398 MAHLER v. SZUCS June 1998
135 Wn.2d 398
[Nos. 64344-0; 65014-4. En Banc.]
Argued October 28, 1997. Decided June 4, 1998.
ELAINE MAHLER, ET AL., Respondents, v. GEORGE G. SZUCS,
Defendant, STATE FARM MUTUAL AUTOMOBILE INSURANCE
COMPANY, Petitioner.
MONICA FISHER, Petitioner, v. ALDI TIRE, INC., ET AL.,
Defendants, STATE FARM MUTUAL AUTOMOBILE INSURANCE
COMPANY, Respondent.
[1] Subrogation - What Constitutes - Elements. Subrogation is an
equitable doctrine for ensuring that a party who is
responsible for a liability or obligation is made to answer
for it. The doctrine applies in cases that involve multiple
claims upon the same property, suretyship, joint debtors,
parties to bills and notes, the administration of estates,
and contracts of insurance. Subrogation has two features:
(1) the right to reimbursement and (2) enforcement of the
right. The right to reimbursement may arise by operation of
law (termed legal or equitable subrogation) or by contract
(termed conventional subrogation). The reimbursement right is
enforced either as a lien against the subrogor's recovery
from the responsible party or by the subrogee's stepping into
the shoes of the subrogor and asserting the subrogor's rights
against the responsible party.
[2] Subrogation - Favored Status - Liberal Application.
Subrogation is favored in the law and is liberally allowed in
the interests of justice and equity.
[3] Insurance - Subrogation - Purpose. Subrogation, in an
insurance context, enables an insurer to recover contractual
payments made to an insured from the party responsible for
the insured's loss.
[4] Insurance - Subrogation - Tortious Loss - Scope - In
General. By contract or on the basis of equitable principles,
an insurer that has advanced insurance benefits to an insured
for a loss caused by tortious conduct may have the right
(1) to seek recovery from the tortfeasor in the name of the
insured or (2) to reimbursement of the advance out of damages
recovered by the insured from the tortfeasor.
[5] Insurance - Subrogation - Tortious Loss - Insured's Recovery
From Third Party - Full Compensation - Necessity. Damages
obtained by an insured from a tortfeasor must fully
compensate the insured before the insurer may claim any
portion thereof as reimbursement for coverage advances it has
made to the insured on the loss.
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135 Wn.2d 398
[6] Insurance - Subrogation - Tortious Loss - Insured's Recovery
From Third Party - Necessity. Settlement between an insured
and a third-party tortfeasor does not extinguish the
insurer's subrogation right when the insured and the third-
party tortfeasor were aware of the insured's subrogation
right, the insurer did not consent to the settlement, and the
third-party tortfeasor had additional assets.
[7] Insurance - Subrogation - Against Own Insured - Validity. An
insurer cannot have a right of subrogation against its own
insured.
[8] Insurance - Subrogation - Scope - Policy Language - Right to
"Proceeds of Settlement" - Effect. Under a clause in an
insurance contract stating that if the insurer has advanced
insurance benefits to the insured the insurer is subrogated
"to the proceeds of any settlement" the insured recovers from
the party responsible for the loss, the insurer's rights are
limited to seeking reimbursement out of the proceeds the
insured might obtain in a settlement with the responsible
party. Such language does not grant the insurer the right to
step into the shoes of the insured and pursue a claim in the
insured's name against the responsible party.
[9] Insurance - Subrogation - Scope - Policy Language - Right of
Action Against Tortfeasor - Insured's Settlement With
Tortfeasor - Effect. Under a clause in an insurance contract
stating that if the insurer has advanced insurance benefits
to the insured the insurer may pursue legal action to recover
the sum from the party responsible for the insured's loss if
the insured has not already recovered the sum from the
responsible party, the insurer does not have a right to step
into the shoes of the insured and pursue a claim in the
insured's name against the responsible party if the insured
has pursued a claim against the responsible party and
obtained a settlement thereof.
[10] Insurance - Subrogation - Tortious Loss - Insured's
Recovery From Third Party - Intercompany Arbitration
Agreement - Effect. An insurer that has advanced insurance
benefits to an insured and that seeks to have the advance
reimbursed out of the insured's recovery in a tort claim
against the party responsible for the insured's loss may be
required to pay its share of the legal expenses incurred by
the insured in prosecuting the claim notwithstanding the
fact that the insurer and the responsible party's insurer
are both bound by an intercompany arbitration agreement
governing disputes between insurers involving subrogation,
reparations, reimbursement, indemnity, or direct action
recovery rights created by the payment of claims or
benefits to insureds.
[11] Insurance - Subrogation - Tortious Loss - Insured's
Recovery From Third Party - Offset for Proportionate
400 MAHLER v. SZUCS June 1998
135 Wn.2d 398
Legal Expenses - Validity - Public Policy. Public policy is
not violated by a clause in an insurance contract requiring
the insurer to pay its share of the legal expenses incurred
by the insured in successfully prosecuting a tort claim
against a party responsible for a loss suffered by the
insured out of which the insurer seeks reimbursement for
insurance benefits advanced to the insured.
[12] Insurance - Subrogation - Tortious Loss - Insured's
Recovery From Third Party - Offset for Proportionate Legal
Expenses - Nature of Recovery - Effect. Under the principle
of equitable sharing, an insurer seeking reimbursement of
insurance benefits advanced to an insured on a loss may be
required to contribute to the insured's legal costs in
successfully prosecuting a tort claim against the party
responsible for the loss if the insured's recovery on the
claim includes recovery of the insurer's subrogation
interest, regardless of counsel's motivation in prosecuting
the claim, the absence of an attorney-client relationship
between counsel and the insurer, the presence or absence of
consent to the action by the insurer, or the nature of the
attorney-client agreement between counsel and the insured.
So long as the insurer benefits from the recovery or has
not been prejudiced by the insured's prosecution of the
claim, neither the character of the recovery nor the reason
why the claim was prosecuted is a reason the insurer should
not be required to pay its fair share of the legal costs.
[13] Interest - Prejudgment Interest - Deprivation of "Use
Value" of Money - Necessity. Prejudgment interest may not
be awarded to a party on money held on deposit pending the
outcome of litigation if the party was not deprived of the
"use value" of the money.
[14] Insurance - Expenses of Insured - Insured's Action To
Obtain Benefit of Policy - Coverage Issue - Necessity. An
insured compelled by the insurer to assume the burden of
legal action to determine the insured's rights under the
insurance contract is entitled to an award of attorney fees
from the insurer only if the essence of the action is a
dispute over coverage.
[15] Insurance - Expenses of Insured - Insured's Action To
Obtain Benefit of Policy - Value of Subrogation Interest. A
dispute between an insured and the insurer over the value
of the insurer's subrogation interest in a third-party
recovery obtained by the insured is not a dispute over
coverage such as would entitle the insurer to an award of
attorney fees for successfully prosecuting the claim.
[16] Arbitration - Attorney Fees - On Appeal. A party entitled
to attorney fees under MAR 7.3 at the trial court level
also is entitled to attorney fees on appeal if the
appealing party's position is not improved by the outcome
of the appeal.
June 1998 MAHLER v. SZUCS 401
135 Wn.2d 398
[17] Costs - Attorney Fees - Amount - Factors - Size of
Recovery. The size of a litigant's recovery does not
determine the amount the litigant may be awarded in
attorney fees; a small recovery is an insufficient basis
alone to warrant reversal of a large award of attorney fees
in the case.
[18] Costs - Attorney Fees - Amount - "Lodestar Amount" -
Determination. When calculating an attorney fee award, a
court should be guided by the lodestar method. Under the
lodestar method, the lodestar amount is determined by
multiplying the number of hours reasonably expended in the
litigation by a reasonable hourly rate of compensation.
[19] Costs - Attorney Fees q Amount - "Lodestar Amount" -
Reasonableness - RPC Factors. The lodestar method for
calculating an award of attorney fees may be further
supplemented by an analysis of the factors set forth in RPC
1.5(a) for determining the reasonableness of a fee.
[20] Costs - Attorney Fees - Amount - Reasonableness - Burden
of Proof. A party requesting an award of attorney fees has
the burden of proving the reasonableness of the award.
[21] Costs - Attorney Fees - Amount - "Lodestar Amount" -
Amount of Time - Unsuccessful Claim - Unproductive Time.
For purposes of calculating an award of attorney fees using
the lodestar method, "reasonable hours" do not include
hours spent on unsuccessful claims or unproductive time.
[22] Costs - Attorney Fees - Amount - "Lodestar Amount" -
Amount of Time - Documentation. The starting point for
calculating an award of attorney fees using the lodestar
method is for the party requesting the fees to provide
contemporaneous records from counsel documenting the hours
worked in securing the successful recovery. The
documentation must indicate (1) the number of hours worked,
(2) the type of work performed, and (3) the category of
attorney who performed the work.
[23] Costs - Attorney Fees - Amount - "Lodestar Amount" -
Hourly Rate - Reasonableness - Actual Billing Rate. For
purposes of calculating an award of attorney fees using the
lodestar method, the reasonableness of a lawyer's hourly
rate of compensation is determined by reference to what the
lawyer actually billed the client for services rendered.
[24] Costs - Attorney Fees - Amount - "Lodestar Amount" -
Deviation - Discretion of Court. In rare instances, a trial
court may adjust a lodestar fee either upward or downward
in its discretion.
[25] Costs - Attorney Fees - Amount - Reasonableness -
Determination - By Court. When ruling on a request for
attorney
402 MAHLER v. SZUCS June 1998
135 Wn.2d 398
fees, a trial court must take an active role in determining
the reasonableness of the award; it should not simply
accept without question the fee affidavits from counsel or
treat the cost decision as a litigation afterthought.
[26] Costs - Attorney Fees - Amount - Review - Basis for Award
in Record - Findings and Conclusions - Necessity. An award
of attorney fees will not be affirmed on review in the
absence of an adequate record supporting the fee award. A
record supporting an award of attorney fees is inadequate
if it does not include findings of fact and conclusions of
law underpinning the award.
[27] Costs - Attorney Fees - Amount - Review - Standard of
Review. A trial court's award of attorney fees is reviewed
for an abuse of discretion. A trial court abuses its
discretion by making an award unsupported by articulable
grounds.
MADSEN, J., concurs by separate opinion; ALEXANDER, J., dissents
by separate opinion; DURHAM, C.J., and SANDERS, J., did not
participate in the disposition of this case.
