Insurer's Right to Contractual Subrogation Trumps Equitable Made-Whole Doctrine Yet Again in Texas

In Fortis Benefits v. Cantu, 234 S.W.3d 642 (Tex.2007), the Texas Supreme Court held that the “made whole” doctrine does not apply where the parties’ agreed contract provides a clear and specific right of subrogation. Despite this ruling, the Austin Court of Appeals was recently confronted with a situation where a trial court attempted to allocate the entirety of an $800,000.00 settlement in a negligence suit to the family of an individual who was injured in an oilfield explosion and spent 52 days in the hospital before eventually succumbing to his extensive injuries. Although the insurer had intervened in the underlying lawsuit and asserted a contract-based lien of over $330,000.00 on any recovery obtained by the family, the Austin Court of Appeals ultimately agreed with the trial court that equitable principles applied to the subrogation claim, and that where “a subrogation claim works an injustice, it shall not be allowed.” Citing the insurer’s solid financial position and the financial hardship that the family would suffer should the insurer’s subrogation rights be enforced, the entire settlement was ultimately allocated to the family under the “made whole” doctrine.

In reversing the Austin Court of Appeals, the Texas Supreme Court held in Texas Health Ins. Risk Pool v. Sigmundik, 315 S.W.3d 12, 14 (Tex.2010) that the “made whole” doctrine was inapplicable, and that it was improper to cut the insurer out of a settlement to which it had a valid claim. Moreover, the Court noted that the trial court could not cut the insurer out of the settlement simply because it was an insurance company, or because the trial court believed the surviving family needed the money more than the insurer.

The Court further addressed arguments by the family that the insurer failed to carry its burden of establishing that settlement funds should be allocated to its lien. In rejecting this argument, the Court held that such evidence was in fact provided. Specifically, the insurer requested the full amount of the total medical expenses incurred beginning with its first petition in intervention, and also provided extensive medical records and testimony to support both the expenses it requested and the damages suffered by the deceased. The Court ultimately remanded the case to the trial court to determine what portion of the settlement funds should be allocated to the insurer.

The Sigmundik case provides even more persuasive authority for insurers to rely on when asserting contractual based rights of subrogation. Based on Fortis Benefits and Sigmundik, it is clear that the Texas Supreme Court will defer to clear policy language when addressing allocation issues between an insured and its insurer. Accordingly, it is imperative that these provisions be reviewed and analyzed at the outset of a claim so that the insurer is not forced to unfairly compromise its rights of subrogation. In addition, Sigmundik also provides a framework for what an insurer needs to do to adequately protect its contractual subrogation interest (namely, intervene and ensure that its damages are properly pled and supported). Adherence to these suggestions will allow an insurer to negotiate from a position of strength should recovery allocation issues arise.

Texas Chain...Of Distribution

With a global economy more and more products are being shipped to the United States from foreign countries daily.  When these products fail, it is expensive and time consuming to seek recovery from the foreign manufacturer.  But before throwing out your products claim, look at your state's laws on pursuing those entities in the chain of distribution of the product.  For example, distributors usually coordinate the sale of the product from the manufacturer to the seller and many times never even touch the product.  Despite their limited role of organizing the transfer of the goods, their liability can be unlimited in some circumstances.

In Texas, if you establish that the manufacturer of the product is insolvent or not subject to the jurisdiction of the court then the distributor can be held fully liable for the damages caused by the product as though they were, in fact, the manufacturer.  See Civil Practice & Remedies Code § 82.003.  Many distributors try to insulate themselves from liability in Texas by pleading the manufacturer is a "responsible third party" under Section 33.004 of the Civil Practice & Remedies Code.  This type of plea allows the distributor to put the manufacturer's name on the jury charge when the manufacturer is not a party to the litigation so the jury can then decide the percentage of responsibility between the manufacturer and the distributor.  Logically, jurors are going to put the majority of responsibility on the manufacturer who made the product as opposed to the distributor who may never have even touched the product.  Don't be fooled by this bit of legal maneuvering by a distributor.  The "responsible third party" statute only applies when both parties are negligent.  Under Section 82.003, the distributor can be held liable for the damages associated with the defective product without any negligence on the part of the distributor.  Since the distributor's responsibility for the product arises from the statutorily imposed guidelines of Section 82.003 of the Civil Practice & Remedies Code and not from any negligent act it did or failed to do, the distributor cannot escape liability by trying to push a percentage of fault onto the manufacturer under Section 33.004. 

Each state has its own laws regarding the liability of distributors and those should be reviewed before closing a claim for a defective product manufactured overseas.