretation
which would lead to an absurd conclusion. Morgan at 434."The insurance
contract must be viewed in its entirety; a phrase cannot be interpreted in
isolation." Allstate Ins. Co. v. Peaslev, 131 Wn.2d 420, 424, 932 P.2d 1244
(1997).
The policy language at issue here states:
12. Our Right to Recover Our Payments
c. Underinsured Motor Vehicle Property Damage Coverage and
Physical Damage Coverages
If we are obligated under this policy to make payment to or for a
party who has a legal right to collect from another, then the right
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No. 75727-0-1/5
of recovery of such party passes to us. Such party must help us
recover our payments by:
(1) keeping our right to recover our payment in trust for us and
doing nothing to impair that legal right;
(2) executing any documents we may need to assert that legal
right; and
(3) taking legal action through our representatives when we
ask.
Our right to recover our payments applies only after the
insured has been fully compensated for the bodily injury',
property damame, or loss.
Clerk's Papers at 80.(Emphasis added).
Daniels contends that the policy unambiguously conditions State Farm's
right to recover its payments on Daniel's full compensation for her property loss,
including her full deductible. Daniels argues that in the absence of a conflicting
policy definition, the term "loss" can only mean "the total amount of the insured's
damages." Appellant's Reply Br. at 7. Thus, she contends that State Farm has
no right to subrogation until she receives full compensation for the total amount
of her loss, which would include that part of the loss covered by her deductible.
State Farm argues that "fully compensated" means payment of the
insured's property loss less the deductible. And, because it paid this amount,
State Farm contends that under the policy, it is entitled to subrogation of her
claims. We agree with State Farm.
Daniels reading of the insurance contract is flawed in a number of
respects. First, Daniels asserts that under the contract, State Farm has no right
to seek recovery at all, unless and until its insured obtains a full refund of his or
1 Although the parties agree that the policy contains a definition of the term "loss," it is not
included in the record before us. The parties also agree that the policy does not define the term
"fully compensated."
5
No. 75727-0-1/6
her deductible. "Whatever rights State Farm may have to recover its payments, it
does not have those rights until after its insured has been fully compensated for
the loss." Br. of Appellant at 15. And to the extent State Farm has a right to seek
recovery, it "has no such rights until its insured receives full compensation." Id. at
17. But reading the contract to preclude State Farm's subrogation unless Daniels
first obtains a full refund of her deductible leads to absurd results. Under Daniels
reading of the contract, before State Farm could assert a subrogation claim
against a third party, one of two things would have to occur. First, State Farm
would have to refund the deductible that Daniels paid, which would make the
provision requiring the payment of the deductible meaningless. Or, second,
Daniels would have to obtain reimbursement from the third party on her own. And
if she failed to do so for any reason, or simply chose not to, State Farm would be
barred from seeking recovery of the payments it made from the responsible third
party.
In addition, Daniels' reading of the contract is inconsistent with WAC 284-
30-393, which places the burden of pursuing a refund of the insured's deductible
on the insurer. Under that regulation:
The insurer must include the insured's deductible, if any, in its subrogation
demands. Any recoveries must be allocated first to the insured for any
deductible(s) incurred in the loss, less applicable comparable fault.
Deductions for expenses must not be made from the deductible recovery
unless an outside attorney is retained to collect the recovery. The
deduction may then be made only as a pro rata share of the allocated loss
adjustment expense... .
The regulation recognizes that insureds often lack the resources or incentive to
pursue recovery of what is very often a small amount of money. It therefore
6
No. 75727-0-1/7
places the burden of collecting the refund on the insurer. But the regulation
assumes that the insurer's ability to proceed with a subrogation claim precedes a
refund of the deductible to the insured. Daniels reading of the contract does just
the opposite. The logical result of her interpretation is that State Farm is either
precluded from subrogating its claim and thus its ability to obtain a refund of
Daniels' deductible or Daniels would have to seek the refund on her own. In
either event, the purpose of the regulation would be frustrated. State Farm either
was or was not entitled to exercise a subrogation right. If it was, then by Daniels'
own definition, she was "fully compensated." If it wasn't, then the issue isn't how
State Farm allocated the funds it received, but instead that it was subrogating its
claim at all. Daniels can't have it both ways.2
We conclude that the only reasonable interpretation of the term "fully
compensated" as used in the insurance contract at issue in this case, does not
include the amount of deductible paid by the insured. The trial court did not err in
dismissing Daniels' complaint on this ground.3
2 The dissent also argues that State Farm's right to recover its payments is not at issue
and complains that this is just"a straw man argument." Dissent at 23. The dissent appears to
suggest that State Farm has the right to pursue recovery of its payments from third parties,
regardless of whether the insured has been fully compensated, despite Daniels' explicit argument
to the contrary. See Br. of Appellant at 10,(State Farm's "right to pursue third party recoveries"
was "entirely contingent on her first being fully compensated for her loss.") See also Br. of
Appellant at 15, 17.
3 State Farm relies heavily on Meas v. State Farm Fire and Cas. Co., 130 Wn. App. 527,
123 P.3d 519(2005). In that case the court stated that the insured was "fully compensated or
'made whole'for the property loss claimed under his collision coverage when he received
payment from State Farm. Further, State Farm recovered his deductible and paid it to him." Id. at
538. State Farm argues that this statement establishes that the term "fully compensated" does
not include the insured's payment of the deductible. But we do not find the case persuasive
because the quoted assertion is made without analysis and was not germane to the central issue
before the court.
7
No. 75727-0-1/8
Daniels also argues that she stated a claim for recovery under WAC 284-
30-393, which requires that a subrogating insurer also seek recovery of the
insured's deductible, less applicable fault. Daniels argues that State Farm
violated this provision by not reimbursing her full deductible because it was later
determined by an arbitrator that she was not at fault.
State Farm complied with WAC 284-30-393. It included Daniels'
deductible with its subrogation demand and originally reimbursed her 70 percent
based on Geico's initial determination that its insured was 70 percent at fault. It
then fully reimbursed her when an arbitrator concluded that she was not at fault.
Daniels relies on hindsight to argue that, because she was ultimately found not at
fault, she should have been originally reimbursed her full deductible. But State
Farm's incremental implementation of WAC 284-30-393 was reasonable and
complied with the plain language of the regulation. In addition, because Daniels
did not plead lack of fault in her complaint, the record does not support her
argument that she had no "applicable comparable fault" at the time she was first
reimbursed her deductible. The trial court did not err in finding that there was no
violation.