Nature of Action: In the Mahler case, plaintiff Mahler, who was
injured in an automobile accident, sought damages for personal
injury from the driver of the other vehicle involved in the
accident. After the parties settled the claim, a portion of the
settlement proceeds equal in amount to the personal injury
protection benefits advanced to Mahler by her insurer was placed
in trust pending the outcome of a dispute with the insurer over
whether Mahler had a right to an offset against the insurer's
reimbursement right for a portion of the cost of litigating the
claim against the tortfeasor. The dispute was resolved by
mandatory arbitration in Mahler's favor. The insurer subsequently
sought a trial de novo. In the Fisher case, plaintiff Fisher, who
also was injured in an automobile accident, sought damages for
personal injury from the owner of the other vehicle involved in
the accident. After the parties settled the claim, a portion of
the settlement proceeds was deposited into the registry of the
trial court pending the outcome of Fisher's dispute with her
insurer over whether she had a right to have a portion of the
cost of litigating the tort claim offset against the insurer's
reimbursement right for personal injury protection benefits
advanced to her. After the tort
June 1998 MAHLER v. SZUCS 403
135 Wn.2d 398
action was dismissed, Fisher sought a judicial determination of
the respective rights to the funds deposited in the registry of
the court. A judgment in favor of the insurer was affirmed in
part, reversed in part, and remanded by the Court of Appeals at
78 Wn. App. 902 (1995). The court held that the contractual
subrogation provisions in the insurance policy supplanted common
law subrogation principles, but that there remained an unresolved
issue of material fact as to whether the insurer was required by
the insurance contract to contribute to Fisher's expenses of
litigating the tort claim.
Superior Court: In the Mahler case, the Superior Court for King
County, No. 94-2-04911-9, Richard D. Eadie, J., on July 15, 1996,
entered a summary judgment granting Mahler an offset against the
insurer's reimbursement right for a portion of her expenses in
litigating her claim against the tortfeasor. Mahler also was
awarded prejudgment interest and attorney fees for litigating her
rights under the insurance contract. In the Fisher case, on
remand from the Court of Appeals, the Superior Court for
Snohomish County, No. 92-2-04410-1, Joseph A. Thibodeau, J., on
January 29, 1997, entered a summary judgment in favor of the
insurer, ruling that the insurer's right to recover personal
injury protection benefits advanced to Fisher through
intercompany arbitration with the tortfeasor's insurer preempted
Fisher's claim for an offset.
Supreme Court: Holding that both Mahler and Fisher were
entitled under their insurance contracts to offsets against their
insurers' reimbursement rights for a portion of the costs of
litigating their tort claims, that Mahler was not entitled to an
award of prejudgment interest, and that Mahler was entitled to an
award of attorney fees under MAR 7.3 upon the entry of sufficient
findings of fact and conclusions of law, the court vacates the
award of prejudgment interest to Mahler, affirms the judgment in
the Mahler case in all other respects, remands the Mahler case
for entry of findings of fact and conclusions of law on the issue
of attorney fees under MAR 7.3, reverses the decision
404 MAHLER v. SZUCS June 1998
135 Wn.2d 398
of the Court of Appeals and the judgment in the Fisher case,
grants judgment in favor of Fisher, and remands the Fisher case
for further proceedings.
Reed McClure, by William R. Hickman and Michael S. Rogers; Todd
& Wakefield, by Scott C. Wakefield; and Julin, Fosso, Sage,
McBride & Mason, by Harold C. Fosso, for petitioner/respondent
State Farm Mutual Automobile Insurance Co.
Law Offices of Patrick H. LePley, Inc., P.S., by Patrick H.
LePley; and Charles K. Wiggins, for petitioner Fisher.
Law Offices of Patrick H. LePley, Inc., P.S., by Patrick H.
LePley; Richard B. Kilpatrick, P.S., by Richard B. Kilpatrick;
Charles K. Wiggins; and Fury Bailey, by William S. Bailey, for
respondents Mahler.
Bryan P. Harnetiaux, Gary N. Bloom, and Debra L. Stephens on
behalf of Washington State Trial Lawyers Association, amicus
curiae.
Daniel P. Mallove and Michael L. Schrenk on behalf of Grange
Insurance Association, amicus curiae.
Alan L. Bunge and Kathryn A. Majnarich on behalf of United
Services Automobile Association, amicus curiae.
Sidney R. Snyder, Jr., and Ronald S. Dinning on behalf of
Washington Insurers, amicus curiae.
Robert H. Madden, Carol J. Molchior, and J. Richard Crockett on
behalf of Arbitration Forums, Inc., amicus curiae.
TALMADGE, J. - In this case we analyze an insurer's right to
recover payments made to an insured pursuant to a Personal Injury
Protection (PIP) provision in a liability
June 1998 MAHLER v. SZUCS 405
135 Wn.2d 398
insurance policy when an insured recovers against a tortfeasor.
Specifically, we are asked to determine the extent to which the
insurer, State Farm Mutual Automobile Insurance Company (State
Farm), must pay the insured a share of the expenses the insured
incurred to recover from the tortfeasor. We hold State Farm's
policy required it to pay its insureds a portion of their
expenses necessary to obtain a recovery from the tortfeasors.
State Farm was not obligated to pay prejudgment interest on
Mahler's expenses, but it was obligated to pay Mahler's attorney
fees to enforce this sharing of expenses. We remand the case to
the trial court for entry of findings of fact and conclusions of
law with respect to the reasonable amount of such fees.
ISSUES
1. Does State Farm's policy require it to pay a share of its
insured's expenses required to secure a recovery from a
tortfeasor when such recovery is the basis for State Farm's PIP
reimbursement?
2. Did the trial court err in awarding prejudgment interest to
Mahler?
3. Did the trial court in Mahler err in allowing Mahler to
recover attorney fees incurred in this action?
FACTS
A.Mahler
On January 4, 1993, Dr. George Szucs pulled out into traffic
from a driveway and hit Elaine Mahler's car. He was cited for
failure to yield right of way. Mahler sustained cervical and
thoracic sprains, and contusions of her forehead, chest, and
right knee. She later suffered from muscle inflammation and
spasm, neck, low back, and hip pain, and persistent headaches for
which she received chiropractic and physical therapy treatments.
Although she claimed to have incurred $8,680 in medical expenses,
State Farm paid only $4,173.32 under her PIP coverage, refusing
406 MAHLER v. SZUCS June 1998
135 Wn.2d 398
further payments after an examination by a physician State Farm
hired concluded no further active treatment was indicated.
Three days after the accident, State Farm sent her a letter
that stated: "If you should recover our interest from the
responsible party or their [sic] insurance carrier, you must
protect our reimbursement rights." Mahler Clerk's Papers at 32.
Two months later, Mahler's attorney notified State Farm he was
representing Mahler and acknowledged State Farm's "lien for PIP
benefits extended in this matter." Mahler Clerk's Papers at 206.
State Farm replied it intended to arbitrate the question of its
reimbursement with the defendant's insurer and asked Mahler's
attorney to "take no action whatsoever in connection with the
recovery of State Farm's claim against the adverse party or
insurance company." Mahler Clerk's Papers at 34. State Farm
subsequently did not assist Mahler in her claim against Szucs.
Mahler, in the meantime, prosecuted her case against Szucs. She
filed a complaint; she submitted interrogatories; she prepared
for and attended a mediation hearing; she negotiated and entered
into a settlement agreement. Szucs defended Mahler's claims
vigorously. In his brief for the mediation hearing, he said:
Liability is an open question. . . . It seems likely that a
jury will find that both parties are partially responsible for
this accident. . . . We anticipate that a jury will relate at
least a third of the claimed treatment to pre-existing or
unrelated problems and that the general damages award will be
rather moderate. Defendant believes that the injuries sustained
by Mrs. Mahler in the accident of January 4, 1993 were an
aggravation of a long-standing, pre-existing problem.
Mahler Clerk's Papers at 20-21. Despite the assertion of these
defenses, Szucs eventually agreed to settle with Mahler for
$24,250. As is typical in settlement and release agreements,
Mahler agreed to hold Szucs and American States, Szucs' insurer,
harmless from all claims growing out of the accident. From the
settlement proceeds, Mahler's
June 1998 MAHLER v. SZUCS 407
135 Wn.2d 398
attorney placed the full amount of State Farm's PIP benefits
advanced into his trust account, reciting in his settlement
statement to Mahler this amount would be "[r]eserved until amount
of subrogation is resolved." Mahler Clerk's Papers at 431. /1
A week before the parties executed the settlement agreement,
Mahler's attorney informed State Farm it was obligated to give
Mahler a credit for expenses necessary to obtain the recovery of
State Farm's PIP benefits advanced. State Farm responded
negatively: "We will not accept having your services unilaterally
forced upon us for a fee that we have not agreed to." Mahler
Clerk's Papers at 262.
Until Mahler settled her case on May 13, 1995, State Farm had
not attempted to recover its PIP payments from American States,
and only on June 20, 1995, more than a month after the settlement
agreement, did State Farm finally file a claim against American
States for the $4,173.32. American States responded by denying
liability. Ultimately, a private arbitration panel under the
auspices of the insurance companies' intercompany arbitration
agreement met and decided in favor of State Farm, against
American States, commenting: "Respondent [American States] did
not protect the Applicant's [State Farm's] interest." Mahler
Clerk's Papers at 272.
In the meantime, Mahler proceeded with a series of motions in
the trial court to obtain a declaration State Farm owed her a
credit against the recovered PIP payments retained in Mahler's
attorney's trust account. Ultimately, a mandatory arbitration
hearing occurred, and the arbitrator awarded Mahler an attorney
fee credit of $1,391.10 against the PIP funds in the trust
account.
State Farm requested a trial de novo. Once back in superior
court, Mahler and State Farm both filed cross-motions for summary
judgment. The trial court entered a judgment in Mahler's favor,
awarding Mahler $1,612.59 as
_______________
1 Because Mahler's attorney had already deducted his one-third
contingent fee of the gross amount of the settlement ($8,083.33),
the money he placed in his trust account was all Mahler's.
408 MAHLER v. SZUCS June 1998
135 Wn.2d 398
an offset for her expenses in recovering State Farm's PIP
payments, /2 and also awarded Mahler attorney fees for having to
litigate her rights to obtain the benefits of her insurance
policy, but the trial court did not enter findings of fact or
conclusions of law supporting the award.
Both Mahler and State Farm sought direct review, RAP 4.2(a),
which we accepted, consolidating the case with Fisher. Amici
briefs have been submitted by the Washington State Trial Lawyers
Association (WSTLA), six auto insurers doing business in
Washington, and by Arbitration Forums, Inc., a firm that conducts
the intercompany arbitrations at issue here and in Fisher.
B.Fisher
Defendant Aldi Tire's truck crashed into Monica Fisher's car
when she was stopped on a state highway south of the city of
Snohomish waiting to make a left turn into a residential
driveway. Her car was a total loss and she suffered cervical and
lumbar injuries. She missed a month of work. State Farm paid part
of her medical expenses and wage loss under its PIP coverage
provision. Fisher retained an attorney to pursue an action for
general damages against the tortfeasor.
