Powell v. Blue Cross and Blue Shield of Alabama

• Decision Date: 28 December 1990
• Parties: Cynthia A. POWELL and Bruce Powell v. BLUE CROSS AND BLUE SHIELD OF ALABAMA. 88-1342.
• Court: Alabama Supreme Court

Page 772

581 So.2d 772

Cynthia A. POWELL and Bruce Powell v. BLUE CROSS AND BLUE SHIELD OF ALABAMA.

88-1342.

Supreme Court of Alabama.

Dec. 28, 1990.

John W. Haley of Hare, Wynn, Newell & Newton, Birmingham, for appellants.

Duncan B. Blair of Lange, Simpson, Robinson & Somerville, and Walter F. Scott III, Birmingham, for appellee.

PER CURIAM.

This appeal presents this primary issue: May the insurer/indemnitor, by contract providing for subrogation, claim reimbursement of its payment to the insured/indemnitee, out of the insured/indemnitee's recovery from the third-party tort-feasor, when the third-party recovery does not exceed the insured/indemnitee's total loss? The trial court held that the insurer/indemnitor could so contract and ordered the insured/indemnitee to reimburse the insurer/indemnitor. Because we hold that the right of subrogation, whether equitable or contractual, does not arise until the plaintiff/insured has been fully compensated for her loss, we reverse and remand. ¹

The facts in this case were stipulated by the parties. Cynthia Powell was permanently injured in an automobile accident. Blue Cross and Blue Shield of Alabama ("Blue Cross") paid Cynthia's medical expenses of $27,080.26 under the provisions of a group health insurance policy that covered Cynthia. Cynthia sued the driver of the other automobile involved in the accident, Joy Jolly, and its owner, Dale Jolly, alleging negligence and wantonness. In an amended complaint, she alleged over $7,000,000 as damages for her injuries. Cynthia Powell, however, settled her claim against the Jollys for the $100,000 limit of the Jollys' liability insurance policy.

Blue Cross filed a motion to intervene in the lawsuit, seeking subrogation for $27,080.26 that it had paid for Cynthia's medical expenses. The trial court allowed Blue Cross to intervene, dismissed the Jollys, and ruled that Blue Cross was entitled to the full amount it had paid for Cynthia's medical expenses out of the settlement recovery. In its judgment the trial court stated that "it is conceded by all concerned that the $100,000 recovery does not make the plaintiff whole." The trial court went on, however, to hold that under the insurance contract Blue Cross was "entitled to the reimbursement of any amounts paid by it for the benefit of its insured. This reimbursement is due even though the insured is not paid in full, or made whole by any recovery from a third party."

The Powells appeal the trial court's judgment that Blue Cross is entitled to recover the full $27,080.26. For a complete understanding of the issues involved in this case and our resolution of them, the reader should take note of two other cases released this day: McKleroy v. Wilson, 581 So.2d 796 (Ala.1990); and Sharpley v. Sonoco Products Co., 581 So.2d 792 (Ala.1990).

Contained in the Blue Cross policy was specific language that gave Blue Cross first priority over any money that the insured collected from a third party. ²

"Separate from and in addition to the Administrator's right of subrogation, if a subscriber or a member of his family recovers money from the other person or organization for any injury or condition for which benefits are provided by the administrator, the Member agrees to reimburse the Administrator from the recovered money that amount of benefits the Administrator has paid or provided. That means that the Member will pay the Administrator the amount of money recovered by him through judgment or settlement from the third person or organization up to the amount of the benefits paid or provided by the administrator. The right to reimbursement of the Administrator comes first even if a Member is not paid for all of his claim for damages against the other person or organization or if the payment he receives is for, or is described as for, his damages (such as for personal injuries) for other health care expenses or if the member recovering the money is a minor." ³ (Emphasis added.)

Blue Cross filed with this Court a motion to dismiss the appeal, arguing that the plaintiffs have no standing to bring an appeal because the trial court dismissed the Jollys as defendants. A party or his personal representative has standing to bring an appeal from an adverse ruling contained in a final judgment. Home Indem. Co. v. Anders, 459 So.2d 836, 842 (1984), appeal after remand, 477 So.2d 312 (Ala.1985). The Powells suffered an adverse ruling with respect to the issue of subrogation. This judgment with respect to Blue Cross is final in all respects and is therefore a final judgment from which the Powells may appeal. Rule 4(f), A.R.Civ.P.

