                                        SYLLABUS

This syllabus is not part of the Court’s opinion. It has been prepared by the Office of the
Clerk for the convenience of the reader. It has been neither reviewed nor approved by the
Court. In the interest of brevity, portions of an opinion may not have been summarized.

         City of Asbury Park v. Star Insurance Company (A-20-19) (083371)

Argued March 31, 2020 -- Decided June 29, 2020

FERNANDEZ-VINA, J., writing for the Court.

       In this case, the Court addresses a question of law certified by the United States
Court of Appeals for the Third Circuit:

              Whether, under equitable principles of New Jersey law, the
              made-whole doctrine applies to first-dollar risk that is allocated
              to an insured under an insurance policy, i.e., a self-insured
              retention or deductible.

The question arises from a dispute between a workers’ compensation carrier and its
insured, a public employer.

        From February 2010 to February 2011, the City of Asbury Park (the City) had an
insurance policy with Star Insurance Company (Star) that provided coverage for workers’
compensation claims against the City. The policy included a “self-insured limit retention
for workers’ compensation” losses against the City in the amount of $400,000 per
occurrence. In turn, Star agreed to indemnify the City for its workers’ compensation
losses that exceeded the self-insured retention.

        In January 2011, John Fazio, an employee of the Asbury Park Fire Department,
suffered injuries while fighting a fire. He filed a workers’ compensation claim against
the City, which in turn paid him $400,000, the full amount of its self-insured retention
limit; Star paid $2,607,227.50, the amount exceeding the self-insured retention limit.

       Fazio later filed suit against a third party for the injuries he suffered in the 2011
fire. Fazio and the third party reached a settlement agreement for $2,700,000.
Subsequently, Fazio, the City, and Star agreed that $935,968.25 of the settlement
proceeds would be set aside to partially reimburse the City and Star.

        Star issued a demand to recover the entire $935,968.25, contending that it was
entitled to be reimbursed in full before the City could recover amounts paid on the self-
insured retention. The City asserted that under the made-whole doctrine, it was entitled


                                               1
to be reimbursed in full before Star could assert its subrogation right. Star responded that
the made-whole doctrine does not apply to self-insured retentions, as application of that
doctrine in this case would unjustly enrich the City.

        The City filed a declaratory judgment action against Star. The United States
District Court for the District of New Jersey granted summary judgment in favor of Star,
finding that “the City has no insurance coverage for the first $400,000.00”; that the
parties expressly agreed under the subrogation provision that “Star has the right to
substitute itself for the City and is subrogated to all of the City’s rights of recovery”; and
that the made-whole doctrine does not apply to this case.

      The City appealed, and the Third Circuit certified its question to the Court as an
important and unresolved matter of New Jersey law. The Court accepted the question as
posed. 240 N.J. 45 (2019).

HELD: The Court answers the certified question in the negative. Under equitable
principles of New Jersey law, the made-whole doctrine does not apply to first-dollar risk,
such as a self-insured retention or deductible, that is allocated to an insured under an
insurance policy.

1. In the insurance context, subrogation is a doctrine allowing the insurer to seek
recovery from the party at fault, exercised after the insurer has indemnified its insured
under the terms of an insurance policy. Subrogation rights are created in one of three
ways: (1) an agreement between the insurer and the insured, (2) a right created by
statute, or (3) a judicial device of equity to compel the ultimate discharge of an obligation
by the one who in good conscience ought to pay it. (pp. 10-12)

2. Under the made-whole doctrine, an insurer cannot assert a subrogation right until the
insured has been fully compensated for his or her injuries. The doctrine applies when the
amount recoverable from the responsible third party is insufficient to satisfy both the total
loss sustained by the insured and the amount the insurer pays on the claim. New Jersey
courts have long recognized and utilized the made-whole doctrine. In Culver v.
Insurance Co. of North America, however, the Court stressed that courts must not only
turn for guidance to equitable principles, but must also “consider the contractual
relevance of the specific subrogation agreement.” 115 N.J. 451, 456 (1989). Thus,
courts must consider both the equitable principles of subrogation, such as the made-
whole doctrine, as well as the rights agreed upon in the contract. Ibid. (pp. 12-16)

3. While the made-whole doctrine generally applies in this state, New Jersey courts have
never addressed the question of whether the doctrine applies to first-dollar risk, such as
deductibles and self-insured retentions, borne by insureds. The Court reviews cases from
other jurisdictions. (pp. 16-21)



