Waiver doesn’t discharge tort liability

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An insurer’s waiver of its right to subrogation doesn’t discharge the tortfeasor’s underlying liability or satisfy the judgment, the Court of Appeals of Virginia has held.

Prior to trial, the plaintiff’s underinsured motorist coverage, or UIM, offered to waive its right to subrogation if the defendant’s liability insurer provided a trial defense. After the jury found the defendant liable, his insurance paid its limits and the plaintiff’s UIM paid the difference. The trial court granted the defendant’s motion to mark the judgment as satisfied.

But Court of Appeals Judge Robert J. Humphreys said that was an error.

“We hold that the mere waiver of the insurer’s right to subrogation does not discharge the underlying tort liability,” he wrote. The collateral source rule doesn’t prevent a windfall to the insured plaintiff by allowing them to recover on the judgment.

Humphreys was joined by Judge Lisa M. Lorish in Brown v. Kirkpatrick (VLW 023-7-255).

Believing that UIM insurance wasn’t collateral to the tortfeasor’s liability, Judge Glen A. Huff dissented.

“Indeed, its very purpose is to provide additional monies to satisfy the risk and exposure of the tortfeasor,” he wrote.

Subrogation waiver

Michael Brown sued Timothy Kirkpatrick in the Newport News Circuit Court for damages arising out of a motor vehicle accident. Kirkpatrick had liability coverage through State Farm; USAA provided Brown’s UIM coverage.

USAA informed Kirkpatrick that it would waive subrogation against him if State Farm defended him through trial. After the jury awarded $286,000 to Brown, State Farm paid him the policy’s limit of $50,000. USAA sent Brown a check for $236,000.

USAA requested that Brown ask the court to mark the matter as “paid and satisfied.”

Brown refused, stating that he was entitled to pursue recovery against Kirkpatrick in light of USAA’s waiver of its right to subrogation.

Because USAA said it would satisfy his share and waive subrogation against him if he appeared for trial, Kirkpatrick moved the circuit court to mark the judgment as satisfied. He argued that USAA’s waiver didn’t open the door for Brown to pursue him.

The circuit court granted Kirkpatrick’s motion.

Collateral source

Humphreys cited the 2019 holding from Llewellyn v. White in which the Supreme Court of Virginia held that “an insurance company’s agreement with the plaintiff to waive its right of subrogation did not relieve the tortfeasor’s judgment debt.”

The Llewellyn court ruled that the defendant remained liable for the full amount of the judgment because the UIM insurer wasn’t a joint tortfeasor and its payment to the plaintiff was a collateral source.

“The collateral source rule, as applied in Llewellyn, establishes that ‘a person who is negligent and injures another owes to the latter full compensation for the injury inflicted[,] … and payment for such injury from a collateral source in no way relieves the wrongdoer of [the] obligation,’” Humphreys wrote.

“Specific to the insurance context, the collateral source rule is that ‘damages, recoverable of personal injuries inflicted through the negligence of another are not to be reduced by reason of the fact that the injured party had been partly compensated for his loss by insurance which he has procured and for which he has paid,’” Humphreys pointed out.

‘At odds’

Here, the judge acknowledged that the collateral source rule and the principle that an injured party shouldn’t be entitled to a double recovery are “fundamentally at odds.”

“The Virginia Supreme Court determined that in resolving this tension ‘the better option is to allow plaintiff to retain the “windfall” that results from his foresight in voluntarily electing to purchase [UIM] coverage rather than allowing defendant … to be the ultimate beneficiary of plaintiff’s decision to procure additional insurance coverage,’” Humphreys wrote.

The judge agreed with Brown that Llewellyn applied with equal force to a situation where the insurance company has agreed with the defendant to waive its subrogation rights.

Kirkpatrick wasn’t entitled to mark the judgment as satisfied unless it was “paid off or discharged,” which it undisputedly was not. Kirkpatrick’s contention that USAA’s waiver was distinguishable from Llewellyn “misconceives the nature of the subrogation right,” Humphreys said.

“Our Supreme Court has distinguished subrogation from reimbursement,” he wrote, citing 1978’s Reynolds Metals Co. v. Smith, in which the court reasoned that “subrogation … requires that the subrogee obtain the right to proceed against a third party[.]”

The judge said Reynolds contradicted Kirkpatrick’s argument because “an insurer’s right to reimbursement from its insured is not equivalent to their right of subrogation against the defendant.”

No discharge

Humphreys found nothing in the record to support a finding that the judgment was discharged.

“The waiver of the right to pursue recovery that is derivative of the insured’s right is conceptually distinct from a settlement, release, or discharge of the underlying debt,” the judge said.

Even if USAA required Brown to reimburse them for anything he recovers from Kirkpatrick, Humphreys said that didn’t mean Kirkpatrick was allowed to escape tort liability.

“USAA has waived its right to pursue Kirkpatrick for the money it paid to Brown. That does not mean that Kirkpatrick’s obligation has been paid off,” the judge wrote, adding that the “waiver of the right to pursue a recovery of another’s claim, standing alone, does not extinguish the underlying claim.”

Noting that USAA’s subrogation right was the only mechanism that allowed it to interfere with Brown’s right to recover from Kirkpatrick, Humphreys said USAA’s waiver effectively disclaimed any interest in the judgment itself.

The Llewellyn court “acknowledged that the waiver of subrogation could lead to a double recovery but noted that the ‘“law contains no rigid rule against overcompensation,” and “making tortfeasors pay for the damages they cause can be more important than preventing overcompensation,”’” Humphreys wrote.

The matter returns to the circuit court.