Are there some easy ways for claims managers, insurers, and attorneys to protect the right to subrogate when workers compensation benefits are provided to an employee who was injured due to third-party negligence? Yes, and we’ll share some general strategies and tips applicable in every jurisdiction, as well as some rules specifically applicable to claims in California, in order to provide a quick reference guide to a few of the most common issues and strategies that come up on an almost daily basis.
The Carrier’s Subrogation Right
In California, the right to subrogate is statutory, beginning with California Labor Code Section 3852, with case law providing further clarification. Section 3852 states, in part: “Any employer who pays, or becomes obligated to pay compensation, […] may likewise make a claim or bring an action against the negligent third-party.” This statute permits the employer or insurer that paid workers compensation benefits to recover against a third party that caused the employee’s injuries; other jurisdictions apply similar authority.
There is little-to-no argument that the right to subrogate exists. When we get down to brass tacks, there are two main issues: Which items are actually recoverable, and what dollar amount is recoverable? These issues are often negotiated at mediation and informal settlement negotiations where many cases are resolved.
Before we discuss the finer points of what is recoverable, however, it must be emphasized that the claims professional and defense attorney will gain an enormous advantage at the negotiation table by learning some of the finer points of subrogation law in their jurisdictions. In cases where injured workers still have open workers compensation claims, this knowledge can create an opportunity not only for a good subrogation recovery, but also the opportunity to resolve the workers compensation claim for a fraction of its value if settled separately.
Recoverable Benefits
A controversial topic during mediation is often a discussion of which benefits are recoverable. This is an area where you may find jurisdiction-specific case law helpful, since the definition of the term “compensation” is often a sticking-point in settling these claims. For example, California Labor Code Section 3852 uses the word “compensation” and states that “the employer may recover […] in addition to the total amount of compensation, damages for which he or she was liable including all salary, wage, pension, or other emolument paid to the employee or to his or her dependents.”
In California, case law creates a broad definition of what is recoverable by the employer, as evidenced in Harvey v. Boysen: “All benefits required to be paid by the employer, […] are deemed the ‘compensation’ and ‘special damages’ of Section 3856, subdivision (b), and are subject to the employer’s lien.”
Benefits are usually categorized as one of two “buckets”: medical benefits and indemnity benefits. Opposing parties often contend that a few specific categories of expenses are not recoverable, but case law states otherwise. These items are medical-legal expenses, the employee’s attorney’s fees for defending industrial depositions, and medical-legal evaluations.
A recent California Appellate Court opinion, Duncan v. Wal-Mart Stores Inc., provides a nice review of prior case law regarding recoverable benefits. The Duncan court reasoned that the subrogation lien includes “all expenditures” the employer makes to provide the employee with workers compensation benefits.
• Medical-legal expenses are recoverable pursuant to Adams v. WCAB.
• The employee’s attorney’s fees and costs for defending industrial depositions are recoverable under Coe v. Professional Assoc. of Diving Instructors.
• The cost of medical-legal evaluations are recoverable under Adams.
Pre-Litigation Checklist
Often, the subrogation claims manager will receive a subrogation matter well after the workers compensation claim arose, sometimes nearly two years later. As time goes by, evidence gets stale, documents are lost, witnesses move on, and critical evidence may never be found. The following are steps that a workers compensation claims manager can take in order to protect potential subrogation rights:
• Obtain the names, addresses, and phone numbers of all witnesses listed on incident reports.
• Retain high-quality copies of all original photographs.
• Review and keep all copies of incident reports and witness statements.
• Determine insurance policy limits for the negligent third party, if possible.
Surprisingly it’s not unusual for attorneys to receive a new subrogation file where the above information was never obtained even over a year after the incident. The first three items on the list are generally available and should always be kept in the file. This not only makes the attorney’s job easier, but also may reduce the cost of litigation as more information is available from the beginning since lack of information often increases litigation costs.
Credit Where Credit Is Due
In California and other jurisdictions, the concept of “credit” is extremely important when settling workers compensation liens. In situations where an employee recovers from a third party, the employer (and insurer) is entitled to offset any future medical or indemnity payments to the employee by the net amount recovered by the employee.
Here is an example: Eddy employee is involved in a rear-end auto collision on the job. The workers compensation carrier has only paid out $10,000 in benefits, but Eddy may need expensive spinal surgery in the future. Eddy obtains a judgment against the negligent driver in the amount of $100,000 fully insured. After his attorney takes her fees and costs of $50,000, Eddy’s net recovery is $50,000. If Eddy becomes entitled to any future workers compensation benefits out of that incident, then the employer is entitled offset those future benefits by Eddy’s net recovery of $50,000. This results in a large cost savings to the employer.
When a claimant stands to gain a large recovery, like in Eddy’s case above, the claims professional or attorney handling the claim should keep credit rights in mind. While the lien was currently only $10,000 before trial, now the employer has obtained a valuable credit right against the cost of expensive future spinal surgery and the inevitable additional disability payments.
Liens as Leverage
Often, the injured worker in a third-party negligence action has an open workers compensation claim simultaneously with the civil case. When it comes to settlement discussions, the employer can wield its lien rights to resolve both its lien and the workers compensation claim in one fell swoop—saving a lot of money.
In California and other states, an employee’s attorney may only recover a small amount from a workers compensation case settlement (in California, it’s 15 percent), but in a civil action an attorney recovering 40 percent is common. When that attorney represents the employee in both the civil and workers compensation case, he is often motivated to allocate the settlement funds in the civil settlement agreement, thereby obtaining a much higher fee. With that knowledge, the employer’s counsel will know that a global settlement of all claims can be achieved for a lesser amount when it is all wrapped up in the civil settlement, along with a full release of all workers compensation claims.
As usual, sophisticated negotiators can use their superior knowledge to achieve recoveries beyond the industry average. How you gather, manage, and use information will determine whether you win or lose.