Applicability of the Made Whole Doctrine in Arizona Property Insurance Subrogation Suits

Once an insurance carrier has paid its insured for a covered loss, the insurance carrier is “subrogated” to the insureds claim against the third party primarily liable for loss. The insurance carrier is then entitled to bring an action against the third party whose tortious or wrongful conduct caused the loss.¹ Essentially, the insurance carrier “stands in the shoes of the insured” taking on the insured rights and remedies against the third party liable for the loss, but subjects itself to the defenses the third party could assert against the insured.²

Unlike most jurisdictions, Arizona has yet to adopt “Made Whole Doctrine” or “Made Whole Rule” in the context of subrogation cases. The Made Whole Doctrine operates as an equitable defense to the subrogation rights of an insurance carrier, which requires the insured be “made whole” with respect to all their damages before subrogation (or reimbursement) is permitted.

In California for example, unless otherwise provided in the contract, the insurance carrier is precluded from recovering from a third party until the insured has first been fully compensated for their damages (or made whole).³

While the Grand Canyon State has yet to fully adopt a version of the “Made Whole Doctrine,” the Ninth Circuit (which includes the state of Arizona) has applied the Made Whole Doctrine in the context of ERISA, as federal common law:

[A]bsent an agreement to the contrary, an insurance company may not enforce a right to subrogation until the insured has been fully compensated for her injuries, that is, has been made whole.⁴

Arizona, however, is not completely silent on the issue; Arizona’s regulations on Unfair Claims Settlement Practices prohibit insurers from failing to settle first party claims on the basis that another party should be responsible for the payment (except as otherwise provided in the policy).⁵
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¹ Monterey Homes Arizona, Inc. v. Federated Mut. Ins. Co., 221 Ariz. 351, 355 (App. 2009); § 222:5.Definition and Nature of Subrogation, 16 Couch on Ins. § 222:5.
² Id.
³ 21st Century Ins. Co. v. Superior Court, 47 Cal. 4th 511, 518–19 (2009).
⁴ Barnes v. Indep. Auto. Dealers Ass’n of California Health & Welfare Benefit Plan, 64 F.3d 1389, 1394 (9th Cir. 1995).
⁵ Ariz. Admin. Code R20-6-801.