This opinion is subject to correction before publication in the PACIFIC REPORTER. Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email corrections@appellate.courts.state.ak.us.

OPINION

WINFREE, Justice.

I. INTRODUCTION

The passenger of a car was injured in a two-car accident. The passenger brought suit against the other car's driver; the passenger's requested recovery included her insurer's subrogation claim for medical expenses. The driver made an early offer of judgment, which the passenger rejected. The driver then paid the subrogation claim, thereby removing it from the passenger's expected recovery. The driver made a second offer of judgment, which the passenger rejected, and the case proceeded to trial. After trial the jury awarded the passenger damages and both parties claimed prevailing party status; the driver sought attorney's fees under Alaska Civil Rule 68. The superior court ruled the first offer of judgment did not entitle the driver to Rule 68 fees, but the second offer did. Both parties appeal, arguing the superior court improperly considered the subrogation claim in its Rule 68 rulings. We conclude the subrogation payment had to be taken into account when evaluating the first offer of judgment, but not the second offer of judgment; we therefore affirm the superior court's rulings.

II. FACTS AND PROCEEDINGS

Patricia Campbell and Karen Dearlove were in a car accident. Campbell sued Dearlove, alleging the accident was caused by Dearlove's negligence; Dearlove denied liability and suggested the accident might be due to malfunctioning brakes. Both parties were insured by a State Farm company: Campbell by a company licensed in Minnesota and Dearlove by a company licensed in Alaska. Campbell's insurer paid the first $20,000 of her medical expenses under her policy's Personal Injury Protection (PIP) coverage. Campbell's insurer therefore had a subrogation claim against Dearlove.1

Campbell's insurer never sent her a "Ruggles letter."2 To the contrary, Campbell's insurer repeatedly called Campbell's attorney for progress reports. Campbell's counsel stated that the insurer "expected [him] to protect [its] subrogation interest in PIP benefits paid."

Dearlove's first Rule 68 offer of judgment was for $18,000, inclusive of prejudgment interest, Rule 82(b)(1) attorney's fees, and Rule 79 costs; it also required Campbell to satisfy her insurer's outstanding subrogation claim. Campbell did not accept Dearlove's first offer of judgment.

Dearlove was deposed and testified there "weren't any problems with the brakes" and the accident was caused by her own negligence. Dearlove later formally stipulated to liability, leaving damages as the only issue for trial.

After Dearlove's deposition her insurer negotiated with Campbell's insurer and settled the subrogation claim by direct payment of $20,000 to Campbell's insurer. Dearlove then sought a ruling that Campbell could not seek recovery of the $20,000 in medical expenses paid by her insurer. Campbell did not oppose the motion, except to request recovery of her attorney's fees and costs on the $20,000 payment. The superior court ruled Campbell could not include the medical expenses in her claim for damages at trial, but reserved the question whether Campbell could recover fees and costs on the $20,000 payment.

Dearlove's second Rule 68 offer of judgment was for $5,000 plus prejudgment interest, Rule 82(b)(1) attorney's fees, and Rule 79 costs. The offer stated Campbell would be "responsible for satisfying any and all accident-related liens and expenses with the exception of the [PIP] Lien of $20,000.00 which [Dearlove had already] satisfied." Campbell rejected this offer.

The case proceeded to trial and the jury was shown an exhibit itemizing Campbell's medical expenses. The expenses covered by Dearlove's insurer's $20,000 payment to Campbell's insurer appeared in a separate column marked "PAID." The court instructed the jury that "[a] portion of the expenses for [the] medical treatment is not at issue because it has been paid. You are not to make an economic award for those expenses that have already been paid." The jury returned a verdict for $2,370 in economic damages and $1,500 in non-economic damages for a total award of $3,870. Both parties claimed prevailing party status and moved for fees.

The superior court reasoned Dearlove's first Rule 68 offer would have resulted in a net $2,000 loss to Campbell because the offer was for $18,000 lump sum and under the offer's terms, Campbell would have been responsible for her insurer's $20,000 subrogation claim. From this, the superior court concluded that Dearlove was not entitled to fees under the first Rule 68 offer.

