Johnson v. State Farm (Mont. 2025): Attorney Fees Are Part of “Made Whole,” But Only for Covered Losses; Coverage‑Segmented Subrogation Clarified

Introduction

In Johnson v. State Farm Ins., 2025 MT 194, the Montana Supreme Court confronted two recurring issues in insurance subrogation disputes: (1) how the “made whole” doctrine operates when an insured incurs attorney fees to recover from a third-party tortfeasor, and (2) whether a common-law conversion claim premised on allegedly premature insurer subrogation survives statutory preemption. While affirming dismissal of the insureds’ suit, the Court significantly corrected the lower court’s reasoning and further clarified Montana’s made-whole jurisprudence.

The case arises from a motor vehicle accident in which State Farm paid certain covered property losses for its insureds, Molly and Mark Johnson, but declined others (10 compact discs and a second set of snow tires). State Farm later asserted subrogation and obtained reimbursement from the tortfeasor’s insurer, GEICO. The Johnsons sued, arguing State Farm violated the made whole doctrine by subrogating before they were fully compensated, and also alleged conversion based on State Farm’s collection. The district court dismissed on standing grounds and, as to conversion, on preemption. The Montana Supreme Court affirmed, but on materially different grounds that refine how the made whole doctrine applies by coverage category and how attorney fees figure into the calculus.

Summary of the Judgment

• The Court reaffirmed that the made whole doctrine in Montana includes the insured’s “costs of recovery, including attorney’s fees,” before the insurer may subrogate, relying on Skauge, DeTienne, McMillan, Swanson, and Zacher. The American Rule does not displace this equitable framework, and the availability or size of the third-party’s policy limits is irrelevant to the made-whole analysis.
• However, the Court held that made-whole protection is assessed by coverage category under Van Orden. An insurer may subrogate for discrete covered losses after the insured is made whole as to those covered losses, even if the insured remains uncompensated for other losses that were not covered by that insurer’s policy.
• Applying that rule, the Johnsons’ claimed shortfall was limited to attorney fees incurred to recover $1,618 in property loss that State Farm did not cover. Because those fees pertained to uncovered losses, they did not trigger the made whole barrier to State Farm’s subrogation on covered property payments. Accordingly, the Johnsons failed to plead a made-whole injury caused by State Farm’s subrogation.
• The conversion claim, premised on the same alleged injury, also failed for lack of standing. The Court therefore declined to reach statutory preemption under § 33-18-242(3), MCA.

Detailed Analysis

Precedents Cited and Their Influence

Skauge v. Mountain States Telephone & Telegraph Co. (1977)

Skauge is the fountainhead of Montana’s made-whole doctrine. It established that:

• Subrogation is equitable in nature and aims to place the ultimate burden on the party who should, in justice, pay.
• When the insured’s total loss exceeds insurance reimbursement, the insured must be “made whole for his entire loss and any costs of recovery, including attorney’s fees,” before the insurer may subrogate against the insured or the tortfeasor (emphasis in original).

The Court repeatedly quoted and relied on Skauge to emphasize that attorney fees are part of the insured’s total loss for made-whole purposes and that subrogation must wait “before” the insured is fully compensated for covered losses and the costs of achieving that recovery.

DeTienne Associates v. Farmers Union (1994)

DeTienne affirmed that the insured’s attorney fees come “off the top” of any third-party recovery before the insurer takes reimbursement—even if that means the insurer is not fully reimbursed. The Court here invoked DeTienne to make two points:

• The word “before” in Skauge prioritizes the insured’s interest in being made whole, including attorney fees.
• Any contrary allocation risks unjust enrichment of the insurer via the insured’s legal efforts.

State Compensation Insurance Fund v. McMillan (2001)

McMillan, a workers’ compensation case, adopted Zacher’s formula: to determine whether the insured has been made whole, add (a) amounts received from the insurer, (b) amounts received or to be received from third parties, and (c) costs of recovery, including attorney fees. Only when that sum equals the entire loss does subrogation begin. The Johnson Court used McMillan to reaffirm the inclusion of attorney fees and to stress that the availability of third-party funds (even the federal government’s deep pockets) is not dispositive.

Swanson v. Hartford (2002)

Swanson held that Montana public policy requires full reimbursement of the insured’s losses and recovery costs, including attorney fees, before subrogation—“regardless of contract language to the contrary.” Notably, the settlement there did not exhaust the tortfeasor’s policy limits, yet the insured’s fees still came first. Johnson relied on this to reject the district court’s focus on GEICO’s limits.

