There's a New Sheriff in Town

Saturday, September 22, 2007 | 0

Whenever there is doubt and confusion regarding the actual application and function of a workers' compensation subrogation statute, the stage is set for trial lawyers to rig settlements and otherwise try to avoid repayment of workers' compensation liens.

For years, this has been the case with Kansas workers' compensation subrogation. However, more recent case law has finally begun to shed the light on how the Kansas workers' compensation subrogation statute works, and the penalties for trial lawyers who skew settlement documents so as to avoid payment of compensation liens can be severe.

The Kansas Court of Appeals decision in Richard v. Liberty Mutual has laid down the law on efforts to circumvent and avoid repayment of carriers' workers' compensation liens. Richard v. Liberty Mutual Ins. Co., 2007 WL 1747886 (Kan. App. 2007).

In Kansas, the carrier's subrogation right to the employee's recovery against a negligent third party is limited to the extent of the compensation and medical paid by the employer in workers' compensation benefits. Section 44-504 provides, in part, as follows:

"In the event of recovery from such other person by the injured worker or the dependents or the personal representatives of a deceased worker by judgment, settlement or otherwise, the employer shall be subrogated to the extent of the compensation and medical provided by the employer to the date of such recovery and shall have a lien therefore against the entire amount of such recovery, excluding any recovery, or portion thereof, determined by a court to be loss of consortium or loss of services to a spouse."

Section 44-504(b) further provides:

"Whenever any judgment in any such action, settlement or recovery otherwise, is recovered by the injured worker or the worker's dependents or personal representative prior to the completion of compensation or medical aid payments, the amount of such judgment, settlement or recovery otherwise actually paid and recovered which is in excess of the amount of compensation and medical aid paid to the date of the recovery of such judgment, settlement or recovery otherwise shall be credited against future payments of the compensation or medical aid."

The Kansas Court of Appeals in McGranaham v. McGough, 802 P.2d 593 (Kan. App. 1990), aff'd in part, rev'd in part, 820 P.2d 403 (Kan. 1991), had previously held that all elements of personal injury damages, including medical expenses, lost wages, disability compensation, pain and suffering, and loss of services, are subject to workers' compensation carrier's rights of subrogation.

After the carrier in McGranaham paid $12,616.29 in compensation benefits to the employee, the employee settled his third party action for $10,000. The plaintiff tried to gerrymander the settlement so as to avoid payment of the workers' compensation lien. The stipulated settlement provided that $6,000 was for pain and suffering, $3,000 for his wife's loss of consortium, and $1,000 was for future medical expenses, and nothing was allocated to past medical expenses or lost wages.

The court held that the carrier was subrogated to the $7,000, including the $6,000 in pain and suffering, because pain and suffering is an integral part of the calculation of disability.

However, they found that the loss of consortium claim was not duplicative of payments made by the employer, and thus, not subject to subrogation.

Despite this ruling, the central holding of the McGranaham decision was that subrogation was not allowed where the third party does not duplicate the compensation in medical benefits paid by the workers' compensation carrier. McGranaham, supra.

Since then, the brand new Court of Appeals' decision in Richard v. Liberty Mutual Ins. Co., 2007 WL 1747886 (Kan. App. 2007) has confirmed that Section 44-504(b) grants employers subrogation liens on tort recoveries by injured workers only to the extent that a worker's recovery duplicates compensation and medical expenses paid by the employer under the Workers' Compensation Act.

In recent years, courts have also differentiated between the carrier's rights of subrogation and reimbursement.

In Wishon v. Cossman, 991 P.2d 415 (Kan. 1999), the court noted that in 1993, the legislature made sweeping changes to Section 44-504(b). In place of the statutory language that was at issue in McGranaham stating that the employer "shall have a lien therefore against such recovery", the amended Section 44-504(b) says that the employer:

"...shall have a lien therefore against the entire amount of the recovery excluding any recovery, or portion thereof, determined by a court to be loss of consortium or loss of services to a spouse. The employer shall receive notice of the action, have a right to intervene and may participate in the action. The district court shall determine the extent of participation of the intervenor, including the apportionment of costs and fees."

In its 1993 amendment, the legislature essentially codified McGranham. Although the lien is to be against the "entire amount" of the recovery, excluding any recovery for loss of consortium or loss of services to a spouse, the carrier is only subrogated to a third party recovery which duplicates the workers' compensation benefits paid. At the time of McGranaham, the statute granted a lien "against such recovery". The current version of the statute grants a statutory lien "against the entire amount of such recovery".

In Wishon, the court indicated that this was a distinction without a difference. It noted that Section 44-504(b) had a two-fold intent: (1) to preserve injured worker's claims against third party tortfeasors; and (2) to prevent double recoveries by the injured workers. Lemery v. Buffalo Airways, Inc., 789 P.2d 1176 (Kan. App. 2007).

