To Intervene or Not Intervene? That is the Question

Saturday, July 28, 2007 | 0

Workers' compensation carriers across the country continue to wrestle with the seemingly simple decision as to whether they should protect their subrogation interests by intervening into California third-party actions or simply file a Notice of Lien, and hope some of the third-party funds will find its way to them. This article will analyze the applicable law relating to this issue and provide the subrogation professional with some guidance in making the right decision in the right case.

Understanding the nuances of the somewhat complicated and confusing subrogation law in California is instrumental in formulating the right decision when it comes to protecting your workers' compensation subrogation interests. The California Act makes clear that either the employee or employer may bring a third-party action. Such an action must be brought within the two-year statute of limitations for personal injury and wrongful death actions in California, and this statute is not tolled by the fact that special damages may be accruing or workers' compensation payments may be in the process of being made during this time period. The employer is entitled to file an independent action against the third party, intervene into an employee's lawsuit filed against a third party, or file a Notice of Lien in the pending third party action. If the civil action against the third-party tortfeasor is brought by the employee alone, the employer can apply for first lien against the judgment for damages in the amount of the employer's expenditure for compensation together with amounts to which he or she may be entitled for special damages under California Labor Code Section 3852. This has become known as filing a "Notice of Lien."

The simple act of filing a Notice of Lien is attractive and deceptively simple for any subrogation professional. It seems relatively easy to do, and the downside is not readily apparent. Filing a Notice of Lien doesn't work any magic other than putting the salient parties on notice of a carrier's workers' compensation subrogation interest. It doesn't give a subrogated party any greater rights than already exist under California law, but serves only to memorialize notice to the parties. It will help ensure that the parties do not settle without giving notice to the carrier. It can be filed with the court for no fee. However, this is absolutely the weakest form of enforcing a workers compensation carrier's subrogation interest. It should be used in smaller cases, cases in which there are limited third-party insurance limits or cases with obviously weak liability. A worker can "settle around" a workers' compensation carrier by expressly excluding from his/her settlement with the third party the carrier's reimbursement claim. Merely filing a Notice of Lien will not protect the carrier should the parties settle around the carrier and will not give the carrier any protection from the plaintiff's attorney's claim for attorney's fees which will be paid out of the carrier's lien. The foregoing is true even where the worker is killed. The risk of proceeding with only a Notice of Lien must be weighed against the potential cost of intervening and putting into play more strenuous protection and participation options.

In essence, the workers' compensation carrier may do one of three things to protect its workers' compensation liens: (1) bring an action directly against the tortfeasor on its own; (2) join as party plaintiff by intervening in third-party action brought by the employee; or (3) allow the employee to prosecute the action and then apply for first lien against the resulting judgment or settlement.

The level of activity a carrier chooses will have a direct effect on the amount of a carrier's recovery, or whether the carrier will be able to recover at all. The less active a carrier is in a case, the more likely a plaintiff and defendant will settle around the carrier, knowing that there is no way that the carrier, with its limited activity and involvement in the case, will be able to gear up and try the case. Larger files (lien and/or credit combined) and files with better liability are usually candidates for interventions as opposed to mere Notices of Liens. The level of activity a carrier chooses to engage in after filing an intervention will also depend on those same criteria. Section 3862 provides for "perfecting a lien" upon a judgment in a third-party action. It reads as follows:

Section 3862. Enforcement of employer's lien against judgment. Any employer entitled to and who has been allowed and has perfected a lien upon the judgment or award in favor of an employee against any third party for damages occasioned to the same employer by payment of compensation, expenses of medical treatment, and any other charges under this act, may enforce payment of the lien against the third party, or, in case the damages recovered by the employee have been paid to the employee, against the employee to the extent of the lien, in the manner provided for enforcement of money judgments generally.

This section, along with Section 3852, seems to be the statutory source of authority in California for filing a Notice of Lien in those cases that may not justify an intervention or the filing of an independent third-party action by the carrier. However, as indicated above, the filing of such Notice of Lien doesn't appear to have any more force or effect than simply giving all parties notice of the carrier's statutory subrogation interest under California law, and can leave the subrogated carrier vulnerable to a variety of lien avoidance techniques which California trial lawyers regularly avail themselves of.

Filing an intervention and active participation have benefits beyond merely thwarting the plaintiff's attorney's effort to settle around you or take a significant portion of your lien as an attorney's fee. In California, a carrier's lien can be substantially reduced by the percentage of employer negligence that is found to exist. Therefore, an employer is only reimbursed for the amount by which its compensation liability exceeds its proportional share of the worker's recovery. Even in a case involving a lot of employer negligence in which any recovery is unlikely, active participation in the case may well result in a significant increase in the amount of future credit the carrier is entitled to, over what would have otherwise been available in the absence of such efforts. We all know that in many cases, the future credit and reserve takedown can be more valuable to the carrier than the lien recovery.

Twenty-five years of workers' compensation subrogation experience has taught us that most of our clients see a net recovery of between 25% and 35% of their lien when utilizing a simple Notice of Lien. In cases involving smaller liens (less than $25,000), this may be the preferred method of protection. This is because after deducting attorneys' fees incurred by subrogation counsel, attorneys' fees possibly awarded to plaintiffs' counsel, and a pro rata share of costs, the $25,000 lien may be reduced to as little as $10,000. Utilizing a Notice of Lien in such cases, especially such smaller cases where liability is speculative, a recovery of $8,000 may be expected, and the two methods of protecting your lien yield similar results, without the risk of incurring fees and costs and receiving a defense verdict on the third-party case to boot.

On the other hand, in cases of clear liability and/or in cases where the lien is between $25,000 and $100,000, the decision as to whether to intervene or to simply file a Notice of Lien should be evaluated in a risk/benefit manner, calculating likely recoveries in comparison with likely expenses. Approximately 75% of the time, these calculations lead to the conclusion that intervening will be the smarter option -- increasing your net recovery and showing your insureds that you are serious and aggressive about protecting their subrogation interests and keeping their risk modifier low.

In cases involving liens of more than $100,000, the intervention route is almost universally the smartest choice. Only in cases involving the slimmest of third-party liability should liens of this size be protected only with a Notice of Lien. In this category of larger lien files, it is important to engage experienced subrogation counsel. The reason? Counsel must advise you as to three levels of activity that can be undertaken. Whether your subrogation counsel employs low, medium, or high levels of participation in the third-party case, will determine whether the carrier has an ability to defeat any claim for attorney's fees made by the workers' compensation attorney. If an employer or carrier actively participates in procurement of a common fund, apportionment is inappropriate and can be avoided. However, merely showing up for depositions or filing one or two documents, lacking in any real substance, does not qualify as active participation and may not be sufficient to defeat the worker's right to receive a contribution to the costs of the procurement of the third-party settlement. In general, an employee is entitled to attorneys' fees as long as there was no active participation by the carrier in the third-party litigation.

In the larger cases (more than $100,000), the level of activity should be determined by both the strength of the third-party liability and the sufficiency of third-party liability insurance available. The stronger the liability and the more insurance available, the higher the level of activity should be. This is because higher activity will increase the carrier's net recovery disproportionate to the cost necessary to increase it. Although the figures vary, every dollar spent on subrogation efforts in such cases can realize $10 or more in increased recoveries.

Quality subrogation counsel should help subrogation professionals decipher the many options that California workers' compensation law presents. Whether to file a Notice of Lien or intervene into a third party action, whether to be active or passive in the third-party action, etc. all must be determined by looking at all of the variables which present themselves in the great State of California.

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

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