WORKERS COMPENSATION SUBROGATION AND THIRD PARTY SETTLEMENTS. B. Industrial Revolution and Workers Compensation Statutes

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1 I. HISTORICAL BACKGROUND A. Common Law WORKERS COMPENSATION SUBROGATION AND THIRD PARTY SETTLEMENTS Before the advent of workers compensation statutes, the only protection afforded to victims of work place accidents were whatever remedies were available under common law. This meant that the injured employee could seek legal recourse against the employer if he dared or against other at-fault parties. B. Industrial Revolution and Workers Compensation Statutes With the transition from an agricultural economy to more of an industrial economy, there came recognition of the need to protect workers from the financial harm occasioned by work place injuries, which were increasing in frequency and severity. The first statutes were enacted in Europe (Germany), and the concept emigrated to the United States in the early 20 th century. The principle features of all state workers compensation laws are: 1. No-fault: The employee is entitled to be compensated, by the employer, for wage loss and medical expenses incurred as a result of a work injury, without regard to who is at fault (employee, employer, third party) for the injury. 2. Employer Immunity: In exchange for having to pay benefits without regard to fault, the employer enjoys immunity from common law tort liability. That is, the employer owes to the employee only the economic benefits defined by the workers compensation statute, and is immune to any claims for other economic losses and any non-economic losses (e.g., pain and suffering). Moreover, at least in Pennsylvania, the employer may not be joined as a Defendant in any third party action (against at-fault parties), even for purposes of apportioning fault. 3. Subrogation: Equity Principles and the Re-Introduction of Fault Subrogation Defined (from Black s Law Dictionary): The substitution of one person in the place of another with reference to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim and its rights, remedies or securities. The right of one who has paid an obligation which another should have paid to be indemnified by the other. II. SUBROGATION UNDER PENNSYLVANIA WC ACT A. Section 319 Pa. WCA: All states incorporate subrogation provisions into their workers compensation statutes. In Pennsylvania, Section 319 of the Act provides, in pertinent part: Where the compensable injury is caused in whole or in part by the act or omission of a third party, the employer shall be subrogated to the right of his employee... against such third party to the extent of the compensation payable... [R]easonable attorney s fees and other proper disbursements incurred in obtaining a recovery or in effecting a compromise settlement shall be prorated between the employer and employee... the employer

2 shall pay that proportion of attorney s fees [and costs] that the amount of compensation paid or payable at the time of recovery or settlement bears to the total recovery or settlement. Any recovery against such third person in excess of the compensation theretofore paid by the employer shall be paid forthwith to the employee... and shall be treated as an advance payment by the employer on account of any future installments of compensation. B. Subrogation Rights are Virtually Absolute 1. There is no statutory requirement that the employer/carrier give notice of its subrogation rights to the employee or potential third party Defendants, in order to enforce its subrogation claim. However, for many reasons, it is in the best interest of the employer/carrier to place all interested parties on written notice of its interests, and thereafter to communicate regularly with all interested parties concerning the amount of the lien and the status of third party claims. 2. Estoppel/Forfeiture: Although, as noted, there are no statutory pre-conditions to enforcement of the employer/carrier s subrogation interest, the equitable principles of estoppel and/or forfeiture may be employed to defeat the enforcement of the subrogation interest when, for example, the employer intentionally interferes with the prosecution of the third party claim (e.g., intentional destruction of material evidence). 3. Waiver: The employer/carrier may voluntarily waive or compromise its subrogation interest, usually in exchange for reduction or release of its workers compensation liability. 4. Intervention: Although the employer/carrier s intervention as a party in the third party litigation is not specifically authorized in the WC Act, the Pennsylvania Rules of Civil Procedure do permit an interested party to intervene, under certain circumstances, in civil litigation. Thus, for example, where there is a dispute regarding the fact or amount of the lien or apportionment of damages, the employer/carrier may seek intervention as a party to the third party litigation in order to assert its subrogation rights and protect against distribution of third party recovery proceeds without acknowledgment of those rights. 5. Limitations: Subrogation recovery is limited to like items of recovery. That is to say, if the employer/carrier pays workers compensation benefits in apples, but the employee recovers third party damages in the form of oranges, there will be no subrogation. For example, damages recovered in the third party claim by the injured employee s spouse, for loss of consortium, are not subrogable, because the employer/carrier has paid only wage loss and medical benefits, not consortium damages. Similarly, in order to be subrogated against an injured employee s subsequent claim for medical malpractice arising out of treatment for the work injury, the employer/carrier will be subrogated only to the extent it can show that it paid wage loss and/or medical benefits that are directly attributable to the consequences of the medical malpractice. Note, however, that the employee is not permitted to defeat a subrogation claim by arbitrarily apportioning the 2

