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21st Century Insurance Co. v. Superior Court of San Diego County

August 24, 2009


San Diego County Respondent; Super. Ct. No. GIC 857010, Ct.App. 4/1 D049430, Judge: Kevin A. Enright.

The opinion of the court was delivered by: Chin, J.

Silvia Quintana (Quintana) was injured in an automobile accident with a third party. She maintained an auto insurance policy with 21st Century Insurance Company (21st Century) that included first party, no-fault medical payment (medpay) insurance coverage in case of an accident. 21st Century paid Quintana $1,000 under her insurance policy's med-pay provision. Quintana then separately pursued a damages claim against the third party and settled the action for $6,000, which sum represented her total damages. In obtaining the settlement, she incurred approximately $2,000 in attorney fees and costs (collectively attorney fees). Insurance policies typically have, and her policy did have, a provision requiring her to reimburse her insurer for monies she recovered from a third person that duplicated her recovery under her policy. Underlying these provisions, the basic idea is that insureds should not recover the same amount twice, once from their insurance company and again from a third party. In sum, insureds are entitled to be ―made whole‖ from the insurance proceeds and tort recovery, but they are not entitled to a double recovery.

The narrow issue before us in this writ proceeding is whether the made-whole rule includes liability for all the attorney fees insureds must pay in order to obtain medical payment compensation from a third party tortfeasor. The issue arises at the intersection of two well-settled legal doctrines: (1) the made-whole rule, whereby a third party recovery must make the insured whole before he or she is obligated to reimburse the insurance company, and (2) the ―common fund‖ doctrine, whereby a party that benefits from another person's expenditure of attorney fees is required to bear a proportionate share (but not all) of that expenditure.

As we explain, we conclude that although the made-whole rule applies in the med-pay insurance context, and the insured must be made whole as to all damages proximately caused by the injury, liability for attorney fees is not included under the made-whole rule. Those fees instead are subject to a separate equitable apportionment rule (or pro rata sharing) that is analogous to the common fund doctrine we discuss below. We therefore affirm the Court of Appeal's judgment.*fn1


On December 8, 2003, Quintana suffered injuries in an automobile accident with a third party. Quintana's insurance company, 21st Century, paid her $1,000 under her insurance policy's med-pay provisions. Med-pay coverage pays the insured's reasonable and necessary medical expenses incurred due to an accident up to a relatively low dollar limit, in exchange for relatively low premiums. (See Progressive West Ins. Co. v. Superior Court (2005) 135 Cal.App.4th 263, 270 (Progressive West).) The insurer provides coverage on a no fault basis. The coverage is primarily designed to provide an additional source of funds for medical expenses for injured automobile occupants without the burdens of a fault-based payment system. There is no statutory obligation to provide med-pay coverage. (Nager v. Allstate Ins. Co. (2000) 83 Cal.App.4th 284, 289-290.)

As noted, Quintana separately sued the third party tortfeasor and settled her action for $6,000. To obtain the settlement, she incurred $2,106.50 in attorney fees. Under its interpretation of the insurance policy's reimbursement provision, 21st Century requested that Quintana repay the $1,000 it had paid her.*fn2 Quintana paid 21st Century $600, an amount arrived at by taking the $1,000 med-pay benefits disbursed to her by 21st Century and subtracting attorney fees of $400 (approximately one-sixth of Quintana's total attorney fees of $2,106.50, one-sixth being the relationship between the $1,000 she received from 21st Century and her $6,000 settlement). 21st Century eventually agreed that amount fully satisfied its reimbursement claim, because it accounted for 21st Century's pro rata share of the attorney fees Quintana expended in collecting the damages from the third party tortfeasor.

Quintana subsequently filed a class action lawsuit against 21st Century, alleging four causes of action: (1) violation of Business and Professions Code section 17200, (2) conversion, (3) unjust enrichment, and (4) declaratory relief. Quintana asserted that 21st Century could not lawfully require any reimbursement under its policy terms because she had not been made whole by the third party damages settlement ($6,000) and medical payments received from the insurer ($1,000) when her attorney fees of $2,106.50 were included as part of her made whole recovery. She argues that the made-whole rule requires the insurer to take into account all of the insured's litigation expenses when calculating whether or not the insured's recovery from a third party tortfeasor resulted in a surplus recovery entitling the insurer to some reimbursement. After paying her attorney fees, Quintana recovered a total of $4,893.50 ($6,000 in settlement proceeds plus $1,000 in med-pay proceeds minus $2,106.50 in litigation expenses). She alleged that, because her total gross recovery of $4,893.50 after payment of attorney fees was less than her total damages of $6,000, she had not been made whole.