                                              2
4. Considering the equitable principles that guide the doctrine of subrogation alongside
insurance policies that allocate first-dollar risk to the insured, the Court finds that the
made-whole doctrine does not apply to first-dollar risk allocated to the insured. A self-
insured retention or deductible is an amount of risk that the insured has agreed to assume
in exchange for a lower premium cost for the insurance policy. Where the award from a
subrogation action against a third party is insufficient to reimburse both the insured’s
self-insured retention and the carrier’s loss in excess of the self-insured retention, to place
priority of recovery with the insured would, in effect, convert the policy into one without
a self-insured retention. Such interference with the contract would essentially write a
better policy for the insured than the one purchased. The Court declines to find “that
equity dictates a departure from the terms of the insurance contract into which the parties
voluntarily entered under such circumstances.” See Fireman’s Fund Ins. Co. v. TD
Banknorth Ins. Agency, Inc., 72 A.3d 36, 46 (Conn. 2013). (pp. 21-22)

5. The Court’s view of the made-whole doctrine requires a close examination of an
insurance contract’s provisions to determine whether the doctrine will apply, including
the effect of reading together provisions relating to self-insured retentions or deductibles
and subrogation rights. Read together, if the policy at issue unambiguously provides Star
with all of the City’s rights to recovery against third-party tortfeasors in the event that
Star makes a payment under the policy, the made-whole doctrine would not apply in this
case -- it would not override the parties’ agreement. (pp. 22-23)

CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, ALBIN, PATTERSON,
SOLOMON, and TIMPONE join in JUSTICE FERNANDEZ-VINA’S opinion.




                                              3
                    SUPREME COURT OF NEW JERSEY
                          A-20 September Term 2019
                                    083371


                             City of Asbury Park,

                              Plaintiff-Appellant,

                                       v.

                           Star Insurance Company,

                            Defendant-Respondent.

                 On certification of question of law from the
             United States Court of Appeals for the Third Circuit .

                   Argued                       Decided
                March 31, 2020                June 29, 2020


            Denise M. DePekary argued the cause on behalf of
            appellant (Weber Gallagher Simpson Stapleton Fires
            & Newby, attorneys; Denise M. DePekary, Andrew L.
            Indeck, and Kenneth E. Sharperson, on the briefs).

            Thomas E. Hastings argued the cause on behalf of
            respondent (Dilworth Paxson, attorneys; Thomas E.
            Hastings, of counsel and on the brief).


      JUSTICE FERNANDEZ-VINA delivered the opinion of the Court.


      In this case, we address a question of law certified by the United States

Court of Appeals for the Third Circuit arising from a dispute between a

workers’ compensation insurance carrier and its insured, a public employer.
                                       1
      Both plaintiff, the City of Asbury Park (the City), and its workers’

compensation carrier, defendant Star Insurance Company (Star), seek

reimbursement of monies paid toward an injured firefighter’s workers’

compensation claim from funds he recouped through settlement with a third-

party tortfeasor. The funds available for reimbursement will not cover the full

amount paid collectively by the City and Star. The question is whether, under

the equitable “made-whole” or “make-whole” doctrine, the City has priority to

recover what it paid before Star may recover any of its losses.

      Here, that question turns on the interplay between the made-whole

doctrine and a particular provision of the contract between Star and the City

under which the City “shall retain, as a self-insured retention,” a per-

occurrence deductible for workers’ compensation claims. By virtue of that

self-insured retention, the City bears what is known as the “first-dollar risk” --

making it responsible for the first $400,000 of any workers’ compensation

claim, with Star bearing responsibility for sums exceeding that amount.

      The certified question is:

            Whether, under equitable principles of New Jersey law,
            the made-whole doctrine applies to first-dollar risk that
            is allocated to an insured under an insurance policy, i.e.,
            a self-insured retention or deductible.

      We answer the certified question in the negative.


                                        2
                                        I.

                                       A.

      From February 2010 to February 2011, the City held an insurance policy

(the Policy) with Star that provided coverage for workers’ compensation

claims against the City pursuant to the Workers’ Compensation Act, N.J.S.A.