Six months before Fisher filed a complaint against the
tortfeasor, State Farm wrote her a letter, with a copy to her
attorney, saying, "If you should recover our [First Party Benefit
payments] from the responsible party or their [sic] insurance
carrier, you must protect our reimbursement rights." Fisher
Clerk's Papers at 309. There is nothing in
_______________
2 The trial court followed the formula in Mahler's insurance
policy. It first found the proportion the amount of State Farm's
PIP payments bore to the total recovery: $4,173.32 + $24,500 =
16.91%. It then calculated 16.91 percent of the total legal
expenses, $9,370.31 (consisting of $8,083.33 for legal fees and
$1,286.98 for costs), to reach the offset amount of $1,612.59. As
a result of this calculation, State Farm is required to pay
Mahler $1,612.59 as expenses for recovering State Farm's
$4,173.12 in PIP payments, or approximately 39 percent of the
amount it recovers. This might represent a slight advantage to
Mahler, as she had to pay her attorney only 33 percent of the
recovery for his services. As can be seen from State Farm's
formula, however, the larger the settlement amount compared to
the PIP payments, the smaller the percentage of expenses State
Farm must share.
June 1998 MAHLER v. SZUCS 409
135 Wn.2d 398
the record to indicate State Farm asked Fisher not to attempt to
recover State Farm's PIP payments to Fisher.
Fisher's attorney exerted significant efforts to establish
liability. He took the deposition of the state trooper who
investigated Fisher's accident, and prepared an 18-page
memorandum of law and supporting affidavits for a summary
judgment motion. After putting Fisher through the expense of
preparing the motion, the attorney for the defendant's insurance
carrier, Federated Service Insurance Company (Federated), advised
Fisher's attorney the defendant would not contest liability, and
asked him to prepare a stipulated order granting partial summary
judgment as to liability.
Two years later, with the case set for trial, Fisher's attorney
informed State Farm that after doing everything "but hammer at
the gates of hell," he was close to settlement with Federated for
between $35,000 and $45,000. Fisher Clerk's Papers at 319-20 He
said he did not intend to give State Farm the total amount of PIP
benefits it paid for Fisher's treatments and wage loss "without
you[r] paying some consideration for the fact that I have had to
battle the insurance carrier for the defendants every step of the
way, both on liability and the reasonableness and necessity of
this lady's medical treatment." He suggested a fair amount for
State Farm to pay out, of the more than $12,000 in PIP payments
he would recover by settlement with Federated, would be $3,900.
State Farm replied it would not "compromise our subrogated
interest" and intended to collect directly from Federated. Fisher
Clerk's Papers at 326. State Farm repeated this position in
another letter.
State Farm took no action to aid Fisher in bringing the case to
a settlement posture. /3 Federated refused State Farm's demand
for recovery of State Farm's PIP payments, not because it
contested liability, but because it had already
_______________
3 Fisher's attorney averred in an affidavit, "State Farm
contacted me only after liability had been established and after
all the necessary and essential work to recover the subrogation
interest and other damages from the defendant occurred." Fisher
Clerk's Papers at 272. State Farm does not dispute the assertion.
410 MAHLER v. SZUCS June 1998
135 Wn.2d 398
paid Fisher's settlement amount and would not pay twice for State
Farm's PIP recovery. State Farm did not invoke inter-company
arbitration with Federated.
The parties settled. Fisher requested the amount of State
Farm's PIP payments from the settlement amount - $12,223.53 - be
placed in the registry of the court so as not to delay execution
of the settlement agreement, and the court so ordered. The trial
court entered an order of dismissal on June 7, 1994. Thereafter,
Fisher instituted a complaint in interpleader to decide the fate
of the funds held in the registry of the court. On cross-motions
for summary judgment, the trial court agreed with State Farm and
ordered the entire amount to be disbursed to State Farm, without
any payment to Fisher.
Fisher appealed, and the Court of Appeals reversed. Fisher v.
Aldi Tire, Inc., 78 Wn. App. 902, 902 P.2d 166 (1995), review
denied, 128 Wn.2d 1025, 913 P.2d 816 (1996). The court held the
policy language controlled over any principles of equitable
subrogation to the contrary, so that State Farm did not have to
pay for Fisher's efforts in recovering the PIP payments pursuant
to specific policy language. Id. at 909. The court then addressed
the provisions of the State Farm policy itself to determine
whether the PIP payments were actually "recoverable" as a matter
of fact at arbitration, disagreeing with State Farm's contention
that simply entering into the intercompany arbitration agreement
established the recoverability of the PIP payments. The court
said:
Thus, in the present circumstances, if inter-company
arbitration works merely as a rubber stamp of personal injury
litigation, subrogated funds are not, in reality, recoverable
through inter-company arbitration. If arbitration is not the
vehicle that provides recovery, the limitation in the insurance
policy would not apply and State Farm would be obligated to
share responsibility for attorney fees a set forth in the
policy.
Because the court's holding mandated a factual inquiry into
whether inter-company arbitration was the "vehicle that
provide[d] recovery," the court remanded the case to the trial
court. Id. at 909-10.
June 1998 MAHLER v. SZUCS 411
135 Wn.2d 398
On remand, the trial court entered summary judgment in favor of
State Farm, holding State Farm's PIP payments were recoverable
through intercompany arbitration "but for the interference by the
insured's attorney." Fisher Clerk's Papers at 7. Fisher sought
direct review, State Farm supported the request, and we granted
direct review, RAP 4.2(a), consolidating this case with Mahler.
ANALYSIS
We are confronted in these cases with a series of practical and
theoretical concerns in interpreting State Farm's policy
provisions regarding reimbursement for PIP benefits advanced to
insureds and whether State Farm must share with its insureds the
expenses necessary to secure recoveries from tortfeasors.
However, the issues in this case so starkly divide the
plaintiffs' personal injury bar on the one hand, and the
insurance industry and the insurance defense bar on the other,
both sides are often emotional and not well-focused on the real
issues at stake in this case. For this reason, it is useful to
resort to basic principles to resolve the issues here.
A. State Farm's Right to Reimbursement for PIP Payments Advanced
General Principles
[1, 2] All of the parties have argued subrogation principles
resolve the issues in these cases. Subrogation is an equitable
doctrine the essential purpose of which is to provide for a
proper allocation of payment responsibility. It seeks to impose
ultimate responsibility for a wrong or loss on the party who, in
equity and good conscience, ought to bear it. RONALD C. HORN,
SUBROGATION IN INSURANCE THEORY AND PRACTICE 3 (1964). Two law
review commentators have referred to this allocation rationale as
stemming from "the moralistic basis of tort law as it has
developed in our system." Spencer L. Kimball & Don A. Davis, The
Extension of Insurance Subrogation, 60 MICH. L. REV. 841, 841
412 MAHLER v. SZUCS June 1998
135 Wn.2d 398
(1962). /4 "The general purpose of subrogation is to facilitate
placement of the financial consequences of loss on the party
primarily responsible in law for such loss." HORN, supra, at 24.
Subrogation has existed in civil law longer than in common law.
HENRY N. SHELDON, SUBROGATION 3 (2d ed. 1893); James Morfit
Mullen, The Equitable Doctrine of Subrogation, 3 MD. L. REV. 201,
201 (1939). It applies in cases involving multiple claims upon
the same property, suretyship, /5 joint debtors, parties to
bills and notes, the administration of estates, and contracts of
insurance. Subrogation is favored in Washington law. "Subrogation
is always liberally allowed in the interests of justice and
equity." J.D. O'Malley & Co. v. Lewis, 176 Wash. 194, 201, 28
P.2d 283 (1934).
There are, in effect, two features to subrogation. The first is
the right to reimbursement. The second is the mechanism for the
enforcement of the right. The right to reimbursement may arise by
operation of law, termed legal or equitable subrogation, or by
contract, called conventional subrogation. Ross v. Jones,
174 Wash. 205, 216, 24 P.2d 622 (1933).
The more troublesome question is the precise enforcement
mechanism for the subrogee's right of reimbursement. Considerable
imprecision on this question is present
_______________
4 We are not persuaded that one rationale for subrogation in
the insurance context is "to prevent unjust enrichment of the
insured," as the Court of Appeals said below. Fisher,
78 Wn. App. at 906. The notion is the insured would be unjustly
enriched if he or she received PIP payments from an insurer and
subsequently recovered special damages from the tortfeasor
duplicating the PIP payments. First, the asserted rationale does
not appear in classical discussions of the purposes of
subrogation. See, e.g., Aetna Life Ins. Co. v. Town of
Middleport, 124 U.S. 534, 8 S. Ct. 625, 31 L. Ed. 537 (1888).
Second, Washington public policy is altogether to the contrary.
"It is a well settled rule in tort actions that a party has a
cause of action notwithstanding the payment of his loss by an
insurance company." Consolidated Freightways v. Moore,
38 Wn.2d 427, 430, 229 P.2d 882 (1951); Ciminiski v. SCI Corp.,
90 Wn.2d 802, 585 P.2d 1182 (1978). The Legislature has abolished
the collateral source rule in the specific case of injuries
occurring as a result of health care, but not in other contexts.
RCW 7.70.080. We reject the notion that subrogation principles
trump the collateral source rule.
5 See discussion in Honey v. Davis, 131 Wn.2d 212, 222-25, 930
P.2d 908, 937 P.2d 1052 (1997) (Talmadge, J., concurring).
June 1998 MAHLER v. SZUCS 413
135 Wn.2d 398
in case law on subrogation. By virtue of payments made to a
subrogor stemming from the actions of a third party, a subrogee
has a right of reimbursement under general subrogation
principles. That reimbursement may be enforced as a type of lien
against any recovery the subrogor secures from the third party.
Alternatively, the subrogee, standing in the shoes of its
subrogor, may pursue an action in the subrogor's name against the
third party to enforce the reimbursement right.
[3] In the insurance context, the "doctrine of subrogation
enables an insurer that has paid an insured's loss pursuant to a
policy . . . to recoup the payment from the party responsible for
the loss." Elaine M. Rinaldi, Apportionment of Recovery Between
Insured and Insurer in a Subrogation Case, 29 TORT & INS. L. J.
803, 803 (1994). Traditionally, subrogation in the context of
insurance concerned cases of marine and fire losses. In a typical
case of a fire loss, upon payment of the loss to the insured, the
property insurer would be subrogated to the extent of its payment
to the remedies of the insured against the party that caused the
loss. This traditional application of subrogation principles is
in accord with the policy of allocating to the causer of the loss
the cost of reimbursing the person (the insurer) who paid for the
loss. Property loss subrogation caused few disputes between the
insurer and the insured, because once the insured had recovered
from the insurer the economic value of the loss, the insured had
little or no interest in competing with the insurer for the right
to sue the tortfeasor; economic damages could make the insured
whole.
