Ex parte STATE FARM FIRE AND CASUALTY COMPANY. (Re: State Farm Fire and Casualty Company v. Scott Hannig and Staci Hannig).
This case involves a subrogation claim filed by an insurer against alleged tortfeasors to recover amounts it had paid to its insured. This Court granted certiorari review specifically to re-examine the rule that an insurer that has paid claims of its insured has no subrogation rights against a tortfeasor who harmed the insured until the insured is “made whole.” That rule was established in Powell v. Blue Cross & Blue Shield of Alabama, 581 So.2d 772 (Ala.1990), and its progeny, Sharpley v. Sonoco Products Co., 581 So.2d 792 (Ala.1990); McKleroy v. Wilson, 581 So.2d 796 (Ala.1990); Peck v. Dill, 581 So.2d 800 (Ala.1991); Complete Health, Inc. v. White, 638 So.2d 784 (Ala.1994); Alfa Mut. Ins. Co. v. Head, 655 So.2d 975 (Ala.1995); and GEICO Ins. Co. v. Lyons, 658 So.2d 445 (Ala.1995).1
State Farm Fire and Casualty Company (“State Farm”) and its insured, Ken Belmore, sued Scott Hannig and Staci Hannig, alleging that the Hannigs were responsible for a fire that damaged a house that was owned by Belmore and insured by State Farm. State Farm sought to recover money it had paid to its insured under the terms of its policy insuring the house. The trial court granted the Hannigs' motion for summary judgment, and the Court of Civil Appeals affirmed the summary judgment. State Farm Fire & Cas. Co. v. Hannig, 764 So.2d 538 (Ala.Civ.App.1999). For the reasons discussed below, we reverse the judgment of the Court of Civil Appeals, and we remand the case.
Facts and Procedural History
In March 1994, Ken Belmore contracted with Scott and Staci Hannig for Belmore to buy the Hannigs' house. The parties closed the sale on May 18 of that year, but the contract allowed the Hannigs to remain in possession of the house until May 27. Belmore obtained insurance coverage on the house from State Farm; it became effective on the date of the closing. During the period after the closing but before Belmore took possession from the Hannigs, a fire caused substantial damage to the house.
Belmore filed a claim for benefits under his insurance policy, and State Farm paid him $64,884.93. Subsequently, State Farm and Belmore reached an agreement concerning the practical implications of the subrogation provisions in Belmore's policy. They agreed that State Farm would obtain counsel to represent both State Farm and Belmore and that State Farm would pay all the costs of litigation to be instituted against the Hannigs. They agreed that Belmore would receive $5,250 of any recovery against the Hannigs. Of that amount, $5,000 was to compensate Belmore for the loss of use of his house, the cost he had incurred for temporary alternative housing, and the frustration he had endured while having his house repaired. The sum of $250 was to compensate Belmore for his $250 deductible.
State Farm and Belmore sued the Hannigs. The Hannigs moved for a summary judgment against State Farm, arguing that State Farm had not fully made Belmore whole and therefore was not entitled to any subrogation damages. The trial court granted that motion. Belmore subsequently settled with the Hannigs for $5,000, and the case was dismissed.
State Farm appealed from the summary judgment, and the Court of Civil Appeals affirmed. We have granted State Farm's petition for certiorari review.
It is apparent from a reading of the main opinion of the Court of Civil Appeals that although the Court of Civil Appeals followed the law as stated in Powell, two of its members thought Powell had been incorrectly decided by a plurality of this Court. That main opinion stated that this “court's plurality decisions in Powell and Sharpley were a sharp departure from [this] court's former position on the issue as set forth in International Underwriters/Brokers, Inc. v. Liao, 548 So.2d 163 (Ala.1989), a unanimous decision of the court, released just one year earlier.” 764 So.2d at 542.
Judge Thompson stated in the main opinion for the Court of Civil Appeals:
“The facts presented in the present case clearly illustrate the inequitable consequences that can result from a strict, across-the-board, application of the ‘made-whole’ rule without regard to the express desires of the insured or the type of insurance involved. In the present case, application of controlling precedent bars the insurer, who has compensated an injured party for a loss, from pursuing a subrogation action against the alleged tortfeasor merely because a $250 deductible was subtracted from the insured's compensation pursuant to the insurance contract, and to the extent of $250, the insured has not been ‘made whole.’ Further, this precedent confers an unjust benefit on the alleged tortfeasor, who is permitted to escape responsibility for his or her alleged wrongdoing.”
