Chandler v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 29 December 2008
• Docket Number: Case No. CV 08-03184 GAF (Ex).
• Citation: 596 F.Supp.2d 1314
• Parties: Stuart CHANDLER, Plaintiff, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Central District of California

596 F.Supp.2d 1314

Stuart CHANDLER, Plaintiff, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant.

Case No. CV 08-03184 GAF (Ex).

United States District Court, C.D. California.

December 29, 2008.

COPYRIGHT MATERIAL OMITTED

Darcy R. Harris, Don Howarth, Suzelle M. Smith, Howarth & Smith, Los Angeles, CA, David Michael Medby, Stephen M. Garcia, Garcia Law Firm, Long Beach, CA, for Plaintiff.

Jacqueline M. Jauregui, Kevin J. Dunne, Sedgwick Detert Moran And Arnold LLP, Los Angeles, CA, for Defendant.

ORDER & MEMORANDUM REGARDING MOTION TO DISMISS

GARY ALLEN FEESS, Judge.

I. INTRODUCTION

This putative class action presents the Court with the question whether an insurer is permitted to recoup a payout from a third-party tortfeasor's insurance company before the insured has sued the third-party tortfeasor, and without first making the insured whole. Plaintiff Stuart Chandler purchased from defendant State Farm Mutual Auto Insurance Company an automobile insurance policy that reimburses policyholders for 80% of their out-of-pocket rental car costs while their automobiles are being repaired following covered accidents. Plaintiff suffered such an accident in March 2007 when his car was rearended by the driver of another car. Plaintiff rented a car, which cost him approximately $300, and State Farm reimbursed him 80% of those costs. Then, State Farm, as a partial subrogee of Plaintiff, sought reimbursement from the third-party tortfeasor's insurer, which questioned the charge and paid State Farm only $70. State Farm apparently accepted the $70 payment. Plaintiff then likewise sought reimbursement of his out-of-pocket rental costs from the third-party tortfeasor's insurer, which refused to pay. Rather than institute a lawsuit against the driver who rear-ended him, Plaintiff demanded that State Farm pay him his out-of-pocket costs from the $70 it had received from the driver's insurance company because, according to Plaintiff, he is entitled to reimbursement from State Farm under the "made whole" rule, which purportedly bars State Farm from recovering any of its expenses until Plaintiff's rental car expenses are paid in full.

Plaintiff candidly admits that his position could defeat a carrier's ability to recoup from tortfeasors and their insurers the full amount of its payments to its policyholders, and that it would, in effect and to that extent, require an insurer to pay more than its contractual obligation to the policyholder. Plaintiff claims to find support for his position in a variety of public policy arguments. But in the end, these arguments are not persuasive because Plaintiff's position undermines the most fundamental public policy at play in this and other cases—the principle that the person ultimately responsible for causing the damage should pay for it. In situations like the one presented here, the imposition of an obligation on an insurer to pay the insured out of proceeds obtained as reimbursement for its out-of-pocket costs in paying the policyholder's claim would confer greater rights on the policyholder than provided in the policy and eliminate any incentive on the part of the policyholder to seek reimbursement from the tortfeasor. The policyholder's carrier would end up short changed, and the tortfeasor would be off the hook even though the tortfeasor caused the damage in the first place. Although no California case addresses this question, a case from New York provides that a carrier may pursue reimbursement and has no obligation to make the policyholder "whole" out of reimbursement proceeds unless and until the policyholder attempts and fails to recover from the tortfeasor. Winkelmann v. Excelsior Ins. Co., 85 N.Y.2d 577, 626 N.Y.S.2d 994, 650 N.E.2d 841, 843-45 (1995). The Court finds the reasoning in Winkelmann persuasive and consistent with the fundamental notion that, whenever possible, the tortfeasor should bear responsibility for losses resulting from her conduct.

For these reasons, which are discussed in greater detail below, the Court concludes that Plaintiff lacks standing to proceed with his lawsuit, and that Plaintiff's claims are unripe. Defendant's motion to dismiss is therefore GRANTED, and Plaintiff's claims are DISMISSED WITHOUT PREJUDICE.

II. BACKGROUND

In March 2007, Plaintiff suffered damage to his car when he was rear-ended by the driver of another car. (First Am. Compl. ("FAC") ¶ 23.) At the time, Plaintiff owned automobile insurance through Defendant. (See FAC, Ex. 1 [Policy].) While his car was being repaired, Plaintiff rented a car and incurred $317.45 in expenses. (FAC ¶ 24.) Pursuant to the terms of Plaintiff's insurance policy, Defendant paid 80% of Plaintiff's rental car expenses, or $253.96, and Plaintiff paid $63.49. (FAC ¶ 24; see FAC, Ex. 1 [Policy at 18-19].) Subsequently, Defendant demanded reimbursement from the third-party insurer of its $253.96 payment. (FAC ¶ 25.) Defendant did not demand reimbursement of the $63.49 paid by Plaintiff. (Id.) The third-party insurer disputed the propriety of the duration of the car rental and the rental rate, and paid Defendant only $70.00 as payment-in-full for Plaintiffs rental car expenses. (FAC ¶ 26.)