Zacher v. American Insurance Co. (1990)

Zacher supplied the operative made-whole formula incorporated in McMillan. Johnson quoted Zacher again to anchor the doctrinal arithmetic that includes attorney fees in the made-whole threshold.

Van Orden v. USAA (2014)

Van Orden is the decisive precedent for Johnson’s outcome. It held that made-whole analysis is performed by coverage category. Where damages are “discrete, readily-ascertainable, and completely covered under a separate policy or portion of the policy for which a separate premium has been paid,” subrogation may proceed as to that element of loss—even if the insured has not been made whole overall as to all losses. Johnson clarifies and applies Van Orden by explaining:

• Insurers cannot subrogate until the insured is made whole for the type of loss the insurer was paid to cover.
• But the existence of uncompensated, uncovered losses does not block subrogation for covered losses once the insured is made whole in that covered category.

Western Tradition Partnership v. Attorney General (2012)

The American Rule generally bars fee-shifting absent statute or contract. Johnson stresses that the American Rule does not control the made-whole doctrine; the latter is an equitable allocation rule governing how an existing recovery is divided between insured and insurer. Thus, counting attorney fees within the made-whole calculus does not amount to a fee award displacing the American Rule.

Larson v. State (2019) and “Right Result, Wrong Reason”

Larson sets Montana’s two-part standing test, requiring a direct causal link between the alleged illegality and the plaintiff’s specific harm that the court can remedy. Johnson uses Larson to frame the justiciability inquiry and ties the plaintiffs’ failure to allege causation to the coverage-category analysis under Van Orden. The Court also applied the “right result, wrong reason” principle (see Hubbell v. Gull SCUBA Ctr., quoting Brookins) to affirm dismissal despite correcting the district court’s doctrinal missteps on the American Rule and policy limits.

The Court’s Legal Reasoning

1) Attorney fees are part of “made whole”; the American Rule is not a bar

The district court held that the American Rule prevented the Johnsons from recovering attorney fees from GEICO and thus broke causation. The Supreme Court decisively rejected that approach. The made-whole doctrine is an equitable allocation rule that requires including attorney fees among the insured’s losses “before” the insurer subrogates; it does not award fees against the third party and therefore does not contradict the American Rule. The Court underscored that its precedents already answered this question repeatedly: fees are included in the made-whole threshold (Skauge, DeTienne, McMillan, Swanson).

2) Third-party policy limits are irrelevant to the made-whole threshold

The district court further reasoned that because the Johnsons settled below GEICO’s property-damage limits, State Farm’s subrogation could not have constrained their ability to recover fees. The Supreme Court rejected any limits-based analysis. Swanson and McMillan teach that what matters is how the actual recovery is allocated between insured and insurer—not the theoretical availability of more third-party insurance.

3) Coverage-category segmentation under Van Orden is dispositive

The core of the Court’s holding is its application and clarification of Van Orden:

• The made-whole doctrine protects the insured within each coverage category for which the insured paid premiums (e.g., covered property damage), including the insured’s costs of recovery for that category.
• If the insured remains uncompensated for other losses that were not covered by that policy (e.g., distinct, uncovered property items), those uncovered deficits do not bar the insurer from subrogating for the covered category, provided the insured has been made whole for that covered category.

Here, the only harm the Johnsons pleaded was the attorney fees they incurred to obtain $1,618 for items State Farm did not cover. Those fees attached to uncovered losses and thus fell outside the made-whole barrier that constrains subrogation for covered losses. Because State Farm subrogated only for amounts it paid on covered property damage—and the Johnsons’ alleged shortfall related solely to uncovered items—the Johnsons failed to show that State Farm’s subrogation caused a made-whole injury.

4) Standing and conversion

Because the alleged injury (fees on uncovered losses) was not protected by the made-whole doctrine, the Johnsons could not establish the necessary causal link between State Farm’s subrogation and any cognizable made-whole harm. That same causation failure defeated standing for their conversion claim, which depended on identical factual allegations. The Court therefore did not reach the question whether § 33-18-242(3), MCA, preempts the conversion claim.