Id. at 542 (emphasis added).
We agree with Judge Thompson that in Powell a plurality of this Court did make a “sharp departure” from the law of subrogation that had previously existed in this State. In International Underwriters/Brokers, Inc. v. Liao, supra, this Court had held that the normal equitable rules of subrogation could be modified by contract,2 but, as pointed out by Judge Thompson, this Court reversed course a year later in Powell and has continuously followed the Powell rationale in subsequent cases.
As Judge Thompson's opinion concludes, and as State Farm recognizes, if we apply the Powell rationale to the facts and circumstances of this case, then we must conclude that the trial court and the Court of Civil Appeals reached the correct result. Recognizing that Powell does control if it is not modified or changed, State Farm argues that this Court should overrule Powell and reinstate the prior rule of Liao.
Although we have a healthy respect for the principle of stare decisis, we should not blindly continue to apply a rule of law that does not accord with what is right and just.3 In other words, while we accord “due regard to the principle of stare decisis,” it is also this Court's duty “to overrule prior decisions when we are convinced beyond ․ doubt that such decisions were wrong when decided or that time has [effected] such change as to require a change in the law.” Beasley v. Bozeman, 294 Ala. 288, 291, 315 So.2d 570, 572 (1975) (Jones, J., concurring specially).
What, then, are the competing interests in this case? On the one hand, the doctrine of stare decisis supports the Hannigs' argument that the trial court appropriately applied the rule of Powell and its progeny and that the judgment of the trial court should be affirmed. On the other hand, as Judge Thompson pointed out in this case, application of the Powell rule “confers an unjust benefit on [a] tortfeasor, who is permitted to escape responsibility for his or her wrongdoing.” Hannig, 764 So.2d at 542.
Powell was decided eight years ago; it overruled Liao, which had been decided the previous year. We recognize that the doctrine of stare decisis supports the argument that Powell and its progeny should not be overruled. Based on the considerations stated above, however, we conclude that time has revealed the inherent inequity in applying the Powell rule; therefore, “we are convinced beyond ․ doubt that [Powell and the other cases listed above that apply the Powell rule] were [wrongly] decided;” 4 that they should be overruled; and that the rule of Liao should be reinstated.
In Liao, this Court asked and answered a question relating to the right of an insurer to be subrogated when it has paid a claim under the terms of a contract. The Court asked:
“Is the general rule that a subrogee is not entitled to recover, absent full recovery by the insured ․, in any way altered by the fact that the subrogation interest is based on a contract between the parties?”
Liao, 548 So.2d at 165. The Court's answer was:
“We recognize that, while the doctrine of subrogation is of purely equitable origin and nature, it may be modified by contract.”
Id., 548 So.2d at 165-66. Applying that rule to the facts of this case, we conclude that the judgment of the Court of Civil Appeals is due to be reversed. We reverse that judgment, and we instruct the Court of Civil Appeals to reverse the summary judgment against State Farm and to remand the case for further proceedings consistent with this opinion.
REVERSED AND REMANDED WITH INSTRUCTIONS.
Unsatisfactory results can occur no matter how we deal with an insurer's right to contract out from under the general rule that prevents subrogation to the rights of the insured against a third party until the insured has been made whole.5 On the one hand, enforcing an insurer's contractual right to intercept funds recovered by the insured from the tortfeasor, regardless of whether the insured has been made whole, allows an insurer to reimburse itself for sums previously paid to the insured under the terms of its obligation to the insured, at the expense of the insured's right to full compensation for a loss or injury. Yet, on the other hand, insisting upon an insured's being made whole as a prerequisite to the insurer's right to subrogation permits a tortfeasor to escape accountability where an insurance policy compensates the victim for only a part of his loss.