The court in Wishon clarified that Section 44-504(b) grants carriers subrogation liens on tort recoveries by injured workers only to the extent that a worker's recovery duplicates compensation and medical benefits paid by the employer under the Workers' Compensation Act.

Despite a workers' compensation lien in excess of $55,000, the court allowed recovery of only $16,890.98, which was the amount it paid in medical benefits. This was because the plaintiff did not offer any evidence or attempt to recover lost wages from the tortfeasor in the underlying third party action. The court indicated that the legislature provides a means to prevent circumvention of the statutory lien by mandating notice, authorizing intervention, and providing for district court supervision.

If the carrier is apprehensive about the strength of its lien, the court in Wishon suggests that it intervenes to protect its lien. Wishon.

McGranahan dealt only with the nature of damages claimed but not the amount of damages. It did not shed light on the ultimate question of whether there are duplicative recoveries when the nature of the damages in the worker's compensation case and the tort settlement are the same, but the amount of the tort settlement does not fully compensate the claimants for their loss.

This question was addressed by the Kansas Court of Appeals in Jerby v. Truck Ins. Exch., 2006 WL 1932716 (Kan. App. 2006). In Jerby, Alan Jerby died in a collision with a tortfeasor who had only $100,000 in third party liability limits. Despite suffering a loss of more than $350,000 in lost wages, Jerby's family settled for the $100,000 limits, and then sued the workers' compensation carrier for a declaratory judgment that the carrier should not be entitled to a future credit because the third party settlement did not exceed the $350,000 lost wage damages.

The trial court concluded that the American Family settlement was not duplicative of the workers' compensation benefits paid by Truck Ins. Exchange because the settlement did not exceed the amount of Jerby's actual lost wages.

The Court of Appeals opined that if widow and the children did not release the tortfeasor and preserve their claims against him, then the rule in Kroeker applies. State Farm Mutual Ins. Co. v. Kroeker, 676 P.2d 66 (Kan. 1984).

In that case the settlement proceeds are not duplicative of the workers' compensation benefits received if the widow's share, which relates to damages compensable under our workers' compensation law exceeded the amount of the carrier's lien at the time. On the other hand, if the widow and the children settled their entire claim against the third party and released him, then the workers' compensation carrier is entitled to reimbursement to the extent of any duplicative benefits.

The Kansas Court of Appeals reversed, holding that the trial court must hold an evidentiary hearing to apportion the settlement proceeds between the widow and children in order to determine what portion was available for the lien.

In Kroeker, the issue was the insurer's right to PIP reimbursement when its insured made a partial settlement of claims against tortfeasor's estate but reserved the right to proceed against the estate for the balance of the claim.

The Supreme Court distinguished these facts from those in Russell v. Mackey, 592 P.2d 902 (Kan. 1979). It held that when there is a partial settlement of a claim and the settlement exceeds the PIP benefits paid, the proceeds of the partial settlement are not duplicative of the PIP benefits paid. However, "if the injured insured settles his total claim with the tortfeasor and releases the tortfeasor from all further liability, the recovery is duplicative as a matter of law, and the PIP carrier has a lien and is entitled to reimbursement for the total amount of PIP benefits paid out of the recovery made by the insured, subject to the two statutory exceptions provided for in sections (d) and (e) of K.S.A. Section 40-3113(a)."

Plaintiffs' counsel may try to gerrymander settlements and releases in such a way as to disguise third party settlements as compensation for items of damage not duplicative of the workers' compensation lien. Obviously, they do this to avoid repayment of the lien. However, courts have held that such efforts must be supported by the evidence, or the attorney making such a claim in an effort to avoid the lien may be subject to sanctions. Richard v. Liberty Mutual Ins. Co., 2007 WL 1747886 (Kan. App. 2007).

A statement that an award is not duplicative must be supported by substantial competent evidence. If there is "substantial competent evidence" that a plaintiff's attorney had no basis to support his claim that the settlement is not duplicative, the court is justified in awarding sanctions against him. This can include the carrier's attorney's fees incurred in defending the spurious "non-duplicative" gerrymandering argument asserted by the plaintiff.

Damages recovered in a third party action for loss of services and loss of consortium are not subject to the workers' compensation carrier's lien because they are not compensable under the Workers' Compensation Act.

A workers' compensation carrier is entitled to reimbursement to the extent of duplicative benefits resulting from a settlement by a workers' surviving spouse with a third party, provided the spouse and children enter into a full and final settlement of all claims against the third party and release him or her. However, a carrier is not entitled to reimbursement from a settlement between a third party and a worker's surviving spouse and children, if they entered into a partial settlement with the third party and reserved the right to preserve their claims against the third party for the balance of their loss, and if the spouse's share of the settlement regarding damages compensable under the workers' compensation law exceeded the workers' compensation lien at the time.

