Daniels v. State Farm Mut. Auto. Ins. Co.

This opinion was
JF IN CLIRKt
.1 OTPICE
Jiled for record
E COURT,
(1 arXTE OF VWkSHWOTOH
Q47g JUL 0 3 Susan L.. C
Carlson
Supreme Court Clerk
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IN THE SUPREME COURT OF THE STATE OF WASHINGTON
LAZURI DANIELS,individually, and
on behalf of all those similarly situated, No. 96185-9
Petitioner,
V. En Banc
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY,
Respondent.
Filed JUL 0 3 2019
JOHNSON,J.—This case concerns whether a first-party insurer, upon
obtaining a partial recovery in a subrogation action, is required to reimburse its
fault-free insureds for the full amount of their deductibles before any portion of the
subrogation proceeds can be allocated to the insurer. Lazuri Daniels brought claims
and sought class action status in a lawsuit against State Farm Mutual Automobile
Insurance Company arguing that by failing to fully reimburse its insureds for their
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
deductibles after recovering in a subrogation action, State Farm violates both
Washington law and its own insurance policy. The trial court dismissed the claims
under CR 12(b)(6), and the Court of Appeals affirmed the dismissal. We reverse
and remand to the trial court for further proceedings.
FACTS
On July 25, 2015, Daniels was involved in a three-vehicle wreck near
Federal Way, Washington. At the time of the wreck, Daniels was insured by State
Farm with a policy that included a $500 deductible. Daniels's vehicle was at the
center of the wreck; the driver of the car that hit her from behind was insured by
GEICO, and the driver in front of her was insured by Liberty Mutual. State Farm
paid the portion of the repair costs that exceeded Daniels's deductible. State Farm
then sought recovery of its payment from GEICO, which agreed that its insured
was 70 percent at fault and reimbursed State Farm for that portion of the total cost
of the repairs. From these proceeds. State Farm reimbursed Daniels for 70 percent
of her deductible.^
Daniels brought a lawsuit and sought class action status against State Farm
alleging that, under both its own policy and Washington law. State Farm is entitled
'Because this case was dismissed under CR 12(b)(6), the record had yet to be developed
by the parties. As a result, the record does not indicate to whom GEICO attributed the remaining
30 percent fault or how the 70 percent fault was determined.
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
to recoup its money only after its insureds are fully compensated for their losses,
including the full deductible, and that by allocating subrogation recoveries to itself
before it has returned its insureds' full deductibles. State Farm violates this
requirement. Daniels asserted claims for breach of contract, bad faith, and
conversion. State Farm filed a motion to dismiss under CR 12(b)(6),^ relying on
Averill v. Farmers Insurance Co. of Washington, 155 Wash. App. 106, 229 P.3d 830
(2010), where the Court of Appeals held that the made whole doctrine does not
extend to this type of subrogation action, as well as WAG 284-30-393, which
requires subrogated insurers to return deductibles "less applicable comparable
fault." Finally, State Farm argued that nothing in its policy language required it to
return the full amount of deductibles before allocating to itself the proceeds of a
direct subrogation action.
The trial court granted State Farm's motion to dismiss, and the Court of
Appeals affirmed. Daniels v. State Farm Mut. Auto. Ins. Co., 4 Wash. App. 2d 268,
421 P.3d 996 (2018). Daniels petitioned this court, and we granted review.^
Daniels v. State Farm Mut. Auto. Ins. Co., 192 Wash. 2d 1001, 430 P.3d 261 (2018).
^ CR 12(b)(6) allows a party to file a motion to dismiss a case for "failure to state a claim
upon which relief can be granted."
^ Amicus briefs were filed by the Washington State Insurance Commissioner, the
Washington State Association for Justice Foundation, and American Property Casualty Insurance
Association and National Association of Mutual Insurance Companies.
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
ISSUES
1. Whether Washington's made whole doctrine requires that insurers allocate
subrogation proceeds to the full reimbursement of its insureds' deductibles
prior to allocating any portion of the proceeds to itself.
