Contractual Exemptions to the “Made-Whole” Rule

The “Made Whole Rule” is an equitable rule of law that that bars an insurer’s right to recovery from the settlement funds of a personal injury victim unless the victim has been fully compensated (“made whole”) for the damages he or she has sustained.

Sapiano v. Williamsburg Nat. Ins. Co. (1994) 28 Cal.App.4th 533 adopted the Made Whole Rule in California in 1994, holding that a commercial vehicle insurer in a subrogation claim cannot “[a]ssert its contractual right to repayment where the total third party insurance is insufficient to compensate the full loss suffered by the insured.” Id. At 533.  In the following year, the federal Ninth Circuit adopted The Made Whole Rule in Barnes v. Independent Automobile Dealers of California, 64 F3d 1389 (9th Cir. 1995) and enunciated the now well-established fact that ‘made whole’ includes past and future medical expenses, loss of earnings, and pain and suffering.

California courts have since confirmed the applicability of the Made Whole Rule on numerous occasions. See, e.g. Hightower v. Farmers Ins. Exchange (1995) 38 Cal. App. 4th 853; and Allstate Insurance Company v. Superior Court of San Diego County (2007) 151 Cal. App. 4th 1512.  Recently, however, there has been a trend in allowing insurance companies to contract out of the made whole rule by including language in their insurance policies that specifically exempts them from the law.  This has left courts struggling to figure out the extent to which such “exemptions” are enforceable, and how specifically must they be worded to have force and effect.

In one of the more noteworthy cases addressing these issues so far, the Court of Appeals in Progressive West Ins. Co. v. Yolo County Superior Court emphasized that an insured does not waive his or her right to be ‘made whole’ through a waiver in his or her insurance policy unless that waiver is “clear and specific” and the insurance company pursues the first party claim in good faith. Progressive West Ins. Co. v. Yolo County Superior Court (2006) 135 Cal.App.4th 263.

So, if you have been in an accident and your medical insurer is attempting to exercise subrogation (recovery) rights on your settlement or award, have an experienced personal injury attorney take a close look at your policy to determine whether it contains a clause exempting your insurer from the made whole rule, and if so, whether it states with sufficient specificity that the insurer is entitled to full reimbursement regardless of your settlement amount.

At Phillips & Associates, we employ all strategic tools available under the law to provide the most favorable possible results for our clients. To schedule a free consultation, call our Los Angeles or San Diego office.