Made Whole Doctrine Does not Apply to a Self Insured Retention

Subrogation Recovery Only to Insurer who Paid a Claim

A self insured retention (SIR) is a contractual device that allows an insurer to insurer excess liability of an insured without a concern for dealing with minor claims. The use of the SIR allows an insurer to charge a small premium since the insured agrees to use its own funds to deal with claims for amounts less than the SIR.

In City Of Asbury Park v. Star Insurance Company and John Does Corporation (1-10), Civ. A. No. 17-5059-BRM-LHG, United States District Court For The District Of New Jersey (October 1, 2018) Plaintiff City of Asbury Park’s (“Asbury Park” or the “City”) presented a Motion for Summary Judgment for Declaratory Judgment and (2) Defendant Star Insurance Company’s (“Star”) also submitted a Motion for Summary Judgment on the Priority of Recovery of Lien Proceeds pursuant to Federal Rule of Civil Procedure 56.


This case arises from the public entity excess liability insurance policy, number CP 0513638 (“Star Policy”) for the period February 15, 2010, to February 15, 2011, issued by Star to Asbury Park. In the Star Policy, Star agreed to indemnify the City in the event the City is liable, under the Workers’ Compensation Act, for damages on account of bodily injury suffered by an employee of the City in excess of the City’s self-insured retention of $400,000.00.

The Star Policy also states, in the event of any payment by Star, “Star will be subrogated to all of the City’s rights of recovery for that loss, and the City will execute and deliver instruments and papers and do whatever else is necessary to secure those rights.”

On January 20, 2011, John Fazio (“Fazio”), an employee of the Asbury Park Fire Department, “suffered life-threatening injuries while fighting a fire.” Following a workmen’s compensation action by Fazio, and pursuant to the policy, the City paid $400,000.00 self-insured retention limit, and Star paid $2,607,227.50 in workmen’s compensation benefits which created a lien totaling $3,007,227.50.

On December 28, 2012, Fazio filed suit against a third party related to the injuries suffered on January 10, 2011, and the City and Star asserted a workmen’s compensation lien in order to preserve their reimbursement rights. Fazio settled for $2,700,000.00 and agreed to set aside $935,968.25 in partial satisfaction of all liens held by the City and Star. The $935,968.25 is being held in escrow by workmen’s compensation defense counsel until otherwise “directed by the City or Star or ordered by the Court.”

Star seeks to recover the entire amount being held in escrow, but the City argues it “has subrogation rights arising out of its payment of its self-insured retention of $400,000.00 and is entitled to be reimbursed out of the” amount in escrow. Accordingly, Asbury Park sued seeking, pursuant to the Uniform Declaratory Judgment Act, a declaration that it is entitled to recovery of its $400,000.00 self-insured retention paid to [Fazio] in satisfaction of Worker’s Compensation claim.


The City contends the make-whole doctrine applies, and therefore, the City should be compensated for its loss, namely the $400,000 payment of the self-insured retention, before Star can recover any of the lien proceeds. Star argues it should be granted the entirety of the $935,968.25 settlement because the plain language of the contract states the City agreed to absorb the first $400,000.00 of any workers’ compensation loss.

Courts should not, and cannot, make contracts for parties. Courts can only enforce the contracts which the parties themselves have made. When the terms of an insurance contract are clear, it is the function of a court to enforce it as written and not to make a better contract for either of the parties. Pursuing equity does not justify departing from the terms of an insurance contract that parties voluntarily entered. When interpreting the language of an insurance policy, it is the court’s responsibility ‘to give effect to the whole policy, not just one part of it.

Although the Superior Court of New Jersey, Appellate Division, found that without clear, express terms to the contrary, the insured must be “made whole” before the insurer can recover anything from a third-party tortfeasor the court acknowledged this right may be altered by a contract. The make-whole doctrine is a rule of interpretation and a gap filler. Additionally, parties have the ability to sign away their make-whole rights when entering into an insurance contract.

The make whole rule is an equitable principle which, absent an agreement to the contrary, prohibits an insurer from enforcing a right to subrogation until the insured has been fully compensated for his injuries – i.e., made whole.

Subrogation rights are created by an agreement between the insurer and the insured. Subrogation promotes equity by preventing an insured from recovering more than full indemnification as a result of recovering from both the wrongdoer and the insurer for the same loss.

An SIR is a thin layer of first dollar liability retained by the consumer (and specifically not transferred to the insurer) to ensure risk-sharing and loss avoidance. Under the policy, the insured agreed to pay the deductible as a first dollar obligation prior to implicating the insurer’s obligation to cover the damages. Therefore, the loss of the deductible is not a shortfall in the insurance coverage. Applying the make-whole doctrine under such circumstances would force the insurer to accept the risk of first dollar liability for which it did not agree nor receive a premium.

The plain language of the Star Policy contained an agreement by the City to retain the first $400,000 as a self-insured retention with Star’s coverage beginning solely in excess of the City’s self-insured retention. The Star Policy requires Star to indemnify the City for a loss, in excess of the City’s self-insured retention, sustained by the City because of liability imposed on the City by the Worker’s Compensation Act.

When interpreting the language in insurance policies, this Court reads the relevant provisions, each in the context of its corresponding insurance policy as a whole, giving meaning to each provision. Read together, the Star Policy unambiguously states the City has no insurance coverage for the first $400,000.00 and, therefore, is not entitled to acquire the lien funds before Star has been fully reimbursed.

Regarding both a deductible and a self-insured retention, the insured agreed to be responsible for a certain, pre-determined loss. In this case, the pre-determined loss was $400,000.00. The insurer owed nothing until the City first paid $400,000. If the City wanted first dollar coverage it could have negotiated this with Star when the insurance policy was drafted. It did not.

Therefore, applying the make-whole doctrine to self-insured retentions would convert the Star Policy to an insurance policy without a self-insured retention, allowing the City to gain an unbargained-for windfall at the expense of Star. Judgment was issued in favor of Star.


An SIR is not insurance. The SIR is the sole obligation of the insured. Since the insured did not bargain for elimination of the SIR it could recover the SIR from a tortfeasor before the insurer who paid as promised. The court, as it was required to do, applied the clear and unambiguous language of the policy and enforced it as written. There was no ground stated to change the policy to provide the subrogation rights the City desired and it was inequitable to give it rights for which it did not bargain or pay premium to receive.

© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at can be reached at

Mr. Zalma’s reports can be found on Tumbler at  on Facebook at and you can follow him on Twitter at

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.




About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
This entry was posted in Zalma on Insurance. Bookmark the permalink.