On June 29, 2020, the New Jersey State Supreme Court held that the “made-whole” doctrine does not apply to first dollar risk, such as a self-insured retention (SIR) or deductible. City of Asbury Park v. Star Ins. Co. 2020 WL 3493526 (N.J. 2020). Under the made-whole doctrine, an injured party is entitled to recover all of its damages before its insurance company can be subrogated for payments made on its behalf. In City of Asbury Park, the Supreme Court was presented with a matter of first impression. It was asked to determine whether, under the made-whole doctrine, an insured’s chosen deductible or SIR must be reimbursed before its insurance company can be subrogated.
In City of Asbury Park, the City purchased a workers’ compensation insurance policy that included a high self-insured limit retention of $400,000.00 per occurrence in exchange for a lower insurance premium. The Insurer agreed to indemnify the City for all workers’ compensation losses that exceeded the SIR. In January 2011, a city employee was injured and filed a workers’ compensation claim. The City paid the initial $400,000.00 in benefits, and the Insurer paid an additional 2.6 million dollars. The injured worker recovered 2.7 million dollars in a third party action and set aside $935,968.25 to reimburse the workers’ compensation lien.
There was insufficient money to fully reimburse both the City and the Insurer. The Insurer argued that it was entitled to the entire $935,968.25 because it was entitled to be reimbursed in full before the City could recover anything paid on the self-insured retention. The City argued that, under the made-whole doctrine, it was entitled to be reimbursed in full before the Insurer could assert its subrogation rights. The City filed suit in Federal District Court and both Parties moved for summary judgement. The District Court ruled in favor of the Insurer and found that the City had no insurance coverage for the first $400,000.00. It ruled that the made-whole doctrine did not apply to this matter because the Insurer had the right to substitute itself for the City and was subrogated to all of the City’s rights of recovery through expressed agreement. The City Appealed to the Third Circuit Court of Appeals.
The Third Circuit determined that the appeal raised an important and unresolved question of state law, and it referred the matter to the New Jersey State Supreme Court. The question posed was whether the City had priority to recover what it paid before its Insurance Carrier could recover any of its own losses. The Supreme Court held that the City did not have priority. Although New Jersey has long recognized the made-whole doctrine, the Supreme Court found that the doctrine does not apply to self-insured retentions. The Court recognized that a self-insured retention is the amount of risk that the insured has agreed to assume in exchange for a lower premium. If the insured was allowed to recover its SIR before the insurance carrier was fully subrogated, it would essentially convert the policy to one without an SIR. The insured would receive an “unbargained for, unpaid for, windfall.” The Court held that equity precludes them from changing the terms of a contract into which the parties voluntarily entered.
This ruling is a win for insurance carriers, and it is a reminder to insureds that they get what they pay for. The insured assumes the risk of having a high SIR. While the Supreme Court’s Decision provides guidance as to the application of the made-whole doctrine, the outcome is not automatic. These cases will require a close reading of the insurance policy at issue to determine whether the made-whole doctrine will or will not apply.
 Audrey L. Shields, Esq. is a Shareholder in GRSLBG&B’s Litigation Department. She defends a wide variety of clients in various civil actions brought forth in New Jersey State and Federal Courts. Audrey can be reached at AShields@grsl.com.
 Punita K. Amin, Esq. is an Associate in GRSLBG&B’s Litigation Department. She defends a wide variety of clients in various civil actions brought forth in New Jersey State and Federal Courts. Punita can be reached at PAmin@grsl.com.