Georgia – Subrogation

Georgia Court of Appeals confirms that subrogated insurer does not need to wait for insured to be made-whole before pursuing its subrogation claim.

Georgia Casualty and Surety Co. v. Woodcraft by MacDonald, Inc., 2012 Ga. App. LEXIS 363 (March 29, 2012): Woodcraft by McDonald, Inc. d/b/a Coachcraft (Coachcraft) was in the business of renovating interiors of recreational vehicles (RVs). On February 14, 2004, Coachcraft’s business was severely damaged when a gas leak from a natural gas pipeline buried beneath its building fractured resulting in an explosion and fire involving Coachcraft’s building. The pipeline was owned and operated by Atmos Energy Corporation.  The property damaged in the fire included customers’ RVs, tools and the personal property of Coachcraft’s employees, as well as an RV and tools that belonged to the owner of the company, Brad MacDonald. Coachcraft was insured under two insurance policies issued by Georgia Casualty (GC).  GC paid in excess of $1.6 million in property loss under two different policies, exhausting the limits of coverage.

GC then filed suit against Atmos to recover the monies paid out under its policies. Coachcraft and MacDonald intervened in the suit seeking to recover their losses in excess of the amounts paid by GC. Atmos asserted counterclaims for indemnification and contribution against Coachcraft, alleging that it had failed to properly construct and ventilate its building. More than two years later, GC and Atmos reached an agreement to settle their dispute for $950,000 in exchange for GC providing Atmos with a complete release. Atmos agreed that it would dismiss its counterclaims against Coachcraft, but that Coachcraft and MacDonald could continue to pursue their claims against Atmos. Coachcraft and MacDonald objected to the dismissal of the case and the settlement contending that GC was prohibited from settling its claims until Coachcraft had been made-whole for its losses.

The district court denied the objections, specifically determining that the settlement did not prejudice Coachcraft or MacDonald, as both could continue to pursue their claims against Atmos.  They both eventually settled with Atmos for $125,000. Sometime after they settled their claim, Coachcraft and MacDonald found themselves dissatisfied with their settlement. They then turned to GC demanding that it pay them out of its settlement proceeds the amount they alleged would make them whole, approximately $179,130.59.  After GC refused their demand, Coachcraft and MacDonald filed suit in Georgia Superior Court. The suit alleged that GC breached its insurance contract and committed bad faith by not making the insured whole before accepting the settlement proceeds.  GC moved for summary judgment arguing that it paid the limits of its policy and that Georgia law did not impose such a duty on an insurance company. Coachcraft and MacDonald argued in response that the public policy behind Georgia’s made-whole doctrine required that an insurer demonstrate that its insured had been made whole before pursuing its subrogation rights. The trial court, relying on Florida Farm Bureau Ins. Co. v Martin, 377 So.2d 827 (Fla. Dist. App. 1979) and Garrity v. Rural Mutual Ins. Co., 253 N.W. 2d 512 (1977), held that the made-whole doctrine applied to property claims and that GC was liable to the extent that the insureds had not been made whole.  However, the court granted GC summary judgment on the bad faith claim.

GC appealed the trial court’s ruling on the made-whole doctrine. On appeal, the court found that Landrum v. State Farm, 527 S.E.2d 637 (Ga. App. 2000), as cited by Coachcraft, supported Georgia Casualty’s position that “the full compensation” rule is not a bar to the insurer’s subrogation rights against the tortfeasor regardless of the fact that the insured had not yet been fully compensated. Based on that decision, the court stated that it could not conclude that Georgia’s public policy conditioned contractual subrogation rights upon the insurance company first insuring that the insured had been made whole.  GC’s exercise of its subrogation rights did not deprive the insureds of their priority under the full compensation rule and barring subrogation in such instances would defeat one of the equitable purposes behind subrogation: to deter wrongdoing by placing ultimate responsibility for paying an obligation on the person who in equity and good conscience ought to pay for it.  Thus, GC’s subrogation rights were not defeated.