The opinion
2016 WI 59
SUPREME COURT OF WISCONSIN
CASE NO.: 2014AP157
COMPLETE TITLE: Dennis D. Dufour,
Plaintiff-Appellant-Cross-Respondent,
v.
Progressive Classic Insurance Company and
Milwaukee Painters Local Union 781 Health Fund,
Defendants,
Dairyland Insurance Company,
Defendant-Respondent-Cross-Appellant-
Petitioner.
REVIEW OF A DECISION OF THE COURT OF APPEALS
(Reported at 364 Wis. 2d 757, 869 N.W.2d 169)
(Ct. App. 2015 – Unpublished)
OPINION FILED: July 6, 2016
SUBMITTED ON BRIEFS:
ORAL ARGUMENT: April 5, 2016
SOURCE OF APPEAL:
COURT: Circuit
COUNTY: Dodge
JUDGE: Brian A. Pfitzinger
JUSTICES:
CONCURRED:
CONCURRED/DISSENTED: ABRAHAMSON, J. and BRADLEY, A. W., J. concur
DISSENTED: and dissent (Opinion filed).
NOT PARTICIPATING:
ATTORNEYS:
For the defendant-respondent-cross-appellant-petitioner,
there were briefs by Robert F. Johnson, Douglas M. Raines, and
von Briesen & Roper, S.C., Milwaukee and oral argument by
Douglas M. Raines.
For the plaintiff-appellant-cross-respondent, there was a
brief by Jason F. Abraham, Kyra K. Plier, and Hupy and Abraham,
S.C., Milwaukee. Oral argument by Jason F. Abraham.
There was an amicus curiae brief by Jesse B. Blocher and
Habush Habush & Rottier S.C., Waukesha, on behalf of the
Wisconsin Association for Justice. Oral argument by Jesse B.
Blocher.
There was an amicus curiae brief by James A. Friedman,
Dustin B. Brown and Godfrey & Kahn, S.C., Madison on behalf of
the Wisconsin Insurance Alliance and the Property Casualty
Insurers Association of American. Oral argument by James A.
Friedman.
2
2016 WI 59
NOTICE
This opinion is subject to further
editing and modification. The final
version will appear in the bound
volume of the official reports.
No. 2014AP157
(L.C. No. 2011CV874)
STATE OF WISCONSIN : IN SUPREME COURT
Dennis D. Dufour,
Plaintiff-Appellant-Cross-Respondent,
v. FILED
Progressive Classic Insurance Company and
Milwaukee Painters Local Union 781 Health Fund, JUL 6, 2016
Defendants, Diane M. Fremgen
Clerk of Supreme Court
Dairyland Insurance Company,
Defendant-Respondent-Cross-Appellant-
Petitioner.
REVIEW of a decision of the Court of Appeals. Reversed.
¶1 PATIENCE DRAKE ROGGENSACK, C.J. We review an
unpublished decision of the court of appeals,1 affirming in part
and reversing in part the summary judgment granted by Dodge
County Circuit Court relative to injuries Dennis D. Dufour
1
Dufour v. Progressive Classic Ins. Co., No. 2014AP157,
unpublished slip op. (Wis. Ct. App. July 16, 2015).
No. 2014AP157
(Dufour) suffered in an accident for which Dufour was not at
fault.2
¶2 Dufour, the insured of Dairyland Insurance Company
(Dairyland), sustained bodily injury and property damage while
operating his motorcycle. The tortfeasor's insurer paid Dufour
its bodily injury policy limit of $100,000, and Dairyland paid
Dufour $100,000 as its underinsured bodily injury policy limit.
The parties agree that Dufour's bodily injury damages were in
excess of $200,000. Under another provision of Dairyland's
policy, it also paid Dufour $15,589.86 for 100% of the property
damage to his motorcycle. After paying Dufour all proceeds to
which he was entitled under the Dairyland policy, and after
Dufour had settled with the tortfeasor's insurer, Dairyland
sought and obtained subrogation from the tortfeasor's insurer
for the property damages that it previously paid to Dufour.
Dufour demanded Dairyland pay him the funds it obtained on its
subrogation claim, and Dairyland refused. Dufour then sued
Dairyland for breach of contract and bad faith.
¶3 The central issue before us is whether Dairyland is
entitled to retain funds it obtained from the tortfeasor's
insurer for property damages Dairyland paid Dufour because
Dufour's bodily injury damages exceed both policies' limits for
bodily injury. More specifically, we must determine whether the
made whole doctrine applies to preclude Dairyland from retaining
2
The Honorable Brian A. Pfitzinger of Dodge County
presided.
2
No. 2014AP157
its subrogation award in this instance. We also consider
whether Dairyland acted in bad faith by refusing to turn over to
Dufour the funds it obtained as a result of its subrogation
claim.
¶4 We conclude that the made whole doctrine does not
apply to preclude Dairyland from retaining the funds it received
from its subrogation claim because the equities favor Dairyland:
(1) Dairyland fully paid Dufour all he bargained for under his
Dairyland policy, which included the policy's limits for bodily
injury and 100% of Dufour's property damage; (2) Dufour had
priority in settling with the tortfeasor's insurer; and (3) if
Dairyland had not proceeded on its subrogation claim, Dufour
would have had no access to additional funds from the
tortfeasor's insurer. We further conclude that Dairyland did
not act in bad faith with respect to Dufour's demand for the
funds Dairyland obtained as subrogation for the property damages
it paid Dufour. Accordingly, we reverse the court of appeals
decision in all respects.
I. BACKGROUND
¶5 On August 6, 2011, Dufour sustained bodily injury and
property damage in a motorcycle accident for which an
underinsured motorist was at fault. Dufour's Dairyland policy
included a bodily injury limit of $100,000 for underinsured
motorists and a separate property damage limit of $40,000.
American Standard Insurance Company of Wisconsin (American
Standard) insured the tortfeasor, with a bodily injury limit of
$100,000.
3
No. 2014AP157
¶6 As a result of the accident, Dairyland paid Dufour
$100,000 as its underinsured motorist bodily injury policy
limit. American Standard also paid Dufour $100,000 pursuant to
its bodily injury policy limit. It is undisputed that Dufour's
bodily injuries arising out of the accident were in excess of
$200,000. In addition to bodily injury proceeds, Dairyland paid
Dufour $15,589.86, which was agreed upon as the full amount of
property damage Dufour sustained.3
¶7 After Dairyland and American Standard paid Dufour,
Dairyland sought subrogation from American Standard for the
property damages it paid to Dufour. Dufour's Dairyland policy
included a subrogation clause that provided, "[a]fter we have
made payment under this policy and, where allowed by law, we
have the right to recover the payment from anyone who may be
held responsible." American Standard paid Dairyland $15,559.86
on this subrogation claim.4
¶8 Dufour contacted Dairyland, requesting payment of the
funds it received on its subrogation claim, based on Wisconsin's
made whole doctrine. His request stated in relevant part:
Dennis Dufour[] is entitled to the full amount
recovered for property damage by Dairyland Insurance
from American [Standard]. Valley Forge Insurance Co.
3
Some portions of the record indicate that the settlement
was in the amount of $15,589.85.
4
The record is unclear as to why Dairyland received $30
less than the property damage amount that it paid to Dufour.
Both parties acknowledge this discrepancy, and it is unimportant
to our decision.
4
No. 2014AP157
v. Home Mutual Insurance Co., 133 Wis. 2d 364, 396
N.W.2d 348 ([Ct. App.] 1986) held that an insurer of
an automobile accident victim was not entitled to
subrogation for property damage paid to victim, when
the insured is not fully compensated for his damages.
This ruling follows longstanding law in Wisconsin
regarding subrogation, see Garrity v. Rural Mutual
Insurance Co., 77 Wis. 2d 537, 253 N.W.2d 512 (1977)
and Rimes v. State Farm Mutual Automobile Insurance
Co., 106 Wis. 2d 263, 316 N.W.2d 348 (1982).
Subrogation is to be allowed only when the insured is
compensated in full by recovery from the tortfeasor.
Dufour's December 2, 2011 letter to Dairyland. Dairyland
responded to Dufour's request, disputing that he was entitled to
further payments from Dairyland:
Mr. Dufour has been paid all limits to which he is
entitled. Mr. Dufour has no right to Dairyland
Insurance's claim for subrogation related to property
damage. Accordingly, we are denying your claim.
Dairyland's March 13, 2012 letter to Dufour.
¶9 Based on Dairyland's refusal, Dufour amended his
complaint, alleging that Dairyland breached its insurance
contract and acted in bad faith by unreasonably failing to turn
over the funds it received in subrogation. Relying on Valley
Forge, the circuit court granted Dufour's motion for summary
judgment with respect to turnover of the funds from Dairyland's
subrogation claim. However, the circuit court agreed with
Dairyland with respect to bad faith, concluding that Dairyland
did not unreasonably withhold the funds.
¶10 Both parties appealed, and the court of appeals
affirmed the circuit court's grant of Dufour's motion for
summary judgment because it concluded that Dufour had not been
made whole for his bodily injuries and, therefore, Dairyland was
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No. 2014AP157
not entitled to retain the funds it obtained as subrogation.5
Further, the court of appeals held that Dairyland acted in bad
faith in light of its obligations under the made whole doctrine
and remanded for a determination of damages for Dufour's bad
faith claim.6
¶11 We granted Dairyland's petition for review.