My awareness of a problem does not overcome my concern for the proper source for the solution. This Court generally has three options for dealing with an offensive contractual provision:
1. To nullify or reform the contract on the basis of fraud. No evidence of fraud is suggested in this case.
2. To nullify or reform the contract so as to eliminate any unconscionable provisions. I am unable to invoke in this setting the rule allowing a court to decline to enforce an unconscionable bargain, especially given the fact that the insured has been compensated for all but a few dollars of his loss. 6
3. To nullify any portion of the contract that violates public policy. I find nothing in the contract that conflicts with any provision of the Alabama Constitution of 1901 or any statute.
Another option available in this particular case would be to determine which version of the subrogation rule is the lesser of evils, to define the doctrine of equitable subrogation in accordance with that version, and then to announce that any contractual deviation therefrom is void, on grounds of public policy. Powell v. Blue Cross & Blue Shield of Alabama, 581 So.2d 772 (Ala.1990), reaches such a result. See, also, Franklin v. Healthsource of Arkansas, 328 Ark. 163, 166, 942 S.W.2d 837, 838-39 (1997) (overruling an earlier decision wherein a three-judge plurality had concluded that “conventional subrogation rights of an insurer created by contract prevail over an insured's equitable right of subrogation arising as an operation of law”). However, Powell arrogates to the judiciary, contrary to § 43 of the Constitution of Alabama of 1901, the authority to declare public policy.7 That function is reserved to the Legislature, subject to limits imposed by the Constitution. Rogers v. City of Mobile, 277 Ala. 261, 281, 169 So.2d 282, 302 (1964). Accord, Franklin, 328 Ark. at 174, 942 S.W.2d at 843 (Imber, J., dissenting).
Until the Legislature should require otherwise, I therefore concur in overruling the across-the-board rule, as first expressed in Powell, requiring that a court disregard a contract provision conferring subrogation rights regardless of whether the insured has been made whole.8
Today's ruling leaves us with a predicament that existed before Powell. Rule 17(a), Ala. R. Civ. P., requires joinder of the insurer (the subrogee) as a coplaintiff even when the insured has a substantial interest in the claim apart from the insurer's subrogated interest. Forcing the joinder of the insurer as a coplaintiff then becomes a ploy for the purpose of weakening the insured's claim.
The rule was written so as to prevent the masquerade by which a subrogation claim is made solely in the name of the insured, when the insurer is the sole party with a pecuniary interest. However, as written, it requires joinder of the insurer in every instance when the insurer has a pecuniary interest in the claim. The result is that not only is the insurer required to be joined to prevent the masquerade that might occur when the insured's interest is limited to a claim for a small deductible, but the insurer also must be joined even when the insured has substantial claims not covered by insurance.
The use of Rule 17(a) in this fashion was not anticipated by the Advisory Committee on Rules of Civil Procedure in 1971-72 when it drafted our Rules.9 The current advisory committee should consider an amendment to Rule 17(a) that would allow the trial court, when justice requires, to prevent a party from disclosing to the jury the insurer's interest. Such an approach would be a reasonable counterpart to the protection we now afford an insurer when we prevent a party from disclosing to the jury the insurer's obligation to satisfy the judgment in an action against its insured.
This case does not justify our overruling Powell v. Blue Cross & Blue Shield of Alabama, 581 So.2d 772 (Ala.1990), and its progeny. All the case before us requires is that we recognize an obvious exception to, or limitation on, the “made-whole” rule. The exception or limitation is that, while an insurer could not enforce a contract or policy provision made before a loss requiring its insured to waive the “made-whole” rule and could not exact such a waiver after a loss as a condition to payment, the insured may, after a loss, effectively waive the “made-whole” rule, and, if the insured does, then no other party can invoke the “made-whole” rule. Such a limitation on, or exception to, the general “made-whole” rule would foreclose the misuse of the rule by the alleged tort-feasors before us and by others similarly situated and yet would preserve the obvious equities the rule secures to insureds according to the rationale of Powell, supra.
1. The main opinion of the Court of Civil Appeals in this case (authored by Judge Thompson and concurred in by Judge Crawley) impliedly asked this Court to review the law of subrogation as expressed in Powell and its progeny:“A review of Alabama caselaw on this issue reveals that Powell and Sharpley, the first cases to establish the ‘made-whole’ rule as it relates to insurers' subrogation claims in Alabama, were both decided by a plurality of the supreme court. Further, the supreme court's plurality decisions in Powell and Sharpley were a sharp departure from that court's former position on the issue as set forth in International Underwriters/Brokers, Inc. v. Liao, 548 So.2d 163 (Ala.1989), a unanimous decision of the court, released just one year earlier.”State Farm Fire & Cas. Co. v. Hannig, 764 So.2d 538, 542 (Ala.Civ.App.1999).
