Some injured workers with a pending New York workers’ compensation claim may also have a third-party general liability action pending as a result of the same accident. If a New York claimant settles a third-party action, the workers’ compensation carrier is entitled to recover its workers’ compensation lien. However, the workers’ compensation carrier must share in the cost of litigation of the plaintiff’s third-party general liability action. The apportionment of the litigation fees between the plaintiff/petitioner and the workers’ compensation carrier is based on the total benefit that the workers’ compensation carrier derives.
Figuring the Fees
Broadly speaking, the cost of litigation is generally one third of the recovery. However, there are two formulas used to obtain the exact calculations: the Kelly formula and the Burns formula. [See Kelly v. State Ins. Fund, 60 N.Y.2d 131, 136 (N.Y. 1983) and Burns v. Varriale, 9 NY3d 2007.]
A major difference between the Kelly and Burns formula is that under Kelly, the workers’ compensation carrier will receive relief from future benefits payments in the amount of the net settlement to plaintiff in the third-party action. This relief comes in the form of a “holiday” period, or a time-period during which the carrier ceases making payments.
To determine the holiday period, one must determine the amount of time it would take the carrier to pay out the amount of the net settlement under the current rate of payment that is directed by the workers’ compensation board. At the end of this holiday period, plaintiff would begin receiving benefits.
On the other hand, under Burns, plaintiff/claimant continues to receive benefits, albeit at a reduced rate. The workers’ compensation carrier does not receive a holiday period as it would under Kelly. The Burns calculation generally results in workers’ compensation carriers recouping more money in liens and almost eliminates instances in which the workers’ compensation carrier would have to pay out “fresh money” to plaintiff/claimant.
The Burns payments continue until the plaintiff’s net settlement amount is exhausted by the difference between the full normal workers’ compensation benefit received by plaintiff and the reduced payments issued by the workers’ compensation carrier under Burns.
The difference during the entire period of Burns payments must equal plaintiff’s net settlement amount (which is similar to the savings the workers’ compensation carrier receives during the holiday period under Kelly).
Generally speaking, if the plaintiff/claimant has a schedule loss of use, a permanent total disability, death case, or is no longer receiving benefits, then the Kelly formula should be used. If the plaintiff/claimant has a permanent partial disability, then the use of the Burns formula is suggested. Below is a detailed breakdown of both formulas.
Preliminary Steps
When applying either formula, one must first confirm whether the workers’ compensation carrier is under board direction to issue ongoing awards. If the carrier is not under direction to issue awards at the time the third-party action settles, then the workers’ compensation carrier is entitled to recover its lien, minus the cost of litigation.
However, if the workers’ compensation carrier is under direction to issue ongoing awards, at the time that the third-party action settles, the workers’ compensation carrier is entitled to recover the outstanding lien (minus the cost of litigation) and has relief from future payments, in the amount of the net settlement to the plaintiff (minus the cost of litigation).
Kelly formula: In short, the net workers’ compensation lien is the percentage spent on litigation costs multiplied by the gross workers’ compensation lien.
Attorneys’ fees and disbursements make up the third-party litigation costs. To obtain the exact percentage spent on litigation costs, divide litigation costs by the gross third-party settlement amount.
The net settlement moving to the plaintiff/claimant is the gross third-party settlement amount, less attorneys’ fees, disbursements, and the net workers’ compensation lien.
Burns formula: In the Burns formula, the following steps should be followed:
- Determine the “total benefit” derived by the workers’ compensation carrier. Under Burns, the “total benefit” is simply recovery of the gross lien (gross workers’ compensation lien = total benefit).
- Determine the litigation costs expended in securing the settlement amount (attorneys’ fees + disbursements = litigation costs).
- Figure the percentage of the gross settlement amount spent on litigation costs (litigation costs / gross settlement = percentage of gross settlement spent on litigation costs).
- Multiply the percentage spent on litigation costs by the carrier’s lien to determine the lien reduction for the carrier’s share of litigation costs (percentage spent on litigation costs * gross workers’ compensation lien = net workers’ compensation lien).
- Using the net workers’ compensation lien, determine the net amount of the settlement award to plaintiff (gross settlement – attorneys’ fees – disbursements – net workers’ compensation lien = net settlement to plaintiff).
- Determine the amount of weekly future Burns payments to be received by the plaintiff (normal weekly benefit payment * percentage of gross settlement spent on litigation costs = amount of weekly payments).
Settlement Caveat
One quick caveat is that all settlement agreements are uniquely tailored for the particular circumstances of each specific case. Sometimes deciding on which formula to apply could be a part of the third-party settlement terms and, accordingly, the parties can agree to use either formula during settlement discussions as a way to get some settlement leverage and arrive at an agreement that makes the most sense for all parties.
Additionally, the workers’ compensation carrier can agree to waive a part of the lien in lieu of fresh money moving to the plaintiff/claimant, in an effort to facilitate the third-party settlement. The logic here is that recovering a part of the lien is better than not recovering anything. This all depends on the specifics of the settlement agreement between the parties.