II. DISCUSSION
A. Standard of Review
¶12 We review grants of summary judgment independently,
applying the same methodology as the circuit court and the court
of appeals, while benefitting from their analyses. Preisler v.
Gen. Cas. Ins. Co., 2014 WI 135, ¶16, 360 Wis. 2d 129, 857
N.W.2d 136. "The standards set forth in Wis. Stat. § 802.08 are
our guides." Id. Summary judgment "shall be rendered if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that
the moving party is entitled to a judgment as a matter of law."
Wis. Stat. § 802.08(2) (2013-14).
¶13 Our review requires us to determine the applicability
of the made whole doctrine to funds Dairyland recovered in
subrogation from American Standard. This is a question of law
5
Dufour, unpublished slip op., ¶26.
6
Id., ¶36.
6
No. 2014AP157
that we review independently. Muller v. Society Ins., 2008 WI
50, ¶20, 309 Wis. 2d 410, 750 N.W.2d 1.
B. Subrogation
¶14 Dairyland's insurance policy expressly provides:
"[a]fter we have made payment under this policy and, where
allowed by law, we have the right to recover the payment from
anyone who may be held responsible." Accordingly, we determine
whether, because Dufour was not made whole for his bodily
injury, Dairyland is precluded by law from retaining funds
American Standard paid to it as subrogation for the property
damages Dairyland paid to Dufour. Prior to undertaking our
discussion of the made whole doctrine's applicability to
Dufour's claim, we first address the law of subrogation,
generally.
1. General subrogation principles
¶15 Subrogation is the "substitution of one party for
another whose debt the party pays, entitling the paying party to
rights, remedies, or securities that would otherwise belong to
the debtor." Black's Law Dictionary 1563-64 (9th ed. 2009).
Contractual subrogation and equitable subrogation both exist
under Wisconsin law.7 Jindra v. Diederich Flooring, 181 Wis. 2d
579, 601, 511 N.W.2d 855 (1994). With either type of
7
Contractual subrogation has been referred to as
"conventional subrogation." Jindra v. Diederich Flooring, 181
Wis. 2d 579, 601, 511 N.W.2d 855 (1994). Equitable subrogation
has been referred to as "common law subrogation." Garrity v.
Rural Mut. Ins. Co., 77 Wis. 2d 537, 541, 253 N.W.2d 512 (1977).
7
No. 2014AP157
subrogation, equities affect the asserted right to subrogation
when it is presented by an insurance company. Garrity v. Rural
Mut. Ins. Co., 77 Wis. 2d 537, 540-41, 253 N.W.2d 512 (1977).
Recently, we summarized subrogation in an insurance context
where we applied equitable principles to a contractual right of
subrogation:
[S]ubrogation is a purely derivative right that
permits an insurer who has been contractually
obligated to satisfy a loss created by a third party
to step into the shoes of its insured and to pursue
recovery from the responsible wrongdoer. . . . The
doctrine of subrogation enables an insurer that has
paid an insured's loss pursuant to a policy of
property insurance to recoup that payment from the
party responsible for the loss.
Muller, 309 Wis. 2d 410, ¶22 (internal citations omitted).8
¶16 Subrogation avoids unjust enrichment because it
precludes double payment for the same loss. Id., ¶29.
Moreover, "[s]ubrogation rests upon the equitable principle that
one, other than a volunteer, who pays for the wrong of another
should be permitted to look to the wrongdoer to the extent he
has paid and be subject to the defenses of the wrongdoer."
Garrity, 77 Wis. 2d at 541. Therefore, subrogation balances
equities between parties by precluding the insured from
recovering twice for the same loss while compelling payment by
8
Mullers' contract with Society contained a subrogation
clause with language providing for recoupment of payment by
Society. Muller v. Society Ins., 2008 WI 50, ¶71, 309 Wis. 2d
410, 750 N.W.2d 1.
8
No. 2014AP157
the tortfeasor who caused the harm in the first instance.
Muller, 309 Wis. 2d 410, ¶24.
¶17 Further, we repeatedly have emphasized the fact-
specific and equitable nature of subrogation. See, e.g., id.,
¶26 (recognizing that subrogation is "heavily influenced by
particular facts"); Vogt v. Schroeder, 129 Wis. 2d 3, 12, 383
N.W.2d 876 (1986) (stating that "subrogation is an equitable
doctrine and depends upon a just resolution of a dispute under a
particular set of facts"); Rimes, 106 Wis. 2d at 271
(acknowledging that "subrogation is based upon equitable
principles").
¶18 We have identified three non-exhaustive, equitable
principles that may affect subrogation: "(1) ensuring that the
plaintiff is fully compensated for loss; (2) preventing unjust
enrichment; and (3) ensuring that the wrongdoer is held
responsible for his conduct and not allowed to go scot-free by
failing to respond to damages while another, the plaintiff's
insurer, is required to do so." Muller, 309 Wis. 2d 410, ¶60
(citing Vogt, 129 Wis. 2d at 13). We now turn to discuss the
made whole doctrine both generally and in some detail.
2. Made whole doctrine
a. made whole, generally
¶19 Ensuring that the insured is fully compensated for his
loss is the essence of the made whole doctrine. Namely, "equity
provides that subrogation ordinarily does not arise until the
underlying debt or loss has been paid in full. This
'antisubrogation rule' is known as the made whole doctrine."
9
No. 2014AP157
Id., ¶25 (citations omitted). The made whole doctrine attempts
to "[b]alanc[e] the insurer's right to recoup benefits it has
paid against an insured's right to obtain full compensation."
Id.
¶20 Our decisions demonstrate that the made whole doctrine
is but one consideration in determining whether an insurer is
entitled to subrogation. Vogt, 129 Wis. 2d at 13 (recognizing
"distinct and separate equitable polic[ies]" in considering
subrogation); Muller, 309 Wis. 2d 410, ¶60 ("[T]he made whole
doctrine is not applicable in all situations, and thus the test
of 'wholeness' stated in Rimes is not the sole criterion for
determining whether an insurer may pursue its subrogation
interest"). Stated otherwise, an insurer is not always
precluded from retaining funds obtained as subrogation for
payments the insurer previously made simply because the insured
has not been fully compensated for the loss. Rather, the
specific facts and equities dictate whether the made whole
doctrine will apply to prevent an insurer from retaining funds
received for its subrogation claim.
b. made whole, in detail
¶21 Because Garrity and Rimes are the foundation of the
made whole doctrine, it is important to understand what they say
and why, as well as to recognize the issues they did not
address. The made whole doctrine embodies the principle that,
"[o]rdinarily, subrogation does not arise until the debt [to the
injured party] has been fully paid." Garrity, 77 Wis. 2d at
541. We explained in Garrity that the insurer "has no share in
10
No. 2014AP157
the recovery from the tort-feasor if the total amount recovered
by the insured from the insurer does not cover his loss." Id.
at 544. In Rimes, we also said:
The purpose of subrogation is to prevent a double
recovery by the insured. Under circumstances where an
insured has received full damages from the tortfeasor
and has also been paid for a portion of those damages
by the insurer, he receives double payment——he has
been made more than whole. Only under those
circumstances is the insurer, under principles of
equity, entitled to subrogation.
Rimes, 106 Wis. 2d at 272.
¶22 Subsequent to our initial setting out of the made
whole doctrine, we recognized that both Garrity and Rimes
presented the same factual scenario where equity drove our
conclusion that the made whole doctrine applied. We explained:
The circumstances in each of those cases were
substantially the same, and therefore the subrogation
problem posed in each was subject to resolution by
applying the same equitable principle to the facts——
that the insured had a right to be made whole, but no
more than whole. Hence, the insurer was to be
subrogated only if further recovery would do more than
make the insured whole.
Vogt, 129 Wis. 2d at 13.
¶23 It is important to note that in both Garrity and
Rimes, the insurer attempted to exercise its claim of
subrogation against funds that otherwise would have gone to its
insured. Id. at 14. Therefore, if the insurer had prevailed on
its subrogation claim, the insured would not have been paid all
that he had contracted to receive under his own policy. The
issue in Garrity and Rimes may be summarized as one of priority:
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No. 2014AP157
there was a limited pool of funds available, and the issue was
whether the insurer or the insured enjoyed priority to those
funds for which they were competing. Id. at 14-15.
¶24 For example, in Garrity, the insureds' barn sustained
damages due to a negligently operated truck, and the insureds
sought proceeds under both their own policy and the tortfeasor's
policy.9 Garrity, 77 Wis. 2d at 539. The insureds recovered the
policy limit under their own policy, $67,227.12; however,
damages to the barn were in excess of $100,000. Id.
Accordingly, the insureds also required proceeds under the
tortfeasor's insurance policy, which had a policy limit of
$25,000, as they attempted to cover their loss. Id. at 543.
¶25 The insurer asserted a subrogation claim against the
tortfeasor's policy limit of $25,000 to recoup part of the
$67,227.12 that it had paid to its insureds. Id. at 540-41.
