The Connecticut Supreme Court’s Summer of Insurance – Part III: Deductibles Remain Deductible
This summer, the Connecticut Supreme Court held in a pro-insurer decision that insureds may not rely on the “make whole” doctrine to recoup amounts they pay to satisfy deductibles. An insurance broker and its errors & omissions carrier, Fireman’s Fund, paid $354,000 to settle a malpractice claim arising from problems with a builder’s risk policy that the broker placed for a construction project. The broker paid $150,000 of the settlement, its per claim deductible under the E&O policy. After resolving the malpractice claim, Fireman’s Fund, as the broker’s subrogee, sued two other insurers who wrote policies for the same construction project and recovered $208,000.
The broker argued that it was entitled to $150,000 of the subrogation recovery on the basis of the “make whole” doctrine. That common law rule restricts an insurer from enforcing its subrogation rights (i.e., rights against third parties who may be liable for the loss) until the insured is made whole. Fireman’s Fund asserted that it was entitled to keep the entire $208,000 it recovered on the subrogation claim, because it had paid out $204,000 to resolve the malpractice claim and spent another $10,000 defending that claim.
The Court ruled for Fireman’s Fund. The Court confirmed, as an earlier decision had suggested, that Connecticut does recognize the “make whole” doctrine. The Court refused to apply the doctrine to deductibles, however. The Court’s reasoning was straightforward. A deductible, the Court noted, typically represents risk that the insured agreed to assume in exchange for a lower premium. Applying the make whole doctrine to deductibles thus would upend the agreement negotiated by the parties and create a windfall for the insured.
While the Court noted that insureds and insurers are free to agree to a different allocation of subrogation recoveries, it is unlikely that insurers will readily agree that the insured gets to recover its deductible before the insurer can enforce its subrogation rights. Perhaps recognizing this reality, the Court also included a footnote inviting the legislature or the commissioner of insurance to weigh in, as has happened in other states.
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