The superior court then concluded Dearlove was entitled to Rule 68 fees and costs from her second offer. To compare Campbell's $3,870 recovery at trial with the $5,000 second offer of judgment, the court made several preliminary rulings. First, because the second offer added fees, prejudgment interest, and costs to the offer amount — as would the jury's verdict — the superior court concluded those "add-ons" did not change the comparison's outcome.3 Second, the court did not include the $20,000 subrogation payment in Campbell's total recovery when it compared the second offer to the verdict, because the subrogation claim had been satisfied before the second offer was served. Third, because the $20,000 payment was not included in Campbell's verdict for purposes of assessing the second offer, it was not included in the calculation of prejudgment interest, Rule 82 attorney's fees, and costs that Dearlove owed Campbell on the verdict. Finally, though the court concluded Campbell was entitled to recover a proportional share of her own actual attorney's fees and costs incurred in the process of recovering the subrogation claim on her insurer's behalf, the court also concluded this obligation was owed by Campbell's insurer, not Dearlove. The court declined to order Campbell's insurer to pay its share of Campbell's fees and costs because the insurer was not a party to the litigation.

Based on these legal rulings, the superior court calculated that Campbell's recovery at trial ($3,870 plus "add-ons") was at least five percent less favorable than the second offer of judgment ($5,000 plus "add-ons"). Accordingly, the court ruled that Dearlove was entitled to recover Rule 68 attorney's fees and costs incurred after Campbell's second offer of judgment.

Campbell appeals the superior court's decision regarding Dearlove's second offer of judgment. Dearlove cross-appeals the superior court's decision regarding her first offer of judgment.

III. STANDARD OF REVIEW

We review de novo whether the superior court correctly applied the law in awarding attorney's fees.4 We also exercise our independent judgment in reviewing the superior court's interpretation of Civil Rule 68,5 as well as in calculating a judgment's value to determine whether it exceeded an offer of judgment.6

IV. DISCUSSION

A. Subrogation Claims

A subrogation claim arises when an insurer compensates its insured for an injury caused by a third party and obtains the "right to proceed against [the] third party responsible for [the] loss which the insurer has compensated pursuant to its contractual obligation under [the] policy."7 An insurer with a subrogation claim "may pursue a direct action against the tortfeasor, discount and settle its claim, or determine that the claim should not be pursued."8 The insured may include the subrogation claim in the insured's own claim against a third-party tortfeasor, unless the insurer objects.9

Here, Campbell's insurer repeatedly indicated that it wanted Campbell to pursue recovery of its subrogation claim. The subrogation claim was part of the damages Campbell sought from Dearlove at the start of this litigation.

B. Alaska Civil Rule 68

When there is a single defendant, Rule 68(b) provides in relevant part:

Rule 68's purpose is to discourage expensive and protracted litigation by encouraging settlements,10 with earlier settlement offers entitling the offeror to a greater percentage of attorney's fees.11 In practice, the rule encourages parties to assess their litigation risks carefully and penalizes rejection of reasonable settlement offers.

C. Dearlove's First Offer Of Judgment

Dearlove's first offer of judgment was for $18,000 (including add-ons) and required Campbell to pay all outstanding medical liens. The superior court reasoned that this offer would have resulted in a $2,000 net loss to Campbell due to her responsibility to pay the $20,000 subrogation claim. Though Campbell received only a modest award of $3,870 at trial, the court concluded that Campbell was better off with the jury award than she would have been if she had accepted the first settlement offer.

Dearlove argues the court erred by considering the $20,000 subrogation claim when it assessed the value of her first settlement offer. She maintains that the correct comparison was between the $18,000 offer, standing alone, and the $3,870 award (plus add-ons). Although we agree it was error to compare the hypothetical net recovery to the jury award, we disagree with Dearlove that the $20,000 payment to Campbell's insurer is irrelevant in the comparison. As we discuss below, the superior court should have included Dearlove's payment of the subrogation claim in Campbell's recovery before comparing it to the jury award (plus add-ons).