2. Whether, in the absence of an acknowledgement that an insured bears
comparative fault, WAC 284-30-393 requires an insurer to recover and
return its insured's full deductible.
3. Whether State Farm's policy language required that it allocate subrogation
proceeds to the full reimbursement of its insureds' deductibles prior to
allocating any portion ofthe proceeds to itself.
ANALYSIS
"Subrogation is the right that one party has against a third party following
the payment, in whole or in part, of a legal obligation that ought to have been met
by such third party." 2 Allan D. WiNDT,Insurance Claims and Disputes §
10:5, at 10-23 (6th ed. 2013). Its common law foundation applies as an "equitable
doctrine the essential purpose of which is to provide for a proper allocation of
payment responsibility." Mahler v. Szucs, 135 Wn.2d 398,411, 957 P.2d 632
(1998). In the insurance context, the "doctrine of subrogation enables an insurer
that has paid an insured's loss pursuant to a policy ... to recoup the payment from
the party responsible for the loss." Elaine M. Rinaldi, Apportionment ofRecovery
between Insured and Insurer in a Subrogation Case, 29 Tort & iNS. L.J. 803, 803
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
(1994). The right to pursue such a claim against the at-fault party is often included
in insurance policies, as it was in this case.
Generally two means exist through which a subrogated insurer can recover
from a responsible third party:(1)the insured brings a claim against the third party
and the insurer seeks reimbursement from the insured's recovery, or(2)the insurer
can "stand in the shoes" of its insured and pursue a claim against the responsible
party directly. In either situation, "[t]he potential for conflict of interest abounds."
Mahler, 135 Wash. 2d at 414. This is because if the insured still has uncompensated
injuries, both the insurer and insured will generally be looking to recover from the
same third party, and that party's own insurance and assets are not always
sufficient to cover both claims. In such circumstances, there is a high potential for
conflict between insureds who wish to be compensated for the full extent of the
damages they have suffered, and first-party insurers who expect to be reimbursed
for amounts they have advanced to the insured.
Daniels argues that insureds' right to be fully compensated for their losses,
including full reimbursement for deductibles, takes priority over an insurer's
interest in recouping its payments through a direct subrogation action. Daniels
asserted in her complaint that State Farm's conduct violates both its own policy as
well as Washington law. Three separate legal theories are presented for requiring
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
State Farm to return its insureds' full deductibles prior to allocating to itself any
portion of subrogation proceeds. These include (a)the common law made whole
doctrine,(b) Washington insurance regulations, and (c) State Farm's own policy
language. The trial court dismissed all of Daniels's claims under CR 12(b)(6) and
the Court of Appeals, in a divided opinion, affirmed. Daniels, 4 Wash. App. 2d at
278. Judge Becker dissented, asserting that Averill was wrongly decided and
should be disavowed, and concluding that all three of Daniels's theories should
survive a motion to dismiss under CR 12(b)(6).
Whether a case is properly dismissed under CR 12(b)(6) is a question of law
that we review de novo. San Juan County v. No New Gas Tax, 160 Wash. 2d 141,
164, 157 P.3d 831 (2007). Such a dismissal is appropriate where "there is not only
an absence of facts set out in the complaint to support a claim of relief, but there is
no hypothetical set offacts that could conceivably be raised by the complaint to
support a legally sufficient claim." Worthington v. WestNET, 182 Wash. 2d 500, 505,
341 P.3d 995 (2015)(citing No New Gas Tax, 160 Wash. 2d at 164). Given this high
standard, CR 12(b)(6) motions should be granted '"sparingly and with care'"
where "plaintiffs allegations show on the face ofthe complaint an insuperable bar
to relief." No New Gas Tax, 160 Wash. 2d at 164 (quoting Tenore v. AT&T Wireless
Servs., 136 Wash. 2d 322, 330, 962 P.2d 104(1998)). Here, dismissal under CR
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
12(b)(6) was proper only if there is no set of facts that could conceivably be drawn
from the complaint to support any one of the three legal theories involved. We
begin our analysis with Daniels's claims under the common law made whole
doctrine.