8
No. 75727-0-1/9
Amendment of Complaint
Daniels argues that the trial court erred by denying her request that she be
granted leave to amend her complaint "to address any deficiencies found by the
trial court." Br. of Appellant at 27-28. The decision to grant leave to amend the
pleadings is within the discretion of the trial court. Sprague v. Sumitomo Forestry
Co. Ltd., 104 Wn.2d 751, 763, 709 P.2d 1200 (1985).
Daniels does not identify in her appellate brief how she might amend her
complaint. Thus, we cannot assess whether permitting amendment would cause
prejudice such as "undue delay, unfair surprise, and jury confusion." Wilson v.
Horsley, 137 Wn.2d 500, 505-06, 974 P.2d 316(1999)(citing Herron v. Tribune
Pubrq. Co., Inc, 108 Wn.2d 162, 165-66, 736 P.2d 249 (1987). RAP 10.3(a)(6)
directs each party to supply, in its brief, "argument in support of the issues
presented for review, together with citations to legal authority and references to
relevant parts of the record." We do not consider conclusory arguments that are
unsupported by citation to authority. Joy v. Dep't of Labor & Industries, 170 Wn.
App. 614, 629, 285 P.3d 187(2012). Therefore, we decline to consider this
assignment of error.
Attorney Fees
Daniels seeks attorney fees under Olympic Steamship Co. Inc., v.
Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d 673(1991). Because Daniels is not
the prevailing party, she is not entitled to fees under Olympic Steamship.
9
No. 75727-0-1/10
Affirmed.4
/C
c4At\ev.,
)c),
WE CONCUR:
r
4 Although both parties discuss Averill v. Farmers Ins. Co. of Washington, 155 Wn. App.
106, 229 P.3d 830(2010), at length, the case is inapposite because the contract language at
issue in that case was different than the language we examine here. In addition, Daniels' reliance
on Sherry v. Financial lndem. Co., 160 Wn.2d 611, 621, 160 P.3d 31(2007) and S & K Motors,
Inc. v. Harco Nat. Ins. Co., 151 Wn. App. 633, 213 P.3d 630(2009) is misplaced. Those cases
involved situations where the insured recovered directly from the tortfeasor. In those
circumstances the term "fully compensated" takes on a more expansive meaning.
10
Daniels v. State Farm Mut. Auto. Ins. Co., 75727-0-1
BECKER, J. — This appeal is part of an ongoing controversy about how to
allocate a collision deductible after a subrogation recovery by the insurer.
Appellant Daniels contends that her insurer, State Farm, was required to fully
compensate her for the deductible before keeping any part of the recovery it
obtained through subrogation from the tortfeasor who damaged Daniels' car.
State Farm made a recovery of 70 percent of the cost of repair from the insurer
of another car involved in the collision. Instead of making Daniels whole from
that recovery for 100 percent of her $500 deductible, State Farm sent her a
check for only 70 percent of it, or $350.1
The touchstone in Washington on this topic is Thiringer v. American
Motors Insurance Co., 91 Wn.2d 215, 588 P.2d 191 (1978). The controversy
arises from a case involving a deductible in which this court ruled that the made
whole doctrine of Thiringer has no application to the insurer's recovery in
subrogation. Averill v. Farmers Ins. Co. of Wash., 155 Wn. App. 106, 229 P.3d
830, review denied, 169 Wn.2d 1017(2010).
1 This case did not become moot when, some time later, State Farm
obtained the remaining 30 percent from the insurer in arbitration and then
returned to Daniels the remaining 30 percent of her deductible ($150). See
Clerk's Papers at 65. The question posed by Daniels' appeal is whether an
insurer is obligated to make its insured whole from the first dollars recovered in
subrogation, without waiting to see whether further efforts will increase the
amount of the insurer's recovery.
No. 75727-0-1/2 (dissent)
Daniels' complaint alleges causes of action for breach of contract, bad
faith, and conversion. Respondent State Farm relies on Averill as the primary
basis for affirming the trial court's dismissal of Daniels' complaint for failure to
state a claim. Daniels maintains that Averill was wrongly decided, but argues in
the alternative that she is entitled to relief under the policy language even if the
common law made whole doctrine does not apply. The majority focuses
exclusively on the contract language and does not address Averill except to say
in a footnote that it is inapposite because the contract language at issue in that
case was different from the language in Daniels' policy. Majority at 10 n.4.
I respecffully dissent from the majority's conclusion that it would be an
absurd result if the policy language is interpreted to require reimbursing Daniels
for the deductible before State Farm takes any portion of the subrogation
recovery. But first, I must disagree that the case can be decided in favor of State
Farm without discussing Averill. Because Daniels has squarely presented the
argument that the made whole doctrine applies to the recovery of deductibles
notwithstanding Averill, we cannot ignore it. !would accept Daniels' request to
revisit Averill. I would hold that the made whole doctrine applies, that Averill is
inconsistent with Washington case law on subrogation and reimbursement, and
that the subrogation provision in the State Farm policy incorporates the made
whole rule of Thiringer. The order of dismissal should be reversed, and Daniels
should be allowed to proceed with her lawsuit.
The broad issue, as presented by Professor Robert Keeton, is, "After an
insurer has paid to an insured the benefits specified in the insurance contract,
2
No. 75727-0-1/3 (dissent)
what are the interests of the insurer and the insured in the insured's claim against
a third party allegedly responsible for the loss?" ROBERT E. KEETON, BASIC TEXT
ON INSURANCE LAW § 3.10(c)(2), at 160(1971). Keeton summarizes five
theoretical approaches to the problem of allocating proceeds of a recovery from a
third-party tortfeasor. They range from a rule that entitles the insurer to the full
amount recovered on the theory that the insurer is the sole beneficial owner of
the claim against the third party, to the opposite rule that rejects subrogation and
entitles the insured to the full amount recovered whether or not the total received
from the third party and the insurer exceeds the insured's loss. Keeton, at 161
62. In the middle, Keeton's "Third Rule" is a proration approach, whereby the
recovery from the third person "is to be prorated between the insurer and the
insured in accordance with the percentage of the original loss for which the
insurer paid the insured under the policy." Keeton, at 161.
Professor Keeton's "Fourth Rule" is, "Out of the recovery from the third
party the insured is to be reimbursed first, for the loss not covered by insurance,
and the insurer is entitled to any remaining balance, up to a sum sufficient to
reimburse the insurer fully, the insured being entitled to anything beyond that."
Keeton, at 161. This approach,followed by most courts, is termed the "Insured:
Whole" rule in Elaine M. Rinaldi, Apportionment of Recovery Between Insured
and Insurer in a Subrogation Case, 29 TORT & INS. L.J. 803, 805-06 (1994). The
Rinaldi article recognizes Washington as an "insured-whole" state that follows
Keeton's Fourth Rule, citing Thiringer as the basis for this classification. 29 TORT
& INS. L.J. at 807 & n.41.
