November 2016

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 By Attorney Jennifer Anderson 

            If someone with insurance sustains damages or is injured as a result of another person’s negligence and the at-fault party is uninsured, the injured insured’s insurance company pays for his or her damages and injuries and then has a right of recovery against the at-fault party for the amounts paid to and/or on behalf of its insured.  However, sometimes the insured settles with or files a lawsuit against the at-fault party for various claims without the insurer’s knowledge. 

            When an insured sues an at-fault party, also known as a “tortfeasor,” without the insurance company knowing, how does that affect the insurance company’s rights of recovery?  Generally, an insured cannot extinguish an insurer’s right to recovery against an at-fault party if: (1) the insured is made whole; (2) the insured did not sign an indemnity agreement; and (3) the insured recovered different damages from the tortfeasor than those for which the insurer paid to the insured.1  

            When the insurer makes claims against the at-fault party who has already paid the insured directly, there are several typical arguments that the at-fault party will make in furtherance of the claim that the insured’s rights should be extinguished. Likely, the tortfeasor will claim that Wis. Stat. §803.03 requires the insured to join all parties asserting a claim for subrogation (for our purposes, the repayment of amounts paid by the insurer to the insured for damages caused by the at-fault party) in the action and failure of the insured to do so eliminates the insurer’s right to recover.  However, the remedy for such a failure on the part of the insured should not be the extreme measure of extinguishing the insurer’s rights when the insurer had no knowledge and no control over the insured’s actions.

             Tortfeasors will also argue that claim preclusion or res judicata operates to extinguish an insurer’s rights of recovery.  Claim preclusion has three elements: (1) identity of parties or their privies (those with a mutual interest); (2) identity of causes of action; and (3) a final judgment on the merits.2  Not all of the elements are present in these situations.  There is no identity of parties in these matters, nor are the insured and the insurance company privies because they have different interests and claims.  The causes of action are also different.  For example, the insured may be seeking to recover on a property damage negligence claim while the insurer has a lien for medical payments.  These claims have different elements which must be proven.

             Another argument to be made by the at-fault party to extinguish an insurer’s lien when the insured has already filed suit is that the insurer’s lien has already been discharged by the insured because they share the same claim.  However, the insurer and the insured each own separately a part of the claim against the at-fault party.  “[W]e have characterized the interests of the insurer and the insured as each owning separately a part of the claim against the tortfeasor.”3   When the insured settles a claim, it only settles that part of the claim owned by the insured; the part of the claim owned by the insurance company remains unsatisfied and the insurance company can pursue a suit against the tortfeasor.

             Finally, it can be argued that insurer’s recovery rights are prevented by the terms of the policy itself.  The argument is as follows: There is no right of recovery against the at-fault party because the insurance payment was voluntary since the policy language revokes the insured’s right to payment under “any affected coverage” if the insured recovers from another without the insurance company’s written consent.  The Milwaukee County Circuit Court recently accepted the argument that payment to the insured by the at-fault party only revoked coverage for the specific bills paid by the “other source.”  For example, if the at-fault party paid for a doctor bill from January 1, 2016 directly to the insured and the insurer paid for a chiropractic bill from February 1, 2016 the affected coverage wherein the insured’s right to payment from the insurance company was revoked was only the coverage for the January 1, 2016 medical bill that was paid for by the at-fault party (the “other source”).  Any bills not paid for by the “other source” are not affected and the insurer’s recovery rights remain intact for those bills.

             The bottom line is that the right of an insurer to recover from the at-fault party is equitable in nature.  The party responsible for causing the accident should be responsible for paying the bills incurred as a result thereof, regardless of whether the insured sued that party without the insurance company’s knowledge.  The insurance company should not lose its right to recover the money it paid to its insured from the at-fault party simply because the insured settled other claims with that party or filed suit against that party without its knowledge and, as illustrated above, the law supports this argument. 


1  There are exceptions to this; however, for the limited purpose of this article, we will assume that the damages recovered by the insured from the at-fault party are different than those paid by the insurer

2Wis. Public Service Corp. V. Arby Construction, Inc., 2012 WI 87, ¶35, 342 Wis. 2d 544, 557, 818 N.W.2d 863, 870 (citations omitted).

3Mutual Service Casualty Company v. American Family, 140 Wis. 2d 555, 561, 410 N.W.2d 582, 585 (1987)(citations omitted).

Posted: 11/18/2016 1:57:10 PM by Tom Connor | with 0 comments