The Made Whole Doctrine
In addressing conflicts between subrogated insurers and injured insureds, we
have generally established priority for the interests ofthe insureds through the
made whole doctrine. In Thiringer v. American Motors Insurance Co., we
articulated this doctrine as a general rule that
while an insurer is entitled to be reimbursed to the extent that its
insured recovers payment for the same loss from a tort-feasor
responsible for the damage, it can recover only the excess which the
insured has received from the wrongdoer, remaining after the insured
is fully compensated for his loss.
91 Wash. 2d 215, 219, 588 P.2d 191 (1978). In other words, an insurer can obtain
reimbursement from an insured who has been more than fully compensated for
their injuries and has actually received excess compensation from having received
payments from both the first-party insurer and a third party. In these circumstances
an insurer can seek reimbursement from its insured, as the insured is not entitled to
a double recovery. But an insurer generally cannot obtain a recovery if its insured
has uncompensated damages. We held that this rule "embodies a policy deemed
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
socially desirable in this state," as it prioritizes the indemnification of victims of
automobile accidents, Thiringer, 91 Wash. 2d at 220, and, in doing so, helps to reduce
the potential conflicts between insurers and insureds.
As correctly recognized in Judge Becker's dissent below, the approach we
took in Thiringer aligns with Professor Robert Keeton's "Fourth Rule" for
allocating proceeds of a recovery from a third-party tortfeasor. "Out of the
recovery from the third party the insured is to be reimbursed first, for the loss not
covered by insurance, and the insurer is entitled to any remaining balance, up to a
sum sufficient to reimburse the insurer fully, the insured being entitled to anything
beyond that." Robert E. Keeton,Basic Text on Insurance Law § 3.10(c)(2), at
161 (1971).
The issue before us is how, under the circumstances of this case, the made
whole doctrine applies. Daniels argues that we should prioritize an insured's
recovery in any type of subrogation scenario, including where the insurer pursues a
direct subrogation action against a responsible third party. Under this broad view
of the doctrine, an insurer like State Farm would have to ensure that its subrogation
recovery is first allocated to any uncompensated portion of its insured's loss before
the insurer allocates any proceeds to itself. State Farm, on the other hand, asserts
that the doctrine is specifically confined to situations where the insurer seeks to be
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
reimbursed from the insured's own recovery from a third party and does not apply
in situations where an insurer pursues a direct subrogation action to recoup its
payments. Under this view, the insurer would be able to allocate the proceeds
recovered in the subrogation action to itself before its insured has been fully
compensated for their loss. The trial court agreed with State Farm and held that
under Averill, the made whole doctrine does not provide Daniels a claim for relief.
Averill was decided by the Court of Appeals with similar facts as the case
before us. Two drivers were involved in a wreck and the drivers' insurers
determined the two were equally at fault. After Farmers Insurance Company of
Washington received a 50 percent recovery and reimbursed Averill for half of her
deductible, she sued the insurer, claiming that among other things, the common
law made whole doctrine required a full return of her deductible before Farmers
could allocate any proceeds to itself. The Court of Appeals rejected this argument,
holding that the made whole doctrine limits an insurer's recovery only when it
seeks reimbursement from its insured and does not extend to situations where the
insurer pursues its subrogation claim directly. The court went on to hold that this
result is consistent with the purpose of deductibles, which represent "the amount of
risk retained by the insured," and that to allow Averill to recover her deductible
Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
would change the contract to one without a deductible, which the court was "not at
liberty" to do. Averill, 155 Wash. App. at 114. We disagree.