Quintana sought to represent the class of all ―California policyholders, past and present, of [21st Century] who: (1) were not made whole after deducting all attorney fees from the money they received from the resolution of their claims against third party tortfeasors; (2) received an amount from 21st Century that was less than the amount paid by such policyholders for such attorney fees; and (3) paid 21st Century money in response to its demand for reimbursement of payments it paid under the med-pay coverage.‖

21st Century demurred to the complaint, asserting that Quintana did not state a cause of action because California law includes no attorney fees or costs in the made-whole calculation. 21st Century contended that reimbursement for attorney fees is separately determined under an equitable apportionment rule known as the common fund doctrine and its requirement that an insurer pay a prorata portion of attorney fees once the insured recovers his or her damages. In other words, 21st Century claimed that Quintana's interpretation of the made-whole rule conflicted with the common fund doctrine. The trial court overruled the insurer's demurrer.

21st Century filed a petition for writ of mandate with the Court of Appeal challenging the trial court's order. The Court of Appeal issued an order to show cause and ordered 21st Century's writ petition to be considered with four other writ petitions, all filed in the Fourth Appellate District in San Diego County, which raised the identical legal issue against different insurers. The Court of Appeal held that the made-whole rule does not require an insurer seeking reimbursement to consider the attorney fees the insured expended in recouping his or her losses from the tortfeasor. Those expenses, the court held, fall under the common fund doctrine. The court therefore granted 21st Century's petition for writ of mandate and ordered the trial court to vacate its judgment and enter a new order sustaining the demurrer. We granted Quintana's petition for review challenging the Court of Appeal's decision that attorney fees are not properly considered when calculating an insured's liability for reimbursement under the made-whole rule.

Quintana contends that insurance companies are not entitled to reimbursement of payments they made under med-pay policy provisions unless the insured has been reimbursed for 100 percent of its attorney fees. She argues for an interpretation of the made-whole rule that would require that attorney fees be deducted from the total amount recovered in the third party tortfeasor litigation. Quintana urges the court to hold that the made-whole rule is not satisfied when the insured's damages recovery is reduced by its obligation to pay its attorney fees. By contrast, 21st Century contends that neither California case law nor the policy justifications underlying the made-whole rule and the common fund doctrine support Quintana's position. As we explain, we agree with 21st Century.


A. Contractual Subrogation and Reimbursement

Med-pay insurers must seek recovery for personal injury claims through contractual reimbursement rights against their insureds, because they are not allowed to assert subrogation claims directly against third party tortfeasors. (Progressive West, supra, 135 Cal.App.4th at p. 272.) The rule is based on the premise that personal injury claims are not assignable, and therefore a med-pay insurer generally has no right to sue the tortfeasor directly and has no standing to intervene. (See Lee v. State Farm Mut. Ins. Co. (1976) 57 Cal.App.3d 458, 466 (Lee).) Although Progressive West suggests that an insurer may interplead into a third party action, the interpleader has typically been limited to property damage cases and has not been allowed in the personal injury context. (See California Physicians' Service v. Superior Court (1980) 102 Cal.App.3d 91, 95-97 [rejecting interpleader in third party action].)

If insureds must reimburse their insurers once they recover from the tortfeasors, they are prevented from receiving double recovery and the financial responsibility for their loss is placed on the tortfeasor. (See Helfend v. So. Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1, 11, fn. 17 (Helfend).) Med-pay insurance contracts typically contain provisions that grant the insurer a right of reimbursement for certain payments that the third party who caused the insured's losses makes to the insured. These provisions are often interchangeably referred to as reimbursement or subrogation provisions but, in the present context, are appropriately called reimbursement provisions.*fn3 (See Progressive West, supra, 135 Cal.App.4th at p. 273.)

B. The Made-whole Rule

The made-whole rule is a common law principle that limits the insurer's reimbursement right in situations where the insured has not recovered his or her ―entire debt.‖ (See Sapiano v. Williamsburg Nat. Ins. Co. (1994) 28 Cal.App.4th 533, 536 (Sapiano); Plut v. Fireman's Fund Ins. Co. (2000) 85 Cal.App.4th 98, 104 (Plut).) The rule precludes an insurer from recovering any third party funds paid to the insured until the insured has ― ‗been fully compensated for [his or] her injuries....' ‖ (Plut, supra, 85 Cal.App.4th at p. 104.)

California courts recognize a made-whole rule when - typically due to underinsurance - the tortfeasor could not pay his or her ―entire debt‖ to the insured: ―The general rule is that an insurer that pays a portion of the debt owed to the insured is not entitled to [reimbursement] for that portion of the debt until the debt is fully discharged.‖ (Sapiano, supra, 28 Cal.App.4th at p. 536, quoting 2 Cal.Ins. Law & Practice (1988) Rev.) § 35.11 [4][b]. pp. 35-47.) Sapiano's definition of the made-whole rule does not consider attorney fees, and is the ―established California rule.‖ (Sapiano, supra, 28 Cal.4th at pp. 536-537.)

