Wine v. Globe American Cas. Co.

• Decision Date: 21 March 1996
• Docket Number: No. 95-SC-89-DG,95-SC-89-DG
• Citation: 917 S.W.2d 558
• Parties: David WINE, Lisa D. Webb, Appellants, v. GLOBE AMERICAN CASUALTY CO., Motorist Mutual Insurance Co., Aetna Casualty and Surety Co., Appellees.
• Court: United States State Supreme Court — District of Kentucky

Page 558

917 S.W.2d 558

David WINE, Lisa D. Webb, Appellants, v. GLOBE AMERICAN CASUALTY CO., Motorist Mutual Insurance Co. Aetna Casualty and Surety Co., Appellees.

No. 95-SC-89-DG.

Supreme Court of Kentucky.

March 21, 1996.

On Review from Court of Appeals No. 93-CA-2106 (Jefferson Circuit Court No. 91-CI-978).

Charles L. Cunningham, Jr., Charles E. Fell, Jr., Louisville, for Appellant Wine.

Thomas A. Klausing, Louisville, for Appellant Webb.

Walter L. Porter, Louisville, for Appellee Globe American Cas. Co.

B. Frank Radamacher, III, Louisville, for Appellee Motorist Mut. Ins. Co.

Perry Adanick, Melissa A. Stevens, Louisville, for Aetna Cas. and Sur. Co.

KING, Justice.

This case concerns whether the estate of a man killed in an automobile collision or three insurance carriers should have priority to payments by the uninsured tortfeasor. Three brothers, Robert, James and David Webb were passengers in an automobile driven by appellant David Wine. Because of the negligence of Wine, Robert and James Webb were injured and David Webb was killed in a one car collision. David Webb was survived by his wife, appellant Lisa Webb, and their three minor children.

The tortfeasor, Wine, was uninsured. David Webb was an insured under policies issued by Globe American Casualty Company, Motorist Mutual Insurance Company, and Aetna Casualty and Surety Company. Robert and James Webb were insured with Motorist and Aetna. Collectively the three insurance carriers paid $10,000.00 in basic reparation benefits and $137,500.00 in uninsured motorist benefits to Lisa Webb in her capacity as Administratrix of David's estate and as parent and next friend of David Webb's three minor children. Additionally, Motorist and Aetna paid $36,456.04 in benefits to their insureds, Robert Webb and James Webb.

Shortly after resolving the uninsured motorist claim with Lisa Webb, Globe initiated suit seeking judgment against Wine, the uninsured tortfeasor, for the amount of its subrogated interest. Motorist and Aetna intervened and sought identical relief. Lisa Webb was later joined as a party. Ultimately, an agreed judgment was entered in which Wine agreed to pay each insurance company the amount of its subrogated interest. He also agreed to pay Lisa Webb, individually and as Administratrix of David's estate, $250,000.00 above the sum the estate had previously received and an additional $240,000.00 for the benefit of the three minor children.

After entry of the agreed judgment, Globe, Motorist and Aetna moved for an order awarding their subrogation claims a higher priority than the claims of Lisa Webb and David Webb's estate. The trial court issued an order of priority granting all three insurance carriers preferred status as judgment creditors by ordering that each must "receive full payment of their respective judgments entered herein prior to payment of any amounts on the judgment entered herein on Lisa D. Webb" as Administratrix or parent and next friend of the three Webb minor children. Both Ms. Webb and Mr. Wine appealed to the Court of Appeals which affirmed the Circuit Court's order. We granted discretionary review and reverse in part and affirm in part.

SETTLEMENT OF THE UNINSURED MOTORIST CLAIM

Three different insurance policies provided uninsured motorist coverage for the injuries and losses sustained by Lisa Webb and the Webb estate. Ms. Webb, in her dual capacity, settled uninsured motorist claims against all three insurance carriers. She, and her counsel, executed a release with Globe and Motorist. Aetna did not request a release.

The appellants, Webb and Wine, argue that we should adopt the "made whole" rule which provides that an insurance company's right of subrogation does not arise until the injured party is fully compensated for the In determining the rights of an uninsured motorist carrier in obtaining reimbursement of the benefits it has paid an injured person we must look to: (1) the common law doctrine of subrogation; (2) pertinent statutory law; and (3) the contractual obligations of the parties.

                injuries sustained.   The appellee insurance companies argue that the doctrine of subrogation from which the "made whole" rule arose is an equitable doctrine which can be modified by contract.   They contend that in the instant case their insurance contracts and settlement releases preclude the application of the "made whole" rule and afford their claims a higher priority than those of the estate and Lisa Webb
                

THE DOCTRINE OF SUBROGATION UNDER COMMON LAW

Subrogation is the rule of law which allows a party under a legal obligation to satisfy the debt of another and acquire the rights of the creditor against the debtor. National Surety Corp. v. First Nat. Bank, 278 Ky. 273, 128 S.W.2d 766 (1939).

