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Emc Insurance Companies v. Entergy Arkansas, Inc.

United States Court of Appeals, Eighth Circuit

May 14, 2019

EMC Insurance Companies Plaintiff- Appellant
v.
Entergy Arkansas, Inc. Defendant-Appellee

          Submitted: January 16, 2019

          Appeal from United States District Court for the Western District of Arkansas - El Dorado

          Before LOKEN, GRASZ, and STRAS, Circuit Judges.

          LOKEN, CIRCUIT JUDGE.

         A fire seriously damaged the home of Milton and Norma Blakely in Crossett, Arkansas, in October 2014. Entergy Arkansas, Inc., provided electric power to the home. In August 2015, the home was completely destroyed by a second fire while being repaired without electric power service. The Blakelys' homeowner's insurer, EMC Insurance Companies, paid $203, 247.49 for their total property damage and then brought this diversity action against Entergy, alleging the utility's equipment caused the 2014 fire and asserting subrogation claims for damages "in excess of $203, 247.49." The case proceeded to a jury trial. At the close of plaintiff EMC's evidence, the district court[1] granted Entergy's motion for judgment as a matter of law, concluding that EMC "does not have standing to pursue its subrogation claim" because "it failed to obtain a legal determination that its insureds had been made whole . . . prior to initiating this subrogation action." EMC appeals. We affirm, though on a different ground.

         I. The Made Whole Doctrine.

         We apply the substantive law of Arkansas in this diversity action. "Under Erie, [2] we are obligated to apply governing precedent from the Arkansas Supreme Court. When there is no state supreme court case directly on point, our role is to predict how the state supreme court would rule if faced with the same issue before us." Blankenship v. USA Truck, Inc., 601 F.3d 852, 856 (8th Cir. 2010) (cleaned up).

         "Subrogation at its essence is the substitution of one party for another in the exercise of some legal right." Welch Foods, Inc. v. Chicago Tit. Ins. Co., 17 S.W.3d 467, 470 (Ark. 2000). "Subrogation is a normal incident of indemnity insurance" that "assures against unjust enrichment by way of double recovery." S. Farm Bureau Cas. Ins. Co. v. Tallant, 207 S.W.3d 468, 471 (Ark. 2005). In applying equitable subrogation principles, the Supreme Court of Arkansas has adopted a "made whole" doctrine that has also been adopted, with significant variations, in many jurisdictions. The made whole doctrine in Arkansas reflects the principle that "equity will require that the insured be made whole before the insurer's right to subrogation will arise." Franklin v. Healthsource of Ark., 942 S.W.2d 837, 839 (Ark. 1997) (quotation omitted). Thus, "[t]he general rule is that an insurer is not entitled to subrogation unless the insured has been made whole for his loss." Riley v. State Farm Mut. Auto. Ins. Co., 381 S.W.3d 840, 848 (Ark. 2011). Whether the insured has been made whole is an issue of equity for the court. Tallant, 207 S.W.3d at 473.

         In Riley, typical of situations in which the made whole issue commonly arises, an insurer paid the injured insured's medical bills and then asserted the right to a statutory reimbursement lien on the insured's settlement recovery from a tortfeasor's insurer. The insured sought injunctive relief to invalidate the lien on the ground that the third party settlement had not made her whole. Ruling on a certified question, the Supreme Court held that, "absent an agreement or settlement between the parties, an insurer's right to subrogation does not accrue until there has been a legal determination by a court that the insured has been made whole." 381 S.W.3d at 850. The Court therefore remanded for resolution of the made whole issue. Id.

         This appeal presents the made whole doctrine in a different setting. EMC is not asserting a subrogation right to share in the Blakelys' recovery from a third party. Rather, EMC is asserting its right to subrogation directly against Entergy, the alleged tortfeasor, claiming as damages all amounts paid its insureds for property losses from two fires (the second of which was unrelated to the first and could not have been caused by Entergy's negligent provision of electrical services). EMC's Complaint did not allege that its insureds have been made whole. Though Milton and Norma Blakely testified at trial, the made whole issue was not addressed. When Entergy raised the made whole issue in its motion for judgment as a matter of law, EMC argued (i) the made whole doctrine does not apply to property damage claims, and (ii) Entergy was barred from arguing the made whole defense by the doctrine of inconsistent positions. Relying on broad statements in Riley and Tallant, the district court concluded that EMC lacked standing and granted Entergy judgment as a matter of law because "EMC failed to obtain a legal [made whole] determination . . . prior to initiating this subrogation action."

         II. The Made Whole Doctrine Applies.

         On appeal, EMC first argues that the made whole doctrine does not apply to property damage claims. Citing no secondary authority or supporting precedent from other jurisdictions, EMC argues that no Arkansas state court has ever applied the doctrine to property loss claims, and it is illogical to do so. We disagree.

         The Supreme Court of Washington has cogently explained why there are few cases applying the made whole doctrine to property loss subrogation claims:

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 ...

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