City of Asbury Park Can’t Recoup Deductible Before its Insurer

New Jersey’s highest court decided in City of Asbury Park v. Star Insurance Company that an insurance company’s subrogation claim takes priority over a municipality’s deductible/self- insured retention (SIR). In this case the City’s SIR totaled $400,000.00.  

In January 2011, an Asbury Park Fire Department’s employee suffered injuries while fighting a fire and he filed a workers’ compensation claim against the City. At that time, the City of Asbury Park’s workers’ compensation claims were covered by Star Insurance Company and the policy included a self-insured retention limit of $400,000 per occurrence. In other words, the city was responsible for paying the first $400,000 on every claim, which it did. Any additional losses (in this case $2,607,227.50) were covered by Star Insurance Co. The employee also filed suit against other third parties, reaching a settlement of $2,700,000. From that amount, $935,968.25 was set aside to partially satisfy a workers’ compensation lien. Both the City and Star demanded to recover from the $935,968.25, contending that each was entitled to be reimbursed before the other party. The City argued its full reimbursement under the made-whole doctrine, while Star argued that the subrogation provision agreed to by parties gave Star all the insured’s right of recovery against third parties.

The question before the court was whether, based on the made-whole doctrine, the city had priority to recover the paid deductible before Star recovered the amount it paid on the claim. In reaching the decision, the Court considered both the subrogation clause, which allows an insurer to step into an insured’s shoes and seek recovery from third parties at fault, as well as the made-whole doctrine, which gives an insured priority to amounts recovered from third parties to cover its loss. The doctrine typically applies by first covering the insured’s loss when it needs to pay the loss in excess of the insurer’s limited coverage policy. The Court noted that although the made-whole doctrine’s purpose is to protect the insured, a court must still look at the parties’ agreement and determine whether they altered its application, which could deny the insured’s priority.  

In reaching a decision, the Court also noted that, in the insurance context, a deductible represents nothing more than the risk that the insured has agreed to assume in exchange for a lower premium cost for the policy. The Court went on and explained that applying the doctrine would only write a better policy for the insured, that is, one without a deductible. The Court decided that the made-whole doctrine does not override the parties’ agreement if the contract between them unambiguously provides the insurer with all the insured’s rights to recovery against third parties.

Although the Court unanimously ruled that the made-whole doctrine does not override an express agreement between parties to prioritize the insured, the decision still leaves enough room for litigants to argue the ambiguity in a policy’s language.

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