The requisites for subrogation are usually described as (1) payment by one of a debt of another; (2) subrogee is not a volunteer; (3) the debt is not one for which the subrogee is primarily liable; (4) the entire debt must be paid unless the others who made payment are joined; and (5) subrogation must not work any injustice to the rights of others.

Bryan v. Henderson Elec. Co., Ky.App., 566 S.W.2d 823, 825 (1978).

The appellants, Globe, Motorist and Aetna, each have a right of subrogation. This right permits each to be placed in the position of its insured in order to pursue recovery for the payments each was obligated to pay its insured.

The issue before us is not whether the right of subrogation exists, rather it is when does this right arise? In a world of limited resources, who has priority in its claim, the uninsured motorist carriers or its insured who sustained damages in excess of those benefits received from the carrier?

In Williston on Contracts, Section 1269, (Third Ed.1967) the author states:

The surety's right of subrogation does not arise ordinarily until the debt is paid in full. A partial payment of the debt, even though it may be the full amount for which the surety has bound himself, will not entitle him to subrogation to the creditor's rights and securities.

And at Section 1273:

There is no equity on which to base the deprivation of the creditor of any of his legal rights for the benefit of the surety until he has been paid in full.

In the absence of relevant statutory law or contractual obligations between the parties, the answer to when the right of subrogation arises is rooted in equity. In order to achieve "natural justice" we look to the purpose of subrogation and the relationship between the insurer and its insured.

The doctrine of subrogation has a long and rich tradition of benevolence and fairness, Evans' Adm'r. v. Evans, 304 Ky. 28, 199 S.W.2d 734 (1947), and is irrevocably anchored in principles of natural justice. Movl Const. Co., et al v. Covington Trust & Banking Co., 258 Ky. 485, 80 S.W.2d 560 (1934). It was an invention of equity, designed to prevent unjust enrichment by requiring those who benefited from another paying their debt to ultimately pay it themselves. Rollins v. Board of Drainage Com'rs, 281 Ky. 771, 136 S.W.2d 1094 (1940). It was often called the rule of substitution because one legally required to pay the obligation of another became legally entitled to be substituted in the place of the creditor. Lewis' Administrator v. United States Fidelity & Guaranty Co., 144 Ky. 425, 138 S.W. 305, 306 (1911); and Rollins, supra.

Because the goal of subrogation is to accomplish justice between the parties, under common law great care is taken to ensure that invoking the doctrine does not impair one with a superior equitable right. Accordingly, the doctrine is applied only after considering the rights of all parties and "where an injustice will be wrought" the doctrine will not be applied. Rollins, supra, at Maryland Casualty Co. v. Walker, 257 Ky. 397, 78 S.W.2d 34, 36 (1935).

These principles underlying the common law doctrine of subrogation must also underlie the determination of when the right to subrogation arises. Under common law, it has generally been held that no subrogation rights exist (or the right does not arise) until the insured has first recovered the full amount of loss sustained. In Couch on Insurance 2d, Section 61:64 (Rev.Ed.1983), the author states:

[T]he insurer may in a given case have made the full payment required of it by its contract of insurance but this amount is not adequate to indemnify the insured in full. In such an instance, it has been held, in absence of waiver to the contrary, that no 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 his loss. [Emphasis added.]

In the context of uninsured motorist coverage, the purpose of the doctrine of subrogation is two-fold: the prevention of double recovery by the plaintiff and a prevention of a windfall to the tortfeasor by benefiting from the payment of the insurance carrier without ultimately bearing at least some of the cost. It is indisputable that Wine lacks sufficient assets to satisfy the judgment. Therefore, Lisa Webb, the Administratrix of the estate of her deceased husband, will never be fully compensated for the losses sustained, no less unjustly enriched. Granting priority to the uninsured motorist carrier would place the burden of loss squarely on the shoulders of the party least able to bear the loss and would defeat the age old, underlying principles of subrogation. On the other hand, granting the injured insured, not fully compensated, priority over the insurance carrier places the risk of loss on the entity paid to assume such risk.

Under general principles of equity, in the absence of statutory law or valid contractual obligations to the contrary, an insured must be fully compensated for injuries...