Frost v. Porter Leasing Corp.

• Decision Date: 03 June 1982
• Citation: 386 Mass. 425,436 N.E.2d 387
• Parties: Frank F. FROST et al., The Union Labor Life Insurance Company, intervener, v. PORTER LEASING CORP. et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 387

436 N.E.2d 387

386 Mass. 425

Frank F. FROST et al., The Union Labor Life Insurance

Company, intervener, v. PORTER LEASING CORP. et al.

Supreme Judicial Court of Massachusetts, Middlesex.

Argued Feb. 4, 1982.

Decided June 3, 1982.

Neil Sugarman, Boston (Dennis Paul Phillips, Boston, with him), for plaintiff.

Edward S. Rooney, Boston (William F. Kennedy, Jr., Boston, with him), for intervener.

Before HENNESSEY, C. J., and WILKINS, LIACOS, ABRAMS and O'CONNOR, JJ.

HENNESSEY, Chief Justice.

A Superior Court judge has reported the question "(w)hether a group insurer which provides medical and hospital expenses benefits to an insured has a right of subrogation in a recovery by the insured against a tortfeasor for personal injuries even though the group insurance policy contains no express provision entitling the insurer to subrogation rights." We conclude that the insurer has no right, in the absence of a subrogation clause, to share in the insured's recovery against the tortfeasor.

Frank F. Frost was injured in a motor vehicle accident. At the time, he was a beneficiary of a group insurance policy issued to a union health plan and paid for by his employer. Frost submitted medical expense claims totalling $26,566.04, and the insurer, The Union Labor Life Insurance Company (Union Labor), paid benefits of $22,679.57. ¹

The present case began as a tort action by Frost and his wife, Rilla Frost, against the owner and driver of the other vehicle involved in the accident. Frank Frost claimed damages for the medical expenses he had incurred, as well as for pain and suffering, impaired earning capacity, and future medical expenses. Rilla Frost claimed damages for loss of consortium.

Union Labor intervened in the Frosts' action, asserting a right of subrogation. Specifically, it claimed that, to the extent of the benefits it had paid to Frost, it was entitled to any damages Frost might recover from the defendants for medical expenses. Union Labor did not assert any claims directly against the tortfeasors.

Subsequently, the Frosts negotiated a settlement with the owner and driver of the other car. Frank Frost demanded $500,000, and Rilla $100,000. The parties agreed to a lump-sum settlement of $250,000, the limit of the defendants' liability insurance policy. The case was dismissed as against the defendants, leaving the Frosts and Union Labor to dispute over the proceeds of the settlement. ² The judge then allowed the parties' motion for a report to the Appeals Court, see Mass.R.Civ.P. 64, 365 Mass. 831 (1974), and entered a memorandum of decision, in which he concluded that Union Labor enjoyed a right of subrogation in the proceeds to the extent of the benefits it had paid, less a share of the costs the Frosts had incurred in obtaining a settlement. We granted the Frosts' application for direct appellate review.

Subrogation is an equitable adjustment of rights that operates when a creditor or victim of loss is entitled to recover from two sources, one of which bears a primary legal responsibility. If the secondary source (the subrogee) pays the obligation, it succeeds to the rights of the party it has paid (the creditor or loss victim, called the subrogor) against the third, primarily responsible party. See Travelers Ins. Co. v. Graye, 358 Mass. 238, 240-241, 263 N.E.2d 442 (1970); 1. G. E. Palmer, Restitution § 1.5(b) (1978). The doctrine of subrogation applies, within limits to be discussed shortly, to payments under policies of insurance. Upon payment, the insurer is entitled to share the benefit of any rights of recovery the insured may have against a tortfeasor for the same loss covered by the insurance. See Travelers Ins. Co. v. Graye, supra at 241, 263 N.E.2d 442; General Exch. Ins. Corp. v. Driscoll, 315 Mass. 360, 363-364, 52 N.E.2d 970 (1944). See generally 16 G. Couch, Insurance c. 61 (2d ed. 1966 & Supp. 1981). If the insured recovers from the tortfeasor, the insurer's right becomes a right to the proceeds in the hands of the insured. ³ Travelers Ins. Co. v. Graye, supra. General Exch. Ins. Corp. v. Driscoll, supra, 315 Mass. at 364, 52 N.E.2d 970. See generally 16 G. Couch, supra § 61:29; Annot., 51 A.L.R.2d 697 (1957).

An insurer's right of subrogation may be reserved in an agreement between the insurer and the insured, e.g., General Exch. Ins. Corp. v. Driscoll, supra, or may arise by implication, as a matter of general law, e.g., Travelers Ins. Co. v. Graye, supra 358 Mass. at 240-241, 263 N.E.2d 442. See generally 16 G. Couch, supra § 61:2. ⁴ Here, Union Labor admits that Frost's insurance policy contained no provision for subrogation. Union Labor's claim is one of implied subrogation, and we express no opinion on the ability of parties to fix their rights by contract. See Kimball & Davis, The Extension of Insurance Subrogation, 60 Mich.L.Rev. 841, 860-868 (1962). Cf. Morin v. Massachusetts Blue Cross, Inc., 365 Mass. 379, 383-390, 311 N.E.2d 914 (1974).