3
No. 75727-0-1/4 (dissent)
The issue in Thiringer concerned the allocation of the proceeds of a
settlement obtained from the tortfeasor by the insured in a personal injury case
after the insurer had paid out coverage under a personal injury protection (PIP)
provision. The insurer argued that the proceeds "should be allocated first to the
special damages covered by the PIP provision or, in the alternative, prorated
between the general damages and the PIP damages." Thiringer, 91 Wn.2d at
219. The court rejected this argument and held that the insurer was not entitled
to reimbursement until the insured had been made whole. "While an insurer is
entitled to be reimbursed to the extent that its insured recovers payment for the
same loss from a tort-feasor responsible for the damage, it can recover only the
excess which the insured has received . . . after the insured is fully compensated
for his loss." Thiringer, 91 Wn.2d at 219. Thus, it is clear that Washington does
not belong in the "insurer-whole" or "proration" categories identified in Keeton, at
161. In Washington, the limiting principle is that "insureds are not entitled to
double recovery." Sherry v. Fin. lndem. Co., 160 Wn.2d 611, 618, 160 P.3d 31
(2007). Under Thirincier, so long as the insured does not receive a double
recovery, the insured's interest comes first.
1. The made whole doctrine is not limited to recoveries made by the insured
Averill undermines Thiringer. Averill does this after surveying Thiringer
and cases applying it and then categorizing them as cases "where the insurer
sought reimbursement out of third party funds recovered by the insured." Averill,
155 Wn. App. at 112-13. From this, Averill deduces that Thirincier does not apply
to cases where the insurer recovers directly from the tortfeasor in subrogation.
4
No. 75727-0-1/5 (dissent)
"Farmers pursued its own subrogation interest against the tortfeasor. The made
whole doctrine has no application to this recovery." Averill, 155 Wn. App. at 114.
This narrowing of the Thirinqer principle is found in no other Washington case.
The Averill court adopted Farmers' premise that the key to application of
the made whole doctrine is "whether the insured or the insurer made the
recovery." Averill, 155 Wn. App. at 111. The court cited no scholarly support for
this premise, and I have found none. The court acknowledged that Averill would
have been entitled to recover her full deductible if she had been the one who
obtained the third-party recovery. Averill, 155 Wn. App. at 113. There is no
reason why the outcome should be different when it is the insurer who obtains
the recovery. Either way, it is the insured's loss that is being recovered. A
subrogating insurer is "standing in the shoes of its subrogor" and is thus acting in
the name of its insured against the third party when it pursues its reimbursement
right. Mahler v. Szucs, 135 Wn.2d 398, 413,415 & n.8, 957 P.2d 632, 966 P.2d
305(1998).
The Averill court erred by limiting Thiringer to the procedural posture of the
cases in which it has previously been applied. Nothing in the law stated by those
cases, including Sherry and Mahler, forecloses applying the made whole rule to a
subrogation recovery obtained by the insurer; in fact, they indicate that it should
apply. The general view is that "subrogation creates in the insurer, by contract or
equity, a right to be reimbursed. The enforcement of the interest, whether by a
type of lien against the subrogor/insured's recovery from a tortfeasor or by an
action by the subrogee/insurer in the name of the insured against the tortfeasor,
5
No. 75727-0-1/6 (dissent)
is governed by the general public policy of full compensation of the insured."
Mahler, 135 Wn.2d at 417-18(emphasis added). Averill is inconsistent with this
statement. By declaring that Thiringer applies only to "cases where the insured
recovers the payment and the insurer is seeking reimbursement, not vice versa,"
Averill nudges the made whole doctrine out of its central and influential place in
Washington insurance law. Averill, 155 Wn. App. at 112(footnote omitted).
Indeed, State Farm's brief depicts Thirinqer's holding as narrow and suggests
that Averill should now be regarded as the leading case.
Averill confusingly invokes the common fund doctrine in support of its
analysis. The court says that if Averill had sued the tortfeasor directly, "the
combination of the property loss insurance payments and the third party recovery
would have created a common fund," and the made whole rule would have
limited Farmers to reimbursement of the property loss payments. Averill, 155
Wn. App. at 113, citing Mahler, 135 Wn.2d at 426-27. The common fund
doctrine is not the basis of the made whole rule of Thirinqer. Keeton and other
scholars do not mention the common fund doctrine when discussing the various
approaches to allocation of third-party recoveries. In Washington, the common
fund doctrine is the source of Mahler's requirement that the insurer pay a portion
of the insured's attorney fees when the insured achieves a recovery from the
tortfeasor that includes amounts previously paid by the insurer—for example,
personal injury protection benefits. Mahler, 135 Wn.2d at 426-27. Sharing of
attorney fees was not an issue in the present case or in Averill, nor was it an
6
No. 75727-0-1/7 (dissent)
issue in Thiringer or Sherry. Injecting the common fund doctrine into the analysis
only muddles it.
Further muddling comes from attributing significance to the distinction
made in Mahler between reimbursement and subrogation. Averill, 155 Wn. App.
at 112 n.2, citing Mahler, 135 Wn.2d at 420 n.9, 415 n.8. Reimbursement and
subrogation are terms with distinct meanings that are often used imprecisely.
But the fact that they have distinct meanings does not mean that the made whole
doctrine applies only to one and not the other. Averill invokes the distinction in its
search for a way to distinguish Sherry: "An offset such as in Sherry is akin to a
reimbursement claim from a common fund and, unlike in this case, the made
whole doctrine was triggered." Averill, 155 Wn. App. at 114 n.4. This is
unconvincing. Sherry does not say or suggest that the made whole doctrine is
triggered only when the insurer is seeking reimbursement. Sherry states that the
insured must be fully compensated for his loss before an insurer may seek "an
offset, subrogation, or reimbursement" for benefits already paid. Sherry, 160
Wn.2d at 618(emphasis added), citing Thiringer, 91 Wn.2d at 219. Sherry did
not condition application of the made whole doctrine on the difference between
subrogation and reimbursement, nor did it say anything about a common fund.
Sherry recognizes that Washington has adopted "a broad view of full
compensation." Sherry, 160 Wn.2d at 622. Thus, Averill is inconsistent with the
reasoning in Sherry.
In short, the central holding proposed by Farmers and adopted in Averill is
result-driven. Inconsistencies with Washington's existing case law are glossed
7
No. 75727-0-1/8 (dissent)
over. This court should reject Averill's holding that the made whole doctrine
applies only when the recovery from the tortfeasor is initiated by the insured.
2. The made whole doctrine applies to deductibles
If the made whole doctrine truly applied only when the recovery from the
tortfeasor was initiated by the insured, there would have been no need in Averill
to go further. Instead, the Averill court provides a second and independent
rationale to bolster its result: the made whole doctrine does not apply to
deductibles.
