Wickert: High Court Ignores Public Policy Interests

Friday, December 2, 2016 | 0

Just when you thought that the level of judicial and legislative apathy and/or ignorance with regard to the huge financial benefits of workers’ compensation subrogation for businesses and the economy couldn’t get any higher, the Montana Supreme Court just lowered the bar even further.

Gary L. Wickert

In a decision that will effectively increase the cost of doing business in Montana for small and large employers located outside of the state, on Oct. 4, 2016, the court did its best impersonation of Georgia and exponentially increased both the cost and risk of doing business in Montana. From this point forward, employers from other states engaging in business in Montana and whose employees are injured in Montana essentially give up their subrogation rights in third-party cases filed in Montana unless and until they can meet the virtually insurmountable burden of proving that the employee has been “made whole.”

Georgia’s workers’ compensation subrogation statute also has a requirement that every employee must be “made whole” before an employer is entitled to be reimbursed workers’ compensation benefits paid as a result of injury or death caused by a third-party tortfeasor.

In Talbot v. WMK-Davis, LLC, 2016 WL 5787289 (Mont. 2016), Jason Talbot, an Oklahoma resident, was employed by Cudd Pressure Control Inc. On March 18, 2014, in Billings, Montana, while in the course of employment with Cudd, Talbot was struck by a car driven by Johnathan Tokarski, while crossing the street. Talbot suffered serious brain injuries as a result.

Talbot filed a workers’ compensation claim against Cudd in Oklahoma and filed a third-party suit against Tokarski in Montana. Cudd paid approximately $600,000 in workers’ compensation benefits and intervened into Talbot’s third-party case, asserting its subrogation rights under § 43(A)(1)(c), Oklahoma’s new workers’ compensation subrogation statute.

A conflict of law developed because Oklahoma’s statute does not require the employee to be made whole as does Montana’s statute. Talbot filed a motion for summary judgment, arguing that the lien was invalid under Montana law, and the court ruled that Montana law applied. It ruled that previous case law prohibited Montana courts from undertaking a choice-of-law analysis when determining whether a workers’ compensation subrogation lien could be asserted against an injured employee who had not been made whole.

Applying Montana’s made-whole doctrine, the court ruled that Cudd was precluded from attaching a worker’s compensation lien to Talbot’s potential tort recovery prior to Talbot being made whole.

The issue was whether a Montana court should undertake a choice-of-law analysis before determining whether a workers’ compensation subrogation lien may be asserted against an injured employee prior to being made whole. It sought to determine whether Montana or Oklahoma law applied to either preclude or permit subrogation in the underlying tort action. The court ruled that no subrogation is allowed because Talbot was not made whole, and allowing subrogation would violate Montana’s strong made-whole public policy.

In addressing this issue the court indicated a desire to move away from more “rigid” rules, holding that Montana follows the “most significant relationship” test for choice-of-law issues sounding in tort found in Restatement § 145. It looked at two choice-of-law cases it had recently decided.

First, in Phillips v. General Motors, 995 P.2d 1002 (Mont. 2000), the court dealt with a choice-of-law issue involving a personal injury/product liability/wrongful death suit. It decided that Montana did not recognize a “public policy exception” to the “most significant relationship” test, stating that “the purpose of choice-of-law rules is to resolve conflicts between competing policies, and the considerations of public policies are expressly subsumed within the most significant relationship approach.” Montana applies the “most significant relationship” test in order to determine which state’s substantive law applies to a tort action.

Second, five years later, in Oberson v. Federated Mutual Ins. Co., 126 P.3d 459 (Mont. 2005), the court dealt with which state’s workers’ compensation law applied in a situation where the third-party suit was filed in Montana by a Michigan employee working for a Michigan employer and receiving Michigan benefits.

Federated Mutual Insurance Co., the workers’ compensation carrier, filed a subrogation suit in Michigan’s workers’ compensation court, while Oberson filed a declaratory judgment action in Montana state court, seeking a determination that Montana law applied to Federated’s subrogation rights, and Federated was precluded from subrogating until the employee was made whole. The court held that § 185 of the restatement, which requires that the local law of the state in which the workers’ compensation benefits were paid be applied to determine the subrogation rights of the benefit-paying parties, did not apply because they rejected the rigid rule in favor of a more flexible approach that permitted the analysis of the policies and interests of Montana.

That court held that Montana law applied to bar any subrogation until the employee was declared to be made whole. Because § 185 is silent with regard to concerns about public policy, the court said an exception to it is appropriate where entertaining a suit would violate strong local public policy.

The court then noted that it had yet to address the role of Restatement (Second) of Conflict of Laws § 90 “Action Contrary to Public Policy” in this scenario. That section reads:

No action will be entertained on a foreign cause of action the enforcement of which is contrary to the strong public policy of the forum.

Because Montana has strongly maintained that workers’ compensation subrogation is precluded until the employee made a full recovery, the court ruled that § 185 is inapplicable in Montana, and Montana relies on § 90 to supplement determination. No § 185 choice-of-law analysis will be conducted in Montana when determining whether a workers’ compensation carrier or employer is entitled to a lien on an injured employee’s third-party lawsuit.

The court ruled that because Cudd was determined not made whole by his third-party recovery, no subrogation interest could be asserted. In future cases when there is a question about whether the employee was made whole, subrogation would be permitted, pending such a determination, but the likelihood that an employee’s attorney will agree that the client has been “made whole” are roughly those of being struck dead by a meteorite.

In a dissent, Justice Laurie McKinnon said Montana should apply the most significant relationship test set forth under § 145. She said that isolating the subrogation claim from the underlying tort claim for an independent choice-of-law analysis is inappropriate. The subrogation claim flows from the injured party’s recovery of damages under a particular state’s law.

While a state’s interest in subrogation may be relevant to deciding the choice-of-law for the underlying tort action, it is subsumed into consideration of the §§ 6(2) and 145 factors. The competing interests of Oklahoma and Montana would be considered along with all the relevant factors in deciding the choice-of-law. If Montana law is selected, no subrogation would be allowed. If Oklahoma law is selected, subrogation would be allowed. This is the way it works in almost every other state.

Companies and employers in states outside Montana purchase insurance based on underwriting principles and calculations that take into consideration, and rely on, subrogation recoveries and future credits when calculating premiums for workers’ compensation policies. These subrogation rights positively affect the employers’ risk modifiers, relieving them from significantly increased workers’ compensation insurance premiums for years to come.

The simple act of crossing the Montana border now means that insurance companies will be required to raise insurance premiums on anybody experiencing a loss while engaging in commerce in Montana. You can rest assured that none of the justices who joined in on this opinion gave that significant factor a lick of thought.

Notwithstanding the Talbot decision, in Martin v. SAIF Corp., 167 P.3d 916 (Mont. 2007), the Montana Supreme Court gave full faith and credit recognition to an allocation of a third-party recovery by the Oregon Workers’ Compensation Commission, because the benefits were paid under Oregon law and the commission’s decision was the equivalent of a judgment. As a result, getting a ruling from the forum state’s commission might be an excellent prophylactic measure to avoid the harsh Talbot rule.

Clearly, much forethought and strategy is called for to effectively subrogate workers’ compensation benefits paid as a result of a Montana accident, regardless of which state’s laws govern the payment of benefits.

Gary Wickert is a partner with the Matthiesen, Wickert & Lehrer law firm in Hartford, Wisconsin. This blog post is reprinted with permission.