3 third party recovery. For example, the employee is not permitted to apportion most or all of his recovery to pain and suffering damages in order to defeat the employer/carrier s claim for wage loss and medical benefits paid. III. INVESTIGATION AND PROSECUTION OF THIRD PARTY CLAIMS EMPLOYER S ROLE Before there can be subrogation recovery, there must be a recovery against third parties and, because work injuries invariably occur on the employer s premises and/or involve an instrumentality under the employer s control, the employer usually has a role to play in the investigation and development of the third party claim. A. Evidence Preservation The employer may preserve evidence that is likely to be material and necessary in the prosecution of the third party claim, by taking photographs of the scene/instrumentalities, retaining and maintaining the condition of evidence (e.g., defective machine), and memorializing witness statements. B. Cooperation with Investigation Generally, it is in the employer s interest to cooperate with the employee s investigation of the claim, by permitting entry of experts, investigators, etc., and providing access to evidence and material witnesses. 1. Indemnification: In some cases, the employer may owe contractual indemnification to the at-fault parties. For example, in its lease agreement with a property owner, a retail employer may agree to indemnify the property owner for negligence claims asserted by the retailer s employees against the property owner. In such cases, the employer may wish to limit its cooperation and/or to involve legal counsel with any such cooperation. However, it is never recommended that the employer actively impede the third party investigation. 2. Commercial Relationship Similar considerations apply where, although there may not be an indemnification agreement, there is nonetheless a business relationship between the employer and the potential third party Defendant. The employer s cooperation with the third party investigation, in these situations, could threaten such relationships and/or draw down good will. 3. OSHA and other Employer Exposure: As noted above, the employer is immune to any direct claims by the employee for tort liability. However, the circumstances of the work injury (e.g., the employer s removal of a guard from a machine) may give rise to other exposures, such as sanctions for OSHA violations. The employer must therefore be cautious and prudent in its cooperation with the third party investigation, and consultation with legal counsel at the outset is well-advised. C. Employer s Prosecution of Third Party Claim Where the injured employee chooses not to pursue a third party claim, may the employer/carrier do so in order to enforce its subrogation rights? While there is some controversy on this issue, there is lower-court authority supporting the employer s legal right to pursue a third party claim, 3

4 as the employee s subrogee. However, as a practical matter, it is difficult to prosecute the claim without the employee s cooperation. IV. MONITORING AND ASSESSMENT A. Notice: As noted above, there is no legal requirement of notice to employee and/or third party Defendant - of a WC subrogation interest in order to render it enforceable. However, the employer s best practice is to place the employee, third party Defendant, and their respective carriers on written notice of the lien early and often. By way of communication with employee counsel, and perhaps as part of the employer s cooperation with the investigation of the third party claim, the employer should identify potential third party Defendants and their respective insurance carriers, and all interested parties should not only be placed on notice, but should be periodically updated as to the amount of the lien. B. Monitoring the Third Party Claim 1. Before suit is filed, employer may monitor the progress of the third party claim by way of regular contact with employee counsel. This communication is undoubtedly facilitated by the employer s cooperation with the investigation of the third party claim. 2. After suit is filed, employer may monitor the third party claim more directly by periodically checking the docket entries (court records) of the pending third party litigation. This, however, is not a substitute for regular communication with employee counsel and with third party defense counsel. C. Assessment of the Third Party Claim: In planning ahead with regard to whether waiver or compromise of the WC lien may be advantageous, it is helpful to make an assessment of the likelihood of the success of the third party claim (i.e., finding of liability) and of the magnitude (dollar value) of that recovery, including the amount of available insurance coverage for the third party Defendants. This assessment can be performed by the employer, the WC carrier and/or by counsel on their behalf. D. Administration of the WC Claim during Pendency of Third Party Claim: The employer and/or WC carrier is often encouraged, by employee counsel, to minimize or forego the WC carrier s efforts to mitigate its WC exposure. By examining the employee and getting an opinion of full recovery, the argument goes, the employer and/or WC carrier adversely affects the value of the third party claim, thereby adversely affecting the subrogation recovery. However, a successful third party claim is never a certainty, whether because of difficulties with fault/liability, or insurance coverage limits and, in any event, the employer/wc carrier can expect to recover no more than about 60% of whatever is paid in workers compensation benefits. Therefore, it is always in the employer s best interest to seek to contain its exposure for payment of WC benefits. V. LIEN RESOLUTION AND METHODS OF ENFORCEMENT A. Suit against Employee and/or Third Party Defendants after Recovery 1. Suit versus employee: The employer/carrier may enforce its subrogation rights by suing the employee after the third party recovery. The difficulty here is that the employee may well be judgment-proof by the time legal proceedings are concluded. 2. Suit versus third party Defendants: The employer/carrier may enforce its subrogation rights against the third party Defendants, even after the third party monies have been paid 4