This result is consistent with the purpose of the deductible.
A deductible indicates the amount of risk retained by the insured.
See Bordeauxf, Inc. v. Am. Safety Ins. Co.1, 145 Wn. App.[687,]
695-96[, 186 P.3d 1188 (2008), review denied, 165 Wn.2d 1035
(2009)]. The insurance policy shifts the remaining risk of any
damages above the deductible to the insurance company. Id.
Averill contracted to be out of pocket for the first $500. Farmers'
subrogation interest was for the amount of the loss it paid Averill,
not including the deductible amount. When Farmers pursued its
subrogation interest, that interest did not include Averill's
deductible. Allowing Averill to recover her deductible from Farmer'
subrogation recovery would have changed the insurance contract
to one without a deductible. We are not at liberty to rewrite the
policy in this manner.
Recovery by the insurer from a tortfeasor, under its
subrogation interest for losses paid to its insured, is not the
equivalent to a claim for reimbursement against a fund recovered
by the insured and does not invoke the made whole doctrine.
Averill is not entitled to recover her deductible from funds obtained
by Farmers under subrogation from the third party's insurer.
Averill, 155 Wn. App. at 114-15 (footnote omitted).
Averill holds that an insured who agrees to a deductible effectively says
goodbye to it forever. "When Farmers pursued its subrogation interest, that
interest did not include Averill's deductible." Averill, 155 Wn. App. at 114-15.
This is wrong. The cause of action (against the tortfeasor) "is indivisible." Garrity
8
No. 75727-0-1/9 (dissent)
v. Rural Mut. Ins. Co., 77 Wis. 2d 537, 253 N.W.2d 512, 514-15 (1977). The
subrogating insurer is acting in the name of the insured, Mahler, 136 Wn.2d at
418, not in its own name.
By paying the deductible up front, Daniels did not give State Farm the right
to pursue in subrogation only its own interest in recovering the payments to
Daniels. State Farm stepped into Daniels' shoes and therefore had to pursue
Daniels' interest in recovering her deductible. It is Daniels who suffered the loss,
not State Farm. The cause of action belongs to Daniels, not to State Farm. The
idea that an insurer like State Farm is entitled to pursue only its own interest
implies—wrongly—that Daniels' claim can be split and that she was free to
proceed separately against the tortfeasors to recover her $500 deductible.
Daniels' right of recovery passed to State Farm via the insurance contract ("the
right of recovery of such party passes to us.")
Averill asserts that allowing the insured to recover her deductible from
Farmers' subrogation recovery "would have changed the insurance contract to
one without a deductible." Averill, 155 Wn. App. at 114. This is not an accurate
statement. Whether or not there is a later subrogation recovery, a deductible
always produces the effect bargained for by the parties. It reduces the insurer's
obligation to investigate and pay for minor dings while reducing the premium for
the insured. Thus, requiring State Farm to first pay Daniels $500 out of a
subrogation recovery would not make the deductible ineffective.
The policy provision spelling out the insurer's right to subrogation is
independent of any deductible agreed to in the coverage. The right to
9
No. 75727-0-1/10 (dissent)
subrogation serves to maximize the insurer's profits to an extent that depends on
many variables: for example, whether there is a third party at fault; if so, whether
the torffeasor is insured; and how skillfully and efficiently the insurer pursues
subrogation. But the insurance contract does not guarantee that the insurer will
recover anything in any particular case.
In excluding deductibles from the made whole doctrine, Averill is
inconsistent with this court's decision in Bordeaux. In Bordeaux, we addressed
the nature of self-insured retention provisions in commercial general liability
policies. Self-insured retention provisions are analogous to deductibles.
Bordeaux, 145 Wn. App. at 695.2 Applying Thiringer, the Bordeaux court held
that an insured who paid a self-insured retention amount has priority over the
insurer when proceeds from a third-party tortfeasor become available. Bordeaux,
145 Wn. App. at 696-97.
In Bordeaux, two related developers, Bordeaux Inc. and Cameray Inc.,
were defendants in construction defect lawsuits brought by condominium
associations. Insurers for the developers defended them under a reservation of
rights. Under the policies, each developer was obligated to pay a self-insured
retention amount of $100,000 (analogous to a deductible) as a condition
precedent to the right to a defense and coverage. Analogous to Daniels' State
Farm policy, the policies obligated the insurers to cover their insureds' damages
2 Averilllists cases that apply the made whole doctrine and states,"None
of these cases discussed recovery of deductibles." Averill, 155 Wn. App. at 113.
Averill mistakenly includes Bordeaux in that list, failing to recognize that it does
discuss recovery of deductibles.
10
No. 75727-0-1/11 (dissent)
in excess of the self-insured retention amount. Bordeaux, 145 Wn. App. at 690-
91.
After a mediation, the condominium association in the case involving
Bordeaux Inc. agreed to accept $630,000 in settlement. Bordeaux Inc. satisfied
its obligation to pay $100,000 toward this amount.3 In the meantime, Bordeaux
Inc. obtained third-party settlements from contractors. In a subsequent
declaratory action against their insurer, American Safety Insurance Company,
Bordeaux Inc. and Cameray Inc. sought to establish that they were entitled to the
proceeds of the third-party settlements "to fully reimburse them for the SIR [self-
insured retention]funds they paid for defense and settlement costs before any of
the proceeds were paid to their insurers." Bordeaux, 145 Wn. App. at 693.
American Safety asserted a right of priority recovery from the proceeds of
the third-party settlements. American Safety argued that retention of the risk of
paying up to $100,000 for construction defect claims operated as primary
insurance, making American Safety an excess insurer with a right to subrogation
against the third-party settlement funds. The court rejected this argument and
held that the self-insured retention was actually a form of traditional insurance
involving risk shifting, not risk retention as would be the case if Bordeaux Inc.
were truly a self-insurer. Bordeaux, 145 Wn. App. at 694-97.
3 Bordeaux also paid its insurer a second $200,000 under protest and on
appeal won the right to reimbursement, but the issue concerning the second
$100,000 is not pertinent to the present case. See Bordeaux, 145 Wn. App. at
697-98.
11
No. 75727-0-1/12 (dissent)
Pertinent to the present case, the court then invoked the "long-standing
rule of Thiringer" favoring full compensation of insureds over the subrogation
rights of insurers. Bordeaux, 145 Wn. App. at 696-97. Applying Thiringer, the
court concluded that the proceeds of the third-party settlements properly
belonged to the insured developers to make them whole for their retention.