For the offeror to obtain attorney's fees under Rule 68 when there is a single defendant, the value of the amount recovered must be at least five percent less favorable than the offer's value.12 The offer of judgment must not be conditional or joint, though it can acknowledge the existence of a lien and require the party accepting the offer to pay the lien from the settlement.13 The critical comparison is between the offer amount and the ultimate recovery. We have refused to label an offer as "worthless" simply because it was for less than the value of a subrogated lien.14 This recognizes that although a party may have incurred significant damages, other factors — such as strong defenses to liability — may significantly reduce a claim's settlement value. Offers for less than the value of subrogated liens can serve as the basis for Rule 68 offers of judgment.

But contrary to Dearlove's position, we have held that requiring courts to consider only the final award is "an overly technical reading" of Rule 68.15 In Progressive Corp. v. Peter ex rel. Peter, the defendant made the plaintiffs an offer of judgment for $52,501 plus prejudgment interest, costs, and fees.16 The plaintiffs rejected the offer.17 The superior court subsequently ruled on a key liability issue against the defendant.18 The defendant then voluntarily paid $75,681.27 — an amount representing the underinsured motorist policy limits — into the court registry for the plaintiffs' benefit.19 Because the plaintiffs did not recover additional damages and were awarded only $8,555 in attorney's fees, the defendant sought Rule 68 fees, claiming "[v]oluntary payments and partial settlements are not the benchmark by which offers of judgment should be evaluated."20 The superior court disagreed, and we affirmed the superior court's ruling.21 Our decision looked to the total "amount recovered" rather than just the amount awarded at trial; we held that the superior court did not err by including the insurer's voluntary payment in its calculation of the "judgment finally rendered."22

Here the superior court should have included the amount of the subrogation claim recovery along with the jury's verdict when determining the total amount Campbell recovered. We reach this conclusion because Campbell's insurer specifically requested that she include its subrogation claim in the damages she pursued in her lawsuit, and — at the time of the first settlement offer — its subrogation claim was a part of Campbell's claim and was included in the first offer as an "accident-related lien[]." Under the facts of this case Dearlove's insurer's direct payment to Campbell's insurer to satisfy its subrogation claim was a part of Campbell's total recovery, and it should have been considered when the superior court compared Campbell's "judgment finally rendered" against the first settlement offer.

The consequences of interpreting Rule 68 so strictly as to allow only consideration of the amount reflected in a final verdict could thwart Rule 68's goals. Under Dearlove's reading, voluntary pre-trial payments would not be included when assessing a previous Rule 68 offer's success. But this would permit a party to make a Rule 68 offer knowing the opposing party is unlikely to accept, make voluntary payments to remove part of the opposing party's claim from the issues to be presented at trial, and then seek Rule 68 attorney's fees and costs based on the amount awarded in the final verdict.

Indeed, in Progressive we cautioned that abusive settlement tactics could result if trial courts were unable to consider partial recoveries expressly included in the court's judgment: "To hold otherwise would be to create a loophole allowing parties to either escape or create the punitive measures of an offer of judgment by simply making a gratuitous payment prior to the entry of a final judgment. Such a loophole would effectively avoid the rule."23 We further observed that if trial courts could not consider voluntary pre-trial payments when determining whether to award Rule 68 fees, the "unconditional acceptance of an eve-of-trial payment could trigger an unexpected and ruinous penalty."24

Rule 68's purpose is served by awarding fees and costs when an offeree incorrectly assesses a claim's value. It is not intended to benefit an offeror who unilaterally satisfies a portion of the other party's claim in a way that is not reflected in the final verdict.25 As to Dearlove's first offer of judgment, the correct comparison is between her $18,000 all-inclusive offer and Campbell's $23,870 recovery — Dearlove's $20,000 payment to Campbell's insurer plus the $3,870 Campbell recovered at trial (plus add-ons). Dearlove's first offer was for an amount less than Campbell's recovery; accordingly, Rule 68 fees were not available to Dearlove.

