(Article from Insurance Law Alert, July/August 2020)
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Addressing a matter of first impression under New Jersey law, the New Jersey Supreme Court ruled that the made whole doctrine, under which an insurer is not permitted to seek subrogation until the insured has been fully compensated for its loss, does not apply to self-insured retentions or deductible payments. City of Asbury Park v. Star Ins. Co., 2020 WL 3493526 (N.J. June 29, 2020).
Star Insurance provided workers compensation coverage to the City of Asbury. The policy included a self-insured retention of $400,000 per occurrence, as well as a subrogation provision that allowed Star Insurance to be subrogated to the City’s rights after payment is made under the insurance contract. When a City employee was injured, the City paid the employee $400,000 (the full amount of its self-insured retention) and Star Insurance paid an additional $2.6 million. After a third-party tortfeasor paid the injured employee additional amounts, the City and Star Insurance sought reimbursement of amounts paid to the employee. The question before the court was whether, under the made whole doctrine, the City had priority to recover its self-insured retention before Star Insurance could recover any of its payments.
The New Jersey Supreme Court, answering a question certified by the Third Circuit, ruled that the made whole doctrine does not apply “to first-dollar risk that is allocated to an insured under an insurance policy, i.e., a self-insured retention or deductible.” The court explained that such payments reflect risk that the insured agreed to assume in exchange for a reduced premium. Therefore, prioritizing reimbursement of a self-insured retention over an insurer’s loss “would, in effect, convert the policy into one without a self-insured retention.”
As the court noted, the Supreme Courts of Connecticut and Pennsylvania have reached similar conclusions, whereas the Supreme Court of Washington ruled that a first-party insurer, upon receiving partial recovery through subrogation, was obligated to reimburse its “fault-free insureds for the full amount of their deductible before any portion of the subrogation proceeds can be allocated to the insurer.”