34:15-1 to -146. The Policy included a “self-insured limit retention for

workers’ compensation” losses against the City in the amount of $400,000 per

occurrence. In turn, Star agreed to indemnify the City for its workers’

compensation losses that exceeded the self-insured retention. In the event of

such a loss, Star also agreed to indemnify the City for claim expenses, such as

investigation and legal expenses, “in the proportion that the insurer’s portion

of the loss bears to the total amount of such final award, verdict or judgment

against the insured.”

      The Policy further contained a subrogation provision which provided:

            In the event of any payment under this insurance
            contract, the insurer shall be subrogated to all of the
            insured’s rights of recovery therefore against any
            person or organization, and the insured and the service
            company shall execute and deliver instruments and
            papers and do whatever else is necessary to secure such
            rights. No person or organization shall do anything to
            prejudice such a right.




                                        3
                                        B.

                                        1.

      In January 2011, John Fazio, an employee of the Asbury Park Fire

Department, suffered life-threatening injuries while fighting a fire. Fazio filed

a workers’ compensation claim against the City, which in turn paid Fazio

$400,000, the full amount of its self-insured retention limit; Star paid

$2,607,227.50, the amount exceeding the City’s self-insured retention limit.

Pursuant to N.J.S.A 34:15-40, the payments by the City and Star created a

workers’ compensation lien in the amount of $3,007,227.50, entitling the City

and Star to reimbursement on any recovery by Fazio against a third party.

      On December 28, 2012, Fazio filed suit against a third party for the

injuries he suffered in the 2011 fire. Fazio and the third party reached a

settlement agreement for $2,700,000. Subsequently, Fazio, the City, and Star

agreed that $935,968.25 of the settlement proceeds would be set aside in

partial satisfaction of all liens held by the City and Star. The $935,968.25 is

being held in escrow by the City’s workers’ compensation defense counsel,

who agreed to distribute the funds only as directed by the City and Star, or

court order.

      Star issued a demand to recover the entire $935,968.25 held in escrow,

contending that pursuant to the Policy, it was entitled to be reimbursed in full

                                        4
before the City could recover amounts paid on the self-insured retention. The

City asserted that under the made-whole doctrine, it was entitled to be

reimbursed in full before Star could assert its subrogation right. Star

responded that the made-whole doctrine does not apply to self-insured

retentions, as application of that doctrine in this case would unjustly enrich the

City.

        The City filed a declaratory judgment action against Star in Superior

Court asserting that 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” escrow account before Star may recover anything. Star removed the

matter to the United States District Court for the District of New Jersey. The

district court denied the City’s motion to remand the case to state court. Star

then filed for a declaratory judgment claiming that it is “entitled to be

reimbursed in full before any reimbursement of the City’s self-insured

retention.”

                                        2.

        Both parties moved for summary judgment pursuant to Fed. R. Civ. P.

56. The district court granted Star’s motion and denied the City’s motion.

Relying on the plain language of the Policy, the court found that “the City has

no insurance coverage for the first $400,000.00,” and the parties expressly

                                         5
agreed under the subrogation provision that “Star has the right to substitute

itself for the City and is subrogated to all of the City’s rights of recovery.”

      Moreover, the court rejected the City’s contention that the made-whole

doctrine applies to this case. First, the court reasoned that an insured’s right to

be made whole before the insurer can recover anything from a third-party

tortfeasor can be altered by the insurance contract. Here, the court found that

the Policy’s subrogation provision altered the City’s right to be made whole.

Second, the court determined that the made-whole doctrine does not apply to

first-dollar coverage such as deductibles or self-insured retentions, because to

hold otherwise “would convert [the Policy] to an insurance policy without a

deductible,” allowing the City “to gain an unbargained-for windfall at the

expense of [Star].”

      The City appealed the district court’s judgment. After briefing, the

Third Circuit determined that the appeal raised an important and unresolved

matter of New Jersey law. Pursuant to Rule 2:12A-3, the Third Circuit

certified its question to this Court. We accepted the question as posed by the

Third Circuit. 240 N.J. 45 (2019).




                                         6
                                        II.

                                        A.

      The City primarily relies on Providence Washington Insurance Co. v.

Hogges, 67 N.J. Super. 475 (App. Div. 1961), in support of its contention that

in New Jersey, the insured is to be “made whole” before an insurer may

recover proceeds from a third-party tortfeasor, even if the insured’s only

remaining loss is from the policy’s deductible or self-insured retention. The

City points out that in Hogges, the policy at issue contained a subrogation

provision that is essentially identical to the subrogation provision in this case.

