by Ron E. Peck, Esq.

In the case of Osborne v. Jauregui, Inc., the Texas Court of Appeals, Third District at Austin, has enforced the holding of Fortis Benefits v. Cantu, 234 S.W.3d 642 (Tex. 2007), and espoused an anti-double recovery policy, (Tex.App. – Austin, Aug. 29, 2007 & April 17, 2008 – No. 03-04-00813-CV).  This represents yet one more victory for subrogating insurers, and those that hope to see the costs of insurance remain within reason.

In this case, Jauregui was the architect and builder of the Osbornes’ house, which contained numerous defects. State Farm provided the Osbornes’ homeowners’ insurance, and paid numerous claims on the Osbornes’ behalf.  The Osbornes then brought suit against Jauregui and various subcontractors, seeking damages in excess of $2,000,000.  State Farm intervened, asserting a subrogation claim.  The trial court declined to grant State Farm any of the proceeds from the Osbornes’ settlement with the subcontractors.

State Farm appealed. The court of appeals reviewed this case and determined that the denial of subrogation rights was inappropriate, and remanded the subrogation claim for re-evaluation in light of the new Texas Supreme Court opinion in Fortis Benefits v. Cantu, (No. 05-0791, Jun. 29, 2007).

In making its decision, the court states that “both questions at issue here–whether attorney’s fees should be awarded and whether State Farm is entitled to subrogation rights–involve the one-satisfaction rule, which is the longstanding proposition that a plaintiff should not be compensated twice for the same injury. CTTI Priesmeyer, Inc. v. K & O Ltd. P’ship, 164 S.W.3d 675, 683 (Tex. App.–Austin 2005, no pet.) (citing Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1, 7 (Tex. 1991)); see Crown Life Ins. Co. v. Casteel, 22 S.W.3d 378, 390 (Tex. 2000). “The rule” the opinion states, “guards against a plaintiff receiving a windfall by recovering an amount in court that covers the plaintiff’s entire damages, but to which a settling defendant has already partially contributed.”  The one-satisfaction rule bars a plaintiff from being compensated twice for one injury. Crown Life Ins., 22 S.W.3d at 390; CTTI Priesmeyer, 164 S.W.3d at 683. In the same vein, the principle of subrogation provides that once an insured is made whole from his damages, the insurer that has paid for the insured’s covered losses is entitled to the insured’s rights and remedies against a third party for the covered losses. Harris v. American Prot. Ins. Co., 158 S.W.3d 614, 622 (Tex. App.–Fort Worth 2005, no pet.).

Concerning subrogation, these judges conclude that “Texas courts are ‘particularly hospitable’ to the concept.” Id.

State Farm argues that the trial court abused its discretion in denying State Farm’s subrogation claim because that denial grants the Osbornes a double recovery.  State Farm also argues that any money received from Jauregui would be subject to State Farm’s subrogation rights.  State Farm argues that its contractual right of subrogation displaces any equitable considerations regarding whether the Osbornes have been “made whole” for their damages. State Farm further argues that even under an equitable determination of subrogation rights, it is entitled to the settlement proceeds because the Osbornes have already been “made whole” by insurance payments totaling $1,874,687.28.

The Court responds by holding that, “in the absence of a contractual subrogation provision, subrogation rights are “firmly granted in” and “not easily detached from” equity.” Esparza v. Scott & White Health Plan, 909 S.W.2d 548, 552 (Tex. App.–Austin 1995, writ denied). “If either an insured or an insurer ‘must to some extent go unpaid,’ the loss should be borne by the insurer for that is a risk the insured has paid it to assume.” Ortiz v. Great S. Fire & Cas. Ins. Co., 597 S.W.2d 342, 344 (Tex. 1980) quoting Garrity v. Rural Mut. Ins. Co., 253 N.W.2d 512, 514 (Wis. 1977). An insurer is not entitled to an equitable right of subrogation until the insured is “made whole” for his loss. Ortiz, 597 S.W.2d at 343; Esparza, 909 S.W.2d at 552.  The Court tempers this statement, however, by pointing out that “in determining equitable subrogation rights, to avoid injustice, the equities must still be balanced.  Such considerations include the prevention of a double recovery by the insured.  Furthermore, the Texas Supreme Court recently held in Fortis Benefits v. Cantu, No. 05-0791, 2007 Tex. LEXIS 603, at 18-19 (Tex. June 29, 2007), that contract-based subrogation rights trump equitable considerations, which are to be used by default in the absence of a contractual right to subrogation. As a result, equitable considerations such as the ‘made whole’ doctrine are to apply only in the absence of contrary reimbursement language in the contract.” Id.

The Court concludes that, “under these facts, the Osbornes have already recovered insurance payments well in excess of the damages the jury determined they incurred.  To refuse subrogation in this case would result in the Osbornes receiving a windfall well beyond the $835,000 in damages they suffered  Furthermore, if a contract provides for subrogation regardless of whether the insured is first made whole, the contract’s specific language controls . . . and the equitable defense of the ‘made whole’ doctrine must give way.” Fortis Benefits v. Cantu, 234 S.W.3d 642, 651 (Tex. 2007).

Tags:

This entry was posted by Adam V. Russo on Monday, April 21st, 2008 at 2:00 pm and is filed under Made Whole Rule, Subrogation, Texas. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.