A subrogation provision in the policy stated, "[i]f the insured has rights to
recover all or part of any payment we have made under this Coverage Part,
those rights are transferred to us [American Safety]." Bordeaux, 145 Wn. App.
at 691. In a similar case involving a policy with an identical subrogation clause,
the Florida Supreme Court relied on Bordeaux as persuasive authority for
applying the made whole doctrine. Intervest Const. of Jax, Inc. v. Gen. Fid. Ins.
Co., 39 Fla. L. Weekly S75, 133 So. 3d 494, 504-06 (2014). The policy required
the insured to exhaust self-insured retention of $1 million before coverage would
kick in. Intervest, 133 So. 3d at 506. The court held that the insured had to be
fully compensated for its advance of self-retention funds before any third-party
recovery funds were paid to the insurer, and this common law principle
preserving the insured's right of priority could not be overridden by a transfer of
rights provision in a policy. Intervest, 133 So. 3d at 504.
The point here is that self-insured retention provisions are analogous to
deductibles. Bordeaux, 145 Wn. App. at 695. Just as developers who advance
self-insured retention amounts of $100,000(Bordeaux) or $1 million (Intervest)
have a priority right to be made whole once a recovery from a tortfeasor is in
12
No. 75727-0-1/13 (dissent)
hand, an ordinary driver like Daniels has a priority right to be made whole for
advancing her deductible of $500.
Precedent for the idea that collision deductibles are uniquely excluded
from application of the made whole rule is sparse and unconvincing. One
treatise, in a section titled "Subrogation—Pro tanto," does proclaim that "the
made whole doctrine does not apply to deductibles." 2 Alan D. Windt, Insurance
Claims and Disputes § 10:6, at 10-38 to -39 (5th ed. 2007). But the single case
cited, Birch v. Fire Insurance Exchange, 2005 UT App 395, 122 P.3d 696, does
not bear the weight of the generalization. On the unusual facts of the case, a
judgment denying full recovery of the insured's deductible was affirmed primarily
on the basis that the insured had already been more than fully compensated. "At
the end of the day, Birch received $361.65 more than his actual damages."
Birch, 122 P.3d at 700. By contrast, allowing Daniels to recover her full
deductible will simply make her whole.
In passing, the Birch court also agreed with the insurer's position that "by
attempting to recover the full $500.00 deductible, Birch is attempting to allocate
the subrogation recovery to an uninsured portion of the loss, which amounts to
double recovery." Birch, 122 P.3d at 699. The court cites no authority for this
proposition. Similarly, the Windt treatise cites no authority for its assertion that if
the insured were to be made whole for its deductible before the insurer is made
whole, the insured would be receiving "an unbargained for, unpaid for, windfall."
Windt, at 10-39. This assertion contradicts the general rule set forth by Windt at
the beginning of the section: "the insurer has no right to reimbursement until the
13
No. 75727-0-1/14 (dissent)
insured's entire loss has been paid. This is true even if the insurer is liable for
only a part of the loss and pays its entire obligation. An insurer cannot recoup
any part of its loss while the insured is still less than whole." Windt, at 10-28.
And according to a brief discussion of deductibles in Appelman, "in jurisdictions
that follow the "made-whole rule, the policyholder is entitled to recover first in
the absence of contract provisions stating otherwise." 5 JEFFREY E. THOMAS &
SUSAN LYONS, NEW APPLEMAN ON INSURANCE LAW LIBRARY EDITION § 49.02[2][b]
(2017).
Averill's assertion that applying the make whole rule would write the
deductible out of the contract is unsupported by authority or reasoned analysis,
yet it is now being cited by other courts as if it were solid law. See,aa,
Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 309 Conn. 449,72
A.3d 36, 39(2013); Jones v. Nationwide Prop. & Cas. Ins. Co., 613 Pa. 219, 32
A.3d 1261, 1268 (2011). In TD Banknorth, the court cites Averill in support of the
insurer's argument "that the deductible is not part of the loss to which the make
whole doctrine applies and that to conclude otherwise would essentially convert
the policy into one without a deductible, thereby providing TD Banknorth with an
unbargained for windfall at the expense of Fireman's Fund." TD Banknorth, 72
A.3d at 39. In Jones, the winning argument was that the plaintiffs position
"would render the deductible meaningless and would convert the policy into a
deductible-free policy." Jones 32 A.3d at 1270. This is the same mistake made
in Averill: to assume that the insured's priority right in allocation of proceeds from
a third-party settlement exists only to the extent of loss covered by the policy.
14
No. 75727-0-1/15 (dissent)
3. The insured's right to be made whole does not depend on the loss being fully insured
The thread running through cases like Averill, Birch, TD Banknorth, and
Jones is the mistaken idea that the right to be made 100 percent whole from a
subrogation recovery is part of the coverage—something that has to be
bargained for and something that is given up if the insured agrees to a
deductible. Jones, for example, states, "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." Jones,
32 A.3d at 1272. This court has previously explained the flaw in that reasoning.
"The question of coverage concerns whether an insurer contracted to pay a
particular loss. The question of reimbursement concerns only whether an
insured has been fully compensated for its loss. This inquiry does not depend
upon whether the loss is fully or only partially insured. Neither does it depend
upon whether the insured itself was the cause of some part of the loss." S & K
Motors, Inc. v. Harco Nat'l Ins. Co., 151 Wn. App. 633, 641-42, 213 P.3d 630
(2009)(footnotes omitted), citing Sherry, 160 Wn.2d at 621-22, 625. This makes
sense. Although Daniels' collision damage loss was only partially insured by
State Farm, it was still part of her loss. If there had been no subrogation
recovery, she would properly remain only partially compensated for her loss—
that is, she would remain out of pocket for the $500 deductible because that is
what she agreed to. But as it happened, there was a subrogation recovery.
Requiring State Farm to make sure Daniels is fully compensated from the funds
received from the tortfeasor before keeping any for itself is not the same as
15
No. 75727-0-1/16 (dissent)
requiring State Farm to provide her with coverage for the first $500. The money
is coming from the tortfeasor, not from the premium State Farm collected from
Daniels in exchange for covering the loss less the deductible.
To read the respondent's brief, one would think it was State Farm that had
suffered a loss. Covering losses is what insurance companies do and the
collection of premiums is what enables them to do it. State Farm received a
premium from Daniels to assume the risk that someone else's car would collide
with hers and cause more than $500 worth of damage. In this particular case,
the risk materialized, and State Farm had to make a payout to Daniels for the
cost of repair less the deductible. But this payout was not a loss to State Farm, it
was the cost of doing business. Daniels suffered a loss, while State Farm
incurred a business expense. State Farm was able to establish that a tortfeasor
was liable for 70 percent of Daniels' loss, and as a result, State Farm was able to
obtain for itself an amount equivalent to 70 percent of the payout. Receipt of this
amount by State Farm was over and above the coverage premium it had already
received from Daniels. Just as in the Thirinqer context, it is equitable that the
first dollars received from the tortfeasor be given to Daniels, who is the actual
victim of the tort.