Consequently, permitting the insurer's subrogation claim would
have reduced the insureds' recovery by $25,000, thereby
increasing the amount by which the insureds were not made whole.
See Vogt, 129 Wis. 2d at 14-15. In concluding that the insureds
maintained priority to the tortfeasor's $25,000 policy limit for
which the insurer was competing, we stated that, "where either
the insurer or the insured 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." Garrity, 77 Wis. 2d at 542.
9
Both the insured and the tortfeasor maintained insurance
policies with the same insurance company.
12
No. 2014AP157
¶26 Rimes involved an automobile accident where the
insured sustained damages in excess of $300,000. Rimes, 106
Wis. 2d at 264-65. The insured received $9,649.90 from its
insurer, State Farm Automobile Insurance Company, under medical-
pay policy provisions in two State Farm policies, each with a
$5,000 limit. Id. at 265-66. Subsequently, the insured
stipulated to a $125,000 settlement with the tortfeasors'
insurers, which amount included $9,649.90 for medical-pay.
Rimes was paid all but $9,649.90, which amount was paid into
court subject to State Farms' subrogation claim. Id. at 267.
¶27 The circuit court held a mini-trial on damages,
finding Rimes' total damages were $300,433.54, of which past
medical expenses were $26,560.70.10 Id. at 268-69. In applying
the made whole doctrine to preclude the insurer from accessing
funds for which it was competing with its own insured, we stated
that, "[u]nder Wisconsin law[,] the test of wholeness depends
upon whether the insured has been completely compensated for all
the elements of damages, not merely those damages for which the
insurer has indemnified the insured." Id. at 275. In Rimes,
the insured was not made whole for either medical-pay damages or
for personal injury damages. Therefore, the insured was not
required to disgorge amounts for which he was indemnified by his
insurer. Id. at 276.
10
This type of evidentiary hearing on damages has become
known as a Rimes hearing or a made whole hearing. Schulte v.
Frazin, 176 Wis. 2d 622, 627, 500 N.W.2d 305 (1993).
13
No. 2014AP157
¶28 We subsequently clarified that the broad statements
from Garrity and Rimes were to be applied only when the
application of the made whole doctrine would yield an equitable
result. Vogt, 129 Wis. 2d at 12. For example, in Vogt, the
insured, who was the injured party in an automobile accident,
suffered damages in excess of the tortfeasor's insurance
policy's $15,000 limit of liability. Id. at 7. The
tortfeasor's insurer offered to settle with the insured-injured
party for its $15,000 policy limit in exchange for a release of
the tortfeasor and the tortfeasor's insurer from any further
liability. Id. at 8. Because the insured-injured party's
damages exceeded the tortfeasor's $15,000 limit of liability,
the insured also was entitled to recover under his own policy's
$50,000 underinsured motorist coverage. Id. The insured-
injured party's insurer refused to approve the settlement and
release without preserving its right to subrogation, and the
matter came before the circuit court for resolution. Id.
¶29 We explained in Vogt that our central inquiry was
"[w]hether an automobile insurer which by the terms of its
contract pays its own insured under the underinsured motorist
coverage has a right of subrogation against the tortfeasor . . .
once a payment has been made to its own insured." Id. at 15-16.
In answering this question in the affirmative, we noted a
"distinct and separate equitable [principle]" that is important
when considering how the made whole doctrine is to function.
Id. at 13. Specifically, we concluded that the tortfeasor
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No. 2014AP157
should be held "responsible for his conduct and not [] allowed
to go scot-free by failing to respond in damages." Id.
¶30 Notably, the issue in Vogt was not the same as the
issue of priority that was presented in Garrity and Rimes where
subrogation would have operated to reduce the insured's recovery
to which he was entitled under his own policy. See id. at 15.
Rather, in Vogt, there was no competition, and the insured
maintained priority to all proceeds to which he was entitled
under the tortfeasor's policy limit, as well as under his own
policy. Id. at 17-18. In such a situation, it would have been
inequitable to allow the insured unilaterally to prevent his
insurer from seeking subrogation from the tortfeasor, and
thereby hold the tortfeasor accountable if subrogation would
have no discernible effect on the insured's recovery. See id.
at 17-19. Consequently, we declined to apply the made whole
doctrine to prevent the insurer from seeking subrogation from
the tortfeasor. Id. at 19.
¶31 In Mutual Service, we further explained the
independent nature of subrogation claims and their connection to
the made whole doctrine. We clarified that an insurer who pays
a claim to its insured for which a tortfeasor is responsible has
a derivative, but separate claim against the tortfeasor and the
tortfeasor's insurer. "In such a situation, we have
characterized the interests of the insurer and the insured as
each owning separately a part of the claim against the
tortfeasor." Mut. Serv. Cas. Co. v. Am. Family Ins. Grp., 140
Wis. 2d 555, 561, 410 N.W.2d 582 (1987).
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No. 2014AP157
¶32 In Mutual Service, we held that when an insurer
maintains a separate subrogation claim against the tortfeasor,
the made whole doctrine as articulated in Garrity and Rimes is
inapplicable if the claim is "brought by a subrogated insurer
against the tortfeasor or the tortfeasor's insurer where the
subrogated insurer's insured has previously settled with the
tortfeasor." Id. at 563-64. As with Vogt, we did not apply the
made whole doctrine to preclude the insurer's claim for
subrogation. See id. It is important to note that in the
absence of the insurer's success on its subrogation claim, there
would not have been any funds that the insured could seek to
collect after having recovered under her own policy as well as
under the settlement agreement with the tortfeasor. See id.;
see also Vogt, 129 Wis. 2d at 17-19.
¶33 In Schulte v. Frazen, 176 Wis. 2d 622, 500 N.W.2d 305
(1993), a medical malpractice action, we examined a settlement
that permitted Schulte, through an indemnification agreement
among Schulte, the tortfeasor and the tortfeasor's insurer, to
unilaterally defeat the insurer's subrogation claim against the
tortfeasor and his insurer. Id. at 625. There, Schulte
received $90,000 in medical payments from her insurer, Compcare
Health Services Insurance Corporation. Id. at 625-26. Schulte
then settled with the tortfeasor and the tortfeasor's insurer
for $2,460,000. Id. at 626. As part of the settlement, Schulte
agreed to indemnify the tortfeasor and the tortfeasor's insurer
for any further liability they incurred from the medical
malpractice. Id. at 626-27.
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No. 2014AP157
¶34 Schulte then moved to extinguish Compcare's
subrogation lien and requested a Rimes hearing. Id. Because of
the indemnification agreement, Compcare, who was not consulted
prior to Schulte's settlement, found itself in competition with
Schulte over the funds she had received. Id. at 633-34 ("[A]n
indemnification agreement indirectly creates the prospect that
the insurer will be competing with its own insured.").
¶35 At the Rimes hearing, the circuit court found that
Schulte's damages were between $2,950,000 and $4,790,000 and
therefore, Schulte had not been made whole by the settlement.
Id. at 627. If Compcare prevailed on its subrogation claim that
arose from the $90,000 it paid Schulte in medical-pay, Schulte
would have been required to indemnify the tortfeasor for that
amount. See id. Therefore, the recovery to which she was
entitled under her own insurance policy would have been reduced
by $90,000, for which coverage Schulte had paid a premium. See
id. Consequently, we concluded that the circuit court correctly
applied the made whole doctrine when it extinguished Compcare's
subrogation claim due to the indemnification agreement. Id. at
633-35.
¶36 Most recently, we considered the applicability of the
made whole doctrine in Muller, where the pool of money available
was sufficient to fully satisfy the injured parties' losses and
the subrogation claim of their insurer. The Mullers' property
was destroyed by a fire, resulting in damages of $697,981.58.
Muller, 309 Wis. 2d 410, ¶5. The Mullers' insurer, Society
Insurance, paid them $407,378.88, Society's policy limit. This
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No. 2014AP157
payment left the Mullers uncompensated by $290,602.70. Id., ¶6.
The tortfeasor was insured under a United Fire and Casualty
policy with a liability limit of $1,000,000. Id., ¶5.
¶37 Although the tortfeasor's United policy was sufficient
to cover the remaining loss, the insureds voluntarily settled
with the tortfeasor for $120,000. Id., ¶11. The settlement
agreement contained no indemnification obligation for the
Mullers. Id., ¶12. Subsequently, Society and United settled
Society's subrogation claim for $190,000. Id. The Mullers then
argued that they were entitled to receive the remainder of their
loss from those funds, as they had not yet been made whole.
Id., ¶13.
¶38 We set forth the issue as follows:
[W]hether an insurer may retain in full a subrogation
settlement with a tortfeasor and a tortfeasor's
insurer after its insureds have settled with the
tortfeasor and the tortfeasor's insurer for an amount
less than necessary to make the insureds "whole," even
though the tortfeasor's insurance policy limits were
sufficient to cover all claims, including those of
both the insureds and the insurer.
Id., ¶2. Given the equities created by the facts of the case,
we did not apply the made whole doctrine, which would have
deprived the insurer of its subrogation rights. Instead, we
held that Society had fulfilled all of its obligations under its
insurance policy by paying the Mullers' policy limits, by not
competing with the Mullers for a limited pool of funds and had
done nothing to otherwise reduce the Mullers' recovery. Id.,
¶4.