The analysis in Averill runs counter to the principles our cases have
established addressing the made whole doctrine. We have not confined this
doctrine to situations involving reimbursement from the insured; on the contrary,
we have expressly stated that it extends further. As Judge Becker correctly
recognized in her dissent below, in Sherry v. Financial Indemnity Co. we
established a broader view that the made whole doctrine applies whenever an
insurer seeks "an offset, subrogation, or reimbursement for PIP [personal injury
protection] benefits already paid." 160 Wash. 2d 611, 618, 160 P.3d 31 (2007)
(emphasis added). Furthermore, an analysis of Thiringer and Sherry reveals that
we have not limited the doctrine in the manner asserted by the Averill court.
In Thiringer, the insured was injured in a car wreck and sought payment
from his insurer after the at-fault driver was unable to compensate him for his full
general and special damages. His insurer denied his claim, arguing that the
recovery from the at-fault driver was sufficient to cover his insured special
damages and the recovery should be allocated to those damages first, rather than to
his uninsured general damages. We rejected that argument and held that Thiringer
had "a right to expect that the payments promised under this coverage will be
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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
available to him," and established a rule that insureds such as Thiringer are
"entitled to be made whole." Thiringer, 91 Wash. 2d at 220. This meant that he could
first allocate the payments from the at-fault party to his general damages and then
seek recovery from his own insurer for his special damages.
The important point here is that the insurer in Thiringer was not seeking to
be reimbursed from a recovery; instead, it was seeking to avoid payment in the first
place by controlling how the recovery from the third party was allocated. We held
that the made whole doctrine applied and allowed the insured to allocate his
proceeds in a manner that would bring him the closest to being made whole. Given
that Thiringer did not involve a claim for reimbursement, any argument that it
limited the made whole doctrine to such claims fails.
In Sherry, we expanded on this reasoning. Sherry involved a pedestrian who
was struck by a car driven by an uninsured motorist. The pedestrian was insured by
Financial Indemnity Company(FIC) under both an underinsured motorist(UIM)
policy and a PIP policy. FIC paid for medical benefits and lost wages under the
PIP policy, then claimed an offset when it paid UIM benefits, seeking to reduce its
UIM payment to account for the PIP payments it had already made, as well as to
account for comparative fault ofthe insured. We held that FIC could not claim an
offset until its insured had been fully compensated for his damages, as he had a
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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
right to be made whole, and that fiill compensation in this context referred to
compensation for the insured's full actual damages with no reduction based on
comparative fault. Sherry, 160 Wash. 2d at 625.
Sherry involved no claim for reimbursement; there was no third party from
which FIC could be reimbursed because it was FIC that was paying under both
policies. Instead of seeking reimbursement, the insurer was seeking to minimize its
payments through an offset, and we held that it could not do so when its insured
had yet to be made whole. Neither Thiringer nor Sherry involved claims for
reimbursement by the insurer, so there appears to be no support for the assertion in
Averill that the made whole doctrine is so confined.
We also disagree with the Averill court's reasoning that allowing an insured
to recover their deductible from a subrogation recovery would change the
insurance contract to one without a deductible. The court reasoned that the
deductible was the amount Averill contracted to be out of pocket before her
insurance would be triggered, but its analysis did not fully explain how this creates
a conflict with application ofthe made whole doctrine to subrogation claims. The
idea would appear to be that an insured's premium is, among other things, based
on the amount of risk the insured retains in the form of a deductible. Thus, by
receiving back her deductible without any change to her premium, Averill would
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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
receive a windfall. She would have a lower premium that was based, in part, on her
having to pay a deductible, yet application of the made whole doctrine would
relieve her of being out-of-pocket for that deductible. Once again, we disagree.
The focus on deductibles as contracted-for risk is only one way of viewing
deductibles; they also act to "eliminate insurance coverage for losses that are small
enough that they are better borne by the insured . . . because the administrative
expenses for an insurer are substantial in relation to the amount of such losses."
Robert E. Keeton & Alan I. Widiss,Insurance Law § 3.10, at240 (1988).
Thus, an insured pays a higher premium for a lower deductible to make up for the
increased administrative costs that come with the insurer having to cover smaller
claims. Requiring that an insurer reimburse insureds for deductibles as part of the
made whole doctrine does not interfere with this purpose and does not rewrite the
policy to one with no deductible. Where insureds sustain a loss that does not
exceed the amount of their deductible, they will still receive no benefits under the
policy.