Subsequently, Plaintiff contacted the third-party insurer and requested reimbursement of his $63.49. (FAC ¶ 27.) The third-party insurer rejected Plaintiff's demand for reimbursement of the $63.49, claiming that it had already paid Defendant the full amount of reimbursement owed on the car rental. (Id.) This prompted Plaintiff to seek reimbursement from Defendant of the $63.49. (FAC ¶ 28.) After Defendant also rejected Plaintiffs demand, Plaintiff initiated the present putative class action lawsuit against Defendant, asserting claims of (1) violation of California's Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200 et seq.; (2) conversion; (3) unjust enrichment; and (4) declaratory relief.

III. DISCUSSION

Defendant seeks to dismiss Plaintiff's suit on a number of procedural grounds, including lack of standing, unripe claims, and failure to state a claim for which relief may be granted. All of Defendant's arguments, however, boil down to one central legal issue: the "made-whole" rule's applicability under the present circumstances.

California courts are silent on the issue of the made-whole rule's applicability to situations in which an insured has not yet sued the third-party tortfeasor, but the insurer has already obtained reimbursement of the policy payout from the third-party tortfeasor's insurer. Accordingly, to resolve the matter before it, the Court must look to the general principles governing the doctrine of subrogation and the made-whole rule, as well as persuasive authority and public policy considerations.

A. SUBROGATION AND THE MADE-WHOLE RULE

1. GENERAL PRINCIPLES

Subrogation is an equitable doctrine that permits an insurance company to assert the rights and remedies of an insured against a third party tortfeasor. Allstate Ins. Co. v. Mel Rapton, Inc., 77 Cal.App.4th 901, 92 Cal.Rptr.2d 151, 156 (2000) (citing Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal.3d 622, 119 Cal.Rptr. 449, 532 P.2d 97, 104 (1975)). The doctrine's purpose is "to prevent the insured from obtaining a double recovery (and thus being unjustly enriched) and to place the responsibility for paying the loss on the party who caused the loss." Allstate Ins. Co. v. Superior Court, 60 Cal.Rptr.3d 782, 787 (2007), appeal docketed on other grounds, No. S154790. "When an insurance company pays out a claim on a first-party insurance policy to its insured, the insurance company is subrogated to the rights of its insured against any tortfeasor who is liable to the insured for the insured's damages." Progressive West Ins. Co. v. Superior Court, 135 Cal.App.4th 263, 37 Cal.Rptr.3d 434, 441 (2006). In other words, an insurer "step[s] into the shoes of the insured and assert[s] the insured's rights against the third party." Id. at 442. Subrogation is thus a purely derivative doctrine: "An insurer entitled to subrogation is in the same position as an assignee of the insured's claim, and succeeds only to the rights of the insured.... Thus, an insurer cannot acquire by subrogation anything to which the insured has no rights, and may claim no rights which the insured does not have." Transcon. Ins. Co. v. Ins. Co. of Pennsylvania, 148 Cal.App.4th 1296, 56 Cal.Rptr.3d 491, 498 (2007) (internal quotation marks omitted) (quoting Fireman's Fund Ins. Co. v. Maryland Cas. Co., 65 Cal.App.4th 1279, 77 Cal.Rptr.2d 296, 303 (1998)).

The made-whole rule is a common law exception to insurers' right of subrogation. Allstate Ins., 60 Cal.Rptr.3d at 788. In general, the doctrine "precludes an insurer from recovering any third party funds unless and until the insured has been made whole for the loss." Id. (emphasis omitted). "The applicability of the doctrine generally depends on whether the insured has been completely compensated for all the elements of damages, not merely those for which the insurer has indemnified the insured." Id. at 789. California courts recognize two general limitations on the applicability of the made-whole rule. See id. at 789-90. First, an insurer may disclaim the madewhole rule in an insurance contract by using clear and specific language that indicates the parties' intent to permit the insurer to seek reimbursement even if the insured has not been made whole. Id. at 789 (citing Progressive West, 37 Cal. Rptr.3d at 443; Sapiano v. Williamsburg Nat'l Ins. Co., 28 Cal.App.4th 533, 33 Cal. Rptr.2d 659, 661-62 (1994)). Second, the made-whole rule does not apply if the insurer participates in prosecuting the claim against the third-party tortfeasor. Id. at 790 (citing Progressive West, 37 Cal. Rptr.3d at 442; Travelers Indem. Co. v. Ingebretsen, 38 Cal.App.3d 858, 113 Cal. Rptr. 679, 685 (1974)). Neither limitation applies here because Defendant's policy agreement does not contain clear and specific language that would...