Alabama Supreme Court Ruling on Common-Fund Doctrine

In Ex parte State Farm Mut. Auto. Ins. Co., 2012 WL 4238631, Mitchell, a State Farm insured, was injured in an accident caused by Kirk, a Cotton States insured.   Mitchell retained an attorney who investigated the accident and wrote Cotton States seeking to settle for policy limits.  State Farm paid Mitchell (a) $5,000 in medical payments and (b) $7,992.90 in non-medical payments.  State Farm contacted Cotton States seeking reimbursement of the full $12.992.20 paid Mitchell; Cotton States acceded as to $7,992.90 of the demand but, as to the $5,000, declared that “the balance of the subrogation remains outstanding pending the settlement of the Bodily Injury claim with the insured and her attorney.”  State Farm wrote Mitchell’s attorney that State Farm did not him to assist in protecting its subrogation rights as to the $5,000.  Mitchell sued Kirk and State Farm.  When Mitchell and Cotton States reached a tentative settlement for $35,000, State Farm consented to the settlement but requested full reimbursement of the $5,000 payment for medical expenses.  On behalf of Kirk, Cotton States paid $30,000 to Mitchell and interpleaded $5,000 into court.  The trial court ruled that, the common-fund doctrine did not apply and that State Farm was entitled to the entire $5,000.  The Alabama Court of Civil Appeals reversed the trial court and held that the common-fund doctrine fund did apply and that Mitchell was entitled to a deduction for attorney fees and expenses.  The Alabama Supreme Court affirmed the Court of Civil Appeals.

 

The Supreme Court noted that Cotton States declined to meet State Farm’s direct subrogation demand for repayment of the subject $5,000.  Thus, Mitchell’s filed lawsuit would create a common fund from which State Farm’s subrogation right would be satisfied.

 

The Supreme Court rejected State Farm’s contention of “active participation,” an exception to applying the common-fund doctrine.  This exception arises if the insurer “actively assist its insured in the creation, discovery, increase or preservation of the common fund.”  The Supreme Court declared that “an insurance company’s limited appearance to protect its subrogation interest and no more will not shield the insurance company from the application of the common-fund doctrine.”  In other words, the insurer must do more than inform the insured’s attorney that his assistance is not wanted; instead, the insurer must actually do something that helps create the common fund.

 

The Supreme Court further found that there was no policy language that abrogated the application of the common-fund doctrine.