(discussing Hogges, 67 N.J. Super. at 476).

      The City stresses that the Appellate Division in Hogges labeled the

subrogation provision as a “general clause” and determined that, under such a

clause, “the interests of the insured come first. In the absence of express terms

in the contract to the contrary, he must be made or kept whole before the

insurer may recover anything from him or from a third party under its right of

subrogation.” (quoting Hogges, 67 N.J. Super. at 482). Thus, the City

contends that, in this case, the subrogation provision in the Policy does not

contain “express terms” that run contrary to its rights as an insured under the

made-whole doctrine.




                                         7
      Further, the City points out that in Hogges the insured sued a third-party

tortfeasor in part for $900 in property damage caused to his vehicle without

notifying his carrier, which paid for this loss minus a $50 deductible.

(discussing Hogges, 67 N.J. Super. at 476-78). In finding that the insured did

not violate the subrogation provision by filing the third-party suit and alleging

property damage, the Appellate Division determined that the insured “still had

a prior right to $50 of any sum recovered for property damage from the

tortfeasors, and to any surplus over $900,” while the carrier would have been

indemnified up to the $850 paid on the policy. (quoting Hogges, 67 N.J.

Super. at 479). On that basis, the City contends that the Appellate Division

endorsed the made-whole doctrine and “required reimbursement of an

insured’s insurance deductible prior to the insurer receiving any monies by

way of subrogation.” The City asserts that this result was “cited favorably” by

this Court in Culver v. Insurance Co. of North America, 115 N.J. 451, 458

(1989), in which we stated that the Hogges court “allowed the insured to be

paid its $50 deductible from the third party award before the insurer could be

reimbursed for its insurance payment.”

                                       B.

      Star contends that applying the made-whole doctrine to deductibles or

self-insured retentions would circumvent “the bargain made by the parties” of

                                         8
an insurance policy “and unjustly enrich insureds who had agreed to bear

financial responsibility for first-dollar loss.” Star emphasizes that the City

agreed to bear the first $400,000 of each workers’ compensation loss. By

agreeing to the Policy, Star asserts that “[t]he City did not pay for first -dollar

coverage, [yet] that is what it would get if its self-insured retention were

reimbursed before the payments made by Star.” Star further points out that

insureds receive lower premiums in return for retaining first-dollar risk, thus

Star contends that an insured’s reimbursement for those funds before the

carrier’s payment results in a windfall for the insured.

      Star asserts the Policy’s subrogation provision gives Star all rights of

recovery whenever it pays for a loss. Star contends there “was no occasion for

[the] subrogation provision to address the priority of recovery” because the

“Policy does not specify an upper limit on workers’ compensation coverage.”

With “no prospect that the City could incur a workers’ compensation loss in

excess of an upper limit of its coverage,” Star contends there is no

“circumstance in which the made-whole doctrine could apply” under this

Policy.

      Star further contends that the Appellate Division’s statements in Hogges

relied upon by the City were dictum and not relevant to the court’s holding.

Star points out that the carrier in Hogges sued the insured for reimbursement

                                         9
of its $850 payment after the insured filed a third-party lawsuit without

notifying the carrier and lost. Star asserts that the issue before the Appellate

Division in that case “was about whether the insured had to reimburse the

insurer for the entire payment made by the insurer, not whether the insured

was entitled to reimbursement of his deductible.” Thus, Star contends that the

Hogges court’s statement “that the ‘insured had a prior right to $50 of any sum

recovered for property damage from the tortfeasors’” “was not essential, or

even relevant, to the issue before the court.” (quoting Hogges, 67 N.J. Super.

at 479). Moreover, Star argues that the Hogges “court’s comments relating to

the priority of recovery are at best ambiguous, because the court also observed

that [the insured] would have held any recovery from the tortfeasor in trust for

the benefit of the insurer ‘up to’ $850.” (quoting Hogges, 67 N.J. Super. at

479).

                                        III.

                                        A.

        To answer the Third Circuit’s certified question, we begin with the

doctrine of subrogation. “It has long been appreciated that ‘[s]ubrogation is a

device of equity to compel the ultimate discharge of an obligation by the one

who in good conscience ought to pay it [and] . . . to serve the interests of

essential justice between the parties.” Culver, 115 N.J. at 455-56 (alterations

                                        10
in original) (quoting Standard Accident Ins. Co. v. Pellecchia, 15 N.J. 162, 171

(1954)).