It has been only in the last 30 to 40 years that subrogation
disputes regarding personal injury cases have arisen. "During
this period, subrogation clauses have been inserted in first
party medical payments coverage in automobile policies, uninsured
and underinsured motorist coverage, and medical and
hospitalization coverage." Roger M. Baron, Subrogation on Medical
Expense Claims: The "Double Recovery" Myth and the Feasibility of
Anti-
414 MAHLER v. SZUCS June 1998
135 Wn.2d 398
Subrogation Laws, 96 DICK. L. REV. 581, 583 (1992). /6 In the
personal injury context, where insureds may wish to pursue claims
for noneconomic damages, i.e., pain and suffering, disputes
regarding the right to subrogation have proliferated.
The complexities are readily apparent. By contrast with a
property loss case, where the damages are all economic and
usually readily determinable, so that the insured can be made
whole by the payment of money, in a personal injury case, the
claimed noneconomic damages typically amount to many multiples of
the economic damages and are almost always disputed because they
are not objectively ascertainable. Thus, rather than stepping
aside and allowing the insurer to pursue the tortfeasor by means
of subrogation for the money it paid its insured, the injured
insured will often sue the tortfeasor to recover noneconomic
damages, and include in the claim the medical expenses and other
special damages he or she has incurred as a result of the injury.
In effect, the injured insured does not abandon its shoes, and
its insurer thus has no shoes to step into to pursue subrogation.
The potential for conflict of interest abounds in such
circumstances. Both insurer and insured, having entered into an
insurance contract, are bound by the common law duty of good
faith and fair dealing, as well as the statutory duty "to
practice honesty and equity in all insurance matters." RCW
48.01.030. We have said the statute creates a fiduciary duty for
insurers running to their insureds. Industrial Indem. Co. of the
Northwest, Inc. v. Kallevig, 114 Wn.2d 907, 916-17, 792 P.2d 520
(1990). Yet the injured insured seeks recovery from the
tortfeasor, the same source to
_______________
6 For instance, "until 1958 the subrogation clauses that were
included in the standard forms for automobile insurance
specifically were not applicable to medical payments coverages."
ROBERT E. KEETON & ALAN I. WIDISS, INSURANCE LAW 228 (1988).
"Automobile medical payments coverage is of comparatively recent
origin. It was conceived and reared without benefit of
subrogation, and only during the past few years have some
automobile insurers undertaken to wrap it in a mantle of
subrogation." Travelers Indem. Co. v Chumbley, 394 S.W. 2d 418,
425, 19 A.L.R.3D 1043 (Mo. App. 1965).
June 1998 MAHLER v. SZUCS 415
135 Wn.2d 398
which the insurer may look to recover its payments to its
insured. /7
[4-6] As a result of these new conflicts, some courts initially
refused to allow subrogation in the personal injury context,
basing their denials on the common law rules against splitting
causes of action and assigning personal injury claims. Baron,
supra, at 583 (citing cases). Most jurisdictions, however, now
allow subrogation. J. A. Beck, Annotation, Subrogation Rights of
Insurer Under Medical Payments Provision of Automobile Insurance
Policy, 19 A.L.R.3D 1054.
We have dealt with some of these difficulties as they have
arisen since the advent of subrogation in insurance contracts
involving personal injury claims. In general, the right of
reimbursement in the insurance setting may arise by contract or
equitable means. The right may be enforced contractually by an
insurer's right to recover from the insured the amount of
payments made from any recovery the insured secures from a third
party tortfeasor or by a legal action in the name of the insured
against the tortfeasor. /8 We have articulated basic principles
of subrogation in the insurance setting in three decisions:
Metropolitan Life Ins. Co. v. Ritz, 70 Wn.2d 317, 422 P.2d 780
(1967); Thiringer v. American Motors Ins. Co., 91 Wn.2d 215, 588
P.2d 191 (1978); and Leader Nat'l Ins. Co. v. Torres,
113 Wn.2d 366, 779 P.2d 722 (1989).
In Metropolitan Life, the insurer paid medical benefits to
_______________
7 We are dubious that two actions arising from the same tort
against a tortfeasor may proceed either simultaneously or
consecutively, one by the injured insured seeking noneconomic
damages, and another by the injured insured's PIP carrier seeking
recovery of its PIP payments. Elementary considerations of the
undesirability of claim splitting and of fairness to the
defendant tortfeasor militate against such an outcome. "The
doctrine of claim preclusion prohibits claim splitting as a
matter of policy, primarily in order to conserve judicial
resources and to ensure repose for parties who have already
responded adequately to the plaintiff's claims." Babcock v.
State, 112 Wn.2d 83, 93, 768 P.2d 481 (1989).
8 "Usually, subrogation allows an insurer to recover what it
pays to an insured under a policy by suing the wrongdoer. The
insurer steps 'into the shoes' of its insured." Touchet Valley
Grain Growers, Inc. v. Opp & Seibold General Constr., Inc.,
119 Wn.2d 334, 341, 831 P.2d 724 (1992).
416 MAHLER v. SZUCS June 1998
135 Wn.2d 398
the insured, pursuant to a group policy which contained a
subrogation provision. Nevertheless, the insured entered into a
complete release of all claims against a third party tortfeasor
without specifically referencing the insurer's interest. We
stated the general release "deprived" the insurer of subrogation
rights, noting the insurer "was entitled either to reimbursement
from [the insured] or to be subrogated to [the insured's] claim
for medical expenses against the tortfeasor." Metropolitan Life,
70 Wn.2d at 321. The Court held the insurer could secure
reimbursement from the insured's recovery from the tortfeasor,
subject to the insurer's obligation to share proportionately in
the insured's expenses incurred to obtain the settlement.
In Thiringer, an insurer refused to pay PIP benefits to an
insured, and the insured settled with a tortfeasor. The insured
then demanded PIP benefits because his damages exceeded the
amount of the settlement. The trial court held the settlement
reasonable and the insurer's subrogation rights were not
prejudiced by it. The trial court held further that the
settlement amount was to be first applied to the insured's
general damages and then, if any excess remained, toward the
payment of the special damages to which the insurer's PIP
coverage applied. We held the insured's release did not prejudice
the insurer's subrogation right so as to invalidate the insured's
right to PIP benefits, noting Thiringer, 91 Wn.2d at 219:
the policy quite reasonably contemplates that the insured may
pursue his remedy against a third party, and the only
restriction is that he must not do any act to prejudice the
rights of the insurer. Since the losses covered by the PIP
provision may represent only a minor portion of an insured's
total damage, it would be patently unfair to require him to
surrender his right of action against a third party in order to
receive this payment. Also, it is unrealistic to expect that a
third party will accept only a partial release when he settles
a claim, under circumstances such as those presented here.
Moreover, with respect to the allocation of benefits, we
June 1998 MAHLER v. SZUCS 417
135 Wn.2d 398
articulated a rule of full compensation, that is, no right of
reimbursement existed for the insurer until the insured was fully
compensated for a loss:
The general rule is that, while an insurer is entitled to be
reimbursed to the extent that its insured recovers payment for
the same loss from a tortfeasor responsible for the damage, it
can recover only the excess which the insured has received from
the wrongdoer, remaining after the insured is fully compensated
for his loss.
This rule embodies a policy deemed socially desirable in this
state, in that it fosters the adequate indemnification of
innocent automobile accident victims.
Thiringer, 91 Wn.2d at 219-20 (citations omitted). Thiringer is
in accord with the great majority of jurisdictions in following
this "full compensation for the insured" rule. Rinaldi, supra, at
807.
Finally, in Leader Nat'l, the insured received $10,000 in
medical payments under a PIP policy provision. The insured then
sought $5,211.10 in unreimbursed special damages and general
damages from a tortfeasor, ultimately settling with the
tortfeasor for a total of $10,000. Both the insured and the
tortfeasor were aware of the insured's subrogation right, the
insurer did not consent to the settlement, and the tortfeasor had
additional assets. Under these circumstances, we held the
settlement between the insured and the tortfeasor did not
extinguish the insurer's subrogation right against the third
party tortfeasor. We held the risk of loss in such a context must
be borne, not by the insured, but by the tortfeasor or the
insurer. Leader Nat'l, 113 Wn.2d at 372. See also Bierce v.
Grubbs, 84 Wn. App. 640, 929 P.2d 1142 (1997) (acceptance of CR
68 offer of judgment prejudiced insurer's subrogation right and
insurer could pursue reimbursement from insured once insured was
fully compensated).
These cases are consistent with the general view that
subrogation creates in the insurer, by contract or equity, a
right to be reimbursed. The enforcement of the interest,
418 MAHLER v. SZUCS June 1998
135 Wn.2d 398
whether by a type of lien against the subrogor/insured's recovery
from a tortfeasor by an action by the subrogee/insurer in the
name of the insured against the tortfeasor, is governed by the
general public policy of full compensation of the insured,
tempered by the principle that the insured and/or a tortfeasor
may not knowingly prejudice the right of the insurer to be
reimbursed.
With these principles at hand, we proceed to discuss the issues
in the present cases.
B. State Farm's Policy Language
The State Farm policy language with respect to recovery of its
PIP payments and the sharing of expenses is essentially identical
in both the Mahler and Fisher policies. In the "Conditions"
section of the policy, under the heading, "Our Right to Recover
Our Payments," the following language appears:
a. Medical payments, death, dismemberment and loss of sight
and total disability coverage payments are not recoverable
by us.
b. Under personal injury protection and underinsured motor
vehicle coverages, we are subrogated to the extent of our
payments to the proceeds of any settlement the injured
person recovers from any party liable for the bodily injury
or property damage.
If the person to or for whom we have made payment has not
recovered our payment from the party at fault, he or she
shall:
(1) keep these rights in trust for us and do nothing to
impair them;
(2) execute any legal papers we need; and
(3) when we ask, take legal action through our
representative to recover our payments.
We are to be repaid our payments, costs and fees of
collection out of any recovery.
c. Under all other coverages the right of recovery of any
party we pay passes to us. Such party shall:
June 1998 MAHLER v. SZUCS 419
135 Wn.2d 398
(1) not hurt our rights to recover; and
(2) help us get our money back.
d. If the insured recovers from the party at fault and we
share in the recovery, we will pay our share of the legal
expenses. Our share is that percent of the legal expenses
that the amount we recover bears to the total recovery.
This does not apply to any amounts recovered or recoverable
by us from any other insurer under any inter-insurer
arbitration agreement.
Our right to recover our payments applies only after the
insured has been fully compensated for the bodily injury,
property damage or loss.
Paragraph b of the State Farm policy establishes State Farm's
right to reimbursement, but it articulates two distinct
mechanisms for enforcement of the right.
In the first paragraph of Paragraph b, the phrase "[w]e are
subrogated to the extent of our payments to the proceeds of any
settlement the injured person recovers from any party liable for
the bodily injury or property damage" is significant. First, this
phrase refers only to the proceeds of settlements, and not to the
proceeds of any judgments the insured might obtain. Second, the
phrase speaks of the "proceeds of any settlement," thereby
suggesting State Farm's contractual right to recover payments
from its insureds under PIP or UIM coverage arises only after
settlement. There are obviously no proceeds of a settlement until
the settlement occurs.
