October 2013: Insurance Litigation Update - Deductibles Need Not Be Made Whole

On July 30, 2013, the Connecticut Supreme Court released its opinion in Fireman’s Fund Insurance Company v. TD Banknorth Insurance Agency, Inc., SC 18796 (Conn. 2013), answering a certified question from the Second Circuit on the “make whole” doctrine. The make whole doctrine is an equitable insurance law principle, which holds that in the absence of a valid contractual obligation to the contrary an insurer will not receive any of the proceeds from the settlement of a claim, except to the extent that the settlement funds exceed the amount necessary to fully compensate the insured for the loss suffered. Insurers who settle claims on behalf of their insureds typically have rights of subrogation, allowing them to pursue claims to recoup the amount paid in settlement. In Fireman’s Fund, the court was asked how subrogation recoveries would be applied where the insured had a large deductible and claimed that any recoveries should be paid to it, rather than the insurer. The Second Circuit certified the following question to the Connecticut Supreme Court: “Are insurance policy deductibles subject to Connecticut’s make whole doctrine?” Fireman’s Fund Insurance Company v. TD Banknorth Insurance Agency, 644 F.3d 166, 172-73 (2d Cir. 2011).

The Connecticut Supreme Court held that the “make whole” doctrine does not require an insurer to forgo subrogation recoveries when an insured has not recovered its deductible. The decision makes clear that insureds that purchase policies with high deductibles will be held to the bargain they struck with their insurer.

The case arose when Haynes Construction Company sued TD Banknorth for negligence. Fireman’s Fund was TD Banknorth’s errors and omissions carrier. Jointly, Fireman’s Fund and TD Banknorth settled with Haynes for $354,000—$150,000 from TD Banknorth (its deductible), and the remainder from Fireman’s Fund. As part of the settlement, Haynes assigned any right of recovery against others to Fireman’s Fund and TD Banknorth. Ultimately, there were subrogation recoveries of $208,000. TD Banknorth claimed it was entitled to recover its deductible under the “make whole” doctrine, and Fireman’s Fund filed suit in the District of Connecticut for a declaratory judgment that TD Banknorth was entitled to nothing, because Fireman’s Fund’s payments for defense and indemnity exceeded the $208,000 recovered.

On summary judgment, the District Court (Droney, J) ruled for Fireman’s Fund, concluding that the subrogation clause in Fireman’s Fund’s policy was sufficient to overcome Connecticut’s “make whole” doctrine. On appeal, the Second Circuit disagreed that the language in the policy was sufficient to abrogate the doctrine, but certified the issue of whether the doctrine even applied in the first instance to the Connecticut Supreme Court.

In answering the question, the Connecticut Supreme Court first concluded that the “make whole” doctrine applies in Connecticut, but that it does not allow the insured to recoup its deductible. (Slip. Op. at 4). The Court noted that “[a] deductible represents the level of risk the insured has agreed to assume” and the Court was “not of the opinion that equity dictates a departure from the terms of the insurance contract into which the parties voluntarily entered.” On that basis, the Court reasoned that applying the equitable considerations of the make whole doctrine to deductibles would “effectively disturb the contractual agreement into which [the insured] and [the insurer] entered, thereby creating a windfall for [the insured] for a loss that it did not see fit to insure against in the first instance when it contracted for lower premium payments in exchange for a deductible.” (Slip. Op. at 14).