18
No. 2014AP157
¶39 Additionally, we acknowledged that an insurer has a
separate subrogation claim against the tortfeasor, which the
insurer was entitled to pursue as long as it recognized the
priority of the insureds to available funds, which Society did.
Id., ¶72.
¶40 Even though the Mullers were not made whole,11 they
received all benefits under their own insurance policy for which
they bargained and all benefits from their settlement agreement
with the tortfeasor. Id., ¶70. Had Society chosen not to
pursue its subrogation claim, the Mullers would not have had
access to any additional monies after collecting under both
their policy with Society and the settlement agreement with
United. Id., ¶86. Therefore, we concluded that it would have
been inequitable to allow the Mullers to prevent their insurer,
Society, from retaining funds received on its subrogation claim
and "would discourage subrogees from pursuing their subrogation
rights." Id.
¶41 We now consider the court of appeals' Valley Forge
decision, upon which both the circuit court and court of appeals
relied when denying Dairyland's retention of funds it recovered
in subrogation from the tortfeasor's insurer. There, the
insured, Samuel McIlrath, was injured in an automobile accident
and also sustained property damage to his vehicle. Valley
Forge, 133 Wis. 2d at 366. McIlrath maintained a Valley Forge
11
There was no Rimes hearing, but the parties agreed that
Mullers were not made whole by the payments they received.
19
No. 2014AP157
automobile insurance policy with collision coverage, under which
Valley Forge paid approximately $6,000 for property damages.
Id. at 366-67. The tortfeasor, Joseph E. Ropson, maintained an
insurance policy with Home Mutual, which provided separate
policy limits for bodily injury and property damage. Id. at
366.
¶42 Pursuant to the settlement agreement, Home Mutual paid
McIlrath and two passengers who were injured its bodily injury
policy limits, with McIlrath receiving $25,000. Id. Home
Mutual also paid McIlrath $6,000 in property damage. Id. at
366-67. It was undisputed that McIlrath's bodily injury damages
exceeded $25,000 and that he was paid twice for his property
damage, once by Valley Forge and once by Home Mutual. Id. at
367, 369. Further, the property damage payment was made
directly to McIlrath, rather than to Valley Forge, at the
direction of McIlrath's attorney. The settlement agreement also
required McIlrath to indemnify Home Mutual from any claims made
against it or the tortfeasor by Valley Forge. Id. at 367. This
placed Valley Forge's subrogation claim in direct competition
with the recovery of its insured. See Schulte, 176 Wis. 2d at
633-34.
¶43 Valley Forge sued Home Mutual, its insured, Ropson,
and McIlrath, asserting a subrogation claim based on its
previous $6,000 property damage payment to McIlrath. The
subrogation claim of Valley Forge against Home Mutual and
Ropson, if successful, would have taken $6,000 from McIlrath due
to McIlrath's indemnification obligation to Home Mutual and
20
No. 2014AP157
Ropson under the settlement agreement. This would have caused
McIlrath's first-party claim against Valley Forge to become
unfunded.12
¶44 Rejecting the insurer's claim to recoup the subrogated
property damage funds from its own insured through the operation
of the indemnification provision in the settlement agreement,
the court of appeals over simplified the issue as whether the
insurer or the insured should go unpaid, and concluded that "the
loss should be borne by the insurer for that is a risk the
insured has paid it to assume." Valley Forge, 133 Wis. 2d at
369-70 (quoting Garrity, 77 Wis. 2d at 542). In so doing, the
court of appeals overlooked the equities affecting Valley Forge
and whether McIlrath was entitled to pursue subrogated property
damage funds from Home Mutual in the first instance because he
had been fully paid for that claim by Valley Forge.13
12
A first-party claim in an insurance context is a claim
made by the insured on his contract of insurance with his
insurer, as distinguished from the situation in which a third
party sues an insurer. Brethorst v. Allstate Prop. & Cas. Ins.
Co., 2011 WI 41, ¶¶23-24, 334 Wis. 2d 23, 798 N.W.2d 467.
13
As we have explained, one cause of action may arise out
of an automobile accident, but it can contain two claims: one
for property damage and one for personal injury. Borde v. Hake,
44 Wis. 2d 22, 29, 170 N.W.2d 768 (1969). Subsequent to the
insurer's payment of the insured's property damage, the insurer
and its insured have common ownership of that claim. Id. at 28;
see also Heifetz v. Johnson, 61 Wis. 2d 111, 122, 211 N.W.2d 834
(1973) (withdrawing dicta from Borde relative to statute of
limitations effect of failing to name subrogated insurer).
21
No. 2014AP157
¶45 Moreover, the court of appeals missed the import of
the indemnity provision in the settlement agreement to the
equities that related to the insurer, even though in Vogt we
pointed out similar equitable issues to that which an indemnity
agreement can raise. Instead of paying heed to what we had said
about the equities that affect subrogation, the court of appeals
dismissed our decision in Vogt as "inapposite" to the issues
presented in Valley Forge. Id. at 369.
¶46 By so doing, the court of appeals failed to consider
the equitable bases upon which we refused to enforce full
releases of the tortfeasor and his insurer required by the
settlement offer in Vogt and how those equities would have been
implicated as the court of appeals considered the indemnity
provision of the settlement agreement in Valley Forge. As we
carefully explained in Vogt, when the insured has received
payment under his own policy and an opportunity to settle with
the tortfeasor and the tortfeasor's insurer, "a just result"
puts the ultimate burden on the tortfeasor, not on the insurer
who has paid a first-party claim in full under its contract with
its insured. Vogt, 129 Wis. 2d at 19.
¶47 More specifically, in Vogt, we examined contentions
that related to a settlement agreement that required full
releases of the tortfeasor and his insurer by the injured party:
(1) payment to the injured party of $15,000, the tortfeasor's
policy limits; (2) release of the tortfeasor from any obligation
for damages he caused; and (3) termination of the insurer's
subrogation rights. Id. at 8. After balancing the equities
22
No. 2014AP157
among the parties, we did not terminate the insurer's
subrogation claim. Rather, we offered the insurer the choice of
paying its insured's first-party claim from the $50,000 of
underinsured motorist coverage14 and then pursuing the tortfeasor
for payment in subrogation or paying its insured's first-party
claim and accepting the settlement if the insurer determined
that the tortfeasor was not collectable and, therefore, not
worth pursuing. Id. at 26.
¶48 Given the record before us, we were unsure whether the
tortfeasor was collectable; therefore, we remanded the matter to
the circuit court to give the insurer sufficient time to decide
how it would proceed. Id. Importantly, the balance we effected
did not put the insurer in competition with its own insured and
permitted the insurer to hold the tortfeasor responsible for the
damages he had caused.
3. Application: made whole or subrogation
¶49 We conclude that, given the facts presented in the
instant case, the made whole doctrine does not apply to preclude
Dairyland from retaining funds obtained in subrogation even
though Dufour has not recovered all of his bodily injury damages
flowing from the accident. First, Dairyland fully paid Dufour
its bodily injury policy limit of $100,000 as well as 100% of
the damage to his motorcycle under its property damage
14
"There is nothing in the record to show the total amount
of damages to which Vogt may be entitled." Vogt v. Schroeder,
129 Wis. 2d 3, 7, 383 N.W.2d 876 (1986).
23
No. 2014AP157
provision. As with Muller, these proceeds constituted every
dollar to which Dufour was entitled under his contract of
insurance with Dairyland. See Muller, 309 Wis. 2d 410, ¶70.
Had Dufour wished to insure himself against greater bodily
injury losses, he could have paid a higher premium for higher
policy limits.
¶50 Second, Dufour also had priority in recovering from
the tortfeasor's policy, as required by Garrity, wherein he was
paid the policy limit of $100,000 for bodily injury. Garrity,
77 Wis. 2d at 542-43. Dairyland permitted Dufour to recover all
benefits to which he was entitled under both policies before it
pursued its separate subrogation claim against the tortfeasor's
insurer. Third, by waiting until Dufour recovered all available
proceeds under both insurance policies, Dairyland was not in
competition with Dufour for a limited pool of funds. As Dufour
acknowledges, but for Dairyland's subrogation action against the
tortfeasor's insurer, Dufour would have no access to any
additional funds from either insurer. Consequently, allowing
Dairyland to seek and obtain subrogation had no effect on
Dufour's recovery. Muller, 309 Wis. 2d 410, ¶4.
¶51 Therefore, the equities presented favor Dairyland,
which has wholly fulfilled its contractual obligations to
Dufour. Dufour purchased two types of insurance coverage that
are relevant here: bodily injury and property damage. Each
coverage type gave rise to a separate premium, a separate policy
limit and a separate description of the kind of damage for which
it would indemnify Dufour. He exhausted his underinsured
24
No. 2014AP157
motorist bodily injury policy limit and now is attempting to tap
into his property damage policy limit in order to satisfy his
remaining bodily injury losses. We decline to rewrite
Dairyland's policy to provide for lump sum coverage where such
coverage was not contemplated by the parties. Brethorst v.
