The issue before the New York Court of Appeals in Fasso v. Independent Health Assoc., No. 21 (N.Y. Feb. 24, 2009) [here] was whether the injured party and the tortfeasor could settle on terms that extinguished the insurer's subrogation rights?
Plaintiff was treated by Dr. Doerr and subsequently developed complications that required her to undergo a liver transplant. She then sued Dr. Doerr for medical malpractice. Plaintiff required a second transplant, resulting in medical expenses of approximately $780,000, all of which was paid by her insurer, Independent Health Association, Inc. (IHA).
IHA intervened in Plaintiff's suit against Dr. Doerr. Shortly after the trial commenced, Plaintiff and the doctor reached a settlement. Plaintiff would receive $900,000, Dr. Doerr would admit no wrongdoing, and IHA's equitable subrogation claim would be dismissed because Plaintiff was not "made whole" since the settlement payment was less than her actual damages. Although IHA did not object to Plaintiff's receipt of the monetary settlement, it did contest the dismissal of its equitable subjugation claim because after payment of the $900,000 settlement, there still remained $1.1 million in potential insurance coverage. The trial court approved the settlement and dismissed the subrogation claim. Since Plaintiff was not being paid the full amount of her damages, the subrogation claim could not survive. The Appellate Division affirmed.
The Court of Appeals reversed. Generally, an insurer's subrogation rights could only be pursued against the tortfeasor once the injured party was "made whole." Here, the doctrine did not prevent subrogation because the settlement between Plaintiff and Dr. Doerr left a potential source of money. Consequently, the made whole rule did not mandate dismissal of IHA's equitable subrogation claim merely because the Plaintiff decided to accept a settlement figure that did not completely compensate her for the full extent of the damages. Once an insurer paid a claim, the wrongdoer and the insured could not agree to terminate the insurer's claim for subrogation without its consent.
