The opinion of the court was delivered by: Graffeo, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
When a person suffers personal injuries because of the wrongdoing of another and the injured party's health insurer pays for medical treatment, a cause of action for equitable subrogation accrues to the health insurer, allowing the insurer to seek recoupment of its expenditures. The issue before us is whether the injured party and the tortfeasor can agree to a settlement that extinguishes the insurer's subrogation rights. We conclude that the subrogation claim in this case cannot be discontinued without the subrogee's consent.
Plaintiff Paula Fasso received medical services from defendant Ralph Doerr, M.D., in 1996. She subsequently developed complications that required her to undergo a liver transplant. Approximately two years later, Mrs. Fasso and her husband commenced this action against Dr. Doerr and the hospital where he treated her, alleging that Dr. Doerr had committed medical malpractice. Mrs. Fasso required a second liver transplant in 2003, resulting in her medical and surgical expenses totaling approximately $780,000, all of which were paid by her health insurance carrier, Independent Health Association, Inc. (IHA).
In 2005, IHA moved to intervene in the Fassos' medical malpractice action pursuant to CPLR 1013 in order to assert an equitable subrogation claim against Dr. Doerr for reimbursement of the payments made on Mrs. Fasso's behalf*fn1. IHA represented that it would "not unduly delay" the litigation or "prejudice the substantial rights of any party" if permitted to intervene*fn2. Neither plaintiffs nor defendants opposed IHA's motion and Supreme Court therefore allowed IHA to become a party to the case.
The Fassos eventually sought summary judgment dismissing IHA's complaint for equitable subrogation. They contended that IHA could not expect to receive reimbursement from Dr. Doerr because Mrs. Fasso's damages exceeded the $2 million of malpractice coverage available to Dr. Doerr. Hence, the Fassos claimed that Mrs. Fasso could not be "made whole" in light of the coverage limits of the doctor's malpractice policies. Supreme Court denied the Fassos' motion to dismiss IHA's complaint.*fn3
Before the trial began, IHA informed Supreme Court that it would rely on the Fassos' proof of Dr. Doerr's alleged negligence and would present only one witness to establish the medical expenses. Mrs. Fasso was the first witness to testify and, the following morning, the attorneys for plaintiffs and the doctor advised the court that a settlement had been reached. Under the terms of the agreement, plaintiffs would receive $900,000, Dr. Doerr would not admit wrongdoing and IHA's equitable subrogation claim would be dismissed on the basis that Mrs. Fasso was not "made whole" since the settlement payment was less than her actual damages. IHA, which had not participated in the negotiations or agreed to the dismissal of its cause of action against Dr. Doerr, did not object to plaintiffs receiving the monetary payment. But it did contest the dismissal of its equitable subrogation claim because, after Dr. Doerr paid the $900,000 settlement, there remained $1.1 million in potential insurance coverage an amount greater than the sum IHA sought in subrogation. IHA also moved for a mistrial so that it could obtain its own witnesses and evidence to prove Dr. Doerr's negligence.
Supreme Court denied IHA's request for a mistrial and approved the settlement between the Fassos and Dr. Doerr. Since Mrs. Fasso was not being paid the full amount of her damages, the court held that IHA's subrogation claim could not survive and sua sponte dismissed IHA's complaint. The Appellate Division affirmed (46 AD3d 1358 ). We granted leave (10 NY3d 707 ) and now reverse.
It is well established that when an insurer pays for losses sustained by its insured that were occasioned by a wrongdoer, the insurer is entitled to seek recovery of the monies it expended under the doctrine of equitable subrogation (see e.g. Blue Cross & Blue Shield of N.J., Inc. v Philip Morris USA Inc., 3 NY3d 200, 206 ; Winkelmann v Excelsior Ins. Co., 85 NY2d 577, 581 ; Federal Ins. Co. v Arthur Andersen & Co., 75 NY2d 366, 372 ; Connecticut Fire Ins. Co. v Erie Ry. Co., 73 NY 399, 402 )*fn4. Equitable subrogation is premised on two related concepts. First, that the party who causes injury or damage should be required to bear the loss by reimbursing the insurer for payments made on behalf of the injured party. Second, that the injured party should not recover twice for the same harm once from its insurer and again from the wrongdoer (see Winkelmann v Excelsior Ins. Co., 85 NY2d at 581). Therefore, if an injured party receives monies from the tortfeasor attributable to expenses that were paid by its insurer, the insurer may recoup its disbursements from its insured; but when the wrongdoer does not pay damages for an insured's medical expenses, generally the insurer, as subrogee, has been allowed to seek recovery directly from the tortfeasor (see e.g. Teichman v Community Hosp. of W. Suffolk, 87 NY2d 514, 521-523 ).
There is, however, an important limitation on recovery under the doctrine of equitable subrogation. If "the sources of recovery ultimately available are inadequate to fully compensate the insured for its losses, then the insurer who has been paid by the insured to assume the risk of loss has no right to share in the proceeds of the insured's recovery from the tortfeasor" (Winkelmann, 85 NY2d at 581). In other words, the insurer may seek subrogation against only those funds and assets that remain after the insured has been compensated. This designation of priority interests referred to as the "made whole" rule assures that the injured party's claim against the tortfeasor takes precedence over the subrogation rights of the insurer.
The Fassos and Dr. Doerr contend that the "made whole" rule precludes IHA from pursuing equitable subrogation against the doctor in this case because plaintiffs settled for less than the total damages caused by Dr. Doerr's alleged negligence. This position misconstrues the made whole principle. If the recovery the injured party receives, whether determined by settlement or verdict, is greater than the wrongdoer's assets and available insurance coverage, there is nothing left for the insurer to execute its subrogation rights against and the made whole rule prevents the insurer from sharing in the insured's judgment or recovery. But that is not the situation here. In this case, the made whole doctrine does not present an obstacle to the insurer's right to seek recoupment from the tortfeasor because the settlement between the Fassos and Dr. Doerr left a potential source of recovery $1.1 million in remaining insurance coverage. Consequently, the made whole rule did not mandate dismissal of IHA's equitable subrogation claim merely because the Fassos decided to accept a settlement figure that did not completely compensate them for the full extent of their damages. The Fassos and Dr. Doerr alternatively maintain that their agreement to extinguish IHA's equitable subrogation cause of action is binding on IHA because an insurer stands in the shoes of its insured and acquires only those rights that the insured possesses. This argument misapprehends the nature of the equitable subrogation doctrine. The right to subrogation "accrue[s] upon payment of the loss" by the insurer (Federal Ins. Co. v Arthur Andersen & Co., 75 NY2d at 372) and it generally cannot be imperiled by the insured (see e.g. Ocean Acc. & Guar. Corp. v Hooker Electrochemical Co., 240 NY 37, 50 ; Aetna Cas. & Sur. Co. v Bekins Van Lines Co., 67 NY2d 901, 903 ). Once an insurer has paid a claim and the tortfeasor knows or should have known that a right to subrogation exists, the wrongdoer and the insured cannot agree to terminate the insurer's claim without its consent and such an agreement cannot be asserted as a defense to the insurer's cause of action (see Ocean Acc. & Guar. Corp., 240 NY at 50-51; see ...