The analysis in Averill is in conflict with the policy underlying the made
whole doctrine, and to the extent the Court of Appeals held the made whole
doctrine is confined to reimbursement claims, we overrule it. Under Thiringer and
Sherry, no distinction exists based on who brings a claim against a responsible
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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
third party. Since the claim seeks recovery of the insured's losses, that the insurer
brings the subrogation claim makes no difference in the application of the made
whole doctrine—^the principles of the doctrine apply equally and the result is the
same. Whether in the context of a reimbursement request, offset, or direct
subrogation action, a fault-free insured must be made whole for their entire loss
before an insurer may offset or recover its own payments. Stated another way, the
proceeds of any recovery from a third-party tortfeasor, whether in a subrogation
action or otherwise, must be allocated in such a way as to first make the insured
whole. Daniels's complaint asserted that State Farm fails to abide by this
requirement, which states a valid claim supported by the common law made whole
doctrine and survives a CR 12(b)(6) motion to dismiss.
Insurance Regulations
We turn next to Daniels's assertion that State Farm violates Washington's
insurance regulations. We interpret regulations under the same rules used in
statutory construction. Mader v. Health Care Auth, 149 Wash. 2d 458, 472, 70 P.3d
931 (2003). In doing so, we seek "to ascertain and give effect to its underlying
policy and intent." Cannon v. Dep't ofLicensing, 147 Wash. 2d 41, 56, 50 P.3d 627
(2002). If a regulation is clear on its face, then its meaning should be derived from
the plain language; however, if the regulation is subject to two or more reasonable
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Daniels v. State Farm Miit. Auto. Ins. Co., No. 96185-9
interpretations, we will resort to principles of statutory construction, legislative
history, and relevant case law to assist in resolving the ambiguity. We construe an
ambiguous rule or regulation to effectuate the intent of the agency. Cannon, 147
Wash. 2d at 57.
The regulation at issue here is WAC 284-30-393, the relevant portion of
which reads,"The insurer must include the insured's deductible, if any, in its
subrogation demands. Any recoveries must be allocated first to the insured for any
deductible(s) incurred in the loss, less applicable comparable fault." The parties
agree that this requires an insurer to seek recovery of its insured's deductible as
part of any subrogation claim against a third party and that the insurer must return
some portion ofthe deductible to the insured. The dispute between the parties is
over the meaning ofthe final four words,"less applicable comparable fault."
Daniels argues that "applicable comparable fault" refers to fault that is
attributable to the insured. Under this interpretation, the disputed portion of the
regulation is confined to circumstances where there is a determination that the
insured is partially at fault. State Farm, on the other hand, contends there is nothing
in the language that limits "applicable comparable fault" to fault that has been
attributed to the insured. It would have us interpret the regulation such that the
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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
insurer need reimburse its insured only for a portion of the deductible equal to the
fault of the party from which it has recovered.
In its amicus brief, the Office of the Insurance Commissioner(QIC)points
us to a final cost benefit analysis issued during the rule making process to amend
WAG 284-30-393 to its current form. This analysis explains that the party who
petitioned for the amendment, Farmers Insurance, specifically asked that the rule
be amended so "insurers may deduct the amount of an insured's comparative fault
from reimbursement for their deductible." Clerk's Paper's(CP)at 33 (emphasis
added). The QIC's analysis then goes on to state repeatedly that the amendment is
meant to do just that, to allow reductions to the reimbursement of deductibles
based on the insured's fault. See CP at 36 (stating that the amendment will provide
"greater clarity in resolving claims . . . where the policyholder is partially at fault"
(emphasis added)).
