“Made Whole Rule,” Which Limits An Insurer’s Recovery in Subrogation Claim, Does Not Apply to Salvage Recovery

On August 8, 2016, Justice Oing of the New York County Commercial Division issued a decision in Potemkin Cadillac-Buick-Chevrolet-Geo, Ltd. v. Specialty Mar. Ins. Co., 2016 NY Slip Op. 31507(U), holding that the “made whole rule,” under which an insurance carrier cannot recover from a third-party on a subrogation claim until the insured has first been fully compensated for the injury, does not apply to salvage recovery for property damage.

In Potemkin, the plaintiff (a car dealership) suffered a $9 million loss to its inventory during Hurricane Sandy. The policy only provided $7 million in coverage, and the carrier, pursuant to a provision of the policy, required that the insured provide it with storm-damaged vehicles to dispose of as salvage in an amount equal to the $7 million insurance payment. The plaintiff then sold the remaining vehicles for salvage, but was still left with an uncompensated loss of $900,000. It brought suit against the carrier to recover that loss, relying on the “made whole” doctrine, which limits an insurer’s ability to recover from a third-party tortfeasor until the insured has been fully compensated for the loss. See Fasso v. Doerr, 12 N.Y.3d 80, 87 (2009) (under the "made whole" rule, "the insurer may seek subrogation against only those funds and assets that remain after the insured has been compensated" in order to "assure[] that the injured party's claims against the tortfeasor takes precedence over the subrogation rights of the insured").

Justice Oing held that this doctrine did not apply in the context of a salvage recovery, explaining:

[T]he subrogation principle clearly permits an insurer to sue a third-party tortfeasor to recoup the amount of insurance payment it paid to the insured, and the made whole doctrine assures that the insured's claim and recovery against the tortfeasor is superior to the insurer's subrogation rights when the recovery from such tortfeasor is inadequate to fully compensate the insured for its loss.

Here, there is indisputably no third-party tortfeasor. Thus, invocation of the subrogation principle, contractual or equitable, in inapplicable to the instant facts. . . . Correlatively, the made whole doctrine is equally inapplicable. That doctrine governs the priority of the parties' entitlement to the proceeds recovered from a third-party tortfeasor when the recovery is inadequate to compensate for the insured's loss. Here, Hurricane Sandy is clearly not a third party that can be held legally responsible for the loss.

(Citations omitted).