Large Loss Property Subrogation: Property Insurer Entitled to Piece of Insureds' Settlement Funds

On April 17, 2008, the Austin Court of Appeals found that a property insurer which paid almost $2 million for mold-related claims by its insured had subrogation rights in the settlement proceeds of a lawsuit brought by its insured concerning those claims. 

In Osborne v. Jauregui, --- S.W.3d ---, 2008 WL 1753553 (Tex.App.--Austin 4/17/08), Dr. Osborne and his wife bought a home whose architect and builder was Jauregui.  State Farm insured the home.  After mold was discovered in the house, State Farm paid $1,874,687 to the Osbornes in mold-related claims. Despite receiving those payments, the Osbornes sued Jauregui and various subcontractors, asserting tort and contractually-based claims.  The Osbornes then settled with certain subcontractors before trial for more than $1 million. After the jury found the Osbornes had suffered $835,000 in damages, the trial court applied a settlement credit in Jauregui's favor and, accordingly, entered a judgment that the Osbornes take nothing on their claims. The trial court denied State Farm subrogation rights in the proceeds from the Osbornes' settlement with the subcontractors.

The court of appeals reversed, holding that the insurer was entitled to subrogate against the settlement proceeds paid to its insureds.  In so holding, the court recognized the "one-satisfaction rule," which guards against a plaintiff receiving a windfall by being compensated twice for the same injury. The court also recognized that the principle of "subrogation" provides that once an insured is made whole from his damages, the insurer which paid for the insured's covered losses is entitled to the insured's rights and remedies against a third party for those losses.

Thus, the court reasoned that an insurer which paid benefits under a policy in an amount more than the jury awarded to its insureds was entitled to subrogate against  the settlement proceeds paid to its insureds by settling subcontractors where: (1) the insureds suffered one injury, that being the defective house,  (2) the policy contained a clause giving the insurer the right to seek an assignment of rights and requiring the insureds to cooperate in such an assignment, and (3) the insurer overpaid the insureds by $893,600 for damage to the structure (even though the insurer underpaid on some subcategories of damages, such as clothing or personal effects). 

Of note, the court did recognize that absent a contractual provision, subrogation is based on equitable principles.  Thus, if either an insured or an insurer must go to some extent unpaid on a category of damages, the loss should be borne by the insurer.  However, if the policy provides for subrogation regardless of whether the insured is first made whole, the contract's specific language controls. "[I]f a contract provides for subrogation regardless of whether the insured is first made whole, '[t]he contract's specific language controls ... and the equitable defense of the 'made whole' doctrine must give way.'  Fortis Benefits v. Cantu, 234 S.W.3d 642, 651 (Tex.2007).  '[C]ontract-based subrogation rights should be governed by the parties' express agreement and not invalidated by equitable considerations that might control by default in the absence of an agreement.' Id. at 650."

If you would like a copy of this opinion, or more information on the topic, please contact the Business Litigators at Clouse Dunn Khoshbin LLP at info@cdklawyers.com.