The concept of "made whole" is a legal doctrine in all 50 states that requires insurance companies to compensate insured people for their losses before taking any money for themselves. The doctrine prevents an insurance company from taking money from a settlement to cover the insurance company's costs without first repaying the consumer for any expenses or injuries she suffered.
Made Whole Doctrine
Insurance companies are generally not under any legal obligation -- aside from those itemized in your contract -- to cover all of your expenses. They might, for example, require a deductible before your medical bills are covered or place limits on the amount of coverage you have. "Made whole" does not mean that every damage you've experienced has to be fixed by your insurance company. Instead, it means that the insurance company can't try to take any money you get in a legal settlement until your damages have been covered.
Multiple Recovery Sources
People sometimes pursue multiple sources of reimbursement of their expenses at the same time. For example, if you are in a car accident, you might file an insurance claim and a lawsuit. The "made whole" doctrine is designed to address these situations. If you had $80,000 in damages from a car accident and won $100,000 in a lawsuit, the insurance company would be able to take no more than $20,000 of it.
Subrogation is the mechanism insurance companies use to take a portion of lawsuit monies and legal settlements. Companies use this process to recover a portion of the costs they've paid. For example, if your insurance company pays $50,000 in medical bills and you receive $100,000 in a lawsuit, your insurer might file subrogation papers to recover the $50,000. The insurer can only subrogate an amount that does not interfere with you being "made whole." If, for example, you still had $100,000 left in damages, the insurance company would not be able to subrogate the money you receive from the lawsuit. Because consumers are often represented in court by their insurance companies, in many cases the insurance company may be able to subrogate monies before consumers receive them.
Each state interprets the "made whole" doctrine slightly differently, and some states are beginning to make subrogation more challenging for insurance companies. In a 2011 Supreme Court of Arkansas case, for example, the court ruled that an insurance company could only subrogate lawsuit winnings with the consumer's written permission or with an order issued by a judge.
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