2. Liao, 548 So.2d at 166.
3. Chief Justice Vanderbilt, of the New Jersey Supreme Court, wrote extensively of the role of the doctrine of stare decisis in his dissent in Fox v. Snow, 6 N.J. 12, 76 A.2d 877 (1950):“The doctrine of stare decisis neither renders the courts impotent to correct their past errors nor requires them to adhere blindly to rules that have lost their reason for being. The common law would be sapped of its life blood if stare decisis were to become a god instead of a guide. The doctrine when properly applied operates only to control change, not to prevent it. As Mr. Justice Cardozo has put it, ‘Few rules in our time are so well established that they may not be called upon any day to justify their existence as means adapted to an end. If they do not function they are diseased. If they are diseased, they must not propagate their kind. Sometimes they are cut out and extirpated altogether. Sometimes they are left with the shadow of continued life, but sterilized, truncated, impotent for harm.’ Nature of the Judicial Process (1921) 98․“․“․ The doctrine of stare decisis tends to produce certainty in our law, but it is important to realize that certainty per se is but a means to an end, and not an end in itself. Certainty is desirable only insofar as it operates to produce the maximum good and the minimum harm and thereby to advance justice․ When it appears that the evil resulting from a continuation of the accepted rule must be productive of greater mischief to the community than can possibly ensue from disregarding the previous adjudications on the subject, courts have frequently and wisely departed from precedent, 14 Am.Jur., Courts, § 126.”6 N.J. at 23-25, 76 A.2d at 883-84.
4. Beasley, 294 Ala. at 291, 315 So.2d at 572 (Jones, J., concurring specially).
5. For a brief overview of the evolution of the rule prohibiting such contracts and references to the rule as it is applied in other jurisdictions, see Ex parte Brock, 734 So.2d 998, 999-1000 (Ala.1999).
6. Compare Hare v. State, 733 So.2d 277, 283-84 (Miss.1999), where the Mississippi Supreme Court, using language suggesting a finding of unconscionability, refused to enforce a contractual provision sparing the insurer from the consequences of the made-whole rule in a setting where the insurer was trying to intercept funds paid to the insured under uninsured-motorist coverage provided by another insurer and the insured was nowhere near being made whole for injuries suffered in an automobile accident. Whether such circumstances would meet this Court's standards of unconscionability is not before us.
7. Section 43 mandates the separation of the judicial power from the legislative power and condemns usurpation of the one by the department of government that is authorized to exercise the other.
8. The doctrine of stare decisis has a diminished efficacy in instances where the former decision is grounded in an erroneous application of the Constitution and corrective action is limited to constitutional amendment or overruling the earlier decision. Agostini v. Felton, 521 U.S. 203, 235, 117 S.Ct. 1997, 138 L.Ed.2d 391 (1997). See, also, Ex parte Dan Tucker Auto Sales, Inc., 718 So.2d 33, 42, n. 10 (Ala.1998) (Lyons, J., concurring specially and quoting from Justice Black's dissenting opinion in Gwin, White & Prince v. Henneford, 305 U.S. 434, 454-55, 59 S.Ct. 325, 83 L.Ed. 272 (1939) (Black, J., dissenting), in which he stated: “[T]he rule of stare decisis cannot confer powers upon the courts which the inexorable command of the Constitution says they shall not have.”).
9. My recollections in this area were first expressed many years ago in Champ Lyons, Jr., Alabama Practice, 17.2, pp. 295-96 (2d ed. 1986), and they were repeated in Champ Lyons, Jr., Alabama Practice, 17.2, pp. 408-09 (3d ed. 1996).
HOOPER, C.J., and HOUSTON and SEE, JJ., concur. LYONS, J., concurs specially. COOK, JOHNSTONE, and ENGLAND, JJ., concur in the result but dissent from the rationale.