Washington’s Made Whole Doctrine Applies to Deductible in Subrogation Action

In Lazuri Daniels v. State Farm Mutual, No. 96185-9 (July 3, 2019), an en banc Washington Supreme Court decided that an insurer which has sought and obtained subrogation proceeds from a third party is required to reimburse its fault-free insured for the full amount of their deductible before allocating any portion to its subrogated interest.

The insured was involved in an auto accident. The insurer, State Farm, paid its insured the portion of the repair costs that exceeded the insured’s deductible and then sought to recover its payment from the at-fault driver’s insurer, Geico. Geico contended that it’s insured was 70% at fault for the collision and offered State Farm 70% of its insured’s total damages. State Farm accepted the offer and then reimbursed its insured for 70% of her deductible. State Farm’s insured then filed suit against State Farm alleging that under its own insurance policy and Washington law, State Farm was entitled to settlement proceeds only after fully compensating its insured for her losses, including the full deductible. The trial court dismissed the claims against State Farm via summary judgment which was affirmed by the Court of Appeals.

The Washington Supreme Court reversed and remanded. The Supreme Court held that the application of the Made Whole Doctrine is not limited to situations where the insured recovers directly from a third-party, and instead applies whenever an insurer seeks “an offset, subrogation, or reimbursement” for benefits already paid. It followed its reasoning in Thiringer v. American Motors Insurance Co. and Sherry v. Financial Indemnity Co., stating that “the proceeds from any recovery from a third-party tortfeasor, whether in a subrogation action or otherwise, must be allocated in such a way as to first make the insured whole.” The Court also determined that this policy is supported by the insurance regulations and State Farm’s own insurance policy language.
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