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.