LEGAL AND PRACTICAL SUBROGATION ISSUES IN THE U.S.A.
of subrogation. There are, of course, states which have protected the subrogated carriers’rights and if the loss occurs in one of those jurisdictions, subrogation can proceed.PRORATION OF RECOVERIES - “FIRST DOLLAR OUT” DOCTRINEThe division of subrogation dollars between insured and insurer can be anextremely complex and divisive issue.For example, when an insured sustains asubstantial uninsured loss and then joins with the insurer in subrogating against thewrongdoer, how is any recovery shared? Should the insurer be made whole for all of itsindemnity payments before the insured makes any recovery? On the other hand, shouldthe uninsured loss, including any deductible, be satisfied before the insurer makes anyrecovery?Professor Robert Keaton, a recognized authority on insurance law, has categorizedthe various approaches to apportionment of subrogation recoveries as follows:Rule 1 (Insurer: Whole Plus):Rule 2 (Insurer: Whole):Rule 3 (Proration):Rule 4 (Insured: Whole):Under this rule, the insurer is the sole beneficialowner of the claim and is entitled to fullrecovery even if it exceeds the amount paid bythe insurer to the insured.Under this rule, the insurer is to be reimbursedfirst out of any recovery and the insured then isentitled to the difference remaining.Under this rule, the recovery is proratedbetween the insurer and the insured accordingto the percentage of the original loss for whichthe insurer paid the insured.Under this rule, the insured is reimbursed firstfrom any recovery and the insurer is entitled toMP3 20204330.1- 12-
any balance remaining after the insured is fullyreimbursed.Rule 5 (Insured: Whole Plus):Under this rule, the insured owns the entireclaim against the third party and is entitled toany amount recovered whether or not thisexceeds the insured’s loss.’*While all of the rules have their adherents, the majority of jurisdictions have adoptedeither Rule 2 or Rule 4.Rule 3 is typically only followed when the parties havecontractually agreed to proration.Those jurisdictions which adopt Rule 2 represent the minority view in the UnitedStates.By far, the greater weight of authority is that the insured must be fullycompensated for any uninsured loss before the insurer can share in the proceeds.Approximately 27 states have adopted the rule in some form or another.Garrity v. Rural Mutual Insurance C0.19 is one of the most frequently cited casessupporting the rule. In Garrity, the subrogated insurer had made payments under itspolicy of fire insurance. The insured commenced its own action against the tortfeasorsand eventually settled his claims for less than the actual amount of his damages. Theinsurer asked for a declaration that it was entitled to recover its payment before theinsured received any of the proceeds.The court denied the insurer’s request andconcluded that the insured must be completely compensated for all elements of damagesbefore the insurer’s subrogation rights arise. Thus, the insured was entitled to keep theentire amount of the settlement to the exclusion of the insurer.l9MP3 20204330.1Robert E. Keeton, Basic Text on Insurance Law 9 3.1 O(c)(2) (1 971).253 N.W.2d 512 (Wis. 1977).- 13 -