Allstate Prop. & Cas. Ins. Co., 2011 WI 41, ¶68, 334 Wis. 2d 23,
798 N.W.2d 467 (declining to rewrite insurance policy "to bind
an insurer to a risk which it did not contemplate and for which
it was not paid"); Maxwell v. Hartford Union High Sch. Dist.,
2012 WI 58, ¶¶34-35, 341 Wis. 2d 238, 814 N.W.2d 484
(emphasizing importance of both insurers and insureds receiving
the benefit of their bargain as premiums are based on risk
assessment). Although we are sympathetic to Dufour's personal
injuries for which he was not made whole, preventing an insurer
from pursuing its subrogation claim for property damage payments
under circumstances such as presented herein would not solve the
problem of underinsurance for personal injuries.15
¶52 Finally, although we have serious concerns about the
court of appeals decision in Valley Forge and caution against
its use, given our discussions in Vogt, subsequent cases and
herein, we do not overrule Valley Forge. The holding in Valley
Forge requires a settlement agreement whereby the injured party
becomes obligated to indemnify the tortfeasor and its insurer
15
Insurers would not proceed on their subrogation claims
were they not able to retain the funds awarded from those
claims.
25
No. 2014AP157
for any award the injured party's insurer obtains in
subrogation. Such an agreement sets up the potential for
competition for a limited pool of funds between the insurer and
its insured. Schulte, 176 Wis. 2d at 633-34. There is no
indemnification agreement here, no potential competition for a
limited pool of funds and no potential to apply Valley Forge.
C. Bad Faith
¶53 A bad faith claim is a separate and distinct cause of
action from an insured claiming that the insurer breached its
insurance contract. Brethorst, 334 Wis. 2d 23, ¶23. Bad faith
sounds in tort, not in contract, and it constitutes "a separate
intentional wrong, which results from a breach of duty imposed
as a consequence of the relationship established by contract."
Anderson v. Cont'l Ins. Co., 85 Wis. 2d 675, 687, 271 N.W.2d 368
(1978).
¶54 In order to prevail on a bad faith claim, an insured
must establish three elements. Brethorst, 334 Wis. 2d 23, ¶¶49,
65 (citing Weiss v. United Fire & Cas. Co., 197 Wis. 2d 365,
377, 541 N.W.2d 753 (1995) and Benke v. Mukwonago-Vernon Mut.
Ins. Co., 110 Wis. 2d 356, 362, 329 N.W.2d 243 (Ct. App. 1982)).
The insured must show all of the following: First, "that there
is no reasonable basis for the insurer to deny the insured's
claim for benefits under the policy." Id. Second, "that the
insurer knew of or recklessly disregarded the lack of a
reasonable basis to deny the claim." Id. Third, "some breach
of contract by an insurer is a fundamental prerequisite for a
26
No. 2014AP157
first-party bad faith claim against the insurer by the insured."
Id., ¶65.
¶55 As we have explained above, Dairyland paid Dufour
every dollar to which he was entitled under its policy.
Therefore, Dairyland did not breach its insurance contract.
That Dairyland sought and obtained subrogation for payments it
made to Dufour is not in contravention of the parties' contract.
Quite to the contrary, Dairyland's policy specifically provided,
"[a]fter we have made payment under this policy and, where
allowed by law, we have the right to recover the payment from
anyone who may be held responsible." As insurer of the
tortfeasor, American Standard was a person who may be held
responsible for the tortfeasor's negligence and it was from
American Standard that Dairyland obtained subrogation.
Accordingly, we conclude that Dairyland did not act in bad faith
by retaining the funds it obtained as subrogation.
III. CONCLUSION
¶56 We conclude that the made whole doctrine does not
apply to preclude Dairyland from retaining the funds it received
from its subrogation claim because the equities favor Dairyland:
(1) Dairyland fully paid Dufour all he bargained for under his
Dairyland policy, which included the policy's limits for bodily
injury and 100% of Dufour's property damage; (2) Dufour had
priority in settling with the tortfeasor's insurer; and (3) if
Dairyland had not proceeded on its subrogation claim, Dufour
would have had no access to additional funds from the
tortfeasor's insurer. We further conclude that Dairyland did
27
No. 2014AP157
not act in bad faith with respect to Dufour's demand for the
funds Dairyland obtained as subrogation for the property damages
it paid Dufour. Accordingly, we reverse the court of appeals
decision in all respects.
By the Court.—The decision of the court of appeals is
reversed.
28
No. 2014AP157.ssa
¶57 SHIRLEY S. ABRAHAMSON, J. (concurring in part and
dissenting in part). The instant case focuses on the interplay
of subrogation and the made whole doctrine. Subrogation enables
an insurance company that has paid its insured's loss pursuant
to its policy to recoup that payment from the party responsible
for the loss.1 The made whole doctrine limits an insurance
company's rights to subrogation in recognition of the injured
insured's right to obtain full compensation for his or her
losses.
¶58 A tension exists between the two doctrines.
¶59 The made whole doctrine is an equitable limitation on
subrogation. Indeed, the court has called the made whole
doctrine "an antisubrogation rule."2 The made whole doctrine,
simply and generally stated, is "that there is no subrogation
until the insured has been made whole,"3 that is, an insurer may
1
Muller v. Society Ins., 2008 WI 50, ¶22, 309 Wis. 2d 410,
750 N.W.2d 1; see also Garrity v. Rural Mut. Ins. Co., 77
Wis. 2d 537, 541, 253 N.W.2d 512 (1977) ("Subrogation rests upon
the equitable principle that one, other than a volunteer, who
pays for the wrong of another should be permitted to look to the
wrongdoer to the extent he has paid and be subject to the
defenses of the wrongdoer.") (citations omitted).
The subrogation provision in Dairyland's policy states:
"After we have made payment under this policy and, where allowed
by law, we have the right to recover the payment from anyone who
may be held responsible." Majority op., ¶7.
2
Muller, 309 Wis. 2d 410, ¶25.
3
Garrity, 77 Wis. 2d at 542.
1
No. 2014AP157.ssa
not recover payments from the tortfeasor or the tortfeasor's
insurer until the insured has been compensated for all elements
of damages he or she sustained.
¶60 The limitations on subrogation imposed by the made
whole doctrine exist to prevent the inequitable prospect of an
insurance company competing with its insured for funds when the
insured has indisputably not been made whole.4 The court has
explained: "Where either the [insurance company] or the insured
must to some extent go unpaid, the loss should be borne by the
[insurance company] for that is a risk the insured has paid it
to assume."5
¶61 Numerous cases focus on the interplay of subrogation
and the made whole doctrine in a variety of fact situations.
Because the essence of the case law is that equitable principles
apply to subrogation and the made whole doctrine,6 these cases
turn on their specific facts.
4
Schulte v. Franzin, 176 Wis. 2d 622, 625, 500 N.W.2d 305
(1993).
See Petta v. ABC Ins. Co., 2005 WI 18, ¶38, 278
Wis. 2d 251, 692 N.W.2d 639 ("Outside of situations where a
person has a competing claim with a subrogated insurer, the
equities will vary dramatically.").
5
Rimes v. State Farm Mut. Auto. Ins. Co., 106 Wis. 2d 263,
276, 316 N.W.2d 348 (1982) (quoting Garrity, 77 Wis. 2d at 542).
6
Fischer v. Steffen, 2011 WI 34, ¶34, 333 Wis. 2d 503, 797
N.W.2d 501.
2
No. 2014AP157.ssa
¶62 Although the case law is not easy to follow, certain
principles are very clear: Subrogation and the made whole
doctrine are equitable doctrines. There is no subrogation until
an insured is made whole. Subrogated insurance companies should
not compete with their insureds for limited settlement funds.
¶63 The undisputed facts here are that Dufour recovered
from the tortfeasor's insurance company, American Standard, and
his insurance company, Dairyland, a total of $200,000 for bodily
injuries stemming from a motorcycle accident. This sum did not
cover Dufour's full losses for bodily injuries.
¶64 In addition, Dairyland paid Dufour the sum of
$15,589.86, to compensate for damages to Dufour's motorcycle.
¶65 Based on this payment for damages to the motorcycle,
Dairyland sought reimbursement for the $15,589.86 from American
Standard. Under American Standard's policy insuring the
tortfeasor, American Standard was liable to the injured person
for property damage caused by American Standard's insured (the
tortfeasor).
3
No. 2014AP157.ssa
¶66 After Dairyland was reimbursed $15,589.86 by American
Standard, Dufour sought this $15,589.86 from Dairyland on the
grounds that he was not made whole.7
¶67 The issue in the instant case is who is entitled to
this $15,589.86——Dufour, or Dairyland, his insurance company——
given that Dufour has not been fully compensated for his bodily
injuries from the accident.
¶68 Contrary to the majority opinion's assertions, in the
instant case, the insured and his insurance company are
competing for a limited pool of funds that is not sufficient to
satisfy both the insured's losses and the insurance company's
subrogation interest. An overriding concern of the made whole
doctrine is the "inequitable prospect of insurance companies
attempting to take the funds that should have gone to the
insured."8 The majority opinion ignores this competition for the
7
An article refers to the three parties involved in
subrogation and the made whole doctrine as follows: The
tortfeasor is referred to as the "loss-causer"; the injured
party is referred to as the "loss-victim"; and the loss-victim's
insurance company is referred to as the "loss-insurer." See
Brendan S. Maher & Radha A. Pathak, Understanding and
Problematizing Contractual Tort Subrogation, 40 Loy. U. Chi.