[7, 8] The policy language says State Farm is "subrogated" to
those proceeds. The meaning here is indistinct. "No right of
subrogation can arise in favor of an insurer against its own
insured since, by definition, subrogation exists only with
respect to rights of the insurer against third persons to whom
the insurer owes no duty." Stetina v. State Farm Mut. Auto. Ins.
Co., 196 Neb. 441, 243 N.W. 2d 341, 346 (1976); 16 GEORGE J.
COUCH, INSURANCE § 61:136, at 195-96 (2d ed. 1983). This language
plainly does not contemplate State Farm will step into the shoes
of its insureds
420 MAHLER v. SZUCS June 1998
135 Wn.2d 398
and pursue their claims against the tortfeasors. Instead, State
Farm has simply contracted for a right to reimbursement of its
PIP payments from its insureds from the proceeds of a
settlement. /9
The Supreme Court of Oregon considered nearly identical policy
language in State Farm Mut. Auto. Ins. Co. v. Pohl, 255 Or. 46,
464 P.2d 321 (1970). The State Farm policy provided:
Upon payment . . . the company shall be subrogated to the
extent of such payment to the proceeds of any settlement or
judgment that may result from the exercise of any rights of
recovery which the injured person or anyone receiving such
payment may have against any person or organization and such
person shall execute and deliver instruments and papers and do
whatever else is necessary to secure such rights. Such person
shall do nothing after loss to prejudice such rights.
Id. at 322 (alteration in original). The specific issue before
the Oregon court was whether this language created a right of
subrogation in State Farm. The court held it did not: "The
literal language of the clause only purports to transfer an
interest in moneys after they become the property of the insured.
The clause creates a right in the proceeds, not against the
tortfeasor." Id. at 324. We agree.
[9] By contrast, in the second paragraph of Paragraph b and in
Paragraph c, State Farm contracted with its insureds for a
traditional subrogation right to recover payments made to its
insureds. In the second paragraph of Paragraph b, State Farm
indicated it would "take legal action through our representative
to recover our [PIP or UIM] payments" when "the person to or for
whom we have made payment has not recovered our payment from the
party at fault."
_______________
9 The term "reimbursement" comes into play where an insurer is
permitted to recoup its payment out of the proceeds of an
insured's recovery from the tortfeasor. In this situation the
insurer's right of recoupment is contingent upon a third-
party recovery by the insured.
1 IRWN E. SCHERMER, AUTOMOBILE LIABILITY INSURANCE 3D § 19.01, at
19-2 (1995).
June 1998 MAHLER v. SZUCS 421
135 Wn.2d 398
Thus, State Farm has reserved a traditional subrogation right to
sue in the shoes of the insured only when it makes PIP payments
to the insured and the insured does not pursue a tortfeasor.
Similarly, Paragraph c quoted above succinctly creates a
subrogation right: "Under all other coverages the right of
recovery of any party we pay passes to us." This assignment of
rights is a proper, classical subrogation clause.
Thus, by its terms Paragraph b creates a contractual right of
reimbursement, not a right to subrogation, when an insured
pursues an action or seeks recovery from a tortfeasor. /10 With
this understanding of State Farm's insurance contract, we proceed
to the central issue in this case: whether, and to what extent,
State Farm must share with its insureds any expenses necessary to
obtain a settlement from a tortfeasor.
C. Expenses of Collecting the PIP Recoveries
Through the settlement of their claims, both Mahler and Fisher
obtained funds that included State Farm's PIP payments. /11
Mahler and Fisher argue, however, State Farm is entitled to those
funds only if it pays a pro rata share of the costs involved in
settling their cases, including the cost of their attorney fees.
State Farm adamantly refuses to pay those costs.
State Farm asserts: "The insurance policy between State Farm
and the plaintiffs expressly provides that if the
_______________
10 State Farm does not argue equitable subrogation applies in
these cases. If equitable subrogation did apply, we would be
compelled to consider under equitable principles the sharing of
legal fees incurred in obtaining recoveries from the tortfeasors.
11 In these cases, Mahler and Fisher both collected settlement
amounts in excess of State Farm's PIP payments. Neither Mahler
nor Fisher argue they would not be fully compensated were they to
reimburse State Farm from the settlement proceeds. State Farm
contractually obligated itself to subordinate its reimbursement
rights to the attainment of full compensation by its insureds.
See last sentence of policy language quoted supra. This policy
language reflects our rule requiring full compensation to
insureds before an insurer becomes entitled to reimbursement for
a loss. Thiringer v. American Motors Ins. Co., 91 Wn.2d 215, 588
P.2d 191 (1978). See also Brown v. Snohomish County Physicians
Corp., 120 Wn.2d 747, 845 P.2d 334 (1993).
422 MAHLER v. SZUCS June 1998
135 Wn.2d 398
insured recovers State Farm's subrogation interest from the party
at fault and State Farm shares in the recovery, State Farm will
pay its share of the legal expenses. There is no additional
requirement that the efforts of the insured's attorney be
necessary to State Farm's recovery, or that they benefit State
Farm." Br. of Appellant State Farm at 29. We agree.
[10] State Farm then points to the last sentence of Paragraph d
and asserts this sentence establishes an exception to its promise
to pay. The intercompany arbitration agreement to which the
policy refers binds signatory insurance companies (including
State Farm, Farmers, and Federated; Br. of Amicus Arbitration
Forums, Inc. at 1) "to arbitrate all disputes arising from the
pursuit of subrogation, reparations, reimbursement, indemnity or
direct action recovery rights created by the payment of claims or
benefits to insureds." Mahler Clerk's Papers at 340. /12 Thus,
State Farm argues, its PIP payments were "recoverable" from
Farmers and Federated through an inter-company arbitration
agreement: "Under the policy, State Farm is not required to pay
its share of legal expenses, even if the insured recovered from
the party at fault and State Farm shared in the recovery." Br. of
Appellant State Farm at 32. "State Farm's subrogation interest
was always 'capable of being recovered' in the inter-company
arbitration, regardless of whether or when the plaintiffs settled
with the tortfeasor, and regardless whether it was actually
recovered in the arbitration. The court may not read the word
'recoverable' out of the contract." Id. at 33. /13
To test whether State Farm is correct that the policy
_______________
12 The intercompany arbitration agreement is not new. Insurance
companies recognized many years ago the disadvantages in costs,
delay, and public relations stemming from litigation of
subrogation actions among insurers. The use of arbitration to
resolve such disputes occurred first in New York in 1929. A
Nationwide Inter-Company Arbitration Agreement was drafted and
became effective on February 1, 1952. HORN, supra, at 127-28.
Approximately 2,000 insurance companies are signatories to the
current version of the agreement. Br. of Amicus Arbitration
Forums, Inc. at 1.
13 Amici insurance carriers contend the sharing of expenses
will significantly increase the cost of PIP coverage and suggest
the plaintiffs' trial bar should not
(Footnote cont'd. next page)
June 1998 MAHLER v. SZUCS 423
135 Wn.2d 398
provision negates its promise to pay a share of the costs of
recovering the PIP payments, we must determine what the word
"recoverable" means in the context of State Farm's policy. The
word appears in this sentence: "This does not apply to any
amounts recovered or recoverable by us from any other insurer
under any inter-insurer arbitration agreement." The indefinite
pronoun "this" apparently refers to State Farm's promise to pay
its share of legal expenses involved in recovery of PIP payments
from the tortfeasor. Thus, the third sentence of Paragraph d
obviates State Farm's promise to pay when its PIP payments are
recoverable from "any other insurer under any inter-insurer
arbitration agreement." (Emphasis added.)
This language plainly has nothing to do with traditional
subrogation rights as described in the second paragraph of
Paragraph b and Paragraph c of State Farm's policy. State Farm's
insureds, as plaintiffs, have claims against their tortfeasors,
but not against their tortfeasors' insurance carriers. Thus, if
State Farm were to subrogate to its insured's rights, standing in
the shoes of its insureds, State Farm would also have no claim
against the tortfeasors' insurance carriers stemming from the
occurrence that gave rise to the PIP payments. Because the inter-
insurer agreement "shall not be construed to create any causes of
action or liabilities not existing in law or equity," Mahler
Clerk's Papers at 109 (Personal Injury Protection (No-Fault)
Arbitration Agreement Rules and Regulations at 1), we are at a
loss to understand what State Farm believes is "recoverable"
against the tortfeasors' insurers.
We next examine whether, under the circumstances of the cases
at bar and the policy language, there is anything to recover,
assuming arguendo State Farm does have a claim against the
tortfeasors' insurers that makes its PIP
_______________
(Footnote cont'd. from previous page)
be allowed to recover an additional fee. Amicus Arbitration
Forums, Inc., notes that 2,000 insurance companies and self-
insurers are signatories to inter-company arbitration and argues
its arbitration process is a true independent alternative dispute
resolution process (not a rubber stamp) favored under
Washington's public policy favoring arbitration of disputes. The
economics of the insurance industry are not before the Court, and
nothing in the appellate record supports their argument as to the
effect of third party recoveries on insurance rates.
424 MAHLER v. SZUCS June 1998
135 Wn.2d 398
payments "recoverable." As noted above, State Farm contracted for
a right to reimbursement from its insureds' settlement proceeds
and a traditional right of subrogation only if its insured did
not seek recovery from a tortfeasor. As Fisher and Mahler sought
such recovery, State Farm had only a right of reimbursement from
its insureds from the proceeds of the settlements. More
important, State Farm had to await the outcome of the settlement
process before attempting any recovery from the tortfeasors'
insurers, because, pursuant to Thiringer, State Farm was not
entitled to any recovery of its PIP payments until its insureds
had been made whole. Until the settlement agreements became
effective, however, there was no way to know if Mahler and Fisher
had been made whole. Thus, State Farm could do nothing until the
settlements were executed.
Once the settlements were executed, however, there was nothing
left for State Farm to recover, either from the tortfeasors or
the tortfeasors' insurance companies. Surely the tortfeasors
cannot be made to pay Mahler and Fisher once, and then pay State
Farm again. /14 Nor can we discern any rule of law or of
commercial common sense that would permit State Farm to recover
from the tortfeasors' insurers after those insurers had already
paid their insureds to settle with Mahler and Fisher.
In summary, State Farm had no rights against the tortfeasors'
insurers, and even if it did, nothing was "recoverable." /15
That being the case, the exception stated in Paragraph d does not
apply. We hold State Farm must pay Mahler and Fisher according to
the first sentence of
_______________
14 By settling with Mahler and Fisher, the tortfeasors did not
destroy State Farm's subrogation rights. State Farm's insurance
contract, under the circumstances of these cases, afforded State
Farm only a right to reimbursement from its insureds. State Farm
had no conventional subrogation rights with respect to the PIP
benefits here.
