Defense Digest

A Hole In The Make-Whole Doctrine: The Ohio Supreme Court Approves An Insurance Contract That Avoids The Make-Whole Doctrine

Ohio insurance law has long recognized and applied the principles of equitable subrogation, which include the make-whole doctrine. Under the make-whole doctrine, an insurance company may not enforce a right to subrogation until the insured has been fully compensated, or made whole, for his injuries. What happens, then, when this equitable limit on subrogation collides with contract principles, i.e., can an agreement between an insured and an insurer override the doctrine so that the insurer has a priority to recover from the tortfeasor? Can the parties create a hole in the make-whole doctrine? In N. Buckeye Education Council Group Health Benefits Plan v. Lawson, 103 Ohio St.3d 188 (2004), the Ohio Supreme Court answered this question in the affirmative, so long as the agreement is clear and unam-biguous.

Before discussing the Ohio Supreme Court’s holding in the Lawson case, one must understand the his-tory leading up to the decision. Northern Buckeye Education Council Group Health Benefits Plan provid-ed Karen Lawson with health insurance (hereinafter referred to as the "Plan"). The Plan, which was negotiated between Ms. Lawson’s employer and Northern Buckeye, included a reimbursement and sub-rogation provision. The provision stated that the insured will reimburse the Plan for any amounts that are later recovered from a tortfeasor by way of settlement or in satisfaction of a judgment. As security for this agreement, the Plan included a subrogation clause that subrogated all of the insured’s rights of recovery against a tortfeasor to the Plan, at least up to the amount of any payments made by the Plan to the insur-ed in connection with the claim.

Ms. Lawson’s minor daughter was injured in a car accident. Prior to paying any of her daughter’s medical bills, the Plan insisted on Ms. Lawson signing an acknowledgement form regarding her full understanding of the reimbursement and subrogation clauses in the coverage contract. After some reluctance, Ms. Lawson signed the form, and the Plan paid her daughter’s medical bills in excess of $85,000. Ms. Lawson eventually received $250,000 for her daughter’s claim-a portion of the money came from the tortfeasor and another portion came from Ms. Lawson’s underinsured motorist coverage.

Despite receiving this money, Ms. Lawson refused to reimburse the Plan. Her argument was that her daughter had not been made whole from the monies received, and therefore, the law did not require her to reimburse the Plan. Ms. Lawson’s position was that the reimbursement and subrogation clauses in the Plan were ambiguous and vague and did not override the equitable principles of subrogation. Northern Buckeye argued that the language in the Plan was clear and unambiguous, and with such language, the insurance contract could trump the equitable principles of the make-whole doctrine.

The trial court granted summary judgment in favor of Ms. Lawson. In reaching its decision, the court reli-ed on Stephens v. Emanhiser, Seneca App. No. 13-99-03, 1999 Ohio 849, 1999 WL 692408, a case in which the reimbursement and subrogation agreement expressly used the words "make-whole" and was found to effectively avoid the make-whole doctrine. The trial court concluded that since the Plan’s subro-gation clause did not specifically use the words "make-whole," then the agreement was ambiguous and unclear and did not circumvent the make-whole doctrine.

The court of appeals reversed the trial court. Like the trial court, the appellate court recognized that the parties could contractually avoid application of the make-whole doctrine if the agreement was clear and unambiguous. When reviewing the language of the reimbursement and subrogation clauses in the Plan, the appellate court found the agreement to be clear and unambiguous. In reaching its decision, the appellate court identified a conflict in this area of the law, as the 5th District Court of Appeals had found a subrogation and reimbursement clause attempting to give an insurer's claim priority over an insured’s claim against a tortfeasor, regardless of whether the insured received full compensation for her injuries, against public policy and unenforceable. See Cent. Res. Life Ins. Co. v. Hartzell, Tuscarawas App. No. 94AP120094, 1995 Ohio App. Lexis 6027, 1995 WL 768553. The Ohio Supreme Court granted review in Lawson to resolve any questions that may exists regarding the ability of an insurance company to con-tractually avoid the make-whole doctrine.

By its ruling in Lawson, the Ohio State Supreme Court made clear that such an agreement between an insurer and an insured is not against public policy. The Court began its opinion by clearly setting forth the analytical framework for subrogation in Ohio. It recognized the three types of subrogation: legal, statutory, and conventional. Legal subrogation exists by operation of law; statutory subrogation is a right that exists only against a wrongdoer; and conventional subrogation exists as a result of the contractual obligations of the parties. The Court categorized the issue in Lawson as a contractual subrogation matter. As such, the Court looked to precedent that discussed contractual subrogation provisions.

The Ohio Supreme Court’s survey of the law revealed a consistent holding that the contractual language of the insurance contract is controlling; and that if the language is clear, the contract can avoid the make-whole doctrine-even if the outcome appears unfair. The Court recognized that if, however, the contract is silent regarding the priority of subrogation, the make-whole doctrine applies by default. The test adopt-ed by the Court to make this determination is a follows: "A reimbursement agreement between an insur-ed and an [insurer] clearly and unambiguously avoids the make-whole doctrine if the agreement estab-lishes both (1) that the insurer has a right to a full or partial recovery of amounts paid by it on the insured’s behalf and (2) that the insurer will be accorded priority over the insured as to any funds re-covered." Lawson, 103 Ohio St. 3d at 194. In applying the two-prong test, the Court held that the agree-ment in the Plan clearly and unambiguously avoided the make-whole doctrine.

The Ohio Supreme Court’s ruling in Lawson that a clear and unambiguous agreement between an insurer and an insured can avoid the make-whole doctrine is a welcome ruling for most insurance companies, and one that should be seriously considered when drafting subrogation and reimbursement clauses in insurance contracts. Insurers should take to heart the Court’s two-prong test established in the Lawson opinion and consider the language affirmed in the case as an example of how to protect a subrogated interest. Plaintiffs' attorneys will also take to heart the Lawson opinion by cautioning clients about such provisions that have the potential to gut a settlement. Additionally, there exists the unanswered question regarding the deduction, if any, of an attorney’s contingency fee from a recovery-an issue that will un-doubtedly be litigated in the near future.

A more subtle, yet real, effect of the Lawson opinion is the importance of defense attorneys to closely scrutinize subrogation claims and strongly consider the tactical decision to join parties with a contractual subrogation interest in order to avoid a subsequent collateral claim. Regardless of one’s viewpoint, the Ohio Supreme Court should be applauded for announcing a definite and workable standard that practi-tioners can look to when ascertaining whether a contractual agreement has created a hole in the make-whole doctrine.

*Marty, an associate in our Akron, OH office, can be reached at (330) 255-0041 or msitler@mdwcg.com.