The Make-Whole Rule prohibits insurance companies from demanding reimbursement for money paid to an insured until the insured has been 'made whole' for the entirety of his or her loss. For example, if an insurance company has paid an insured $2,000 under the terms of his or her policy but the insured's damages equal $10,000, the insurance company cannot demand reimbursement for its $2,000 payment until the insured recovers the remaining $8,000 of his or her loss from the original tortfeasor.

California courts have struggled with how to apply the Make-Whole Rule since its adoption in 1975, and the resulting body of case law is extremely complex. The latest in a series of clarifications to the general rule arises from 21st Century Insurance Company v. Superior Court (2009) 47 Cal. 4th 511. Fortunately, the changes in law are advantageous to plaintiffs and, therefore, warrant our most thorough understanding.

At issue in 21st Century was whether the 'Make-Whole Rule' includes liability for all the attorney fees insureds must pay in order to obtain medical payment compensation from a third party tortfeasor. Specifically, the insured party had received $1,000 in med pay compensation from his insurance company and, subsequently, $6,000 in general and special damages from the tortfeasor herself. The insured argued that he had yet to be 'made whole' because his attorney received $2,000 of his $6,000 recovery and, therefore, his insurance company was not entitled to reimbursement for its $1,000 payment.

Ultimately, the court rejected the plaintiff's argument, reasoning that its adoption "[w]ould effectively shift the burden of paying attorney fees in personal injury actions from insureds to first party insurers because insurers would have to forgo reimbursement in order to account for the insureds' attorney fees." In turn, the court reasoned, insurers would presumably pass some portion of these additional costs on to their insureds by increasing the premiums due on med-pay policies and, thus, render med-pay insurance less accessible to persons who need it most.

The 21st Century decision was far from a complete loss for plaintiffs, however. Although 21st Century rejected the argument that attorney fees should not count toward an insured's total recovery for purposes of the Make-Whole Rule, the court did determine that insurance companies must pay a pro rata share of those fees in exchange for their reimbursement. In other words, the court determined that insurance companies should assume a responsibility for attorney fees that is proportional to the benefit they received. In the case at hand, for example, the efforts of the insured's attorney resulted in a $1,000 recovery for 21st Century (via the make-whole rule). That $1,000 represented 1/6 of the total amount the insured's attorney recovered, and therefore, the court required the insurance company to pay 1/6 of the attorney's $2,000 fee, or approximately $350.

Although, the amount of money at stake in 21st Century was small, the impact of the court's decision will, of course, be more substantial in calculating payments where the attorney fees of a plaintiff are more significant. In those cases, the result may be a potential savings of tens of thousands of dollars for plaintiffs whose cases are subject to the new law.