            In the insurance context, subrogation is a doctrine
            allowing the insurer to seek recovery from the party at
            fault, exercised after the insurer has indemnified its
            insured under the terms of an insurance policy. The
            doctrine is based on the principle that a benefit has been
            conferred upon the insured at the expense of the insurer
            and vests in the latter any rights the former may have
            had against a third party who is liable for the damages.

            [Kenny & Lattal, N.J. Insurance Law § 8-2, at 231-32
            (2019 ed.) (citations omitted).]

In subrogation cases, the insured’s right to recovery against a third party

tortfeasor vests in the insurer, and the insurer “steps into the shoes of the

insured,” Pellecchia, 15 N.J. at 172, and files suit against the tortfeasor subject

to any “defenses which would defeat recovery by the [insured].” Hartford Fire

Ins. Co. v. Riefolo Constr. Co., Inc., 81 N.J. 514, 524 (1980).

            It is important to understand that subrogation rights do
            not arise spontaneously nor are they free-floating or
            open-ended. Subrogation rights are created in one of
            three ways: (1) an agreement between the insurer and
            the insured, (2) a right created by statute, or (3) a
            judicial device of equity to compel the ultimate
            discharge of an obligation by the one who in good
            conscience ought to pay it. While the doctrine has an
            equitable foundation, the attitude of courts toward
            subrogation has been described as one of allowing
            complete freedom of contract and trying to determine


                                        11
             and enforce the expressed intention of contracting
             parties.

             [Culver, 115 N.J. at 456 (quotation marks and citations
             omitted).]

      “Although [subrogation is] highly favored in the law, ‘it is not an

absolute right but rather is applied under equitable standards with due regard

to the legal and equitable rights of others . . . .’” Weinberg v. Dinger, 106 N.J.

469, 489-90 (1987) (quoting Pellecchia, 15 N.J. at 171-72). “When . . . an

insurance carrier which has satisfied a loss it was paid to cover, seeks to

recoup by asserting a claim its insured has against another with respect to that

loss, the final question must be whether justice would be furthered by that

course.” Id. at 490 (quoting A. & B. Auto Stores of Jones St., Inc. v. City of

Newark, 59 N.J. 5, 23 (1971)).

                                              B.

      “Under the make-whole doctrine, an insurer cannot assert a subrogation

right until the insured has been fully compensated for his or her injuries.” 44A

Am. Jur. 2d Insurance § 1780. The doctrine applies “when the injured party’s

damages exceed a limited pool of funds from which recovery may be had,”

ibid., or, in other words, “[w]hen the amount recoverable from the responsible

third party is insufficient to satisfy both the total loss sustained by the insured

and the amount the insurer pays on the claim,” Fireman’s Fund Ins. Co. v. TD

                                         12
Banknorth Ins. Agency, Inc., 72 A.3d 36, 40 (Conn. 2013). Under such

circumstances, the made-whole doctrine holds that “the injured party should be

the first to tap into the limited pool of funds and recover on any loss, and when

someone cannot be fully paid, the loss should be borne by the subrogee, the

insurer.” 44A Am. Jur. 2d Insurance § 1780.

      Our courts have long recognized and utilized the made-whole doctrine.

See, e.g., Hogges, 67 N.J. Super at 482 (“In the absence of express terms in the

[insurance] contract to the contrary, [the insured] must be made or kept whole

before the insurer may recover anything from him or from a third party under

its right of subrogation.”); see also McShane v. N.J. Mfrs. Ins. Co., 375 N.J.

Super. 305, 313-15 (App. Div. 2005) (applying the made-whole doctrine to a

subrogation action involving underinsured motorist coverage); Werner v.

Latham, 332 N.J. Super. 76, 84 (App. Div. 2000) (finding a health insurance

carrier “entitled to reimbursement of its medical payments only to the extent

that the settlement proceeds [from the third-party suit] exceed the full amount

of plaintiff’s damages for all damage claims other than medical payments”).

