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Workers' comp subrogation: there's gold in Thar Hills!

Pursuing workers' compensation recoveries through subrogation is like prospecting for gold. It is speculative, specialized, potentially lucrative and requires a true entrepreneurial spirit.

Workers' compensation subrogation is the legal process by which an employer or its insurance carrier after paying a compensation claim, seeks to recover the amount of the claim from a third-party who is legally responsible for the worker's injuries. Employers are generally immune from lawsuits by their employees for workplace injuries. However, workers can sue other persons or companies whose conduct causes or contributes to the worker's injury or occupational disease. These third-party tort claims are typically made against manufacturers or suppliers of defective or hazardous machines, products or chemicals, vehicle operators, and negligent property owners. In addition, construction contractors on jobs where employees are injured and physicians who negligently treat employees after an accident can become defendants in a third-party tort suit.

Average subrogation recoveries account for only a fraction of claims dollars paid compared to coverage recoveries on other lines of insurance. Obviously, many subrogation claims are not being pursued. One reason for this situation is that the carrier finds it too difficult to identify the third-party claim. However, even if the carrier identifies the claim, it may be unable to manage it because its claims investigators are not trained to pursue tort subrogation. As a result, potential third-party claims slip through the cracks, obvious claims such as slips and falls occurring off the employer's premises are recognized and sophisticated claims such as those involving defective design products liability go unrecognized.

When a, potential subrogation claim is identified the carrier is often unable to pursue it, even though the carrier may have an equal or greater interest in the outcome of the suit. Depending on the jurisdiction, the subrogation case may be pursued by the worker and his workers' compensation counsel without the cooperation of the carrier. When that happens the success of the subrogation claim depends entirely on the expertise, skill and financial capabilities of the worker and his counsel.

Another reason for the failure of the carrier to pursue subrogation is the difficulty in identifying the exact nature of the third-party tort theory. Based on a limited compensation investigation, it is difficult to identify potential third-party defendants in a tort claim. Claims investigators are generally expert in handling compensation claims, not tort subrogation claims. To properly identify and manage subrogation claims, claims personnel must be skilled in creating tort theories and in identifying appropriate third-party defendants. This requires expertise in tort and contract law, conflicts of law and in pursuing those cases from a plaintiff's point of view. It also requires an analysis of the potential claim in all possible venues.

Beyond these situations, there are practical problems in pursuing subrogation cases. In most cases the interest of the employer, workers' compensation carrier and employee are the same in a third-party tort claim: They each want to obtain the maximum possible recovery from the third-party defendant. It seems in everyone's financial interest to pursue subrogation, however sometimes these parties have conflicting interests.

There are several reasons why these conflicts may occur. In one case, the employer may not want the employee to make a third-party claim because the third-party defendant has a business relationship with the employer. In another possible scenario, the employer or fellow employees may have been negligent. Under the applicable state law, the third-party defendants may join the employer as an additional defendant, although the plaintiff cannot make a direct claim against the employer. On the other hand, the carrier may be involved in a contested claim situation with the employee. Finally, the carrier for the employer may also be the insurer for the potential third-party defendant.

These potential conflicts are not true conflicts of interest. Many potential subrogation claims are not pursued because the carrier perceives of conflicts which, if properly analyzed, would not present true conflict. Accordingly, few subrogation claims are pursued against responsible tort-feasors, and those claims that are pursued result in subrogation recoveries that are low compared to other coverage lines. However, if compensation carriers can develop programs and train or retain personnel to deal with subrogation issues, the potential for increased recoveries is great.

Workers' compensation is regulated individually by each state. Therefore, in analyzing the approach to compensation in the United States, it is necessary to focus on what carriers may recover, how carriers effect recoveries and how fees and costs are apportioned between carriers and workers.

In 45 states the carrier can collect up to 100 percent of the amounts paid, including both wage indemnity and medical costs. In Arkansas the carrier can recover only two-thirds of its interest, while in the District of Columbia the employer can recover all its interest plus 20 percent of the tort recovery. Conversely, Georgia, Ohio and West Virginia completely bar subrogation, while Oklahoma bars subrogation for death claims. Montana allows a 50 percent recovery if the employer does not participate in litigation against a tort-feasor. North Dakota places a 50 percent minimum on the employer's recovery.

Because of the nature of workers' compensation benefits, the carrier may still have a continuing liability after a favorable settlement or judgment has been reached in a third-party tort claim. Where subrogation is allowed, the states have devised two methods to preserve the carrier's right to recover for so-called future benefits due after settlement or payment on the judgment. Thirty-six states allow the carrier to recover for those benefits on a dollar-for-anticipated-dollar basis, while six states permit recovery at the present value of the anticipated benefits. Alabama, Arkansas, Indiana, Mississippi and New Jersey terminate future liability with the settlement of the employer's tort action. Idaho does not terminate the employer's liability upon settlement of the employee's tort action nor does it allow the employer to collect for future benefits.

Throughout the states, there are limitations on employers' rights of subrogation for such claims as medical malpractice, municipal, state, uninsured/underinsured motorists bodily injury and no-fault. Therefore, it is important to analyze each potential subrogation claim on the basis of a conflict of laws analysis, which includes determining the best jurisdictions in which to file the third-party case. For example, based on a recent case, a Pennsylvania worker was injured in North Carolina by a defective product manufactured in Wisconsin which was sold to the worker's employer in New Jersey. North Carolina law does not allow the worker to make a products liability claim based on strict liability and allows the worker's own negligence into evidence as a defense by the manufacturer. Pennsylvania's law is the opposite. By electing to bring this claim in Pennsylvania, where the manufacturer does business, the subrogation recovery was maximized. However, to properly evaluate the case, the laws of each of the five states in which the case could have been brought must be considered.

There are several ways compensation carriers collect liens. These procedures are well established in each state and should not stifle one from pursuing subrogation. In states allowing subrogation only North Carolina and Washington prevent the carrier from maintaining a cause of action in its own name. In these states actions must be pursued nominally through the worker. The remaining states provide alternative methods to initiate the claim, including reasonable notice to the carrier, an independent action by the carrier, a statutory lien, writ of indemnity or an assignment of the worker's claim to the employer.

In the majority of states, fees and costs for generating the subrogation fund are shared by the carrier and the worker on a pro rata basis or are apportioned by the court. Most states regulate or legislate the division of fees and costs from the fund created by the settlement or verdict. These rules are established so there is no conflict between the worker, the lawyer creating the third-party fund and the carrier when the proceeds are divided. Often, the claimant or carrier does not want to cooperate with the other because of unjustified fear concerning how the money will be apportioned in the event of a recovery. This desire to "count chickens before they hatch" interferes with the pursuit of subrogation and is irrational because state regulation dictates how fees and costs will ultimately be divided.

The elements of a successful subrogation recovery program include a desire to increase subrogation results, knowledge of the relevant laws and access to experienced claims personnel. To establish such a program, each insurance carrier must examine its objectives regarding subrogation, then evaluate a program against these priorities.
COPYRIGHT 1990 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Author:Cohen, Stewart L.
Publication:Risk Management
Date:May 1, 1990
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