The reason for implied subrogation under contracts of insurance is to prevent an unwarranted windfall to the insured. See Travelers Ins. Co. v. Graye, supra; 4 G. E. Palmer, supra § 23.1. If the insured recovers from both the insurer and the tortfeasor, his compensation may exceed his actual loss. Duplicative recovery is "a result which the law has never looked upon with favor." Travelers Ins. Co. v. Graye, supra 358 Mass. at 241, 263 N.E.2d 442. It is contrary to the indemnity purposes that underlie many insurance contracts, and produces a form of unjust enrichment. Id. at 240-241, 263 N.E.2d 442. 4 G. E. Palmer, supra. Further, duplicative recoveries by particular accident victims cause an inefficient distribution of the overall resources available for accident compensation. Subrogation returns any excess to the insurer, who can then recycle it in the form of lower insurance costs. See Fleming, The Collateral Source Rule and Loss Allocation in Tort Law, 54 Cal.L.Rev. 1478, 1481-1484 (1966).

Nevertheless, rights of subrogation do not arise automatically upon payment of benefits under any contract of insurance. The availability of subrogation has generally depended on the type of coverage involved. Courts have readily implied rights of subrogation under policies covering property damage. Travelers Ins. Co. v. Graye, supra. See generally 3 J. A. Applebaum & J. Applebaum, Insurance Law and Practice § 1675, at 495 (1967 & Supp. 1981); 16 G. Couch, Insurance §§ 61:233, 61:242, 61:247, 61:332, 61:428 (2d ed. & Supp.1981); 4 G. E. Palmer, supra § 23.13. The insurer's obligation under a policy of property insurance is viewed only as a duty to indemnify the insured for actual loss, and not as an absolute liability to pay a certain sum of money upon the happening of an event. See, e.g., Travelers Ins. Co. v. Graye, supra at 240, 263 N.E.2d 442; Gatzweiler v. Milwaukee Elec. Ry. & Light Co., 136 Wis. 34, 36-37, 116 N.W. 633 (1908); 16 G. Couch, supra § 61:8. Moreover, the insured's loss is generally liquidated, and tort recovery is comparable, if not identical, to insurance coverage. See Aetna Life Ins. Co. v. J. B. Parker & Co., 30 Tex.Civ.App. 521, 523, 72 S.W. 621 (1902), aff'd, 96 Tex. 287, 72 S.W. 168 (1903). Therefore, the insured's actual loss, and the amount of any excess compensation from the combination of insurance proceeds and tort recovery, can be determined with certainty.

On the other hand, courts have not recognized implied rights of subrogation in the area of "personal insurance," a category that has included medical expense benefits as well as life insurance and other forms of accident insurance. E.g., Publix Cab Co. v. Colorado Nat'l Bank, 139 Colo. 205, 228-229, 338 P.2d 702 (1959); Michigan Hosp. Serv. v. Sharpe, 339 Mich. 357, 369-373, 63 N.W.2d 638 (1954); Feaster v. Old Security Life Ins. Co., 87 N.J.Super. 339, 348-349, 209 A.2d 354 (1965), aff'd, 91 N.J.Super. 120, 219 A.2d 340 (1966); Aetna Life Ins. Co. v. J. B. Parker & Co., 30 Tex.Civ.App. 521, 523, 72 S.W. 621 (1902); Gatzweiler v. Milwaukee Elec. Ry. & Light Co., 136 Wis. 34, 37-39, 116 N.W. 633 (1908); Rixman v. Somerset Pub. Schools, 83 Wis.2d 571, 266 N.W.2d 326 (1978). See 16 G. Couch, supra § 61:9; 4 G. E. Palmer, supra § 23.17(b); Kimball & Davis, supra at 849-851. Personal insurance is said to be less a contract of indemnity than a form of investment, imposing on the insurer an absolute duty to pay if the named condition occurs. E.g., Publix Cab Co. v. Colorado Nat'l Bank, supra 139 Colo. at 228, 338 P.2d 702; Feaster v. Old Security Life Ins. Co., supra 87 N.J.Super. at 348, 209 A.2d 354; Gatzweiler v. Milwaukee Elec. Ry. & Light Co., supra 136 Wis. at 37, 116 N.W. 633. But see In the Matter of Maak, 30 Misc.2d 610, 612, 222 N.Y.S.2d 845 (N.Y.Sup.Ct.1961). Further the insured's receipt of both tort damages and insurance benefits may not produce a measurably duplicative recovery. The insured is likely to have suffered intangible losses that are insusceptible to precise measurement, and the two sources of his recovery may cover different ranges of loss and be differently affected by considerations such as fault. Feaster v. Old Security Life Ins. Co., supra. Aetna Life Ins. Co. v. J. B. Parker & Co., supra. Gatzweiler v. Milwaukee Elec. Ry. & Light Co., supra. 4 G. E. Palmer, supra § 23.16, at 441.

Commentators have objected to the courts' classification of medical expense policies with other forms of personal insurance, and have argued that subrogation rights should be implied upon payment of benefits for medical and hospital expenses. They point out that medical coverage, like property insurance, is designed to indemnify the insured for quantifiable economic losses, and bears little similarity to an investment. Fleming, supra at 1501-1502. Kimball & Davis, supra at 851-860.

Although we recognize the indemnity character of medical and hospital expense benefits, we do not feel that the principles that support subrogation under policies of...