15 Our disposition of this issue recognizes that inter-company
arbitration may serve a valid purpose where the insured's
settlement with a tortfeasor falls within the ambit of Leader
Nat'l or an insured declines to pursue recovery from a tortfeasor
and the insurer chooses to seek a recovery on its own. Neither
situation is true here.
June 1998 MAHLER v. SZUCS 425
135 Wn.2d 398
Paragraph d if it wishes to obtain recovery for its PIP
payments. /16
Strangely, State Farm argues this rule at Paragraph d in its
own insurance contract contravenes public policy for four
reasons: (1) plaintiffs counsel already is receiving a contingent
fee for the work she is doing for her client, State Farm should
not have to pay for those same services; (2) there was no
consensual attorney/client relationship between State Farm and
plaintiffs' attorneys in these cases; (3) plaintiffs' attorneys'
dual representation of insurer and insured would create a
potential conflict of interest; and (4) it is unethical for an
attorney to calculate a contingent fee based on PIP payments the
client received without any effort by the attorney. The only
authority State Farm offers to support these arguments is Judge
Forrest's concurring opinion in the Desmond case. Desmond v.
Liberty Northwest Ins. Corp., 63 Wn. App. 81, 89-91, 817 P.2d 872
(1991) (Forrest, J., concurring).
[11, 12] Although we consider it odd for State Farm to be
contending its own contract language is bad public policy, /17
we nevertheless respond. State Farm's arguments are not
persuasive. First, a plaintiff in a personal injury
_______________
16 Mahler, Fisher, and amicus WSTLA invite us to hold that the
equitable rule of pro rata sharing by the insured and the insurer
of expenses necessary to secure a recovery against a tortfeasor
constitute the public policy of Washington which may not be
varied by contract. See Fisher, 78 Wn. App. at 908 (parties to
insurance contract may deviate from common law subrogation
principles).
Mahler, Fisher, and WSTLA find expression for this public
policy argument in the public policy of full recovery articulated
in Thiringer, the disparity of bargaining power between insurers
and insureds, the fiduciary relationship of insurers to insureds,
the policy of RCW 51.24.060 relating to liens for industrial
insurance benefits paid, and the ability of insurers to obtain a
pro rata sharing of expenses per WAC 284-30-390(4). In light of
our interpretation of paragraph d of State Farm's policy, we do
not reach this issue.
17 The State Farm policy language on sharing of expenses
comports with the equitable rule described in Pena v. Thorington,
23 Wn. App. 277, 281, 595 P.2d 61 (1979), and recognized by this
Court in Metropolitan Life, 70 Wn.2d at 321. A leading insurance
treatise stated:
It is grossly inequitable to expect an insured, or other
claimant, in the process of protecting his own interest, to
protect those of the [insurer] as well and still pay counsel
for his labors out of his own pocket, or out of the proceeds of
the remaining funds. And this is precisely the view taken by
the overwhelming
(Footnote cont'd. next page)
426 MAHLER v. SZUCS June 1998
135 Wn.2d 398
action is entitled to seek recovery from the tortfeasor for
special damages, such as medical payments and lost wages. Indeed,
it would be unrealistic and unfair to expect an injured party not
to seek such damages. As State Farm frankly and correctly admits:
[I]t is a well known fact that the dollar amount of medical
expenses has a direct influence on the amount of general
damages that will be awarded by a court or jury and it is for
that reason that attorneys desire to prove the amount of such
expenses. The amount of lost earnings also has an important
impact as it tends to demonstrate the period of physical
disability.
Br. of Resp't State Farm at 15. The approach State Farm argues
for here would require injured plaintiffs to refrain from seeking
recovery from defendants for PIP benefit payments simply because
State Farm might elect to recover those payments on its own. The
result would be reduced general damage awards by juries. Injured
plaintiffs should be able to introduce all relevant evidence to
support their general damages claim. Sofie v. Fibreboard Corp.,
112 Wn.2d 636, 646, 771 P.2d 711, 780 P.2d 260 (1989) (jury's
role in determining noneconomic damages is perhaps even more
essential than its role in determining economic damages).
Moreover, that counsel for the insured, in the course of
pursuing a recovery for the insured, also obtains recovery of the
insurer's PIP payments, does not militate against a sharing of
expenses. This equitable sharing rule is based on the common fund
doctrine, which, as an exception to
_______________
(Footnote cont'd. from previous page)
majority of decisions, in that a proportionate share of fees
and expenses must be paid by the insurer or may be withheld
from its share.
8A JOHN A. APPLEMAN & JEAN APPLEMAN, INSURANCE LAW AND PRACTICE
§ 4903.85, at 335 (1981). Mahler cites 24 states that have
adopted this rule. Br. of Resp'ts at 11-12. In the event an
insured receives PIP payments from State Farm and decides not to
pursue a personal injury action against the tortfeasor (the
situation provided for in the second paragraph of Paragraph b),
and State Farm then subrogates and obtains a recovery in excess
of its PIP payments, it will deduct its costs of obtaining the
recovery before releasing the excess to its insured. In somewhat
analogous circumstances, Washington public policy forbids one-way
attorney fee provisions. RCW 4.84.330.
June 1998 MAHLER v. SZUCS 427
135 Wn.2d 398
the American Rule on fees in civil cases, applies to cases where
litigants preserve or create a common fund for the benefit of
others as well as themselves. Covell v. City of Seattle,
127 Wn.2d 874, 891, 905 P.2d 324 (1995). The Court of Appeals in
Pena v. Thorington, 23 Wn. App. 277, 282, 595 P.2d 61 (1979), in
denying attorney fees, referred to the motivation of the
plaintiffs attorney in securing adequate recovery for the client,
rather than obtaining recovery for the PIP insurer. Motivation of
counsel is irrelevant in this context; the proper focus is the
benefit received.
State Farm's second policy argument is that it had no
consensual attorney/client relationship with Mahler and Fisher's
attorneys. That argument simply makes no difference in common
fund cases. Consent to counsel by the benefited party is not
required in common fund cases. If consent were required, there
would be no common fund rule at all. Thus, if State Farm wishes
to receive the benefit of the funds Mahler and Fisher recovered,
it must share the expenses of recovering those funds. No
attorney/client relationship is necessary, so long as the efforts
of the attorney were a benefit to the common fund. Again, the
proper focus is on the benefit to State Farm.
With regard to its third argument, potential conflict of
interest, State Farm says: "[T]he attorney may be placed in the
position of negotiating with the insurance carrier to reduce the
amount of its subrogation recovery to maximize the recovery for
the insured." This argument is difficult to follow. It appears to
be based on Judge Forrest's erroneous conclusion that the
plaintiff/insured's attorney is simultaneously the attorney for
State Farm. Desmond, 63 Wn. App. at 90. As noted above, in common
fund cases, there is no necessity for an attorney/client
relationship between the attorney whose work creates the common
fund and any benefited party. The attorney for the insured is
supposed to do whatever is necessary to maximize recovery for the
client. The PIP carrier knows what it paid in benefits, and may
either be subrogated for that amount or contract with
428 MAHLER v. SZUCS June 1998
135 Wn.2d 398
its insureds for reimbursement - no more, no less. /18 It makes
no difference how State Farm's insureds may choose to segregate
and label their recovery from the tortfeasor into general damages
and special damages (something a typical plaintiff has no
interest in doing anyway) - the amount State Farm is entitled to
by means of subrogation is based solely on what benefits it paid
out.
In any event, there is no question in this case that the
insureds were both fully compensated by the settlements, or that
State Farm was not prejudiced by those settlements.
As a final matter, State Farm argues Mahler and Fisher's
attorneys should not be permitted to receive contingent fees for
PIP amounts State Farm paid by contract before the attorneys were
even involved in the respective cases: "Plaintiffs' lawyer did
not recover the medical expenses paid by State Farm by settlement
or judgment. His fee agreement does not entitle him to a
contingent fee based on such amounts." Br. of Appellant State
Farm at 39-43. This argument is without merit.
Mahler and Fisher's attorneys did recover from the tortfeasors
money in excess of the PIP amounts State Farm paid, and State
Farm's PIP payments were presumably included in those sums as
special damages. The tortfeasors' insurers did not simply send
checks by return mail when Mahler and Fisher's attorneys
presented demand letters. In order to obtain settlements, both
Mahler and Fisher had to persuade those insurers first that there
was liability and second that they incurred significant damages
provable at trial. Mahler and Fisher's attorneys were compensated
pursuant to their fee agreements for that work.
The vociferous concern of State Farm and the amici insurers
that the plaintiffs' bar will receive a second, unmerited
attorney fee is also misplaced. To the extent counsel for the
insured pursues a recovery for the insured, counsel is entitled
to a single fee from the insured for the
_______________
18 A question not presented in this case is what State Farm's
priority rights to recover its PIP payments would be if the
settlement did not make its insured whole.
June 1998 MAHLER v. SZUCS 429
135 Wn.2d 398
work performed. In Mahler, for example, counsel received a
contingent fee from the overall recovery and placed an amount
representing State Farm's PIP payments into Mahler's trust
account. Counsel has already been fully compensated pursuant to
the fee agreement. The money in trust, the settlement proceeds,
belongs entirely to Mahler. State Farm, pursuant to Paragraph b,
has a chose in action against that money, less Mahler's
reasonable expenses in recovering it, as reimbursement for its
PIP payments pursuant to Paragraph b. It is of no concern to
State Farm whether any fee agreement between Mahler and her
attorney provides for additional attorney fees. State Farm has no
standing to complain about fee agreements it is not a party to.
This is as it should be. The effort to secure a personal injury
recovery, which involves both the insurer's PIP payments and the
insured's other damages, must inure to the benefit of the
insured, not the insured's lawyers. /19
D. Prejudgment Interest in Mahler
In Mahler, the trial court awarded prejudgment interest to
Mahler on the funds that were retained by Mahler's counsel in his
trust account pending resolution of the sharing of expenses
issue.
Prejudgment interest is allowed in civil litigation at the
statutory judgment interest rate, RCW 4.56.110, RCW
19.52.020,
when a party to the litigation retains funds rightfully belonging
to another and the amount of the funds at issue is liquidated,
that is, the amount at issue can be calculated with precision and
without reliance on opinion or discretion. Prier v. Refrigeration
Eng'g Co., 74 Wn.2d 25, 33, 442 P.2d 621 (1968).
[13] The award of prejudgment interest here fails. The
touchstone for an award of prejudgment interest is that a party
must have the "use value" of the money improperly. Hansen v.
Rothaus, 107 Wn.2d 468, 473, 730 P.2d 662
_______________
19 This is distinct from the situation where the insurer
chooses to retain the services of counsel for the insured to
pursue a subrogated interest against a third party.
430 MAHLER v. SZUCS June 1998
135 Wn.2d 398
(1986). In effect, an award of prejudgment interest compels a
party that wrongfully holds money to disgorge the benefit. In the
present case, State Farm did not possess the money as it was in
the trust account of Mahler's counsel. The money in that account
was entirely Mahler's, and she could have invested it any way she
chose, rather than leaving it in trust. Because she had full
control of it, she did not lose any "use value." Consequently,
the award of prejudgment interest here is vacated.