The general purpose of subrogation is to facilitate placement of the
financial consequences of loss on the party primarily responsible in law for such
loss. Mahler, 135 Wn.2d at 412. State Farm claims that Averill is good policy
because it furthers this purpose "by not penalizing a subrogating insurer that
16
No. 75727-0-1/17 (dissent)
uses its own resources to pursue the third party." State Farm compares itself to
an insured in a personal injury case "who risks their own resources in pursuing
the third party, while his or her insurer sits on the sidelines." State Farm says
that Averill properly recognizes that subrogating insurers should similarly "be
rewarded for their efforts."5
As Mahler points out, the allocation of payment responsibility in
subrogation stems from the moralistic basis of tort law. Mahler, 135 Wn.2d at
411. So it is not surprising that State Farm uses moralistic terms like "penalizing"
and "rewarded" to justify its position. But State Farm's argument constructs a
false moral and equitable equivalency between the respective positions of insurer
and insured. It is the insured who suffered a loss. The insurer received payment
from the insured to cover the loss. If the loss was caused by a third-party
tortfeasor, and the insurer is able by its own efforts to shift its cost of covering
that loss to the tortfeasor, the insurer has acted in its own interest and is not
entitled to be rewarded for doing so. The obligation to first make the victim whole
does not penalize State Farm for subrogating; it embodies the "socially desirable"
policy of fostering "the adequate indemnification of innocent automobile accident
victims." Thiringer, 91 Wn.2d at 220.
To the extent an insurer has to make extraordinary efforts to achieve
recovery from the tortfeasor, there might be an equitable argument for cost
sharing, similar to Mahler's requirement that insureds and insurer share the
4 Brief of Respondent at 14 n.3.
5 Brief of Respondent at 14 n.3.
17
No. 75727-0-1/18 (dissent)
expenses necessary to secure recoveries of personal injury protection benefits
from tortfeasors. But this is a different question than whether it is good or bad
policy to make a victim whole. As for cost sharing, the insurance commissioner's
regulation already allows insurers to make a deduction from a deductible
recovery for the expense of collecting it but only if an outside attorney is retained
to collect the recovery and only as a pro rata share of "the allocated loss
adjustment expense." WAC 284-30-393. This suggests that in a typical
subrogation case, the expense of recovery is not extraordinary.
In short, I would follow the reasoning of S & K Motors, Inc. The insured's
right to be made whole from a subrogation recovery is not part of the coverage
she bargained for. It is an equitable obligation imposed by law on subrogating
insurers as a matter of public policy.
4. Deductible cases should not be summarily dismissed
The cases brought by Averill, and now Daniels, are similar to a number of
cases brought elsewhere. Results have varied. For example, at least two
jurisdictions have allowed class actions to go forward. In Florida, the insurer's
practice had been to reimburse insureds for their deductibles on a pro rata basis
in proportion to the amount the insurer recovered on its subrogation claims.
Powers v. Gov't Emps. Ins. Co., 192 F.R.D. 313, 315(S.D. Fla. 1998). A federal
court certified a class action, finding common questions of law and fact as to the
issue whether the insurer "violated the insured-whole rule by failing to fully
reimburse insureds' deductibles when it recovered amounts on its subrogation
claims." Powers, 192 F.R.D. at 317. Recognizing that the insured-whole rule is
18
No. 75727-0-1/19 (dissent)
not uniformly applied in all the states, the court limited the class to Florida
insureds. Powers, 192 F.R.D. at 319. The certified class was defined as "Geico
insureds residing in the State of Florida for whom Geico has pursued subrogation
against third parties and whom have not been reimbursed to the limits of their
deductibles prior to recoupment by Geico of amounts paid to the insured."
Powers, 192 F.R.D. at 320.6 The Powers action concluded with a settlement
establishing a fund of $975,000.7
In Montana, the Supreme Court allowed a class action to go forward to
determine whether the insurer violated the law by taking a subrogation recovery
in a collision coverage case without first reimbursing the insured for her
unrecovered losses, including a deductible. Ferguson v. Safeco Ins. Co. of Am.,
2008 MT 109, 342 Mont. 380, 382, 391,180 P.3d 1164. In Ferguson, the court
found it well established that an insurer "has a duty to first determine whether the
insured has been made whole before the insurer may collect subrogation."
Ferguson, 342 Mont. at 386. Final approval of a settlement for $4,766,169.72 in
Ferguson was granted after a hearing on May 5, 2015.8
6 Daniels proposed a similar class: "All persons in the State of
Washington who had an automobile insurance policy issued by State Farm that
included Collision coverage, where State Farm obtained any measure of
recovery for payments made under that Collision coverage before its insureds
were first fully compensated for the associated property damage loss."
7 Joint Mot. for Prelim. Approval of Proposed Settlement & Approval of
Notice to Class Members, No. 97-0010-CIV, Ex. 1 para. Z, at 9(S.D. Fla. June
24, 1999)(Settlement Agreement)[https://perma.cc/EDR4-6EBA].
8 Ferguson v. Safeco, Case No. DV 04-628B: Overview of the Proposed
Settlement, Garden City Group LLC, http://fergusonmontanasettlement.com/
[https://perma.cc/5YGW-2MWS].
19
No. 75727-0-1/20 (dissent)
On the other hand, a class action complaint similar to Daniels' was
dismissed in Jones, 32 A.3d 1261. As discussed above, the court concluded in
Jones that "the made whole doctrine does not apply in cases involving collision
coverage policies" and "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." Jones, 32 A.3d at 1272.
A different rationale was used to dismiss a putative class action in
Chandler v. State Farm Mutual Automobile Insurance Co., 596 F. Supp. 2d 1314
(C.D. Cal. 2008), aff'd, 598 F.3d 1115 (9th Cir. 2010). There, the plaintiffs auto
insurer paid 80 percent of his car rental expense; the plaintiff paid the remaining
20 percent, or $63.49. Upon obtaining partial reimbursement for the car rental
expense from the third party's insurer, the plaintiff's insurer did not first, or ever,
reimburse the plaintiff for his contribution of $63.49. The court phrased the issue
as "whether an insurer must make the insured whole before pursuing a
subrogation claim against the third-party tortfeasor's insurer where the insured
herself has not yet sued the third-party tortfeasor." Chandler, 596 F. Supp. 2d at
1318. The court was persuaded to answer "no" to this question by Winkelmann
v. Excelsior Insurance Co., 85 N.Y.2d 577,626 N.Y.S.2d 994,650 N.E.2d 841
(1995).