      In Culver, the plaintiffs sustained a fire loss, and their homeowners’

coverage was insufficient to fully compensate them for their loss. 115 N.J. at

453. The plaintiffs and the defendant carrier entered into a subrogation

agreement under which the parties would proceed jointly in an action against

                                       13
the third-party tortfeasors that caused the fire. Ibid. The parties “agreed to

share any recovery[,] 80% for [the carrier] and 20% for the [plaintiffs]”; the

carrier “would bear all costs of litigation and be entitled to legal fees.” Ibid.

After the action against the tortfeasors settled, the plaintiffs refu sed to accept

their share of the proceeds on the grounds that the defendant was to “receive

from the proceeds of the settlement more than it had paid out to [the plaintiffs]

on the policy coverage and that [the plaintiffs’] total recovery, both by way of

the policy limit and the settlement proceeds, would be substantially less than

[their] loss.” Culver v. Ins. Co. of N. Am., 221 N.J. Super. 493, 498 (App.

Div. 1987), rev’d, 115 N.J. 451 (1989).

      In the pending subrogation action between the parties, the carrier moved

to enforce the agreement. Culver, 115 N.J. at 454. The plaintiffs opposed the

motion and cross-moved for a different allocation, alleging fraud and a breach

of fiduciary duty by the carrier and its counsel. Ibid. The trial court ruled in

favor of the carrier’s motion and against the plaintiffs’ motion, and the

plaintiffs failed to appeal the trial court’s order. Ibid. Instead, the plaintiffs

commenced a new action four months later, proffering the same allegations

from the prior cross-motion against the carrier. Ibid. The defendant “moved

for summary judgment on the grounds that the issues raised in the complaint

were res judicata, which the trial court granted.” Ibid.

                                         14
      On appeal, the Appellate Division reversed, ruling that

            the subrogation agreement between the [parties] was
            not enforceable. It determined that [the carrier, as] the
            subrogating insurer, had “a trust obligation to the
            insured in respect of the difference between the
            insurance payment and the insured’s actual loss,” and
            [the carrier] was therefore obligated to hold from the
            settlement an amount equal to the uninsured portion of
            their loss in trust for the [plaintiffs]. [Culver,] 221 N.J.
            Super. at 502. The appellate court concluded that “the
            [subrogation] agreement,” calling for a different result,
            “appears to be unconscionable, violative of public
            policy and in abrogation of [the carrier’s] trust
            obligation to its insureds.” Id. at 504. This conclusion,
            according to the Appellate Division, obviated the
            application of the doctrine of res judicata.

            [Culver, 115 N.J. at 455 (sixth alteration in original).]

The Appellate Division’s finding that the carrier had such a “trust obligation to

the insured” was based on the “equitable principle [that] the right of

subrogation does not arise until the injured party has been made whole.”

Culver, 221 N.J. Super. at 500-03.

      This Court in turn determined that “[t]he appellate court appropriately

turned for guidance initially to equitable principles under the standard

subrogation clause of the insurance policy” but that “it failed then to consider

the contractual relevance of the specific subrogation agreement.” Culver, 115

N.J. at 456. We observed that even in Hogges -- a primary authority on which

the appellate court relied -- the court expressly stated that the made-whole
                                         15
doctrine is subject to the express terms and provisions of the insurance

contract. Id. at 457-59. Thus, we determined that in these cases, courts must

consider both the equitable principles of subrogation, such as the made-whole

doctrine, as well as the rights agreed upon in the contract. Ibid.

                                        C.

      While the made-whole doctrine generally applies in New Jersey, our

courts have never addressed the question of whether the doctrine applies to

first-dollar risk, such as deductibles and self-insured retentions,1 borne by

insureds. Contrary to the City’s assertion, the Appellate Division in Hogges

did not address this question, as the issue there was whether the insured

violated the policy by filing an unsuccessful suit against a third -party

tortfeasor without notifying his carrier. 67 N.J. Super. at 477-78.

