Workers' compensation third party investigation: a practical approach.
The third party investigation is often underemphasized and given low priority in the claim-handling process, as it does not involve the immediate and ongoing demands of issuing benefits. However, given the tremendous impact that a successful recovery program has on the profitability and financial stability of both insurers or self-insured organizations, there is no reason why this should be the case.
A structured frame work for handling the subrogation part of a claim has the following advantages: 1) it provides efficiency and effectiveness in identifying subrogation opportunities; 2) it identifies those factors (negligence test, subrogation, and recovery rights) that determine the likelihood of, and the amount of, recovery; 3) it clarifies the analysis and thought processes; and 4) it provides standardization, which reduces the possibility of missing a subrogation opportunity.
The progressive seven-step analysis to third party investigation presented here can be applied regardless of jurisdiction or whether the workers' compensation carrier or injured employee is pursuing a third party. The approach is considered progressive, as only a positive response to the current step would require the examiner to move forward to the next step. A negative response to any step would rule out a subrogation opportunity. If your investigation allows you to progress through the first six steps, meaning that there is a potential recovery, the last step would indicate the amount of recovery expected and, hence, whether the pursuit of subrogation is economically viable.
Step 1 Obtain a detailed and comprehensive description of the accident from a liability perspective.
A compensability investigation focuses on whether the injury arose out of and in the course of employment. This type of investigation may not provide enough information to determine if the accident was caused by a negligent third party or parties.
Once you have obtained all the facts and circumstances of the accident from the claimant, the insured, and witnesses and secured all the necessary evidence, you are ready to proceed with the progressive part of your analysis. Again, any step can rule out a subrogation opportunity.
Step 2 Was a third party involved in the accident?
Identify all third parties involved in the accident. A third party is defined as any person or entity other than the employer or co-employee. Technically, the employer is the first party, as it is the insured on the policy. The claimant is the second party, as he is the beneficiary or person receiving benefits provided by the policy.
Step 3 Did the third party(ies) indentified in step 2 cause the claimants' injury and, if so, was the third party at fault?
Of the third parties identified in step 1, which ones, in your opinion, acted negligently and caused the claimant's injury. To determine if the third party was negligent, all of the following four elements must be satisfied:
1. Was there a legal duty owed to the claimant to act reasonably under the circumstances?
2. Did the third party breach its legal duty to act reasonably under the circumstances (failure to conform to the standard of care required under the circumstances)?
3. Was there a causal connection between the breach of the legal duty owed and the claimant's injury?
4. Did the claimant incur actual damages (i.e., lost time, medical expenses, or functional loss)?
If your investigation reveals that a third party satisfies all four elements of negligence, you should formulate your theories of liability as concisely as possible based on sound legal principals. The reasonable person standard or rule is used to establish a theory of liability. Defense counsel as well as experienced members of the liability department can be very useful resources in establishing a theory of liability. For the more complex, less obvious, or catastrophic cases, particularly products cases, an expert may need to be hired to prove or rule out liability.
Step 4 Apportion the liability between the claimant and the negligent third parry(ies) collectively. If the state has a strict liability doctrine, does it apply?
Although apportioning liability is purely judgmental and based on the examiners' experience, it is necessary for two reasons: determining if the claimant can meet the judicial negligence test to recover any damages, and assisting in estimating your recovery if the plaintiff can meet the burden required by statute.
One way to apportion liability is first to establish whether the claimant contributed at all to his injury. If the claimant is noncontributory, then the analysis is straightforward and is the same if the case meets the statutory requirement for strict liability: Liability is assessed 100 percent against the defendant(s) and the third parry liability case can be valued on a "pure" basis. If the claimant did contribute to his injury, list each contributory act and assign a percentage of liability to that act, add up the percentages, and subtract the final number from 100 percent.
The application of strict liability, if the state has such a doctrine, varies from state to state. The strict liability doctrine is applied to either a product or an activity. It imposes 100 percent liability on the defendant for the following defects: manufacture/assembly, design, and warning. Furthermore, certain types of activities are considered ultra hazardous and defined by statute. Strict liability is imposed against the defendant even if the defendant can demonstrate that it exercised all the necessary precautions to avoid injury to the public.
Keep in mind that a third party claim with multiple defendants can contain causes of action for both negligence and strict liability. However, if a third party claim only involves a strict liability action and it meets the statutory requirements, skip step 5 and go to step 6; otherwise go to step 5 for each third party in which the strict liability test does not apply.
Step 5 Does the claimant meet the negligence test in the state in which the accident occurred?
The statutory liability rule or negligence test sets forth the plaintiff's maximum contribution to his injury while still being able to recover damages in a civil action. There are four basic types of liability tests that are applied to the behavior of the claimant/plaintiff and one which is applied to the product manufactured by or activity performed by the defendant(s). The plaintiffs' behavior, depending on the jurisdiction, is measured against either the contributory negligence rule or one of four comparative negligence rules: pure, 50 percent, 49 percent, and slight versus gross.
The contributory negligence rule states that if the plaintiff contributes at all to his injury, even one percent, he is barred from recovery. Comparative negligence rules allow the plaintiff to recover damages despite having contributed to his injury. If he meets the burden required by the jurisdiction, however, the amount of his award is reduced by the percentage of liability attributed to his actions.
