A recent Wisconsin Court of Appeals case, Employers Mutual Casualty Company v. Joseph Kujawa, 2015 WI App 26, may change the context in which courts evaluate insurance companies’ subrogation rights.
Joseph Kujawa settled his personal injury claim with the tortfeasor before filing suit, and did not include his personal auto carrier, Employers Mutual, in the negotiations. He signed an indemnification agreement with the tortfeasor agreeing to indemnify it against subrogation claims. Employers Mutual filed a declaratory action against Kujawa for collection of its subrogation lien, effectively requesting a Rimes hearing. The court found that Kujawa was not made whole and therefore Employers Mutual had no right of subrogation.
The right of subrogation has always been limited by equitable considerations. The right of an insurance company to subrogate against the tortfeasor (defendant) is limited in the situations where the insured (plaintiff) and the insurance company are “competing for a limited pool of funds.” When an insured and his or her insurer are competing over the same funds, it is easier for the court to find in favor of the injured party. See Schulte v. Frazin, 176 Wis. 2d 622, 629, 500 N.W.2d 305 (1993). (“Where either the insurer or the insured must to some extent go unpaid, the loss should be borne by the insurer for that is a risk that the insured has paid it to assume.”)
However, courts over the years have differed on what actually limits that pool of funds. Here, Kujawa stresses the concept that “the injured party should have the right to settle on its own terms,” citing Schulte, 176 Wis. 2d at 634. Relying on prior Wisconsin cases, the Kujawa Court held that even when the tortfeasor’s policy limits are more than enough to cover the plaintiff’s claims and the subrogation claims, the injured party signing an indemnification agreement with the tortfeasor acts to shrink the available pool of funds. 2015 WI App 26, at ¶ 9.
It follows that the injured party has the right to dictate the direction of litigation. However, the Kujawa court grants the insured even greater control by effectively allowing the insured to curtail the rights of his or her insurance carrier. The court admits that Kujawa voluntarily accepted a settlement that did not “fully compensate” him for his damages, but did not find that Kujawa was jeopardizing his insurance company’s right of subrogation in violation of the policy. Id. at 12. In a questionable decision, the Court of Appeals writes, “Kujawa acted in good faith and had reasonable reasons for compromising the claim.” Id. Kujawa’s statements regarding his settlement amount to nothing more than passing off litigation as a mere annoyance standing between him and his settlement funds.
The takeaway from this case is that Employers Mutual should not have sued its insured for the $767.00 (yes, that was its entire subrogation lien), and it should not have appealed the trial court’s negative ruling, because it risked the negative outcome. Possibly, also that carriers should be leery of the “made whole doctrine” in the context of pre-suit settlement of personal injury claims of their insureds. They should make every possible effort to place an insured on notice of the lien and to follow up often regarding the lien. Be proactive in protecting the insurer’s rights; once the deed is done, the decision in Kujawa could work to limit, or eliminate, the insurer’s rights to recover later.