Nathaniel Coon felt a “pop” in his knee while playing on ice. Coon received surgery to repair the knee at The Everett Clinic (TEC). Subsequent to the surgery, Coon suffered a serious fungal infection and leg amputation. Group Health Cooperative (GHC) provided health insurance benefits to Coon.

Coon filed suit against TEC for potential negligence claims. Coon settled with TEC without involving GHC. GHC initiated a lawsuit, seeking reimbursement for its contribution. Group Health Cooperative v. Coon, 447 P3d 139, (2019), explores (1) whether settlement for less than policy limits constituted full compensation of Coon and (2) whether GHO suffered prejudice from Coon’s failure to provide notice prior to finalizing settlement with TEC.

Background

In January 2012, Coon injured his knee and experienced immediate pain and disability. On March 1, 2012, Coon received reparative surgery at TEC. On March 19, Coon returned to TEC with complaints of worsening pain and fever. TEC obtained fluid samples from Coon’s knee. On March 20, Coon was admitted to Providence Regional Medical Center.

On March 26, the fungus Scedosporium prolificans (SP) was isolated from the fluid sample collected on March 19. SP, a fungus typically found in soil and polluted waters, is extremely rare, aggressive, and resistant to most known and United States Food and Drug Administration-approved antifungal agents. Coon began the difficult process of fungal therapy.

Coons’ physicians exhausted every resource at their disposal in attempting to overcome SP’s resistance to antifungal agents. However, by the beginning of May, it was clear all attempted measures had failed to control the infection. Coon was referred to the Mayo Clinic.

Between August and October, Coon underwent aggressive surgical procedures and antifungal therapies with no success. The decision was made to amputate the infected leg, due to extreme pain and limited function. The amputation was performed at the Mayo Clinic on October 17, 2012. Coon retained counsel to investigate whether he had any possible legal claims.

Coon’s counsel notified GHO of Coon’s representation in connection with the injury and amputation. GHO provided a breakdown of it subrogation lien in the total amount of $372,634. GHO requested developmental information regarding settlement negotiations and any final settlement, so GHO would be able to confirm its subrogation amount.

In January 2014, Coon’s counsel informed GHO mediation was scheduled for February. GHO was next informed the mediation had been postponed until March. On April 25, 2014, Coon settled with TEC for $2.3 million. Coon’s counsel informed GHO of the settlement, asked GHO to waive its subrogation rights, and stated his firm would hold the amount of GHO’s lien in its trust account until May 30, 2014.

On May 30, 2014, at 3:39 p.m., GHO responded it would not waive its subrogation rights and wished to recover its subrogated interest. On June 2, 2014, Coon’s counsel informed GHO it had distributed the remaining funds to Coon. GHO filed a complaint seeking $372,634.

The superior court granted GHO’s motion and held:

Reasonable minds can reach but one conclusion as to the following facts:

a. Parties may decide by agreement what amounts to full compensation for their damages taking into account their chances of success or failure at trial.
…
c. Once a party settles a claim, the party has identified and accepted the amount of settlement as full compensation for the party’s damages.
…
g. By settling for less than the available insurance policy limits in consideration of Defendants’ evidence of damages versus risk of failure at trial, NATHANIEL COON and LORI COON’s agreement to settle constitutes full compensation for their damages as a matter of law.

Coon appealed. The Court of Appeals reversed the order granting summary judgment to GHO, holding that GHO had no valid and enforceable subrogation claim against the Coons. The court reasoned questions of fact existed regarding (1) whether Coon received full compensation for his losses and (2) whether GHO was prejudiced by Coon’s breach of their insurance contract. The Washington Supreme Court granted review.

Analysis

Compensation:

The relevant portion of the Coons’ insurance contract states:

If the Injured Person’s injuries were caused by a third party giving rise to a claim of legal liability against the third party and/or payment by the third party to the Injured Person and/or a settlement between the third party and the Injured Person, GHO shall have the right to recover GHO’s Medical Expenses from any source available to the Injured Person as a result of the events causing the injury, including but not limited to funds available through applicable third party liability coverage and uninsured/underinsured motorist coverage. This right is commonly referred to as “subrogation.” GHO shall be subrogated to and may enforce all rights of the Injured Person to the full extent of GHO’s Medical Expenses. GHO’s subrogation and reimbursement rights shall be limited to the excess of the amount required to fully compensate the Injured Person for the loss sustained, including general damages.

Subrogation rights have long been recognized as subject to the principle an insured must be “made whole” for any losses before an insurer may recover its payments. Absent a litigated determination of nonliability, any subrogation or reimbursement rights asserted by an insurer are subject to the “Made Whole” doctrine. GHO argues it is entitled to full recovery of its payments to Coon because there is no “third-party tortfeasor . . . ‘responsible in law’ for the insured’s injury.” GHO’s argument failed for two reasons.

First, GHO’s argument is internally contradictory. If the court had accepted GHO’s assertion there is no third-party tortfeasor within the meaning of its contract, which it did not, then the Court of Appeals is correct – GHO has no subrogation claim at all. Second, GHO’s argument wrongly assumes an insured may contract for reimbursement without regard to limits on its subrogation rights. Any right to reimbursement remains subject to the “made whole” rule.

Therefore, if Coon has not been “made whole,” no right to reimbursement ever arises. The court looked to Thiringer to substantiate the interpretation “made whole” rule. Thiringer has held fast for the last 40 years, and dictates the insured must recoup his or her general damages from the tortfeasor before subrogation is permitted.

The Washington Supreme Court found the superior court erred when it found settling for less than the available insurance policy limits in consideration of Defendants’ evidence of damages versus risk of failure at trial, Coon’s agreement to settle constitutes full compensation for their damages as a matter of law. Settlement for less than the tortfeasor’s policy limits does not create a presumption of full compensation. Because there was no presumption of full compensation from the acceptance of a settlement below policy limits, and because Coon has met his burden of production by putting forth evidence that he has not been fully compensated, summary judgment was inappropriate.

Contract:

GHO contends, because of this breach, GHO is entitled, per the contract language, to full reimbursement as a matter of law. However, not every breach discharges performance by the other party. While failure to give notice of settlement is a breach of the policy, it gives rise to a remedy only if GHO was prejudiced by the lack of notice. The burden of proof is on GHO to demonstrate it was prejudiced.

GHO had not offered any evidence of prejudice. Instead, GHO maintained no showing of prejudice was required, because public policy considerations were not at issue. The court reiterated an insurer is entitled to relief based on an insured’s breach of contract only if, and to the extent, it can demonstrate prejudice resulting from the breach. This holding has been well established by Tripp. Tripp dictates GHO bears the burden to prove it was prejudiced by Coon’s failure to notify prior to acceptance of the TEC settlement, and any remedy is limited to the extent of established prejudice.

Conclusion

An insured must be “made whole” before an insurer has a legal right of subrogation. Whether an insured has been made whole is a determination made between the parties or a determination for a trier of fact. Additionally, reimbursement obligations may not be avoided unless an insurer proves it was prejudiced by the insured’s contract breach.

This analysis reveals much is left in the hands of the trier of fact. But not to worry. Realistically, this analysis reveals much is left to Responsibility, Reasonableness, and Common Sense.

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