Insurance policies, such as those insuring commercial properties, usually contain a subrogation clause. In this context, subrogation means that when the insured suffers losses as the result of a third party’s conduct, the insurance company assumes the right to sue that third party for damages. Having paid the insured person’s claim, the insurance company then seeks compensation from the party who caused the claim to be paid in the first place.
But what happens when the insured party believes it has not been fully compensated for his or her loss? Must the insurance company “make whole” the insured before pursuing its own subrogation rights? This past May, the Georgia Supreme Court addressed that question and answered “no,” at least with respect to insurance policies covering commercial properties.
Justices Decline to “Invent a Right” To Be “Made Whole”
The case arose from an underground 2004 gas pipeline explosion in Columbus that destroyed a building used by a recreational vehicle renovation company. The RV company had a commercial property insurance policy with Georgia Casualty and Surety Company. This policy covered damage to the RV company’s building, business personal property, losses for business interruption and related expenses. (A separate policy covered losses resulting from customer vehicles destroyed in the explosion.) The RV company received $368,000 under its commercial property policy, which it claimed was insufficient to cover all losses.
The commercial property policy assigned subrogation rights to Georgia Casualty. The insurance company, accordingly, sued the operator of the exploded pipeline for negligence in federal court. After more than two years of discovery and pretrial motions, Georgia Casualty settled with the pipeline operator for $950,000. The RV company and its owner then filed an objection, arguing such a settlement was prohibited unless and until they were “made whole” by Georgia Casualty. The federal court denied the objection.
The RV company made its own settlement with the pipeline operator but continued to press Georgia Casualty. The company’s owner said he needed approximately $180,000 more to fully compensate him for his losses. He sued Georgia Casualty in state court, arguing the insurer should pay that amount from its own $950,000 settlement with the pipeline operator.
Neither the superior court, the court of appeals, nor the Georgia Supreme Court agreed with the RV company and its owner. Each court had slightly different reasons for reaching its decision. Ultimately, the Supreme Court had the final say.
Justice Harold D. Melton, writing for a unanimous Georgia Supreme Court, put the matter directly. “In the context of an insurance policy that grants subrogation rights to an insurer with respect to a claim for damage to a commercial building,” Justice Melton said, “the [Georgia] Legislature has specifically declined to include a ‘made whole’ provision in the statute that directly governs such an insurance policy.” In the absence of a mandate from the legislature, Justice Melton said, “we cannot by judicial fiat create one and invent a right” for the RV company to be “made whole” before Georgia Casualty acts upon its subrogation rights.
Note that the Supreme Court’s decision does not mean a commercial property policy can never include a “made whole before subrogation” requirement. Parties to an insurance contract are free to negotiate such language themselves. The Court simply declined to require such language.