A city is not entitled to subrogation from a firefighter’s third-party lawsuit, the New Jersey Supreme Court held Monday in a dispute between the city and its insurer.

In City of Asbury Park v. Star Insurance Co., the state’s high court unanimously determined that under New Jersey law, the made-whole doctrine does not apply to money paid out in deductibles or self-insured retentions.

Between February 2010 and February 2011, the City of Asbury Park held a workers compensation policy with Star Insurance Co., which included a self-insured limit retention of $400,000 per occurrence for workers compensation losses against the city.  Star agreed to indemnify the city for workers comp losses that exceeded that retention.

In January 2011, a firefighter suffered severe injuries on the job and filed a workers comp claim. The city paid him $400,000 and Star paid the remaining $2.61 million. He later filed a lawsuit against a third party for his injuries and received a settlement of $2.7 million. The city, Star and the firefighter reached a settlement agreement, determining that the city and Star would be partially reimbursed with $936,000 from the third party. Star then demanded the entire $936,000, arguing that it was entitled to reimbursement before the city could recover anything. The city argued that it was entitled to be “made whole” before its insurer could recover from the third-party lawsuit, even if its only loss was a deductible or self-insured retention.

The city sought declaratory judgment against Star, but a district court granted summary judgment to Star, holding that it had a subrogation right to the firefighter’s settlement. The city appealed and a circuit court certified the question to the New Jersey Supreme Court since New Jersey courts had never determined whether the made whole doctrine applied to first-dollar risk like deductibles and self-insured retentions.

The court held that the made-whole doctrine did not apply to first-dollar risk, such as the self-insured retention the city paid out before Star’s workers compensation coverage began.

“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,” said the court. “… (T)to place priority of recovery with the insured would, in effect, convert the policy into one without a self-insured retention.”