The entire law of subrogation, conventional or legal, is based upon equitable principles. International Underwriters/Brokers, Inc. v. Liao, 548 So.2d 163, 165 (Ala.1989). The equitable considerations that are the underpinnings of subrogation are (1) that the insured should not recover twice for a single injury, and (2) that the insurer should be reimbursed for payments it made that, in fairness, should be borne by the wrongdoer. Id. In International Underwriters, we stated;

"[N]o right of subrogation against the insured exists upon the part of the insurer where the insured's actual loss exceeds the amount recovered from both the insurer and the wrongdoer, after deducting costs and expenses. In other words, the insurer has no right as against the insured where the compensation received by the insured is less than the loss."

548 So.2d at 164-65.

Although today subrogation is most often utilized by insurance companies, historically it was available to anyone who was obligated to pay the debts of another. ⁴ Deneberg, Subrogation Recovery: Who is Made Whole?, 29 Fed'n Ins.Couns.Q. 185, 186 (1979). Anyone who was obligated to pay the debts of another could utilize subrogation. Id. The English courts originally applied subrogation to insurance policies on the rationale that the contract of insurance was a contract of indemnity, which meant that the insured should be fully indemnified, but not more than fully indemnified. Id. citing Castallain v. Preston, 11 Q.B.D. 380, 386 (1883).

The principle of indemnity was the primary reason for the adoption of subrogation in insurance cases. See International Underwriters, supra; North River Ins. Co. v. McKenzie, 261 Ala. 353, 359, 74 So.2d 599, 604 (1954). The insurer's obligation was to make the insured whole, but not more than whole. Accordingly, subrogation originally served to prevent the insured from receiving a double recovery by first collecting the insurance proceeds and then suing the tort-feasor or other third parties, so as to recover again for his injury. ⁵ A second reason for the adoption of subrogation in insurance cases is what has been called "the moralistic basis of tort law as it has developed in our system." Kimball & Davis, The Extension of Insurance Subrogation, 60 Mich.L.Rev. 841, 841 (1962). In other words, the wrongdoer should bear the burden of reimbursing the insurer for payments it made to the insured because of the wrongdoer's actions. See International Underwriters, supra; City of Birmingham v. Walker, 267 Ala. 150, 158, 101 So.2d 250, 256 (1958).

Subrogation accomplished these goals by allowing the insurer to "stand in the shoes" of the insured in order to recover its payments from the tort-feasor who caused the damage. Therefore, these early subrogation cases were based on the premise that the insured would be fully indemnified for his loss before the insurer would have a right to subrogation. Deneberg, supra, at 187.

This basic principle of fully indemnifying the insured was also followed in Alabama:

"It is true that subrogation 'does not depend upon contract, but has its foundation in natural justice' when the debt or superior lien has been fully paid. That is, elements of subrogation are that it is a valuable right that touches the one who owns it and invokes the application or seeks the substitution in that ownership, and that the claim against the debtor or superior lien holder has not been waived when the debt or superior lien has been fully paid by him who would substitute."

Montgomery v. Wadsworth, 226 Ala. 667, 669, 148 So. 419, 421 (1933) (citations omitted).

In the present case, the contract of insurance would abrogate these underlying principles of subrogation by reimbursing the insurer even though the insured has not fully recovered for her loss. Blue Cross argues that it should be allowed to recover the money it has paid in medical expenses, even though Cynthia's loss exceeds her recovery, because its policy expressly entitles it to recover that money out of the settlement proceeds. Blue Cross bases its argument upon language contained in the International Underwriters opinion.

Although the policy itself was not in evidence in International Underwriters, we stated in dictum that "equitable principles apply to all instances of subrogation except when the contract provides otherwise." International Underwriters, 548 So.2d at 165. However, to construe this language as Blue Cross would have us to do would undermine the equitable principles upon which subrogation is based and would thwart the purpose for which the insured purchased insurance. Equity requires that the insured should at least recover his or her loss before the insurer is subrogated.

In International Underwriters, we cited several cases from other jurisdictions in support of the proposition that "equitable principles apply to all instances of subrogation except when the contract provides otherwise." 548 So.2d at 165. Those cases, however, represent a split of authority as to whether the insurer's right to subrogation arises before the insured is fully reimbursed for his loss. For example, in Westendorf v. Stasson, 330 N.W.2d 699 (Minn.1983), the Supreme Court of Minnesota expressly stated that "when the right to subrogation arises by virtue of an agreement, the terms of the subrogation will nonetheless be...