We interpret the regulation in the manner intended by the agency, and in
doing so, it is evident that Daniels raised a valid claim regarding violation of the
WAC. Accepting the facts alleged in her complaint as true, there appears to have
been no assertion that Daniels herself bore any fault for the wreck, yet State Farm
withheld 30 percent of her deductible. Daniels also alleges that this conduct is
consistent with State Farm's dealings with its other insureds. Such assertions
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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
support the claim that State Farm violates WAC 284-30-393 with regard to the
asserted class.
Policy Language
Daniels's final argument, and the one focused on most by the Court of
Appeals, concerns State Farm's own policy language. The relevant language is in
the "General Terms" section ofthe policy and states:
If we are obligated under this policy to make payment to or for a
party who has a legal right to collect from another, then the right of
recovery of such party passes to us. .. .
Our right to recover our payments applies only after the insured has
been fully compensated for the bodily injury, property damage or
loss."^
CP at 80. Daniels argues that the first section creates a basic subrogation right,
allowing State Farm to seek repayment from a responsible party after it has made a
payment to its insured. She then argues that the second section controls the
allocation of proceeds from a successful subrogation claim and requires that the
insured be made whole for any remaining loss before State Farm can repay itself
for its insurance payments.
^ Daniels additionally argues that absent y4ver///, WAC 284-30-393 must fully incorporate
the made whole doctrine. We need not address this argument given the inapplicability of the
WAC in the context of fault-free insureds.
^ The bolded and italicized words in the policy are defined in a separate portion of the
policy not included in the record.
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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
Daniels points out that the second section uses the word "our" when
discussing the payments to which State Farm gains the right to recover, while the
first section does not contain this limiting word. Thus, Daniels argues, the first
section must be read as granting State Farm a very general right of recovery,
allowing it to stand in the shoes of its insured to pursue any and all funds owed by
a third party. If State Farm is successful in such an action, the second section
would then stand as the limit on what funds State Farm can allocate to itself.
Daniels argues that State Farm's "right to recover [its] payments" from the
subrogation proceeds "applies only after the insured has been fully compensated
for the .. . loss," and that the "loss" includes any portion covered by a deductible.
The trial court rejected this interpretation, holding that Daniels was "fully
compensated for her property loss claimed under her collision coverage when she
accepted payment from State Farm," at which time her claim passed to State Farm.
CP at 69-70. The Court of Appeals majority agreed and appeared to read both
sections of the policy as controlling when State Farm's right to pursue recovery
was triggered, not how proceeds would be allocated. We disagree.
We interpret language in an insurance policy as a matter of law and review
dQnovo. Kut Suen Luiv. Essex Ins. Co., 185 Wash. 2d 703, 710, 375 P.3d 596
(2016). We seek to give such policies a "practical and reasonable" interpretation.
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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
rather than a "strained or forced construction" or one that leads to an absurd
conclusion. Morgan v. Prudential Ins. Co. ofAm., 86 Wash. 2d 432, 434, 545 P.2d
1193 (1976).
We are presented with two different interpretations of State Farm's policy
language; however, the presence oftwo possible interpretations does not make the
language ambiguous unless both interpretations are reasonable. Here, there can be
only one reasonable interpretation, which is one that aligns with the common law
made whole doctrine. The interpretation State Farm urges, and which was adopted
by the courts below, does not align with that doctrine; therefore we reject it. We
accept Daniels's assertion that the second section of the policy language prohibits
State Farm from allocating subrogation proceeds to itself until its insured is fully
compensated for their loss, which includes full reimbursement for the insured's
deductible. This interpretation is consistent, as it must be, with the made whole
doctrine and the basic principles of subrogation, which emphasize the loss suffered
by the insured. Under this interpretation, Daniels has asserted a valid claim that
State Farm violates the policy.
CONCLUSION
Daniels's complaint asserted valid claims for relief under the common law,
under Washington insurance regulations, and under State Farm's own policy
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Daniels v. State Farm Mut. Auto. Ins. Co., No. 96185-9
language. As such, dismissal under CR 12(b)(6) was improper. We reverse and
remand to the trial court for further proceedings.
WE CONCUR:
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