§71.4 Non-ERISA, Non-Workers’ Compensation Carriers

The Case: York v. Sevier County Ambulance Authority , 8 S.W.3d 616 (Tenn. 1999).

The Basic Facts: Insured received a personal injury settlement of $130,000, which was found by the trial court to be less than the amount of damages actually suffered by the insured. Insurer (Blue Cross/Blue Shield) was impleaded into the lawsuit claiming a right to reimbursement for $19,149.97, in accordance with a provision of the insurance contract. Trial Court refused to allow the reimbursement; the Court of Appeals reversed.

The Bottom Line:

• "We granted this appeal to decide whether an insured must receive full compensation for losses, i.e., be 'made whole,' before an insurer may receive reimbursement for medical expenses paid on behalf of the insured." 8 S.W.3d at 617.
• "In Wimberly v. American Casualty Co., 584 S.W.2d 200 (Tenn. 1979), we held that an insurer was not entitled to subrogation rights before an insured is made whole for his or her losses. We now likewise conclude that an insurer may not receive reimbursement for medical expenses made on behalf of the insured when the insured has not been made whole for his or her losses, even where a 'right of reimbursement' provision is contained in the insurance policy. A contrary holding would allow an insurer to circumvent the 'made whole' doctrine simply by using a reimbursement provision in lieu of subrogation. We therefore reverse the judgment of the Court of Appeals and reinstate the judgment of the trial court." Id. at 617-18.
• "We will begin by contrasting subrogation and reimbursement. Subrogation is defined as 'the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt.' Castleman Constr. Co. v. Pennington, 432 S.W.2d 669, 674 (Tenn. 1968) (citation omitted). In the context of insurance, subrogation allows the insurer to 'stand in the shoes' of the insured and assert the rights the insured had against a third party. E.g., Wimberly, 584 S.W.2d at 203. In contrast, a right of reimbursement simply allows the insurer to recoup payments from the insured which had been made on the insured's behalf. See Barreca v. Cobb, 668 So. 2d 1129, 1131 (La. 1996) (contrasting subrogation and reimbursement).^FN3

  FN3 In their most basic forms, therefore, subrogation means that party A is substituted for party B and is allowed to raise the rights party B had against party C. Reimbursement simply allows party A to recover from party B payments it made on behalf of party B."

  Id . at 618-19.
• "The principles of subrogation, whether provided for by contract ('conventional' subrogation), or arising under equitable principles of law ('legal' subrogation), are well-established in our case law.^FN4 Subrogation is based on two fundamental premises: 1) that an insured should not be allowed double recovery for the same loss, which would be the result if permitted to recover both from the insurer and a tortfeasor; and 2) that the tortfeasor or wrongdoer should compensate the insurer for payments the insurer made to the insured. Wimberly, 584 S.W.2d at 203; see [16 Couch on Insurance Law 2d, § 61:18].

  FN4 Although not applicable here, a right of subrogation may also be statutory. Castleman v. Ross Eng'g, Inc., 958 S.W.2d 720 (Tenn. 1997)."

  Id . at 619.
• "In applying equitable subrogation principles, we observed in Wimberly that the insured had not been 'made whole,' and therefore could not have received double recovery, because the recovery of $40,000 did not cover the total losses of $44,619. Secondly, we noted that the tortfeasor did not 'reap a windfall' because she was released by the parties in consideration of the $25,000 payment in settling the claim. Moreover, in considering the equities between the parties, we concluded that the loss incurred by the insurance companies was a risk they had been paid to assume. We therefore held that the insured must be made whole, i.e., receive full compensation for his or her damages, before subrogation rights arise in favor of insurers. Id. at 203." Id.
• "Our decision in Wimberly is consistent with the rule followed in numerous other jurisdictions. The question, then, in the case before us is whether our conclusion in Wimberly regarding subrogation applies where an insurance policy has a specific right of reimbursement. In our view, a right of reimbursement raises many of the same equitable issues involved in subrogation and warrants the same conclusion - that the insured must be made whole before the insurer is entitled to reimbursement." Id. at 620 (footnote omitted).
• "Initially, we observe that neither subrogation nor reimbursement should detract from the primary goal of compensatory damages: to compensate a party for the full extent of his or her losses. Moreover, the equitable interests outlined in Wimberly apply equally to reimbursement. For instance, as with subrogation, there is no risk of the insured receiving a 'double recovery' for the same loss if he or she has not been made whole. Similarly, reimbursement to the insurer from the insured would not hold the wrongdoer or tortfeasor accountable for the loss. Finally, in considering the equities between the parties, we note that any potential loss incurred by the insurer is a loss that it was paid to assume by the very nature of an insurance contract." Id.
• "In summary, our case law is clear that an insurer is not entitled to subrogation unless and until the insured has been made whole for his or her losses, regardless of what language is contained in the contract. In our view, the same rule must apply to a contract that, in effect, seeks to evade the 'made whole' doctrine by replacing or supplementing the law of subrogation with a right of reimbursement. Accordingly, we reverse the judgment of the Court of Appeals and reinstate the judgment of the trial court." Id. at 621.

Other Sources of Note: Abbott v. Blount County , 207 S.W.3d 732 (Tenn. 2006) (the made-whole doctrine applies regardless of the language found in the insurance contract); Health Cost Controls, Inc. v. Gifford, 108 S.W.3d 227 (Tenn. 2003) (there is not an exception to made-whole doctrine exists to benefit an insurer for restitution by mistake or for its claim that payment would not have been made to an insured if the insurer had known of a third party's liability); Graves v. Cocke County, 24 S.W.3d 285 (Tenn. 2000) (the made-whole doctrine to does not apply to subrogation interests arising from worker's compensation cases, but also holding that the subrogation interest in such cases does not encompass future medical payments when the parties have settled the case for a lump sum award); Blankenship v. Estate of Bain, 5 S.W.3d 637 (Tenn. 1999) (made-whole doctrine applies to subrogation claims arising from payment of medical expenses by Tenncare). Note: The holding in this case has been substantially impacted by subsequent legislation, Tenn. Code Ann. § 71-5-117(c).

Recent Cases: Health Cost Controls, Inc. v. Gifford , 239 S.W.3d 728 (Tenn. 2007) (holding that court was required to consider all sources of insured's recovery when determining whether he had been made whole).

---