What happens if the workers' attorney tries to gerrymander a settlement, but fails? Will he still be entitled to an attorney's fee out of your lien -- even though he just tried to rake you over the coals?

The answer in Kansas, finally, is no.

The new Richard decision also emphasizes that Kansas law allows for recovery of attorney's fees by the workers' attorney, and provides for apportionment of costs and fees.

Section 44-504(b) provides:

"... the district court shall determine the extent of participation of the intervenor, including the apportionment of costs and fees ..."

Section 44-504(c) provides: "... the court shall fix the attorneys' fees which shall be paid proportionately by the employer and the employee in the amounts determined by the court."

Section 44-504(g) provides:

"... the court shall fix the attorney fees which shall be paid proportionately by the workers' compensation fund, insurer or qualified group-funded workers' compensation pool and the worker or such worker's dependents or personal representatives in the amounts determined by the court based upon the amounts to be received from any recovery pursuant to an action brought under this section."

These sections refer to attorneys' fees for the recovery of the carrier's lien from the third party. The apportioning of attorneys' fees applies to both actions brought by the employee and the employer. Where an attorney for the employee brings an action and recovers the carrier's lien, the employee's attorney is entitled to an attorney's fee fixed by the court. Nordstrom v. City of Topeka, 613 P.2d 1371 (Kan. 1980).

It's an abuse of discretion to enter an order dividing payment of attorneys' fees proportionally between the worker and the employer in an action by the worker against a third party tortfeasor for damages when the recovery also included the employer's subrogation lien recovery. Anderson v. National Carriers, Inc., 717 P.2d 1068 (Kan. App. 1986), aff'd, 727 P.2d 899 (Kan. 1986). The proportion of attorneys' fees to be paid by the carrier shall be calculated based on the carrier's total potential liability and not on past benefits actually paid by the carrier. Lemry v. Buffalo Airways, Inc., 789 P.2d 1176 (Kan. App. 1990), rev. denied. Attorneys' fees are not allowed for the workers' compensation carrier's counsel from the third party recovery, but are allowed for the worker's attorney. However, the degree of participation by the carrier's counsel is taken into consideration in determining the percentage of fees to be paid to the worker's attorney. Leroy v. City of Coffeyville, 671 F. Supp. 23 (D. Kan. 1987).

The attorney's fees mandated in Section 44-504(b), (c) and (g) are designed to compensate a plaintiff's lawyer who recovers an award which is subrogated to the employer's insurer. Richard.

By awarding these attorneys' fees, the court prevents a "chilling effect" upon suits against third party tortfeasors. Anderson, supra. If an injured employee must bear all costs of a suit against the third party tortfeasor, the employee may choose to wait and let the employer bring the suit.

This forces the employee to choose between the quicker and possibly lesser recovery of workers' compensation and a delayed but possibly larger recovery against the tortfeasor.

Allowing attorney's fees eliminates this choice and allows an employee to bring a suit quickly and without extra cost. If the insurer is not subrogated, the plaintiff's attorney is not entitled to attorneys' fees. Deffenbaugh Indus., Inc. v. Wilcox, 11 P.3d 98 (2000), rev. denied, 270 Kan. 897 (Kan. 2001). The statute rewards an attorney who does work, even inadvertently, for the insurer.

However, it should be remembered that the one-third fee to the plaintiff's attorney is not automatic. If the one-third fee is excessive due to the ease of obtaining the settlement or the amount of services provided, then the court should award a lesser fee. Richard, supra. Also, where the plaintiff's attorney attempts to gerrymander the settlement or hide a settlement from the carrier so as to defeat the lien, no attorney's fee should be awarded.

The trial court should use the reasonableness standard in awarding attorney's fees. When considering the reasonableness of attorney's fees, the trial court should consider "the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly." Id.; K.R.P.C. Section 1.5(a). The trial court has wide discretion in awarding attorney's fees; however, the amount of the fees must be supported by substantial competent evidence.

Without evidence of additional time and labor spent on a relatively simple case, the trial court may abuse its discretion in awarding over attorney's fees to the plaintiff's attorney. A hearing to determine the proper amount of fees for the plaintiff's attorney according to the amount of time, difficulty, skill, and labor he or she expends in obtaining this award is appropriate.

Avoiding repayment of workers' compensation liens just got tougher in Kansas. Understanding the new Richard v. Liberty Mutual Ins. Co. decision will go a long way toward helping your company lay down the law with plaintiffs' lawyers who don't seem to have any respect for the law.

This column first appeared in the August newsletter for the clients of Matthiesen, Wickert & Lehrer, S.C.

-------------------------------

The views and opinions expressed by the author are not necessarily those of workcompcentral.com, its editors or management.