I believe Jones was wrongly decided for the reason discussed above,
namely that it views the right to be made whole as a feature of coverage. I
believe Winkelmann is unhelpful here because, unlike in the present case, it
involved a situation where the insurer and the insured jointly sued the tortfeasor.
20
No. 75727-0-1/21 (dissent)
The insurer settled its subrogation claim before the insured was ready to settle its
own claim. The court viewed the two claims as "divisible and independent," and
held that the insurer was not required to forego its right to subrogate "while the
insured delays in asserting its claim against the third party, as plaintiffs did
here." Winkelmann,650 N.E.2d at 844-45. Chandler is unconvincing because it
assumes that the insured had to first make its own attempt to recover $63.49 from
the tortfeasor before demanding any of the proceeds of the insurer's
subrogation. Chandler, 596 F. Supp. 2d at 1321. "Plaintiff's lawsuit is unripe
because Plaintiff has not sufficiently established that he cannot recover the
$63.49 from the third-party tortfeasor." Chandler, 596 F. Supp. 2d at 1323.
My larger point is that the cases discussed above illustrate the variation in
the approaches that have been taken to the problem of allocation of a
subrogation recovery—the "troublesome question," as Mahler termed it, of "the
precise enforcement mechanism for the subrogee's right of
reimbursement." Mahler, 135 Wn.2d at 412-13. This variation weighs against
deciding these deductible cases on motions to dismiss under CR 12(b)(6), which
tends to produce absolute, hard-line holdings like Averill's declaration that "Averill
has no claim as a matter of law." Averill, 155 Wn. App. at 109.
Daniels' claim was likewise dismissed in a motion alleging failure to state
a claim. Consequently, the appellate record is short. It does not include the
policy, except for the page that contains the subrogation clause, which was
handed up to the trial court at oral argument. We do not have the cover page,
the definitions page, or any other part of the policy. We do not know the amount
21
No. 75727-0-1/22 (dissent)
of Daniels' original loss or the amount of State Farm's subrogation recovery. We
do not know how State Farm achieved its recovery from the tortfeasor, whether
doing so required extraordinary efforts, or whether Daniels did anything to impair
these efforts. We do not know if State Farm proceeded according to a uniform
practice. We do not know whether State Farm's practice differs from the
practices of other insurers. We do not know if State Farm or other insurers would
handle a large deductible differently than a $500 deductible. These are but a few
of the factors that, if more was known about them, might influence the shaping
and development of the law in this area.
Averill erred in flatly declaring that the made whole doctrine does not ever
apply in the subrogation context and does not ever apply to deductibles. But
given the current state of the law, it might also be error, on a CR 12(b)(6) motion,
to declare the opposite as a matter of law—that the made whole doctrine always
applies in the subrogation context and always applies to deductibles, without
exception. The facts of the Winkelmann case, where the insurer and insured
jointly sued the tortfeasor and there was an issue of delay, furnish an example of
a nuance that might call for a more flexible rule. For this reason, Ferguson and
Powers—decisions that allowed the cases against the insurers to go forward—
are better models than cases like Averill that summarily dismiss. Daniels has
presented a live issue: whether an insurer violates the made whole rule or
breaches a contractual subrogation clause by taking a subrogation recovery in a
collision coverage case without first reimbursing the insured for the deductible. 1
would remand to set the matter for trial. This would allow the parties to conduct
22
No. 75727-0-1/23 (dissent)
discovery, the insurer to assert defenses, and the trial court eventually to decide
the issue against a fully developed factual background.
5. The policy language requiring full compensation gives the insured priority in
allocation
I now come to the majority opinion in this case, which arrives at affirmance
solely by interpreting the subrogation clause in the insurance contract:"Our right
to recover our payments applies only after the insured has been fully
compensated for the bodily injury, property damage, or loss." I agree with
Daniels that this provision incorporates the made whole doctrine, and it obligated
State Farm to reimburse her for her full loss of $500 before keeping the
remainder of the recovery for itself.
Quoting excerpts from Daniels' brief, State Farm and the majority both
misstate what Daniels is arguing. They claim Daniels is taking the untenable and
easily defeated position that State Farm must return the full deductible to her
before asserting a subrogation claim against a third-party tortfeasor or wait until
she recovers it for herself.9 This is a straw man argument. Daniels' position is
that State Farm had to reimburse her for the full deductible after obtaining any
recovery from assertion of a subrogation claim. She states, "Reading the plain
language of the policy as written, Daniels was entitled to get the rest of her loss
taken care of before State Farm could keep any third party money for itself."19
9 Majority at 6; Brief of Respondent at 23-24.
19 Brief of Appellant at 2.
23
No. 75727-0-1/24 (dissent)
According to Daniels, the record "indisputably establishes that State Farm kept
money it received from Geico—money that should have gone to Daniels."11
At oral argument before the trial court, State Farm correctly stated Daniels'
position. State Farm informed the court that after paying out on the property
damage coverage, it filed an arbitration demand against the insurance carriers
for the other two drivers involved in the accident. State Farm included Daniels'
deductible in the claim. One insurer paid 70 percent of the repair costs
representing what it agreed was its insured percentage of fault. State Farm gave
Daniels $350, or 70 percent of her deductible. Daniels sued at this point,
claiming that she should have received 100 percent of her deductible from this
initial recovery. State Farm correctly told the trial court that Daniels was claiming
"that we should have paid her a 100 percent of her deductible out of our recovery
of our subrogation right before we kept any of that subrogation right. That's the
basis of this lawsuit."12 And this is exactly what Daniels claims on appeal.
Because the majority's analysis sets off on the wrong foot, it lands in the
wrong place. It is unfair to Daniels to recast her argument as a claim that she
must receive a refund of the deductible before State Farm is permitted to
exercise its right to subrogation. Daniels straightforwardly defines the issue in
terms of how State Farm allocated the funds it had already received in
subrogation.
11 Reply Brief of Appellant at 1.
12 Report of Proceedings (July 29, 2016) at 7.
24
No. 75727-0-1/25 (dissent)
Under the contract, State Farm's "right to recover" its payments from funds
received in subrogation "applies only after the insured has been fully
compensated" for the loss. Courts construe insurance policies as a whole, giving
them a fair, reasonable, and sensible construction. Insurance policies are
construed liberally, in order to provide coverage whenever possible. Terms that
are defined within a policy should be interpreted in accordance with the policy
definition. An undefined term is interpreted according to its ordinary meaning,
unless there is a legal, technical meaning that both parties clearly intended to
apply. Ambiguities are construed in favor of the insured. S & K Motors, Inc., 151
Wn. App. at 639-40. The majority does the opposite of what these familiar rules
require.