L.J. 49, 50 (2008). Although I do not use this terminology, I
find it descriptive and helpful.
8
Vogt v. Schroeder, 129 Wis. 2d 3, 14, 383 N.W.2d 876
(1986).
4
No. 2014AP157.ssa
funds, but "[t]he practical competition between an insured and
the subrogated insurer is an equitable factor we cannot ignore."9
¶69 I dissent in part because I would affirm that part of
the decision of the court of appeals holding that the made whole
doctrine applies in the instant case and that Dairyland is
barred from retaining the $15,589.86. This result is just and
equitable under the circumstances.
¶70 Although "Wisconsin decisional law has done more to
influence the expansion of the made whole doctrine than that of
any other jurisdiction,"10 recent Wisconsin cases are chipping
away at the doctrine. The majority opinion in the instant case
continues this process of chipping away and in so doing, fails
to clarify the already messy interplay between subrogation and
9
Schulte, 176 Wis. 2d at 633.
10
Johnny C. Parker, The Made Whole Doctrine: Unraveling
the Enigma Wrapped in the Mystery of Insurance Subrogation, 70
Mo. L. Rev. 723, 771 (2005).
5
No. 2014AP157.ssa
the made whole doctrine in Wisconsin.11 I disagree with chipping
away at the made whole doctrine.
¶71 I concur in part, however, because I agree with the
majority opinion's conclusion that Dairyland did not act in bad
faith when it denied Dufour's claim. I do not agree with the
majority's discussion of this issue. I conclude that Dairyland
had a reasonable basis "to conclude that [its insured's] claim
11
See Donald H. Piper & Terry J. Booth, Subrogation, in 3
The Law of Damages in Wisconsin § 32.22 (Russell Ware ed., 6th
ed. 2016) (stating that the scope of the made whole doctrine "is
not currently well defined" in Wisconsin); John J. Kircher,
Insurer Subrogation in Wisconsin: The Good Hands (Or a Neighbor)
In Another's Shoes, 71 Marq. L. Rev. 33, 72 (1987) (noting that
although "[m]uch water has passed over, under, around and
through the judicial dam since the supreme court articulated the
first principle affecting insurer subrogation in Wisconsin,"
"[c]larity has not always been the product of the courts'
decisions."); see also Jeffrey A. Greenblatt, Comment, Insurance
and Subrogation: When the Pie Isn't Big Enough, Who Eats Last?,
64 U. Chi. L. Rev. 1337, 1345, 1360 (1997) (discussing the
"messy difficulties of applying the made-whole doctrine," and
suggesting that "[e]ven defining the term 'made whole' is
difficult.").
For discussions of subrogation and the made whole doctrine,
see, e.g., 4 New Appleman Law of Liability Insurance ch. 42
(Matthew Bender rev. ed., 2d ed. 2015); 16 Lee R. Russ & Thomas
F. Segalla, Couch on Insurance 3d, chs. 222-226 (2005); II
Arnold P. Anderson, Wisconsin Insurance Law ch. 10 (7th ed.
2015); 3 The Law of Damages in Wisconsin, ch. 32 (Russell Ware
ed., 6th ed. 2016); Maher & Pathak, supra note 7; Parker, supra
note 7; Greenblatt, supra, at 1345, 1360; Kircher, supra, at 72;
Matthiesen, Wickert & Lehrer, S.C., Made Whole Doctrine in All
50 States, https://www.mwl-law.com/wp-
content/uploads/2013/03/made-whole-doctrine-in-all-50-states.pdf
(last updated Feb. 5, 2016)
6
No. 2014AP157.ssa
is fairly debatable and that therefore payment need not be made
on the claim."12
¶72 Accordingly, I dissent in part, concur in part, and
write separately.
I
¶73 I begin with the undisputed facts and the issue
presented.
¶74 Dennis Dufour was seriously injured in a motorcycle
accident. Dufour's bodily injuries exceeded $200,000. Dufour's
property damage, namely damage to his motorcycle, amounted to
$15,589.86.
¶75 Dairyland paid Dufour, its insured, $100,000, its
policy limit for underinsured motorist coverage, for his bodily
injuries. American Standard, the tortfeasor's insurance
company, paid Dufour $100,000, its liability policy limit, for
his bodily injuries.
¶76 Dairyland also paid Dufour $15,589.86 for the damage
to his motorcycle.
¶77 As a result, Dufour received the full amount of his
property damage from his insurance company. Dufour has not,
however, received full compensation for his bodily injuries. He
12
See Brown v. LIRC, 2003 WI 142, ¶24, 267 Wis. 2d 31, 671
N.W.2d 279.
7
No. 2014AP157.ssa
has not been made whole for all bodily injuries he sustained in
the motorcycle accident.
¶78 After paying Dufour its $100,000 policy limit for
bodily injury and $15,589.86 for his property damage, Dairyland
sought and obtained in subrogation from American Standard, the
tortfeasor's insurance company, $15,589.86——the sum Dairyland
paid Dufour for damage to his motorcycle. Obviously in paying
Dairyland $15,589.86, American Standard agreed that its policy
obligated it to pay Dufour for property damage to his
motorcycle.
¶79 The central question presented in the instant case is
who is entitled to the $15,589.86 obtained by Dairyland from
American Standard: Dairyland or Dufour? The answer hinges on
whether Dufour has been "made whole," the general rule being
that "there is no subrogation until the insured has been made
whole,"13 in light of the equities of this particular fact
situation.
II
¶80 I turn now to applying subrogation and the made whole
doctrine in the instant case.
¶81 A premise of the made whole doctrine, as we have
previously stated, is that subrogation does not ordinarily arise
until the loss has been fully paid. When speaking of the loss
13
Garrity, 77 Wis. 2d at 542.
8
No. 2014AP157.ssa
in a tort case, "the loss" refers to all damages arising from a
single occurrence. Considering all damages arising from a
single occurrence as "the loss" is in keeping with the rule that
a cause of action in tort includes all elements of damages.14
¶82 In the instant case, it is undisputed that Dufour has
not been made whole for "all the elements of damages" he
sustained as the result of the accident. Dufour's bodily
injuries exceeded the $200,000 he received.
¶83 Since our seminal cases applying the made whole
doctrine, Rimes v. State Farm Automobile Insurance Co., 106
Wis. 2d 263, 275, 316 N.W.2d 348 (1982), and Garrity v. Rural
Mutual Insurance Co., 77 Wis. 2d 537, 542-43, 253 N.W.2d 512
(1977), this court has made clear that the made whole doctrine
bars subrogation unless "the insured has been completely
compensated for all the elements of damages, not merely those
damages for which the insurer has indemnified the insured."15
¶84 After this court decided Garrity and Rimes, the court
clarified the role of the equities in applying subrogation and
the made whole doctrine. The court stated in Vogt v. Schroeder,
129 Wis. 2d 3, 12, 383 N.W.2d 876 (1986), that because
14
The cause of action against a tortfeasor is indivisible.
Muller, 309 Wis. 2d 410 (citing Garrity, 77 Wis. 2d at 542); see
also Caygill v. Ipsen, 27 Wis. 2d 578, 582-83, 135 N.W.2d 284
(1965).
15
Rimes, 106 Wis. 2d at 275 (quoted with approval in
Schulte, 176 Wis. 2d at 628).
9
No. 2014AP157.ssa
subrogation and the made whole doctrine are equitable doctrines,
and "[e]quity does not lend itself to the application of black
letter rules," the made whole doctrine as set forth in Garrity
and Rimes would be applied only when it leads to equitable
results.16
¶85 Relying on this language in Vogt, the majority opinion
concludes that even though Dufour has not been made whole for
"all elements of damages"——namely his bodily injuries——the made
whole doctrine does not apply because "the equities favor
Dairyland . . . ."17
¶86 The majority opinion relies on three non-exhaustive
equitable principles that may affect subrogation:18 (1) ensuring
that the injured person (here Dufour) is fully compensated for
the loss; (2) preventing the injured person (here Dufour) from
being unjustly enriched; and (3) ensuring that the tortfeasor is
held responsible for his conduct and does not get off scot-free
while another, here the injured person's (Dufour's) insurance
16
See Muller, 309 Wis. 2d 410, ¶44 ("'Hence, only under
fact situations where an equitable result will follow should the
statements quoted above [e.g., 'the conventionally subrogated or
contractual insurer has no share in the recovery from the tort-
feasor if the total amount recovered by the insured from the
insurer does not cover his loss' Garrity, 77 Wis. 2d at 544] be
applied literally.'") (quoting Vogt, 129 Wis. 2d at 12)
(alteration in original) (emphasis omitted).
17
See majority op., ¶4.
18
See majority op., ¶18 (quoting Muller, 309 Wis. 2d 410,
¶60).
10
No. 2014AP157.ssa
company (Dairyland), is required to pay for the tortfeasor's
conduct.