E. Attorney Fees in Mahler
The trial court in Mahler entered an award of attorney fees in
differing amounts for the work of Mahler's attorneys in securing
recovery. The court allowed fees and costs pursuant to Olympic
S.S. Co. v. Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d 673
(1991), in the amount of $56,354.59. In the alternative, the
court allowed fees and costs pursuant to MAR 7.3 in the amount of
$32,694.59. In neither instance did the trial court enter
findings of fact or conclusions of law to explain its analysis in
entering the fee awards. We must determine if Mahler's counsel is
entitled to reasonable attorney fees at trial and on appeal, and
the amount of such fees.
1. Entitlement of an Award of Fees
The trial court awarded attorney fees to Mahler based on
Olympic S.S. In that case, we held "[a]n insured who is compelled
to assume the burden of legal action to obtain the benefit of its
insurance contract is entitled to attorneys fees, regardless of
whether the duty to defend is at issue." Olympic S.S.,
117 Wn.2d at 54. See also McGreevy v. Oregon Mut. Ins. Co.,
128 Wn.2d 26, 28, 904 P.2d 731 (1995) (reaffirming Olympic S.S.).
State Farm asserts the issue of whether it was required to pay
a proportionate share of its insured litigation expenses to
recover its subrogation interest is not a coverage issue
susceptible to an award of attorney's fees, citing Dayton v.
Farmers Ins. Group, 124 Wn.2d 277, 876 P.2d 896 (1994) (fees not
recoverable for dispute over amount of recovery).
June 1998 MAHLER v. SZUCS 431
135 Wn.2d 398
Mahler responds by noting State Farm refused to pay its share of
the litigation expenses, and she had to litigate to obtain a
judgment requiring State Farm to pay.
[14] We believe this case is largely resolved by our discussion
of fees in Leingang v. Pierce County Med. Bureau, Inc.,
131 Wn.2d 133, 930 P.2d 288 (1997). In Leingang, a health care
contractor had a policy provision excluding coverage if the
insured had automobile liability coverage providing
uninsured/underinsured motorist (UIM) coverage. The contract also
had a subrogation clause. The plaintiff was injured in an
automobile accident and the defendant paid PIP benefits to the
plaintiff, but insisted upon a right to recover PIP benefits paid
from any recovery the plaintiffs obtained. The defendant so
advised the tortfeasor's insurance carrier as well as the
plaintiff's UIM carrier. The UIM carrier paid its policy limits
into the registry of the court pending the disposition of the
dispute between the contractor and the plaintiff. Ultimately, the
plaintiff prevailed in his declaratory judgment action against
the contractor and we allowed him to recover fees. We determined
coverage, not the extent of damages, was the essential gravamen
of the dispute:
In the present case, PCM argued throughout the case that Mr.
Leingang did not have coverage for any medical bills which his
own UIM carrier would ultimately pay. The entire case concerned
the validity of an exclusion from coverage.
Leingang, 131 Wn.2d at 144-45 (second emphasis added). We then
stated:
The real dispute in this case went to the issue of coverage.
If the exclusion was enforceable, then there was no coverage
under the medical policy and the insurer was entitled to be
repaid the bills it paid to the extent that UIM benefits were
available. The dispute had nothing to do with the degree of Mr.
Leingang's injuries or the necessity for or amount of the
bills; it only had to do with whether the medical insurance
contract covered the bills. Although PCM paid Mr. Leingang's
bills, it then forced him to litigate the issue of coverage by
asserting an interest against the proceeds of his UIM policy
432 MAHLER v. SZUCS June 1998
135 Wn.2d 398
proceeds. We therefore conclude that the trial court properly
awarded attorney fees for the part of the suit which determined
the issue of coverage.
Leingang, 131 Wn.2d at 147-48.
[15] In this case, the dispute between Mahler and State Farm is
not a coverage dispute, but rather a dispute over the value of
State Farm's subrogation interest. Both Mahler and State Farm
agree State Farm has a right to be reimbursed for PIP benefits
paid to Mahler. The dispute between them boils down to the value
of that right of reimbursement. Insofar as the principal focus of
this dispute is the value of State Farm's subrogation interest,
Dayton controls rather than Olympic S.S./McGreevy. Mahler is not
entitled to fees under this theory.
[16] Independent of any theory for recovery of fees set forth
in Olympic S.S. and its progeny is the right of Mahler to recover
fees under MAR 7.3, which provides:
The court shall assess costs and reasonable attorney fees
against a party who appeals the award and fails to improve the
party's position on the trial de novo. The court may assess
costs and reasonable attorney fees against a party who
voluntarily withdraws a request for a trial de novo. "Costs"
means those costs provided for by statute or court rule. Only
those costs and reasonable attorney fees incurred after a
request for a trial de novo is filed may be assessed under this
rule.
In light of our disposition of the principal issue in this case,
we hold Mahler is entitled to an award of reasonable attorney
fees under MAR 7.3 as State Farm appealed the arbitrator's award
to superior court and failed to improve on its position there.
Mahler is also entitled to her reasonable attorney fees on
appeal, Christie-Lambert Van & Storage Co. v. McLeod,
39 Wn. App. 298, 309, 693 P.2d 161 (1984); Arment v. Kmart Corp.,
79 Wn. App. 694, 700, 902 P.2d 1254 (1995), but, in light of our
disposition of the amount of the fee award, infra, the superior
court will set the award of appellate fees on remand. RAP
18.1(i).
June 1998 MAHLER v. SZUCS 433
135 Wn.2d 398
2. Amount of Fees
Mahler asks us to sustain the trial court's fee award. State
Farm contends the fee award below was unreasonable in light of
the small amount at stake in this case.
[17] At the outset, we note that the amount of the recovery,
while a relevant consideration in determining the reasonableness
of the fee award, is not a conclusive factor. Beeson v. Atlantic-
Richfield Co., 88 Wn.2d 499, 563 P.2d 822 (1977); Scott Fetzer
Co. v. Weeks, 122 Wn.2d 141, 150, 859 P.2d 1210 (1993). We will
not overturn a large attorney fee award in civil litigation
merely because the amount at stake in the case is small.
[18-22] Instead, courts should be guided in calculating fee
awards by the lodestar method in determining an award of attorney
fees as costs. Scott Fetzer Co. v. Weeks, 114 Wn.2d 109, 786 P.2d
265 (1990). /20 The lodestar methodology affords trial courts a
clear and simple formula for deciding the reasonableness of
attorney fees in civil cases and gives appellate courts a clear
record upon which to decide if a fee decision was appropriately
made. Under this methodology,
_______________
20 This methodology can be supplemented by an analysis of the
factors set forth in RPC 1.5(a) which guide members of the Bar as
to the reasonableness of a fee. Allard v. First Interstate Bank
of Wash., 112 Wn.2d 145, 768 P.2d 998, 773 P.2d 420 (1989). RPC
1.5(a) states:
A lawyer's fee shall be reasonable. The factors to be
considered in determining the reasonableness of a fee include
the following:
(1) The time and labor required, the novelty and difficulty
of the questions involved, the skill requisite to perform the
legal service properly and the terms of the fee agreement
between the lawyer and client;
(2) The likelihood, if apparent to the client, that the
acceptance of the particular employment will preclude other
employment by the lawyer;
(3) The fee customarily charged in the locality for similar
legal services;
(4) The amount involved in the matter on which legal services
are rendered and the results obtained;
(5) The time limitations imposed by the client or by the
circumstances;
(6) The nature and length of the professional relationship
with the client;
(7) The experience, reputation, and ability of the lawyer or
lawyers performing the services; and
(8) Whether the fee [is fixed or contingent].
434 MAHLER v. SZUCS June 1998
135 Wn.2d 398
the party seeking fees bears the burden of proving the
reasonableness of the fees. Fetzer, 122 Wn.2d at 151.
Under the lodestar methodology, a court must first determine
that counsel expended a reasonable number of hours in securing a
successful recovery for the client. Necessarily, this decision
requires the court to exclude from the requested hours any
wasteful or duplicative hours and any hours pertaining to
unsuccessful theories or claims. Fetzer, 122 Wn.2d at 151.
Counsel must provide contemporaneous records documenting the
hours worked. As we said in Bowers v. Transamerica Title Ins.
Co., 100 Wn.2d 581, 597, 675 P.2d 193 (1983), such documentation
need not be exhaustive or in minute detail, but must inform the
court, in addition to the number of hours worked, of the type
of work performed, and the category of attorney who performed
the work (i.e., senior partner, associate, etc.).
[23] The court must also determine the reasonableness of the
hourly rate of counsel at the time the lawyer actually billed the
client for the services. Fisher Properties, Inc. v. Arden-
Mayfair, Inc., 115 Wn.2d 364, 798 P.2d 799 (1990) (outside civil
rights context, contemporaneous rates actually billed rather than
current rates or contemporaneous rates adjusted for inflation
will be employed).
[24] Finally, the lodestar fee, calculated by multiplying the
reasonable hourly rate by the reasonable number of hours incurred
in obtaining the successful result, may, in rare instances, be
adjusted upward or downward in the trial court's discretion.
Fetzer, 122 Wn.2d at 150; Travis v. Washington Horse Breeders
Ass'n, 111 Wn.2d 396, 759 P.2d 418 (1988).
[25] In the past, we have expressed more than modest concern
regarding the need of litigants and courts to rigorously adhere
to the lodestar methodology. See Scott Fetzer Co., 122 Wn.2d 141.
Courts must take an active role in assessing the reasonableness
of fee awards, rather than treating cost decisions as a
litigation afterthought. Courts
June 1998 MAHLER v. SZUCS 435
135 Wn.2d 398
should not simply accept unquestioningly fee affidavits from
counsel. Nordstrom, Inc. v. Tampourlos, 107 Wn.2d 735, 744, 733
P.2d 208 (1987).
[26] Consistent with such an admonition is the need for an
adequate record on fee award decisions. Washington courts have
repeatedly held that the absence of an adequate record upon which
to review a fee award will result in a remand of the award to the
trial court to develop such a record. Smith v. Dalton,
58 Wn. App. 876, 795 P.2d 706 (1990); Rhinehart v. Seattle Times,
59 Wn. App. 332, 798 P.2d 1155 (1990); Bentzen v. Demmons,
68 Wn. App. 339, 842 P.2d 1015 (1993); State Farm Mut. Auto. Ins.
Co. v. Johnson, 72 Wn. App. 580, 871 P.2d 1066, review denied,
124 Wn.2d 1018, 881 P.2d 254 (1994). Not only do we reaffirm the
rule regarding an adequate record on review to support a fee
award, we hold findings of fact and conclusions of law are
required to establish such a record.