5 to the employee. However, to proceed in this fashion, the employer/carrier must prove the negligence (or other liability-producing conduct) of the third party Defendants. That is, the subrogation recovery here is not automatic. Moreover, although there is no case law on the issue, this avenue of recovery is likely to be particularly difficult if the third party Defendants were not on written notice of the subrogation interest. 3. Suit versus employee s counsel: This avenue of recovery is available only where it can be demonstrated that the employee s lawyer contractually agreed to undertake protection of the subrogation interest. B. Intervention in Third Party Litigation As noted above, particularly where there is a dispute as to the fact or amount of the subrogation interest, the Rules of Civil Procedure permit intervention, by the employer/carrier, as an interested party. C. Third Party Settlement Agreement If the fact and amount of the lien are not in dispute, and if the employee does not resist/refuse repayment and/or future credits, the parties respective rights and liabilities past, current and future may be delineated in a Third Party Settlement Agreement. D. Mechanics of Lien Reconciliation 1. Past Only: In this scenario, the workers compensation claim is closed at the time of the third party recovery, and there is no possibility of future workers compensation exposure (e.g., WC claim is closed by a termination of benefits, or Compromise and Release Agreement). (a) (b) Third party recovery exceeds WC lien: Employer recovers, out of the proceeds of the third party, all workers compensation benefits paid, less its pro-rata share of the cost of that recovery. See attached Third Party Settlement Agreement (3PSA) No. 1, attached. WC lien exceeds third party recovery: Employer recovers entirety of third party proceeds, less the cost (counsel fee and litigation costs) of that recovery. 2. Past & Future: In this scenario, workers compensation benefits have been paid in the past, and are either continuing or there is a possibility that future medical and/or indemnity benefits will be owed. (a) (b) WC lien exceeds third party recovery: Employer recovers, out of the proceeds of the third party, all workers compensation benefits paid, less its pro-rata share of the cost of that recovery. See attached Third Party Settlement Agreement (3PSA) No. 1, attached. Third party recovery exceeds WC lien: In this scenario, the amount by which the third party recovery exceeds the existing WC lien operates as a credit, in favor of the employer, against its future WC liability. During this grace or vacation period, the employer must pay to the employee the employer s pro-rata share of the cost of recovery of each increment of the credit. See attached 3PSA No. 2. 5

6 3. Future Only: In this scenario, a third party recovery is effected before workers compensation benefits are paid. The most common example is where the employee settles the third party claim while a Claim Petition on a denied WC claim is pending. Ideally, the fact of the lien will be recorded in the WC judge s decision, so that an appropriate Third Party Settlement Agreement can be entered if and when there is a corresponding third party recovery. VI. WAIVER & COMPROMISE The employer may entirely waive, or compromise (agree to reduce) its subrogation interest, either before (more common) or after (less common) the third party recovery is effected. The primary reasons for waiver or compromise are: A. Example: To use the waiver/compromise as consideration, or partial consideration, for settlement of the WC claim by way of a Compromise and Release Agreement. To avoid forcing the third party claim to a trial that could result in a defense verdict. This is why it is important for the employer to assess both the liability and damages aspects of the third party claim, before the eve of the third party trial. Employer has paid $50, in WC benefits, and benefits are continuing Employee effects a third party recovery of $100,000.00, by verdict or settlement The cost of the third party recovery is $40, (1/3 contingent fee, plus expert expenses, etc.) In this scenario, the parties walk away with the following: - Employee: $30, Employer: $30, Employee Counsel: $40, All parties here have incentive to compromise, because the employee nets only $30, out of a $100, third party recovery, and the employer, although it has recovered 60% of its accrued lien, has continuing liability for payment of WC benefits. Depending upon the value of the WC claim at the time of the third party recovery, the employer may, in exchange for a Compromise and Release Agreement, reduce, waive, or waive and pay additional consideration for a Compromise and Release of the WC claim. 6