¶87 The majority opinion weighs the equities and permits
Dairyland to retain the $15,589.86 it obtained in subrogation
from American Standard, the tortfeasor's insurance company.19
¶88 I also weigh the equities. Applying the three
equitable principles set forth by the majority opinion, I
conclude that the equities favor Dufour, not Dairyland (see part
A below). I also disagree with the majority's reading of the
case law (see part B below).
A
¶89 The equities favor Dufour, not Dairyland.
¶90 In the instant case, Dairyland is competing with
Dufour, its insured, for a limited pool of funds. Dairyland and
Dufour are competing for the same $15,589.86 that the tortfeasor
(through his insurance company, American Standard) was liable
for under its policy as a result of the motorcycle accident.
¶91 The made whole doctrine is designed to prevent
competition between the injured party and his or her insurance
company when the injured party's damages exceed the limited pool
of funds from which recovery may be had. The case law is clear:
When a limited pool of funds is insufficient to make the injured
19
See majority op., ¶56.
11
No. 2014AP157.ssa
party whole, the loss should be borne by the injured party's
insurance company (here, Dairyland).20
¶92 That the insurance company (here, Dairyland) bears the
loss rather than the insured (here, Dufour) when funds are
insufficient to pay the insured's entire damages is referred to
as the "recovery priority rule" or the "subrogation rule of
priority."21 The recovery priority rule establishes that Dufour,
the injured party, should be the first to tap into the limited
pool of funds and recover any uncompensated damages under the
made whole doctrine.
¶93 In acting on its subrogation rights to seek recovery
from the tortfeasor, Dairyland must recognize Dufour's priority
over the limited pool of available funds. Because there was an
insufficient pool of funds to satisfy Dufour's entire claim,
Dufour takes priority over Dairyland in the allocation of these
funds; the made whole doctrine applies with full force.22
¶94 In sum, Dufour is entitled to recover in full any sums
payable by the tortfeasor before Dufour's insurance company
could exercise any right of subrogation. "Subrogation is to be
allowed only when the insured is compensated in full by recovery
20
See Muller, 309 Wis. 2d 410, ¶¶27-44; Rimes, 106 Wis. 2d
at 275-76; Garrity, 77 Wis. 2d at 542.
21
This principle was established by Garrity, 77 Wis. 2d at
542-43, and is repeated in Muller, 309 Wis. 2d 410, ¶¶28-32.
22
Muller, 2008 WI 50, ¶72, 309 Wis. 2d 410, 750 N.W.2d 1.
12
No. 2014AP157.ssa
from the tortfeasor." Rimes, 106 Wis. 2d at 272; see also
Garrity, 77 Wis. 2d at 542.23
¶95 I conclude that Dufour, the insured who has not been
made whole for his bodily injuries in a settlement with the
tortfeasor for the tortfeasor's policy limits, has priority over
Dairyland for the $15,589.86 paid by the tortfeasor's insurance
company for Dufour's subrogated property damage claim. As a
result, Dairyland should not be permitted to keep the
$15,589.86.
¶96 The three equitable principles outlined in Muller v.
Society Ins., 2008 WI 50, ¶60, 309 Wis. 2d 410, 750 N.W.2d 1,
and set forth by the majority opinion favor Dufour in the
instant case. First, Dufour was not fully compensated for his
losses. Second, Dufour will not be unjustly enriched if he
receives $15,869.86 from Dairyland. There is no double recovery
here because Dufour has not been fully compensated for all his
losses. Third, the tortfeasor (through his insurance policy) is
held responsible for his conduct regardless of whether Dufour or
Dairyland retains the $15,589.86. The tortfeasor has paid for
23
See Paulson v. Allstate Ins. Co., 2003 WI 99, ¶27 & n.3,
263 Wis. 2d 520, 665 N.W.2d 744 (Rimes and Garrity apply when
the "pie" is not big enough to completely satisfy the claims of
both the injured insured and its insurance company); Drinkwater
v. Am. Family Mut. Ins. Co., 2006 WI 56, ¶¶16-23, 290
Wis. 2d 642, 714 N.W.2d 568 ("Subrogation under circumstances
where the insured had not been made whole 'turn[s] the entire
doctrine of subrogation in its head.'") (citing Ruckel v.
Gassner, 2002 WI 67, ¶41, 253 Wis. 2d 280, 646 N.W.2d 11).
13
No. 2014AP157.ssa
the property damage he caused, and the tortfeasor's insurance
company is not permitted to retain the funds it owes for
Dufour's property damage.
¶97 In sum, this case is not a dispute between the
tortfeasor and the injured party. The dispute is between Dufour
and Dairyland, his insurance company; Dufour and Dairyland are
competing for the funds the tortfeasor owes and has paid under
his policy.
B
¶98 Furthermore, the majority's conclusion favoring
Dairyland over Dufour is based on a mistaken reading of Valley
Forge Insurance Co. v. Home Mutual Insurance Co., 133
Wis. 2d 364, 396 N.W.2d 348 (Ct. App. 1986).24
¶99 In Valley Forge, the court of appeals concluded that
the equities favored the insured in a fact situation almost
identical to that in the instant case.
24
The majority opinion uses sentences from cases taken out
of context and, in my view, misreads several cases. I do not
point out each problem in the majority opinion. See, for
example, the majority opinion's discussion (at ¶¶32-33) of
Mutual Service Casualty Co. v. American Family Insurance Group,
140 Wis. 2d 555, 561, 410 N.W.2d 582 (1987). Mutual Service was
narrowed by Schulte, 176 Wis. 2d at 635-36. Indeed, Justice
Steinmetz's dissent in Schulte objected to the decision on the
grounds that it "improperly violate[d] the doctrine of stare
decisis by rejecting the result and some of the reasoning
in . . . Mutual Service . . . .").
14
No. 2014AP157.ssa
¶100 The plaintiff in Valley Forge was injured in a car
accident.25 The plaintiff's insurance company, Valley Forge,
paid the plaintiff $6,000 for damage to his vehicle.26
¶101 The plaintiff then entered into a settlement agreement
with Home Mutual Insurance Company (the tortfeasor's insurance
company), whereby the plaintiff was paid $25,000 for his bodily
injuries and $6,000 for property damage to his vehicle.27 The
plaintiff agreed to indemnify Home Mutual against any liability
Home Mutual incurred as a result of the settlement.28 The
plaintiff's bodily injuries exceeded the sum that he was paid.29
¶102 The plaintiff's insurance company, Valley Forge,
asserted subrogation rights to (and requested payment of) the
$6,000 from Home Mutual (the tortfeasor's insurance company) to
avoid the possibility of a double recovery by the plaintiff.30
¶103 The Valley Forge court noted that although it appeared
that the plaintiff was receiving a double recovery for his
property damage, there was no double recovery because the
25
Valley Forge Ins. Co. v. Home Mut. Ins. Co., 133
Wis. 2d 364, 366, 396 N.W.2d 348 (Ct. App. 1986).
26
Valley Forge, 133 Wis. 2d at 366.
27
Valley Forge, 133 Wis. 2d at 366.
28
Valley Forge, 133 Wis. 2d at 367.
29
Valley Forge, 133 Wis. 2d at 367.
30
Valley Forge, 133 Wis. 2d at 366.
15
No. 2014AP157.ssa
plaintiff was not made whole for "'all the elements of
damages . . . .'"31 According to Valley Forge, being made whole
depends on the insured being completely compensated for all
types of damages, including bodily injuries and property
damage.32
¶104 Because the plaintiff had not been made whole for
"'all the elements of damages . . . ,'" his recovery of
available subrogated property damage funds was not an
impermissible double recovery.33
¶105 Valley Forge follows long-settled Wisconsin law that,
as a general rule, the subrogor (that is, the injured insured)
must be made whole before the subrogee (that is, the injured
insured's insurance company) may recover anything from the
tortfeasor.34
¶106 Relying on Vogt's pronouncement that subrogation is an
equitable doctrine that "'depends upon a just resolution of a
dispute under a particular set of facts,'" the court of appeals
held that Valley Forge was not entitled to subrogation because
31
Valley Forge, 133 Wis. 2d at 368 (quoting Rimes, 106
Wis. 2d at 275).
32
See Valley Forge, 133 Wis. 2d at 368-69.
33
Valley Forge, 133 Wis. 2d at 368 (quoting Rimes, 106
Wis. 2d at 275).
34
Garrity, 77 Wis. 2d at 541; Rimes, 106 Wis. 2d at 272-73.
16
No. 2014AP157.ssa
the tortfeasor and Valley Forge together paid the plaintiff less
than the total loss the plaintiff suffered.35
¶107 Valley Forge concluded, as had previous cases, that
where either the insurance company or the injured insured has to
suffer a loss, the loss should fall on the insurance company.36
¶108 The majority opinion expresses "serious concerns about
the court of appeals decision in Valley Forge and caution[s]
against its use . . . ."37 Nevertheless, the majority opinion
declines to overrule Valley Forge. Instead it distinguishes
Valley Forge based on an overly narrow reading of the facts and
longstanding case law.38
¶109 I am not persuaded by the majority opinion's reading
of Valley Forge. As the court of appeals recognized in the
instant case, "the facts before us here, for all relevant
purposes, are identical to those in Valley Forge . . . ."39
¶110 In both Valley Forge and in the instant case the issue
is the same: Do funds obtained from the tortfeasor's insurance
company belong to the injured insured or to the insured's
35
Valley Forge, 133 Wis. 2d at 369 (quoting Vogt, 129
Wis. 2d at 12).
