The Interaction and Interplay Between The Collateral Source Rule, Principles of Subrogation and The Made Whole Doctrine in Wisconsin

By John DiMotto

Three of the most difficult Rules/Principles/Doctrines in the Civil Practice of Law that have a direct impact on the award of damages are The Collateral Source Rule, The Principles of Subrogation and The Made Whole Doctrine. On the surface, these concepts seem straightforward. However, in reality, nothing is further from the truth. The interaction and intersection of these Rules/Doctrines have generated much litigation and will undoubtedly continue to do so, forever. This past week, in Fischer v. Steffen, 2011 WI 34, the Wisconsin Supreme Court discussed each of these Rules/Doctrines. Today, I would like to examine them.

The Collateral Source Rule (CSR)

Wisconsin's tort law recognizes the CSR. see Rixmann v. Somerset Pub. Sch., 83 Wis.2d 571 (1978). The CSR provides that a tortfeasor's liability to an injured individual is not reduced because the injured individual received payments from some other source. see Payne v. Bilco Co., 54 Wis.2d 424 (1972). The CSR is part of a policy seeking to deter negligent conduct by placing the full cost of wrongful conduct on the tortfeasor. see American Standard Ins. Co. v. Cleveland, 124 Wis.2d 258 (Ct. App. 1985). The tortfeasor is not relieved of the obligation to the plaintiff simply because the plaintiff had the foresight or good fortune to get benefits from a collateral source (ie. insurance). see Ellsworth v. Schelbrock, 235 Wis.2d 678 (2000). The CSR applies to insurance companies, Medicare and Medical Assistance. In fact, it is not limited to "paid for benefits" but applies to gratuitous medical services provided by the State. see Thoreson v. Milwaukee and Suburban Tranp. Corp., 56 Wis.2d 231 (1972). The CSR places on the tortfeasor full responsibility for the loss he/she caused. The reimbursement rate is not dispositive. The plaintiff can recover the value of the services. see Ellsworth, supra. The plaintiff is entitled to recover without limitation to the amounts paid. Limiting the plaintiff's potential recovery to amounts paid is contrary to Wisconsin's rule of valuation of medical expense damages, the CSR and Principles of Subrogation. see Koffman v. Leichtfuss, 246 Wis.2d 31 (2001). If there is any windfall, the party to profit is the person injured not the tortfeasor. see Powers v. Allstate Ins. Co., 10 Wis.2d 78 (1960).

Principles of Subrogation

Subrogation involves the substitution of one party in place of another with reference to a legal right or claim. see Houle v. School District of Ashland, 267 Wis.2d 708 (Ct. App. 2003). Subrogation is a legal doctrine which permits an insurer to stand in the shoes of the insured to pursue recovery from a responsible tortfeasor. It is a derivative right. see Fischer v. Steffen, 2001 WI 34, supra. The law invokes subrogation to avoid unjust enrichment once an insured has been fully compensated. see Muller v. Society Ins., 309 Wis.2d 410 (2008). The insurer succeeds in relation to the debt and gives to the substitute all the rights, priorities and remedies of the insured for whom the insurer is substituted. Once the insurer pays, it has the right to stand in place of the insured pursuant to contract for insurance and may seek to recoup its outlay from the tortfeasor. In such instance, the insured is normally precluded from seeking the same recovery from the tortfeasor. The right of subrogation normally trumps the CSR although there are two exceptions: first, when the plaintiff is not made whole, the plaintiff gets priority over the insurer and, second, when the insurer waives its right of subrogation the plaintiff may pursue the subrogation claim. see Fischer v. Steffen, 325 Wis.2d 382 (Ct. App. 2010). However, if a subrogated insurer pursues its subrogation claim via settlement or arbitration, the result is binding on the plaintiff and subrogation trumps CSR. see Fischer v. Steffen, 2011 WI 34, supra.

Made Whole Doctrine (MWD)

The MWD prevents competition between the injured party and subrogated insurer when the injured party's damages exceed a limited pool of funds from which recovery may be had. Under MWD, the injured party should be the first to tap into the limited pool of funds and recover on any loss. When some cannot be fully paid, the loss should be born by the subrogated party. The subrogated party has no right to share in any money recovered from the tortfeasor until the plaintiff is "made whole." see Garrity v. Rural Mutual Ins. Co., 77 Wis.2d 537 (1977). An insured is to be made whole, but no more than whole. see Rimes v. State Farm Mut. Auto Ins., 106 Wis.2d 263 (1982). An insured giving a general release and settling a case is not being made whole. see Rimes, supra. The test for wholeness depends on 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. Subrogation is only occasioned when the insured receives an award by judgment or otherwise which pays all elements of damages including those for which the insurer indemnifies the insured. see Rimes, supra.

Conclusion

The Wisconsin Supreme Court in Fischer, supra, indicated that the Collateral Source Rule, Principles of Subrogation and the Made Whole Doctrine work in tandem. They are equitable doctrines and ordinarily work together to further the goals of an injured party recovering for his/her loss and the tortfeasor to pay for damages he/she inflicts. However, there are no "black letter" rules. The interaction and application of these rules/principles/doctrines are heavily influenced by the facts of each case. As a result, we can expect to see much more litigation addressing the interplay between them.