The majority says the only reasonable interpretation of "fully
compensated" in the provision quoted above is that it "does not include the
amount of deductible paid by the insured." Majority at 8. The majority rightly
rejects as unpersuasive State Farm's heavy reliance on Meas v. State Farm Fire
& Casualty Co., 130 Wn. App. 527, 123 P.3d 519 (2005), review denied, 157
Wn.2d 1018 (2006), for the proposition that "fully compensated" means payment
of the collision loss less the deductible.13 Yet the majority fails to otherwise
justify that proposition in terms of the plain language of the policy or in terms of
the rule requiring us to view insurance contracts in the light most favorable to the
insured. Daniels paid $500 toward the repair of the car. That was a loss, and
until she got it back, she was not fully compensated.
13 Majority at 8 n.3; see Brief of Respondent at 18-22.
25
No. 75727-0-1/26 (dissent)
6. The insurance commissioner's regulation allowing reduction for "applicable
comparable fault" does not control
State Farm acknowledges that if "fully compensated" means payment of
the collision loss less the deductible, then State Farm had no contractual
obligation to include the deductible in its subrogation demand or pay Daniels any
fraction of it.14 Yet State Farm did include the deductible in its demand and did
give Daniels 70 percent from the amount recovered. Why? According to State
Farm, its obligation to go even this far comes not from the contract, but solely
from a regulation promulgated by the Office of the Insurance Commissioner.
At the time Averill was decided, the regulation applied the Thiringer
principle by requiring that subrogation recoveries "be allocated first to the insured
for any deductible(s) incurred in the loss." Former WAC 284-30-393; Averill, 155
Wn. App. at 115 & n.5. Averill held that this regulation was "wrong as a matter of
law" because "Thiringer does not require that the insured be made whole for its
deductible when the insurer pursues its subrogation interest." Averill, 155 Wn.
App. at 117.
After Averill Farmers petitioned the commissioner to change the rule to
comply with Averill. Farmers asked that the regulation be amended "so that
insurers may deduct the amount of an insured's comparative fault from
reimbursement for their deductible, when settling a claim."15 The regulation was
14Brief of Respondent at 27.
15 Clerk's Papers at 33 (Office of Ins. Comm'r, Final Cost Benefit Analysis:
Chapter 284-30 WAC, Regarding How an Insurer Handles an Insured's
Deductible in a Subrogation Demand (June 2011)).
26
No. 75727-0-1/27 (dissent)
changed, and it now provides that any recoveries must "be allocated first to the
insured for any deductible(s) incurred in the loss, less applicable comparable
fault." WAC 284-30-393(emphasis added).
Without Averill, the amendment to the regulation is wrong as a matter of
law. And even with Averill there is no other basis in statute or case law for the
reduction of an insured's recovery of a deductible by "applicable comparable
fault." By statute, the basis for contribution among liable persons is the
"comparative fault" of each person, not comparable fault. RCW 4.22.040(1). But
assuming these two terms mean the same thing, Sherry has already held that full
recovery under the made whole principle is not limited to the nonnegligent.
Sherry, 160 Wn.2d at 621. "Rather, our opinions suggest insureds are not fully
compensated until they have recovered all of their damages as a result of a
motor vehicle accident." Sherry, 160 Wn.2d at 621.
And even if the insurance regulation could lawfully authorize reduction for
comparative fault, it does not apply in this case because there is no evidence that
Daniels was at fault. State Farm contends the phrase "applicable comparable
fault" is not limited to the fault of the insured.16 But it is a stretch to imagine that it
means anything else, considering that the amendment was adopted in response
to Farmers' petition that referred specifically to "an insured's comparative fault."
State Farm's discussion of the regulation reinforces the impression that its
analysis is driven by the desire to justify an existing practice of returning the
deductible to its insured after reducing it by the percentage of State Farm's own
16 Brief of Respondent at 32.
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No. 75727-0-1/28 (dissent)
payment that it was able to recover. In this case, State Farm recovered 70
percent, so State Farm deemed it fair to return only 70 percent of her deductible
to Daniels —even though Daniels was free of fault. State Farm has not
presented a sound theoretical basis for this result. It somewhat resembles
Professor Keeton's Third Rule: "The recovery from the third person is to be
prorated between the insurer and the insured in accordance with the percentage
of the original loss for which the insurer paid the insured under the
policy." Keeton, at 161. But it is not the same, because in the Keeton
formulation, the variable is the percentage of original loss, not the amount of the
recovery from the tortfeasor or the tortfeasor's percentage of comparative
fault. And as Keeton reports, the typical application of the Third Rule is found not
in contested cases, but rather as "the result achieved by compromise settlement
between the insured and insurer, whether or not it is consistent with the legally
enforceable rule of allocation." Keeton, at 163-64. With respect to the legally
enforceable rule of allocation, as previously noted, Washington—like most
jurisdictions—is in the camp of Keeton's Fourth Rule, the made whole rule.
7. Attorney fees should abide the result
Daniels requests an award of attorney fees under the rule of Olympic
Steamship Co. v. Centennial Insurance Co., 117 Wn.2d 37, 811 P.2d 673(1991).
State Farm contends that if Daniels prevails, Olympic Steamship does not apply
because this case "does not involve a denial of coverage or even a coverage
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No. 75727-0-1/29 (dissent)
question."17 I agree that the case does not involve a denial of "coverage"; this is
exactly the point I made above when citing S & K Motors, Inc. But the Olympic
Steamship entitlement to attorney fees applies when an insured "is compelled to
assume the burden of legal action to obtain the benefit of its insurance contract."
Olympic Steamship, 117 Wn.2d at 54. This rule will apply to Daniels if, on
remand, she obtains judgment for breach of contract.
Reversing the order of dismissal and reinstating Daniels' complaint will
mean only that she has the opportunity to proceed with her claims; it does not
conclusively determine that she will prevail. Accordingly, I would hold that her
request for attorney fees will abide the result at trial.
8. Conclusion
The guiding principle of Thiringer is well established, theoretically sound,
simple to understand, and easy to follow—all of the things the law should strive
to be. There is no good reason to push Thirinder aside in cases where a
recovery from a tortfeasor is made by a subrogating insurer, and there is no good
reason to push it aside in cases involving deductibles. The majority errs in
following Averill down what has already become a twisting and murky path. The
proper course of action is to turn back. I would reverse and remand for
17 Brief of Respondent at 34, citing Dayton v. Farmers Ins. Grp., 124
Wn.2d 277, 282, 876 P.2d 896(1994).
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No. 75727-0-1/30 (dissent)
reinstatement of Daniels' complaint and for further proceedings not inconsistent
with this opinion.
30