36
See Valley Forge, 133 Wis. 2d at 368.
37
Majority op., ¶52.
38
Majority op., ¶52.
39
Dufour v. Progressive Classic Ins. Co., No. 2014AP157,
unpublished slip op., ¶26 (Wis. Ct. App. July 16, 2015).
17
No. 2014AP157.ssa
insurance company when the insured has not been made whole for
all the elements of damages suffered? At its core, the question
in both Valley Forge and the instant case is who ought to
receive funds that are paid on behalf of the tortfeasor: the
injured person who has not been fully compensated for all his
losses, or his insurance company?
¶111 Valley Forge is applicable to the instant case because
it addresses who is entitled to the limited pool of funds by
applying the equitable subrogation and made whole doctrines.
¶112 Paulson v. Allstate Insurance Co., 2003 WI 99, ¶25,
263 Wis. 2d 520, 665 N.W.2d 744, confirmed that Valley Forge was
an example of impermissible competition between the insurer and
insured for a limited pool of funds: "In Valley Forge . . . the
court of appeals held that a victim's insurer was not entitled
to subrogation where the victim recovered less than his total
loss. Again, the situation was one of the insurer competing
with the insured for funds."
¶113 In Valley Forge, the insured was in possession of the
funds furnished by the tortfeasor's insurance company for
property damage; in the instant case, Dairyland is in possession
of the funds furnished by the tortfeasor's insurance company for
property damage.
¶114 The Valley Forge decision is not contingent on who
possesses the limited pool of funds, but rather who is entitled
to the funds.
18
No. 2014AP157.ssa
¶115 As in Valley Forge, the insured and the insurance
company in the instant case are fighting over a limited pool of
money owed and supplied by the tortfeasor's insurance company.
By relying on the factual difference in the two cases regarding
possession of the pool of funds, the majority opinion elevates
form over substance.
¶116 The majority opinion attempts to distinguish Valley
Forge by maintaining that, unlike the plaintiff in Valley Forge,
Dufour had no access to any additional funds from either
insurance company "but for Dairyland's subrogation action
against the tortfeasor's insurer . . . . Consequently, allowing
Dairyland to seek and obtain subrogation had no effect on
Dufour's recovery."40 But Dairyland did assert its subrogation
rights, American Standard paid the sum its insured (the
tortfeasor) owed Dufour, and the issue is who is entitled to
these funds.
¶117 The majority does not explain how, if Dufour had no
right to seek funds for property damage from the tortfeasor's
insurance company, Dairyland could seek such funds from the
tortfeasor's insurance company. After all, "subrogation confers
no greater rights on the subrogee [Dairyland] than the subrogor
[Dufour] had at the time of the subrogation . . . . Thus, where
one acquires a right by subrogation, that right is not a
40
Majority op., ¶50.
19
No. 2014AP157.ssa
separate cause of action from the right held by the
subrogor . . . . '[I]t is better to think of the insurer as an
assignee of part of the claim.'"41
¶118 In the instant case, Dufour's acceptance of payment
for property damage from Dairyland does not operate as an
assignment to Dairyland of Dufour's claim for property damage
against the tortfeasor. When the injured party has not been
made whole, the made whole doctrine trumps any assignment based
on the doctrine of subrogation.42 We stated this principle in
Muller v. Society Insurance, 2008 WI 50, ¶29, 309 Wis. 2d 410,
750 N.W.2d 1, as follows (citation and internal quotation marks
omitted):
The cause of action against the tortfeasor is viewed
as an indivisible claim, and the plaintiff [here,
Dufour] holds this claim until he is given the
opportunity to fully recover his loss. Logically,
this principle establishes the insured's priority over
his insurer [here, Dairyland] in pursuing recovery,
41
Wilmot v. Racine Cnty., 136 Wis. 2d 57, 63-64, 400
N.W.2d 917 (1987) (citation omitted) (quoting Heifetz v.
Johnson, 61 Wis. 2d 111, 120, 211 N.W.2d 834 (1973)); see also
Ruckel v. Gassner, 2002 WI 67, ¶27, 253 Wis. 2d 280, 646
N.W.2d 11 ("[U]nder basic principles of subrogation . . . , the
insurer is not entitled to recoup anything until the insured has
been made whole.") (citing Garrity, 77 Wis. 2d at 543-44).
42
Schulte, 176 Wis. 2d at 637.
20
No. 2014AP157.ssa
and the general rule [is] that there is no subrogation
until the insured has been made whole.43
¶119 Dairyland asserts that allowing Dufour to retain the
$15,589.86 amounts to rewriting the insurance policy to provide
for a combined single coverage limit to make up for inadequate
bodily injury coverage. This argument has superficial appeal
but on analysis is not convincing.
¶120 The insured's policy is not being rewritten. No
combined single limit is imposed on Dairyland. Nothing about
the instant case requires that insurance funds covering one type
of loss (e.g., property damage) be paid for another type of loss
(e.g., personal injury). Rather, the instant case involves
subrogation and the made whole doctrine and the application of
equitable principles.
¶121 The majority opinion suggests that "the made whole
doctrine . . . is inapplicable if the claim is 'brought by a
subrogated insurer against the tortfeasor or the tortfeasor's
43
In Muller, the tortfeasor's insurance liability was
sufficient to cover all the property losses sustained by the
insured and the insured's insurance carrier. Muller, 309
Wis. 2d 410, ¶4. The court therefore held that the made whole
doctrine did not apply even though the insured settled for less
than full losses. Muller, 309 Wis. 2d 410, ¶4.
The Muller court, however, preserved the rule that when the
funds are limited, the insured is entitled to be made whole.
See Muller, 309 Wis. 2d 410, ¶72.
Subrogation is not permitted in the instant case because
unlike in Muller, the injured party, Dufour, exhausted all of
the available insurance limits without being made whole.
21
No. 2014AP157.ssa
insurer where the subrogated insurer's insured has previously
settled with the tortfeasor.'"44
¶122 This suggestion was repudiated in Schulte v. Franzin,
176 Wis. 2d 622, 635-36, 500 N.W.2d 305 (1993).
¶123 Schulte concluded that when an injured insured settles
with the tortfeasor and the tortfeasor's insurance company
without resolving the subrogated insurance company's part of the
claim, the subrogated insurance company's rights of subrogation
depend on whether the settlement made the insured whole.45 If
the settlement does not make the insured whole, the subrogated
insurance company has no right of subrogation.46
¶124 I agree with the simple, clear implication of Rimes,
Garrity, Vogt, and Valley Forge: "[W]here either the insurer or
the insured 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."47
¶125 In sum, the well-accepted principles, including
equitable principles, relating to subrogation and the made whole
44
Majority op., ¶32 (quoting Mut. Serv. Cas. Co. v. Am.
Family Ins. Grp., 140 Wis. 2d 555, 563-64, 410 N.W.2d 582
(1987).
45
Schulte, 176 Wis. 2d at 637.
46
Schulte, 176 Wis. 2d at 637.
47
Garrity, 77 Wis. 2d at 542.
22
No. 2014AP157.ssa
doctrine weigh in favor of Dufour, not Dairyland. A ruling in
Dufour's favor:
• Protects and defends the right of the insured injured
person to be made whole;
• Preserves the limitations on subrogation imposed by
the made whole doctrine by not allowing subrogation
for "discrete" coverages;
• Reaffirms the equitable principle that if someone must
suffer a loss, it should be the insurance company, not
the injured insured;
• Avoids a double recovery or windfall because the
insured has not been made whole for the full extent of
his or her losses; and
• Ensures that an insurance company does not inequitably
compete with its insured for a limited pool of funds
insufficient to make the insured whole for the losses
caused by the tortfeasor.
¶126 Unfortunately, the majority opinion shifts away from
the compensatory purpose of the made whole doctrine and instead
protects the financial interests of the insurance company to the
detriment of its insured who paid the premiums.
¶127 Valley Forge is not distinguishable on its facts, is
consistent with longstanding case law, does not rewrite
Dairyland's policy, and correctly rules on equitable principles.
23
No. 2014AP157.ssa
Accordingly, I would follow Valley Forge, as did the court of
appeals.
III
¶128 I concur in part because I agree with the majority
opinion's conclusion that Dairyland, Dufour's insurance company,
did not act in bad faith when it denied Dufour's claim.
Dairyland had a reasonable basis "to conclude that [its
insured's] claim is fairly debatable and that therefore payment
need not be made on the claim."48 The "fairly debatable"
standard is an objective test that asks whether a reasonable
insurance company under similar circumstances would have denied
payment on the claim.49 I conclude that Dairyland has met this
objective test by putting forward non-frivolous arguments in
favor of its view that Dufour's claim was fairly debatable.
¶129 For the reasons set forth, I dissent in part, concur
in part, and write separately.
¶130 I am authorized to state that Justice ANN WALSH
BRADLEY joins this opinion.
48
See Brown, 267 Wis. 2d 31, ¶24.
49
See Brown, 267 Wis. 2d 31, ¶24.
24
No. 2014AP157.ssa
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