Indeed, no California court has ever held that an insured was not made whole because he or she had to bear the attorney fees incurred in recovering damages not covered by the insurance contract.

The made-whole rule was extended to med-pay reimbursement claims in 2005. (Progressive West, supra, 135 Cal.App.4th at p. 273.) Progressive West held that parties may properly contract around the rule so long as the contractual language clearly specifies that the parties intend to permit the insurer to obtain reimbursement even if the policyholder has not been made whole. (Id. at pp. 274-275.) The rule applies in the automobile insurance context; it prevents the insurer's reimbursement rights from conflicting with the insured's rights to obtain full performance under the insurance policy. (American Contractors Indemnity Co. v. Saladino (2004) 115 Cal.App.4th 1262, 1271.) The rule makes sense in the underinsurance context because it keeps ―the recovery rights of the [insurer] from conflicting with the [insured's] rights to eventually obtain full performance of the original, underlying obligation.‖ (Ibid.)

C. Common Fund Doctrine

As noted, 21st Century agrees with the Court of Appeal and contends that although the made-whole rule applies in the med-pay context potentially to reduce an insurer's reimbursement right, it does not apply to the insured's claim for attorney fees. Rather, 21st Century claims that California law requires only that the insurer bear a pro rata share of the attorney fees the insured incurred in obtaining recovery from the tortfeasor. Under the pro rata rule, as derived from the equitable common fund doctrine, each party bears attorney fees in proportion to its share of the recovery. As 21st Century notes, under pro rata sharing, the insurer pays all the attorney fees attributable to recovering the med-pay expenses for which it seeks reimbursement, while the insured - like any other litigant - pays fees incurred in pursuing recovery for additional damages (such as for pain and suffering). The rule provides a separate and independent limitation on an insurer's reimbursement rights.

The common fund doctrine originated in the class action context. (Lee, supra, 57 Cal.App.3d at p. 467.) Under the doctrine, ―[w]hen a number of persons are entitled in common to a specific fund, and an action brought by a plaintiff or plaintiffs for the benefit of all results in the creation or preservation of that fund, such plaintiff or plaintiffs may be awarded attorney's fees out of the fund.‖ (Ibid.) The United States Supreme Court introduced the common fund doctrine into American jurisprudence over 100 years ago in two decisions that did not involve insurance reimbursement or subrogation. (See Trustees v. Greenough (1882) 105 U.S. 527; Central R.R. & Banking Co. v. Pettus (1885) 113 U.S. 116.) But it was not until the landmark decision in United Servs. Auto. Assn. v. Hills (Neb. 1961) 109 N.W.2d 174 that the common fund doctrine was extended to insurance law.*fn4

We first applied the common fund doctrine for attorney fees reimbursement in the insurance context in Quinn v. State of California (1975) 15 Cal.3d 162 (Quinn). The insured requested an apportionment of attorney fees between himself and his insurer, which sought reimbursement of worker's compensation benefits paid to the insured. Quinn recognized that American courts ―have never awarded counsels' fees as a routine component of costs, [but] at least one exception to this rule has become as well established as the rule itself: that one who expends attorneys' fees in winning a suit [that] creates a fund from which others derive benefits, may require those passive beneficiaries to bear a fair share of litigation costs.‖ (Id. at p. 167, fn. omitted.) Finding that the insurance company would otherwise be unjustly enriched, we required the insurer to pay a pro rata share of the policyholder's attorney fees. (Id. at p. 176.)

Shortly after we decided Quinn, the Court of Appeal in Lee, supra, 57 Cal.App.3d at page 464, reexamined the common fund doctrine's application. In Lee, the insurance company disputed the lower court's judgment requiring it to bear a pro rata share of the policyholder's attorney fees when seeking reimbursement of medical payments out of a settlement with a third party tortfeasor. (Ibid.) As Lee noted, ―[i]t has been clearly established in California that [med-pay reimbursement provisions]... are valid and enforceable.‖ (Id. at pp. 465-466.) The court emphasized: ― ‗While [the insured] has a right to seek to be made whole, it is unfair for him to seek enrichment by double recovery which would result from retention of all proceeds of the settlement of his suit [against the tortfeasor]... and of all medical and hospital benefits paid to him by [the insurer] under its [insurance] agreement - for the same injuries - all eventually at the cost of the participating members of the plan.' ‖ (Id. at p. 465, quoting Block v. Cal. Physicians' Service (1966) 244 Cal.App.2d 266, 273, first and second brackets added.) Under the common fund doctrine, Lee then affirmed the trial court's order requiring the insurer to ―pay a pro rata share of attorney's fees incurred by [the insured] in securing a settlement or recovery out of which the reimbursement was required.‖ (Lee, supra, 57 Cal.App.3d at p. 460.) Since Lee was decided, at least one California court has assumed the common fund doctrine applies ...

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