D. Dearlove's Second Offer Of Judgment

Dearlove's second offer of judgment was for $5,000 plus prejudgment interest, Rule 79 costs, and Rule 82 attorney's fees. In concluding Dearlove was entitled to Rule 68 fees from this offer, the superior court did not consider the $20,000 payment because the subrogated claim had already been satisfied, was no longer part of Campbell's claim against Dearlove when the second offer was served, and the second offer expressly noted the subrogation claim had been resolved. The court also did not consider the value of prejudgment interest, costs, or attorney's fees on the verdict because both the $3,870 verdict and the second offer of judgment included these add-ons separately; the court decided the add-ons would not make a significant difference in the comparison.26 Campbell appeals the court's decision not to include: (1) the $20,000 payment; and (2) post-verdict Rule 82 fees and Rule 79 costs on the $20,000 payment when it awarded Dearlove Rule 68 fees. We examine each argument in turn.

The superior court was correct not to include the $20,000 payment in Campbell's total recovery when considering the second offer. As stated above, Rule 68's policy goals are to encourage settlement and avoid protracted litigation.27 By the time the second offer of judgment was served, Campbell's claim had changed because Dearlove had settled the insurer's subrogation claim. Campbell could no longer have expected to recover the $20,000 in medical expenses at trial, which she conceded before trial, and the question became whether her remaining damages were likely to exceed the $5,000 offer of judgment. The superior court's review of the second offer of judgment correctly focused on that assessment of Campbell's remaining claims; Campbell's inaccurate assessment of litigation risks and the value of her remaining claims led to a recovery less than the offer of judgment.

Campbell also argues the superior court erred in failing to include attorney's fees and costs on the $20,000 payment when considering her "judgment finally rendered." In essence, Campbell argues that because her insurer did not collect costs and attorney's fees in addition to the $20,000, she was still pursuing that portion of the subrogation claim. But because the subrogation claim against Dearlove belonged to Campbell's insurer, so did the prejudgment interest, costs, and attorney's fees associated with that claim against Dearlove. For its own reasons, Campbell's insurer chose to settle its subrogation claim against Dearlove for $20,000. After that settlement, Dearlove had no liability to the insurer, or to Campbell, for any portion of the $20,000 in medical expenses covered by the subrogation claim or for any associated prejudgment interest, costs, or attorney's fees. Accordingly, the superior court did not err in declining to consider hypothetical costs and attorney's fees on the $20,000 settlement payment as a recovery by Campbell from Dearlove when comparing Campbell's recovery against Dearlove's second offer of judgment.

We emphasize that (1) there is nothing in the record to suggest collusion by the two insurers, and (2) the subrogation claim settlement ultimately did not prejudice Campbell in connection with Dearlove's Rule 68 offers of judgment. Collusion in a subrogation claim settlement prejudicing the plaintiff with respect to a previous Rule 68 offer of judgment likely would require a different analysis. And even in the absence of collusion, a subrogation claim settlement prejudicing the plaintiff-insured with respect to a previous Rule 68 offer of judgment may well implicate the first-party insurer's duty of good faith and fair dealing towards its insured. We do not need to address these issues here.

E. Common Fund Analysis

Campbell argues that she is entitled to additional attorney's fees and costs under the common fund doctrine, contending that Dearlove should also have to pay part of Campbell's counsel's contingency fee for the effort expended to recover the subrogated claim. We find no support for this argument.

The common fund doctrine provides that "a litigant or lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney's fee from the fund as a whole."28 The doctrine's goal is to prevent "persons who obtain the benefit of a lawsuit without contributing to its cost [from being] unjustly enriched at the successful litigant's expense."29 In the subrogation context, this rule is typically applied so that "[a]ny proceeds recovered [on behalf of the insurer] must be paid to the insurer, less [proportional] costs and fees incurred by the insured in prosecuting and collecting the claim."30 Otherwise, the insurer would take the benefit of the insured's premium and the insured's litigation effort.31

The superior court recognized there was no question that Campbell's insurer benefitted from Campbell's litigation efforts. But that does not mean Dearlove should be responsible for part of Campbell's fee agreement with her attorney under the common fund doctrine. As we held in Sidney v. Allstate, a litigating party is entitled to recover a fair share of fees and costs from the beneficiaries of the party's litigation efforts.32 In this case, the party who benefitted from Campbell's litigation efforts was Campbell's insurer, not Dearlove. Campbell must look to her insurer, not Dearlove, for the costs and attorney's fees attributable to her insurer's recovery of the $20,000.

V. CONCLUSION

We AFFIRM the superior court's rulings.