Arkansas employs the “made whole” doctrine, which requires an insured to be fully compensated for damages (i.e., to be “made whole”) before the insurer is entitled to recover in subrogation.[1] As the Riley court established, an insurer cannot unilaterally determine that its insured has been made whole (in order to establish a right of subrogation). Rather, in Arkansas, an insurer must establish that the insured has been made whole in one of two ways. First, the insurer and insured can reach an agreement that the insured has been made whole. Second, if the insurer and insured disagree on the issue, the insurer can ask a court to make a legal determination that the insured has been made whole.[2] If an insured has been made whole, the insurer is the real party in interest and must file the subrogation action in its own name.[3] However, when both the insured and an insurer have claims against the same tortfeasor (i.e., when there are both uninsured damages and subrogation damages), the insured is the real party in interest.[4]
In EMC Ins. Cos. v. Entergy Ark., Inc., 2019 U.S. App. LEXIS 14251 (8th Cir. May 14, 2019), EMC Insurance Companies (EMC) filed a subrogation action in the District Court for the Western District of Arkansas alleging that its insureds’ home was damaged by a fire caused by an electric company’s equipment. EMC never obtained an agreement from the insureds or a judicial determination that its insureds had been made whole. In addition, EMC did not allege in the complaint that its insureds had been made whole and did not present any evidence or testimony at trial that its insureds had been made whole. After EMC presented its case-in-chief, the District Court ruled that EMC lacked standing to pursue its subrogation claim because “EMC failed to obtain a legal determination that its insureds had been made whole . . . prior to initiating this subrogation action.” Thus, the District Court granted Entergy Ark., Inc.’s motion for judgment as a matter of law and EMC appealed the decision.
On appeal, EMC argued that the “made whole” rule does not apply to property damage claims. The Eighth Circuit Court of Appeals disagreed. However, the Circuit Court also explained that the issue of when an insurer must establish that the insured has been made whole (i.e., before filing suit or during prosecution of the suit) is an issue of first impression under Arkansas law. Although the Eighth Circuit identified this procedural issue as one of first impression, the court held that it need not decide the issue because, regardless of when EMC had to establish that its insured was made whole, it failed to prove that its insureds were made whole either before or during the lawsuit. Thus, while the Eighth Circuit ultimately affirmed the decision of the District Court, it relied on a different rationale than the District Court.
The Entergy case shows that, in order to protect their subrogation claims, insurers proceeding as a subrogee in Arkansas must take every possible measure to establish that their insureds have been made whole. These measures include the following: (i) prior to filing suit, the insurer should attempt to reach agreement with the insured confirming that the insured has been made whole; (ii) if there is a disagreement with the insured, the subrogating carrier should seek a judicial determination that the insured has been made whole as early as possible; (iii) the subrogation complaint should state that the insured has been made whole; and (iv) the insurer should present evidence/testimony at trial that the insured has been made whole.
[1] Riley v. State Farm Mut. Auto. Ins. Co., 381 S.W.3d 840 (Ark. 2011).
[2] Id.
[3] McGeorge Contracting Co. v. Mizell, 226 S.W.2d (Ark. 1950).
[4] See Argenia v. Blasingame, 910 S.W.2d 225 (Ark. App. 1995); Ark. R. Civ. P. 17(a).