Impact and Implications

Reaffirmations with practical bite

• Attorney fees matter: Insureds remain entitled to include their reasonable attorney fees and other recovery costs in the made-whole calculation before an insurer may take reimbursement from a third-party recovery for covered categories.
• Policy limits are not the touchstone: Whether the tortfeasor’s carrier has “room” left under its limits does not bear on whether the insured has been made whole. The analysis is about allocation of what is actually recovered, not potential capacity.
• No American Rule detour: Courts will not short-circuit made-whole analysis by invoking the American Rule. The equitable made-whole doctrine remains fully operative in Montana.

Coverage-segmented subrogation is clarified and confirmed

• Insurers may proceed with subrogation as to discrete covered losses once the insured is made whole for that covered category—even if the insured still has uncovered, uncompensated damages in other categories.
• Insureds cannot use attorney fees incurred to recover uncovered losses as a shield to block subrogation on covered losses.
• In practice, this encourages careful categorization of losses and premiums. Where separate coverages or policy parts exist, parties should analyze whether the insured has been made whole within the relevant category for which premiums were paid.

Pleading and proof going forward

• Insureds must plead injury and causation tied to covered categories. It will not suffice to plead fee-related shortfalls tied solely to uncovered losses.
• Attorneys should segregate fees by the work’s relation to covered vs. uncovered elements where possible. If the insured’s legal effort contributes to a recovery that reimburses the insurer for covered losses, the insured’s proportional fees for generating that recovery should be included in the made-whole calculus for that covered category.
• Insurers asserting subrogation should confirm that the insured is made whole in the coverage at issue, inclusive of fees attributable to that covered category’s recovery. Early subrogation that disregards the insured’s covered-category fees remains vulnerable.

Conversion and UTPA preemption

The Court did not decide whether § 33-18-242(3), MCA, preempts the Johnsons’ conversion claim because standing failed. Practitioners should note that common-law claims against insurers often encounter preemption defenses under Montana’s Unfair Trade Practices Act, but Johnson provides no new holding on that point.

Complex Concepts Simplified

Subrogation

When an insurer pays its insured for a loss caused by a third party, the insurer is “subrogated” to the insured’s rights to pursue that third party to recoup what it paid. Subrogation prevents double recovery by the insured and ensures the wrongdoer ultimately bears the loss.

The Made Whole Doctrine

This equitable rule prioritizes the insured: before an insurer may take any portion of a third-party recovery as reimbursement, the insured must be fully compensated for the covered loss and the “costs of recovery,” including reasonable attorney fees. This is not a fee-shifting award under the American Rule; it is an allocation rule for dividing the recovery that already exists.

Coverage-Category (Segmented) Analysis

Montana assesses made-whole status by coverage category. If a loss is fully covered under a distinct policy or policy part for which separate premiums were paid, the insurer can subrogate that covered element once the insured is made whole for that covered element—even if other, uncovered losses remain uncompensated.

American Rule vs. Made Whole

Under the American Rule, parties generally pay their own attorney fees absent a statute or contract authorizing fee-shifting. The made-whole doctrine does not award fees; it requires counting the insured’s fees within the total-loss calculation that must be satisfied before subrogation for covered losses.

Standing and Causation

To sue, a plaintiff must show a direct causal connection between the defendant’s action and a concrete harm that the court can remedy. In made-whole disputes, the insured must tie the alleged shortfall to the insurer’s subrogation on covered losses; fees tied exclusively to uncovered losses will not establish causation.

Conversion and UTPA Preemption

Conversion is a tort consisting of wrongful exercise of dominion over another’s property. In Montana, insurance-related tort claims can be preempted by § 33-18-242(3), MCA (the Unfair Trade Practices Act). Johnson leaves preemption unresolved here because the conversion claim lacked standing independently.

Conclusion

Johnson v. State Farm both reaffirms and sharpens Montana’s made-whole doctrine. The Court unequivocally reiterates that attorney fees are part of the insured’s “entire loss” and that neither the American Rule nor third-party policy limits undermine that principle. At the same time, Johnson underscores that made-whole protection is measured by coverage categories: an insurer may subrogate for discrete covered losses once the insured is made whole as to those covered losses, even if uncovered losses remain.

For insureds, the lesson is to plead and prove made-whole shortfalls—including attorney fees—in the specific coverage category where the insurer seeks reimbursement. For insurers, the decision confirms that subrogation can proceed on covered elements after category-specific made-whole status is achieved, but only with due regard for the insured’s recovery costs in that category. Finally, because the plaintiffs’ alleged injury was confined to fees on uncovered losses, standing failed for both their made-whole and conversion theories, leaving preemption under § 33-18-242(3), MCA, for another day.