This case exemplifies the rationale for such a rule. The record
discloses affidavits from four different counsel or firms who
represented Mahler. We cannot discern from the record if the
trial court thought the services of four different sets of
attorneys were reasonable or essential to the successful outcome.
We do not know if the trial court considered if there were any
duplicative or unnecessary services. We do not know if the hourly
rates were reasonable. We note the trial court found two
different amounts reasonable, depending upon whether MAR 7.3 or
Olympic S.S. was the basis for fees.
[27] Fee decisions are entrusted to the discretion of the trial
court, Boeing Co. v. Sierracin Corp., 108 Wn.2d 38, 65, 738 P.2d
665 (1987), but we will exercise our supervisory role to ensure
that discretion is exercised on articulable grounds. We remand
the fee award to the trial court for the entry of proper findings
of fact and conclusions of law consistent with this opinion.
CONCLUSION
Subrogation in the insurance context of personal injury
436 MAHLER v. SZUCS June 1998
135 Wn.2d 398
claims presents numerous problems. Subrogation serves an
important and traditional role in the property loss arena. But in
the personal injury context, however, subrogation principles are
not readily applicable when an insured seeks noneconomic damages
from a tortfeasor. The Legislature may wish to address these
questions.
In general, an insurer may be reimbursed for PIP payments made
to an insured. Provided the insurer recognizes the public policy
in Washington of full compensation of insureds and its other
duties to insureds by statute, regulation, or common law, the
insurer may establish its right to reimbursement and the
mechanism for its enforcement by its contract with the insured.
Under the specific language of the State Farm policy on sharing
of expenses, State Farm must share in the expense its insureds
incurred to recover State Farm's PIP payments from the
tortfeasors in the respective cases.
In Mahler, we affirm the judgment of the trial court as to the
sharing of expenses, but vacate the award of prejudgment interest
and remand the case to the trial court for the entry of findings
of fact and conclusions of law on attorney fees per MAR 7.3. In
Fisher, we reverse the judgment of the trial court, and remand
the case with instructions to enter judgment in favor of Fisher,
consistent with our opinion.
DOLLIVER, SMITH, GUY, and JOHNSON, JJ., concur.
MADSEN, J. (concurring) - Although I agree with the majority, I
do not agree with its explanation as to why the exception to
cost-sharing in paragraph d retains validity. The exception
appears in the insurance contract in the third sentence of
paragraph d, under the heading "'Our Right to Recover our
Payments,'" and provides that State Farm will not pay its share
of legal expenses for any amounts recovered or recoverable by
State Farm from any other insurer under an inter-insurer
arbitration agreement. Majority at 418-19. The majority reasons
that this language
June 1998 MAHLER v. SZUCS 437
135 Wn.2d 398
retains meaning in cases like Leader Nat'l Ins. Co. v. Torres,
113 Wn.2d 366, 779 P.2d 722 (1989), and in cases where an insurer
seeks to recover on its own. Majority at 424 n.15.
I disagree. In Leader, the insurance company's right to
subrogation concerned $10,000 it had paid in personal injury
protection (PIP) benefits. The insured's settlement involved
claims for medical costs, lost wages and general damages;
however, the insured refused to seek recovery for the $10,000
which its insurance company had paid in PIP benefits. The court
held in Leader that the insurance company was not foreclosed by a
release signed by the tortfeasor and its insured from pursuing a
subrogation right to recover the PIP payments where the
tortfeasor and the insured both knew the insurance company did
not agree to the settlement, and the tortfeasor had additional
assets. Under such facts, the insurance company would expend its
own resources to recover the amount of PIP insurance paid from
the tortfeasor. No issue of cost-sharing arises at all because
the insured did not recover the amount representing the PIP
payments and did not incur costs for doing so. The same is true
where the insurer otherwise chooses to seek recovery on its own
because the insured declines to pursue a recovery.
I am satisfied, nevertheless, with the majority's analysis in
general even if the result is that the exception concerning
amounts recovered or recoverable under an inter-insurer
arbitration agreement has little or no application. /21 This is
because if the exception is given effect as State Farm urges it
should be, an insurer could avoid its promise to share costs
simply by virtue of the inter-company arbitration agreement. For
example, under the facts in Mahler's case, State Farm proceeded
under the intercompany arbitration agreement only after the
insured settled with the tortfeasor. The arbitration panel's
decision
_______________
21 However, I add that circumstances in another case might
reveal a viable application of the exception, and so stop short
of concluding the exception can never be effective.
438 MAHLER v. SZUCS June 1998
135 Wn.2d 398
that American States (the tortfeasor's insurance company) was
liable for the $4,173.32 of PIP coverage State Farm had paid did
not result in an additional payment of that amount, but instead
effectively determined that of the settlement amount already
received by Mahler, $4,173.32 represented the amount of liability
from American States. As the majority notes, however, Mahler's
attorney had already placed the amount representing PIP benefits
paid by State Farm in his trust account, informing Mahler that
this amount would be reserved until the "'amount of subrogation
is resolved.'" Majority at 407 (quoting Mahler Clerk's Papers at
431). While Mahler and State Farm disputed whether State Farm
should be reimbursed the entire $4,173.32 or a net amount after
cost sharing, there was no dispute that State Farm was entitled
to recover from the settlement proceeds the amount of PIP
benefits it had paid. In these circumstances, the determination
that American States was liable to State Farm for the amount of
PIP benefits paid, would, if viewed as a determination of an
amount recovered or recoverable under the agreement, allow State
Farm to obtain the full $4,173.32 without incurring costs of
recovery. Resort to the inter-insurer arbitration agreement
simply allows the insurer to avoid its promise to share costs.
I agree with the majority's analysis that State Farm cannot
recover directly from the tortfeasor's insurance company nor can
it recover its PIP payments until after the insured is fully
compensated. Full compensation cannot be determined until after
the settlement has been reached. Thus, as the Court of Appeals
opined, the inter-company arbitration agreement acts merely as a
"rubber stamp of personal injury litigation," not as the vehicle
for recovery. Fisher v. Aldi Tire, Inc., 78 Wn. App. 902, 909,
902 P.2d 166 (1995).
With these clarifications, I concur in the majority's analysis
and decision.
ALEXANDER, J. (dissenting) - In my view, State Farm
June 1998 MAHLER v. SZUCS 439
135 Wn.2d 398
Mutual Automobile Insurance Company should not have to pay a pro
rata share of the legal expenses for the recovery of Personal
Injury Protection payments in either of these two cases because
the payments in both were recoverable through inter-insurer
arbitration. Because the majority concludes that these payments
were not recoverable through inter-insurer arbitration, I
dissent.
At issue in both cases is paragraph d of the State Farm
insurance policy, which provides:
If the insured recovers from the party at fault and we share in
the recovery, we will pay our share of the legal expenses. Our
share is that percent of the legal expenses that the amount we
recover bears to the total recovery. This does not apply to any
amounts recovered or recoverable by us from any other insurer
under any inter-insurer arbitration agreement.
Mahler Clerk's Papers at 281.
The majority does not dispute that State Farm is bound by an
inter-insurer arbitration agreement. The majority correctly
interprets this fact to mean that State Farm does not have to pay
legal expenses for its share of PIP payments when those payments
were recoverable from "'any other insurer under any inter-insurer
arbitration agreement.'" Majority op. at 423.
It goes on to conclude, however, that the provision exempting
State Farm from paying a share of expenses does not apply here
because State Farm could not recover payments from the
tortfeasors' insurers. This is so, according to the majority,
because the injured insureds could not recover from the
tortfeasors' insurers. Therefore, because State Farm can only
stand in the shoes of its injured insureds, it would also be
precluded from recovering PIP payments from the tortfeasors'
insurer.
The majority decision suffers from a fatal flaw. Its logic is
undermined by the majority's concession that the injured insureds
actually recovered their payments from the tortfeasors' insurers.
"The tortfeasors' insurers did not simply send checks by return
mail when Mahler and Fisher's
440 MAHLER v. SZUCS June 1998
135 Wn.2d 398
attorneys presented demand letters. In order to obtain
settlements, both Mahler and Fisher had to persuade those
insurers first that there was liability and second that they
incurred significant damages provable at trial." Majority op. at
428. Because the injured insureds recovered from the tortfeasors'
insurers, and State Farm can stand in the shoes of its insureds,
State Farm could have recovered the payments from the
tortfeasors' insurers through inter-insurer arbitration.
Therefore, because the payments were recoverable from the
tortfeasors' insurers, State Farm should not have to pay its
share of the legal expenses.
The majority acknowledges an invitation from the appellants and
amicus in this case to find that "the equitable rule of pro rata
sharing by the insured and the insurer of expenses necessary to
secure a recovery against a tortfeasor constitute the public
policy of Washington which may not be varied by contract."
Majority op. at 425 n.16. The majority purports to not reach this
issue in light of its interpretation of paragraph d of the State
Farm insurance policy; however, the fact that the majority
details this public policy argument at some length, without also
sharing countervailing arguments, implies its approval of the
equitable rule advanced by appellants and amicus and creates
reasonable cause for concern that its strained reading of
paragraph d of the insurance policy is but an acceptance of the
invitation to enact new public policy after all. Yet it is not
this court's prerogative to simply read language out of a
contract that it finds to be inequitable.
A contract of insurance . . . should be given a practical and
reasonable rather than a literal interpretation; it should not
be given a strained or forced construction which would lead to
an extension or restriction of the policy beyond what is fairly
within its terms, or which would lead to an absurd conclusion,
or render the policy nonsensical or ineffective.
Morgan v. Prudential Ins. Co., 86 Wn.2d 432, 434-35, 545 P.2d
1193 (1976) (citing Philadelphia Fire & Marine Ins. Co. v. City
of Grandview, 42 Wn.2d 357, 255 P.2d 540 (1953); 44 C.J.S.
INSURANCE § 296 (1945)).
June 1998 STATE v. FOSTER 441
135 Wn.2d 441
Finally, in light of the foregoing, I would also go a step
further than the majority does in reversing the trial court in
Mahler for its award of $51,779.93 in attorney fees (for work in
obtaining legal expenses amounting to $1,612.59) to Mahler under
Olympic S.S. Co. v. Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d
673 (1991). Correctly finding Olympic S.S. inapposite under the
circumstances of the case, the majority would instead remand to
have the superior court award Mahler attorney fees under MAR 7.3.
The rationale for this award is that State Farm appealed an
arbitrator's award to the superior court and failed to improve
its position there. Although I welcome the majority's
constructive discussion of the criteria for determining the
reasonableness of attorney fees because I find that the superior
court erred in awarding legal expenses to Mahler, it necessarily
follows that there should be no award of attorney fees under MAR
7.3 to Mahler for her litigation to pursue those expenses. /22
_______________
22 The superior court had earlier allowed, without any
explanation as to its analysis, an award of attorney fees under
MAR 7.3 in the alternative to Olympic S.S. The amount of these
fees would have been $32,694.59 for work to obtain legal expenses
in the amount of $1,612.59.