The Made Whole Doctrine is an equitable defense to the subrogation or reimbursement rights of an insurance carrier, requiring that an insured must be fully compensated for all damages before the insurer can recover any payments made on a claim.
The Made Whole Doctrine functions as a protective legal principle that prioritizes the financial recovery of the insured over the insurer’s right to be reimbursed.
When a business suffers a loss and its insurance company pays a claim, the insurer typically gains subrogation rights – the ability to pursue reimbursement from the party responsible for causing the damage.
However, this doctrine establishes that the insurer cannot exercise these rights until the insured has been made whole for all their damages, including losses not covered by insurance.
For businesses, this doctrine helps protect companies from financial hardship after a loss event.
Many business losses involve damages that exceed insurance coverage limits, aren’t covered by the policy, or require the payment of deductibles. The doctrine ensures that when third-party recoveries are insufficient to cover all losses, the business’s financial recovery takes precedence over the insurer’s subrogation interests.
The practical application of this doctrine varies significantly across states. Some jurisdictions enforce it strictly as a matter of public policy that cannot be waived, while others allow insurance policies to contractually modify or waive it through clear and unambiguous policy language.
Some insurance contracts also contain provisions attempting to override this doctrine, which may or may not be enforceable depending on state law.
For business owners, the Made Whole Doctrine serves as an important safeguard against having to reimburse their insurers from inadequate third-party settlements.
Without this protection, a business might find itself in the paradoxical situation of having paid insurance premiums for years, only to have their insurer claim settlement funds that the business needs to cover uninsured losses.
Examples of Made Whole Doctrine in Practice
Manufacturing Equipment Damage
Precision Manufacturing experienced catastrophic equipment damage when a power surge caused by a utility company’s negligence destroyed specialized machinery.
The total loss amounted to $300,000, including $200,000 in direct equipment damage and $100,000 in business interruption losses.
Precision’s property insurance covered $150,000 of the equipment damage after a $25,000 deductible, but excluded business interruption coverage.
After suing the utility company, Precision received a $125,000 settlement (limited by various liability factors).
Without the Made Whole Doctrine, Precision’s insurer could claim the entire $125,000 as reimbursement for their $150,000 payout. However, under this doctrine, since Precision’s total loss was $300,000 and they’ve only recovered $275,000 ($150,000 from insurance plus $125,000 settlement), they haven’t been made whole.
The doctrine prevents the insurer from taking any portion of the settlement, allowing Precision to use these funds to address uncovered losses and maintain business operations during recovery.
Commercial Vehicle Fleet Accident
Reliable Delivery Service had three delivery vans damaged when a construction company’s truck caused a multi-vehicle accident.
Reliable suffered $75,000 in vehicle damage, $15,000 in damaged cargo, and $30,000 in business interruption losses. Their commercial auto policy covered $65,000 of the vehicle repairs after a $10,000 fleet deductible but didn’t cover the cargo or business interruption losses.
Reliable sued the construction company and received a $50,000 settlement. Without the Made Whole Doctrine, their insurer could claim most of this settlement as reimbursement for the $65,000 they paid out.
However, since Reliable’s total loss was $120,000 and they’ve only recovered $115,000 total ($65,000 from insurance plus $50,000 settlement), they haven’t been fully compensated.
The Made Whole Doctrine allows Reliable to retain the entire settlement to cover their deductible, cargo losses, and some business interruption costs.
Employee Retirement Income Security Act (ERISA)
The Made Whole Doctrine may be preempted in cases involving employee benefit plans governed by the Employee Retirement Income Security Act (ERISA).
Federal courts have often allowed ERISA plan administrators to enforce subrogation rights through clear plan language, regardless of whether the insured has been made whole.
The Common Fund Doctrine: How It Relates to the Made Whole Doctrine
The Common Fund Doctrine is an equitable legal principle that often works alongside the Made Whole Doctrine in insurance recovery situations.
While the Made Whole Doctrine ensures that an insured business is fully compensated for its losses before an insurer can claim reimbursement, the Common Fund Doctrine addresses who pays the legal costs incurred in securing that recovery, especially attorney fees.
What Is the Common Fund Doctrine?
The Common Fund Doctrine is rooted in the idea of preventing unjust enrichment. It holds that when an attorney’s efforts create or protect a financial recovery (the “common fund”) that benefits multiple parties, such as both the insured business and its insurer.
Those parties should share the costs of obtaining that recovery, including reasonable attorney’s fees.
This doctrine is an exception to the American Rule, which normally requires each party to pay its own attorney fees.
The Common Fund Doctrine increases the “in-pocket” recovery after a loss.
Without it, a business could be forced to pay all legal costs out of its share, while the insurer recoups its payments without contributing to those costs.
The doctrine ensures fairness and encourages businesses to pursue legal action against responsible third parties, knowing their insurer will help cover the legal expenses if it benefits from the recovery.
Relationship to the Made Whole Doctrine
In many states, these doctrines work together: first, the insured must be made whole, and then, if the insurer is entitled to subrogation, it must pay its fair share of the legal costs incurred in creating the common fund.
The Made Whole Doctrine determines the order of payment, ensuring the insured is fully compensated before the insurer is reimbursed.
The Common Fund Doctrine determines how attorney fees are shared when both parties benefit from a recovery.
Pros and Cons of the Made Whole Doctrine
The Made Whole Doctrine provides several important benefits to businesses, primarily by ensuring they receive priority in recovering their complete losses before insurers can seek reimbursement.
This protection is often vital, especially when a company faces significant uncovered losses or deductibles that could threaten its financial stability.
The Doctrine also helps balance the inherent power disparity between large insurance companies and businesses, recognizing that businesses pay premiums specifically for risk transfer.
It prevents the counterintuitive situation where insured businesses could end up worse off financially than if they had no insurance at all. This would undermine the fundamental purpose of insurance as a mechanism to make the insured whole after a loss.
However, insurance companies often include language in their policies attempting to waive or modify the Made Whole Doctrine, which can lead to complex and costly legal disputes.
The interpretation and application of the doctrine varies significantly between states, creating uncertainty for businesses operating across multiple jurisdictions.
Businesses may need to engage in litigation to enforce their rights under the doctrine, potentially delaying full recovery at a time when financial resources are already strained.
Some courts have narrowly construed the doctrine to apply only to covered losses rather than all damages suffered.
Did You Know?
Some states have expanded the Made Whole Doctrine beyond its traditional application in third-party liability cases.
For example, Washington State has extended the doctrine to require insurers to reimburse their insured’s entire deductible before allocating any recovered proceeds to themselves, even in direct subrogation cases.
This expansion represents a growing recognition that deductibles constitute real out-of-pocket losses that should be prioritized in recovery scenarios.
Interestingly, while most jurisdictions include attorney fees and litigation costs when determining whether an insured has been made whole, California’s approach to attorney fees in Made Whole calculations is complex and context-dependent.
In some cases, California courts have held that attorney fees should not be included when determining whether an insured has been made whole, while in other situations, particularly involving the Common Fund Doctrine, they may be considered.
Sources and further reading:
Made Whole Doctrine In All 50 States – mwl-law.com
What is the ‘Made Whole’ Doctrine?
What is the Made Whole Doctrine | Subrogation – Keis George LLP
The “Made Whole Doctrine” in California – A 5-Minute Legal Guide
What Is the “Made Whole Doctrine”? | The Law Office of Stephen Barker
“Insured Made Whole” Doctrine – White and Williams LLP
Washington’s Made Whole Doctrine Majorly Expanded
What Is The Made Whole Doctrine In California?