      Other states have addressed whether the made-whole doctrine applies to

deductibles. In Fireman’s Fund, for example, the Supreme Court of

Connecticut was asked by the Second Circuit whether “insurance policy

deductibles [are] subject to Connecticut’s made whole doctrine.” 72 A.3d at

38. There, a construction company retained the defendant, TD Banknorth, to


1
  Under the circumstances of this case, there is no material distinction between
self-insured retentions and deductibles. See generally IMO Indus., Inc. v.
Transam. Corp., 437 N.J. Super. 577, 622 (App. Div. 2014) (outlining the
differences between self-insured retentions and deductibles); Kenny & Lattal,
app. A, at 831, 865 (defining “deductible” and “self-insured retention”).
                                       16
arrange insurance for its work on a housing development. Ibid. To protect

itself against any negligence, TD Banknorth purchased errors and omissions

insurance coverage from the plaintiff, Fireman’s Fund Insurance Company,

subject to a $150,000 deductible on each claim. Ibid. After a fire occurred on

a lot that was part of the housing development but not included in the policies

arranged by TD Banknorth, the construction company filed suit against TD

Banknorth for its negligent omission of the lot. Ibid. Fireman’s Fund and TD

Banknorth settled with the construction company for $354,000, of which “TD

Banknorth contributed $150,000 (its single claim deductible) and Fireman’s

Fund contributed the $204,000 remainder.” Ibid.

      TD Banknorth and Fireman’s Fund then proceeded to file a claim against

the insurers that denied the construction company’s underlying claim, and the

ensuing combined settlements equaled $208,000, which was deposited into an

escrow account. Id. at 38-39. As in the matter before us, a dispute arose

between Fireman’s Fund, which sought to recover the full $208,000, and TD

Banknorth, which contended that “under Connecticut’s make whole doctrine, it

was entitled to recover its $150,000 deductible from the escrow funds.” Id. at

39.

      In determining that Connecticut’s made-whole doctrine does not apply to

deductibles, the court stated that,

                                       17
            [i]f the insured were to be reimbursed for its deductible
            before the insurer is made whole, the insured would be
            receiving an unbargained for, unpaid for, windfall.
            Under the terms of the insurance policy, it was agreed
            that, as a condition precedent to the insurer being out of
            pocket for even one dollar, the insured had to first be
            out of pocket the amount of the deductible. The [make]
            whole doctrine deals with situations in which the
            combination of the amount of the deductible and the
            amount of the insurance payment is a sum that was
            insufficient to make the insured whole, and a recovery
            is made from a third party (typically, the insurer for the
            tortfeasor [who] injured the insured).

            [Id. at 42 (second and third alterations in original)
            (quoting 2 A. Windt, Insurance Claims and Disputes:
            Representation of Insurance Companies and Insureds
            § 10:6, at 10-42 through 10-43 (6th ed. 2013)).]

      The Fireman’s Fund court further observed that “[a] deductible

represents the level of risk that the insured has agreed to assume, ordinarily in

exchange for a lower premium cost for the insurance policy,” id. at 46, a fact

other courts have noted as well, see, e.g., Jones v. Nationwide Prop. & Cas.

Ins. Co., 32 A.3d 1261, 1263 (Pa. 2011) (“Not surprisingly, if an insured is

willing to bear the risk of paying a higher deductible, her premiums will be

reduced to reflect that the insurer will be responsible for covering less risk.”).

The Fireman’s Fund court added that it is “not of the opinion that equity

dictates a departure from the terms of the insurance contract into which the

parties voluntarily entered under such circumstances.” 72 A.3d at 46. The

                                        18
court determined that to apply the made-whole doctrine to the deductible at

issue “would effectively disturb the contractual agreement into which TD

Banknorth and Fireman’s Fund entered, thereby creating a windfall for TD

Banknorth for a loss that it did not see fit to insure against in the first instance

when it contracted for lower premium payments in exchange for a deductible.”

Id. at 47.

        In Jones, the Supreme Court of Pennsylvania reached a similar result

when it addressed “whether the made[-]whole doctrine . . . applies to cases

where the underlying collision coverage policy includes a deductible.” 32

A.3d at 1271. The named plaintiff, Brenda Jones, filed a class action against

her carrier for its practice of reimbursing, on a pro rata basis, its insureds’

deductibles from funds obtained in the carrier’s subrogation actions against

third-party tortfeasors. Id. at 1264-65. The class action sought full

reimbursement of the deductibles pursuant to the made-whole doctrine. Id. at

1265.

