Made-Whole Doctrine Does Not Apply to Insurance Policy Deductibles

Monday, March 1, 2010

FIREMEN’S FUND INSURANCE COMPANY. v. T.D. BANKNORTH INSURANCE AGENCY (D. Conn. Feb. 1, 2010)

Haynes Construction Company asked T.D. Banknorth to procure a builder’s risk policy and an inland marine policy for one of its developments. T.D. Banknorth procured a builder’s risk policy from Peerless Insurance Company and an inland marine policy from Hartford Insurance Company. On February 14, 2006, a fire destroyed a home being constructed on Lot 14 of the development. Haynes made a claim against Peerless under the builder’s risk policy which was denied because Lot 14 was not covered by the policy.

After Peerless denied coverage, Haynes asserted a claim against the broker arguing it had made an error or omission in procuring insurance coverage by failing to add Lot 14 to the declarations page of the builder’s risk policy. Haynes and the broker subsequently entered into a settlement agreement wherein the broker advanced $150,000 pursuant to its deductible, and its insurer, Firemen’s Fund, paid the remaining $200,000.

Subsequently, Hartford and Peerless agreed to settle claims arising out of the fire for approximately $200,000. The broker then argued that it was entitled to reimbursement of its $150,000 deductible out of the funds advanced by Hartford and Peerless. The broker argued it was entitled to payment pursuant to the made-whole doctrine. That doctrine provides that absent an agreement to the contrary, an insurance company may not enforce a right of subrogation until the insured has been fully compensated for its injuries - that is, has been made whole.

In the resulting declaratory judgment action, the insurer argued that the made-whole rule does not apply to the reimbursement of an insured’s deductible. The court noted that despite the absence of case law on this point in Connecticut, it was inclined to agree. The court stated that while the Connecticut Supreme Court has held that subrogation under the circumstances is equitable in nature, however, the principles of equity would not seem to prohibit the insured’s responsibility for its own deductible, especially when the policy was negotiated between two commercial entities. Moreover, the court concluded that the policy specifically exempted the applicability of the made-whole doctrine by providing that the insurer was entitled to recover any third-party payments to the policyholder.

Impact: This is a case where a federal court has attempted to discern what a state court would decide given the absence of controlling precedent. Here, the court concluded that the made-whole doctrine does not apply to a policyholder’s deductible. While the court does make reference to the terms of the policy and concludes that the policy specifically exempts the applicability of the made-whole doctrine, it is important to note that the court also concluded that under the principles of equity, there is no basis to conclude that a policyholder should be excused from the obligations to pay its deductible.

For a copy of this decision, click here: http://tinyurl.com/GS-PLM-Fed-Ed