Ex parte State Farm: A UIM insurer does not have a subro interest in Lambert advance.

In January 2016, the Supreme Court of Alabama decided the matter of Ex parte State Farm Mutual Automobile Insurance Company (underlying case: In re  State Farm Mutual Automobile Insurance Company v. James Ross Pritchard, Jr.), — So.3d —, 2016 WL 360665 (Ala. 2016), wherein it decided whether a UIM insurer’s right to recover its Lambert advance is a form of a right of subrogation. The Court holding was a three-part decision: (1) the right of subrogation that a UIM insurer protects by making a Lambert advance is its subrogation right for sums paid by the insurer in excess of the tortfeasor’s liability limits; (2) the making of a Lambert advance does not create a subrogation right for the UIM insurer within a tortfeasor’s liability limits, therefore a UIM insurer’s right to recover its Lambert advance is not a subrogation right; and (3) because the UIM insurer has no subrogation interest in recovering the Lambert advance, the insured’s recovery of the Lambert advance from the insurer is an incidental benefit to the insured and does not create a common fund from which the insured’s attorney may be awarded fees to be paid by the insurer.

Important underlying points of law:

• Alabama’s common fund doctrine: The common fund doctrine in Alabama insurance subrogation matters is based on a principle of equity that, to the extent of its subrogation interest, an insurer is entitled to share in any recovery its insured achieves against a tortfeasor; the insurer then should bear a proportional share of the burden of achieving that recovery, including a pro rats share of the insured’s attorney’s fees. See Gov’t Empl. Ins. Co. v. Capulli, 859 So.2d 1115, 1119 (Ala.Civ.App. 2002).
• The Lambert Advance: In Lambert v. State Farm Mut. Auto. Ins. Co., 576 So.2d 160 (Ala. 1991), the Alabama Supreme Court created a mechanism whereby an insured could settle with a tortfeasor while preserving the UIM subrogation rights of the insurer. The UIM insurer who wishes to protect its subrogation right must advance to its insured, within the appropriate time, an amount equal to the tortfeasor’s settlement offer, therefore acting as a substitute for the liability insurance limits of the tortfeasor.

Whether a UIM insurer’s right to recover its Lambert advance is a subrogation right:

In the present case, State Farm asked the Alabama Supreme Court to determine whether a UIM insurer’s right to recover its Lambert advance is a form of a right of subrogation. The trial court and Civil Court of Appeals both found that it was a subrogation right. State Farm argued that a UIM insurer does not have a subrogation interest in the Lambert advance; that the recovery by the insurer from the tortfeasor of a Lambert advance does not create a common fund; and that as a result, the UIM insurer should not be required to pay attorney’s fees for the recovery of the Lambert advance under the common-fund doctrine. The Alabama Supreme Court agreed with State Farm.

In applying its ruling to the case at bar, the Supreme Court held that State Farm did not have a subrogation interest in the $50,000.00 Lambert advance it extended to Pritchard and Pritchard’s recovery from the tortfeasor of the Lambert advance did not create a common fund from which State Farm was required to pay a pro rata share of Pritchard’s attorney’s fees.