        The court determined in part that applying the made-whole doctrine to a

collision coverage policy’s deductible would run contrary to the state’s Motor

Vehicle Financial Responsibility Law. Id. at 1271. It also found that

application of the doctrine, “when considering the inherent nature of

deductibles, would run counter to the equitable principles underlying the

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made[-]whole doctrine and subrogation.” Ibid. The court observed that the

state’s collision policies require the insured to “accept the risk of the fi rst

portion of any loss by way of the deductible[,] and to pay the insurer premiums

to assume the risk of the entire amount of the loss above the deductible up to

the fair market value of the vehicle.” Id. at 1272. The court contrasted this to

other policies where carriers provide “coverage up to the policy limits, but any

amount above the policy limits is an uninsured risk not attributable to the

insurer.” Ibid. In this case, the court determined that the carrier

              accepted only the risk of paying if the loss exceeded the
              amount of the deductible, with premiums calculated
              based upon the amount of first dollar liability accepted
              by the insured. Application of the made whole doctrine
              in such a case would force the insurer essentially to
              cover the risk of the deductible where the insured has
              not paid premiums to cover that risk. It follows that the
              insured should not get preferential treatment in a
              collision coverage case, when he or she accepted the
              risk of paying the deductible in the event of an accident.

              [Ibid.]

Thus, the court concluded “that the practice of pro rata reimbursement of the

insured’s deductible from the insurer’s subrogation recovery does not violate

the made whole doctrine, and therefore is a valid practice for . . . insurers to

use.” Ibid.




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      The Supreme Court of Washington reached a different conclusion in

response to the question of “whether a first-party insurer, upon obtaining a

partial recovery in a subrogation action, is required to reimburse its fault-free

insureds for the full amount of their deductibles before any portion of the

subrogation proceeds can be allocated to the insurer.” Daniels v. State Farm

Mut. Auto. Ins. Co., 444 P.3d 582, 584 (Wash. 2019). Observing that “an

insured pays a higher premium for a lower deductible to make up for the

increased administrative costs that come with the insurer having to cover

smaller claims,” the Daniels court held that “[r]equiring that an insurer

reimburse insureds for deductibles as part of the made whole doctrine does not

interfere with this purpose and does not rewrite the policy to one with no

deductible.” Id. at 588. The court explained that, “[w]here insureds sustain a

loss that does not exceed the amount of their deductible, they will still receive

no benefits under the policy.” Ibid.

                                        IV.

      Considering the equitable principles that guide the doctrine of

subrogation alongside insurance policies that allocate first-dollar risk to the

insured, see Culver, 115 N.J. at 457-59, we find that the made-whole doctrine

does not apply to first-dollar risk allocated to the insured.




                                        21
      A self-insured retention or deductible is an amount of risk that the

insured has agreed to assume in exchange for a lower premium cost for the

insurance policy. See Fireman’s Fund, 72 A.3d at 46; Jones, 32 A.3d at 1263.

Where the award from a subrogation action against a third party is insufficient

to reimburse both the insured’s self-insured retention and the carrier’s loss in

excess of the self-insured retention, to place priority of recovery with the

insured would, in effect, convert the policy into one without a self-insured

retention. Such interference with the contract would essentially “write a better

policy for the insured than the one purchased.” See Templo Fuente, 224 N.J.

at 200 (quoting Chubb Custom Ins. Co. v. Prudential Ins. Co. of Am., 195 N.J.

231, 238 (2008)). The result would be “an unbargained for, unpaid for,

windfall” to the insured. See Fireman’s Fund, 72 A.3d at 42 (quoting Windt, §

10:6, at 10-42 through 10-43). We decline to find “that equity dictates a

departure from the terms of the insurance contract into which the parties

voluntarily entered under such circumstances.” See id. at 46.

      Here, because we are answering a certified question of law, we do not

apply that legal conclusion to the contract at issue. Instead, we observe that

our view of the made-whole doctrine requires a close examination of an

insurance contract’s provisions to determine whether the doctrine will apply,

including the effect of reading together provisions relating to self-insured

                                        22
retentions or deductibles and subrogation rights. Read together, if the Policy

unambiguously provides Star with all of the City’s rights to recovery against

third-party tortfeasors in the event that Star makes a payment under the Policy ,

that conclusion means that, under our decision today, the made-whole doctrine

would not apply in this case. Under such circumstances, the made-whole

doctrine would not override the parties’ agreement.

                                       V.

      In sum, we conclude that under equitable principles of New Jersey law,

the made-whole doctrine does not apply to first-dollar risk, such as a self-

insured retention or deductible, that is allocated to an insured under an

insurance policy.



    CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, ALBIN,
PATTERSON, SOLOMON, and TIMPONE join in JUSTICE FERNANDEZ-
VINA’S opinion.




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