States with pure comparative negligence rules allow the claimant to recover damages, even if he is more at fault than the defendants. For example, if the plaintiff were 90 percent at fault, he would still be able to collect 10 percent of his damages. The 50 percent comparative rule states that the plaintiff can recover damages as long as he is no more at fault than the defendants. The 49 percent comparative rule states that the plaintiff must be less at fault than the defendants. For example, if the plaintiff were 50 percent at fault, he would be able to recover 50 percent of his damages in a state that had 50 percent comparative negligence rule, but he would be barred from recovery in a state that maintained a 49 percent comparative negligence rule. Lastly, in a state that has a slight versus gross negligence rule, the plaintiff can recover only if his negligence is slight in comparison to the defendant's. A state's negligence test is usually found in the state stature or code in the section relating to judi cial proceedings or court procedure.
One final note, make sure that you are applying the negligence law or strict liability doctrine of the state in which the accident happened, not the state that governs the workers' compensation case, also known as the benefit state. It is the benefit state that establishes which subrogation laws apply and the accident state that establishes the applicable negligence and strict liability rules.
Step 6 If the claimant meets the negligence or strict liability test, are there any restrictions to your subrogation and recovery rights?
A carrier's subrogation and recovery rights are usually set forth in either the workers' compensation statute or case law or both. Either or both establishes a carrier's tight to subrogate and to assert a lien, as well as to take credit against future benefits from the bodily injury settlement proceeds. Some states, such as New York, afford the workers' compensation carrier a third right, the right to consent - to the amount of the bodily injury settlement.
Some of the common types of claims or situations in which either the statute or case law may affect a carriers' subrogation or recovery rights are:
* A carrier's contribution toward plaintiff counsel's fee and expenses.
* Uninsured motorist or underinsured motorist claims.
* Certain types' of workers' compensation settlements.
* Certain types of civil actions or types of damages awarded.
* Time limits for filing a notice of motion to intervene to protect the lien, for filing a notice of claim or suit against public entities, and for filing suit against private entities.
* Employer's contribution to the claimants' injury and the Made Whole Doctrine.
The workers' compensation statute or case law usually stipulates a carrier's contribution to both the plaintiff attorney's fee and expenses. The amount of the carriers contribution, as well as the priority of the distribution of the settlement proceeds, has an obvious impact on its recovery rights. Some states require the carrier to pay its pro rata share of the counsel fee on the total projected lien (i.e., the current and future benefits) up front. This is also know as the Total Benefit Theory.
A carrier's subrogation rights on the proceeds of uninsured motorist or underinsured motorist settlements are stipulated in a state's civil case law. These laws have the greatest impact on carriers who have large auto exposures, such as firms that require their employees to travel or transport people or property. The UM and UIM laws either allow or disallow subrogation rights on all settlements or determine a carrier's subrogation rights based on who owns the policy paying the proceeds. In the latter case, a state would only allow a carrier to assert a lien if the settlement proceeds came from a policy other than the claimant's own policy.
Some states allow the carrier to settle the workers' compensation claim in a lump sum but, in exchange for doing so, the carrier waives its subrogation right on that portion of the lien representing the lump sum settlement.
Many states have restrictions on a carrier's right to assert a lien on the settlement proceeds of certain types of liability actions or types of damages awarded. For example, carriers do not have the right to assert liens on death claims in Oklahoma or the survival action portions of wrongful death claims in New Jersey. Although a carrier may have a subrogation right on a third party liability claim, it may not be able to assert a lien on certain types of damages awarded, such as loss of consortium claims, and pain and suffering.
An examiner should always be mindful of any time limitations in order to protect its subrogation rights. For example, Section 31-293 of the Connecticut Statute requires a carrier to file a notice of motion to intervene in 30 days after it receives notice of suit or it may waive its subrogation right. All jurisdictions have a statute of limitations, which can vary depending on the type of claim, such as for personal injury, medical malpractice, and products Liability claims. If the third party is a public entity, the time limit for filing a notice of claim or suit is usually shorter than for claims against private entities. Each jurisdiction also has a statute of repose for claims that involve improvements to real property. Once the carrier or plaintiff attorney fails to protect the statute of limitations or statute of repose, a carriers' subrogation and recovery rights are waived forever. The time limits to file any type of action can usually be found in the Limitations of Actions section of a state's judicia l proceedings.
The Made 'Whole Doctrine and employer's negligence laws have the most profound impact on a carrier's subrogation rights. The former is viewed as more ominous, as it applies to every third party claim in which it has been determined, by either a judge or jury, that the claimant has not been "made whole" from the benefits received from his workers' compensation claim and damages from his civil action. The ladder applies only when the employer is found to have contributed to the claimant's injury.
Step 7 Considering the factors in step 6, the estimated incurred loss, and the policy limits of the third party(ies), is your potential recovery large enough to justify pursuing subrogation?
The anticipated recovery is a function of the following factors: the estimated incurred loss (paid loss plus reserve), the liability carrier's policy limits, the strength of the liability case, and the workers' compensation carrier's subrogation and recovery rights. As long as there are no statutory restrictions on a carriers right to assert a lien or recover from the bodily claim, a case with a large estimated incurred loss, high policy limits, and strong theory of liability will yield a favorable recovery. If a carrier has to pursue a third party directly, as long as the anticipated recovery is greater than the projected cost of pursuing the third party, subrogation is economically viable.
The progressive seven step approach should not only enhance the efficiency of handling a third party investigation, but also improve the effectiveness of the examiner's long term recovery results through more frequent recoveries and gross dollars recovered. Clearly, an organization with a better than average recovery record has a competitive advantage in an increasingly competitive and price sensitive marketplace.
Brian Marx, is second vice president of the New Jersey chapter of the Chartered Property Casualty Underwriters. He can be contacted at email@example.com. Some of the legal research contained in this article was provided by Patrick Timoney of the law firm Cozen O'Connor.