Historically, subrogation was established as an equitable principle allowing an insurer who has indemnified an insured "to stand in the shoes of the insured's claim" for damages against a tortfeasor. (1) Today, subrogation often centers on a conventional approach, flowing from a contract (2) or is statutorily driven, governed by the terms of a statute. (3) Black's Law dictionary defines a "subrogation clause" in insurance as "[a] provision in a property or liability insurance policy whereby the insurer acquires certain rights upon paying a claim for a loss under the policy." (4) These rights include receiving a full or proportionate amount of the benefits paid to the insured. (5)
The concept of subrogation in property insurance was widely applied; however, the concept in the context of personal injury claims remained intensely prohibited at common law. (6) This tenor changed dramatically during the 1960's and 1970's when insurance companies, through aggressive collection efforts and litigation, quickly promoted the expansion of subrogation for medical bills paid by automobile insurers, (7) leaving only a minority of states resisting this movement. (8) Additionally, health insurers began adding subrogation clauses in an attempt to get a share of the damages paid to victims by tortfeasors after the first reported judicial decision addressed the propriety of health insurance subrogation in 1982. (9) Yet, "[m]ore and more jurisdictions have come to recognize the harsh results placed upon the insured through the doctrine of subrogation." (10)
In fact, after an insurer has paid out benefits, but when an insured is not fully reimbursed for all of its losses, a split of authority exists as to who has a superior interest in the third-party recovery. (11) In Basic Text on Insurance Law, Robert E. Keeton describes five standard rules that courts and legislatures often consider. (12) The first and second rules favor the insurer:
First Rule: The insurer is the sole beneficial owner of the claim against the third party and is entitled to the full amount recovered, whether or not it exceeds the amount paid by the insurer to the insured.
Second Rule: The insurer is to be reimbursed first out of the recovery from the third party, and the insured is entitled to any remaining balance. (13)
The third rule provides a middle ground approach between favoring the insurer and the insured. (14)
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. (15)
The fourth and fifth rules favor the insured:
Fourth Rule: Out of the recovery from the third party the insured is to be reimbursed first, for the loss not covered by the 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. Thus, if there is any windfall, it goes to the insured.
Fifth Rule: The insured is the sole owner of the claim against the third party and is entitled to the full amount recovered, whether or not the total thus received from the third party and the insurer exceeds his loss. (16)
In keeping with Keeton's Fifth Rule, (17) some states now have laws prohibiting subrogation, through either statute or common law. (18) While the majority of states allow subrogation, many of these same states, through judicial decisions and legislation, have pronounced the made-whole doctrine in order to minimize its detrimental effects of insurance subrogation on the insured. (19) Additionally, some federal courts have adopted the made-whole doctrine as the default rule. (20)
Insureds anticipate a shift in the risk of loss to the insurer in return for their premium payment. (21) When a loss occurs, there is a certain expectation by insureds that they will be made whole because of this purchased protection. …