Pennsylvania's Workers' Comp 3rd-Party Dispute

Friday, October 25, 2013 | 0

If you think the recent Congressional civil war over cutting entitlements and spending, raising the debt ceiling (again) and funding ObamaCare was a melee, welcome to the ongoing dispute in Pennsylvania over whether a workers’ compensation carrier can initiate the filing of a third-party lawsuit. It’s the usual suspects: trial lawyers vs. subrogation professionals. However, an upcoming appeal from the new Superior Court opinion in Liberty Mutual v. Domtar Paper Co., 2013 WL 5423850 (Pa. Super. 2013), may provide the right case at the right time and resolve the issue once and for all.

The saga of this ongoing debate in Pennsylvania – colloquially referred to as the “reluctant plaintiff problem” – could serve as the backdrop for a new HBO series. Section 671 of Pennsylvania’s Workers’ Compensation Subrogation Statute couldn’t be clearer. It unambiguously states, “…the employer shall be subrogated to the right of the employee.” Section 319 of the Act has appropriately been described as “clear and unambiguous,” “written in mandatory terms” and without “exceptions.” Kidd-Parker v. Workers’ Comp. Appeal Board (Philadelphia School District), 907 A.2d 33 (Pa. Commw. Ct. 2006). However, that doesn’t stop opponents of the carrier’s right to initiate a third-party action, who argue that because the subrogation right contained in § 671 does not rise to the level of an “assignment,” the carrier cannot file a subrogation action on its own. As is the case with so many attacks on subrogation, trial lawyers, like cornered animals driven crazy by hunger and the disappearance of suitable prey, have attacked subrogation seeing as they’ve lost the battle against tort reform. It’s sad that so many conservatives and Republican legislators and judges fall victim to the specious arguments against subrogation and fail to see its societal and economic value. For that, we are to blame. In the upcoming appeal of the Liberty Mutual v. Domtar Paper Co. decision, we have the opportunity to champion subrogation and restore sanity to the ubiquitous attacks on workers’ compensation subrogation in Pennsylvania.

Pennsylvania has long had clear and concise federal district courts confirming the carrier’s right to file a third-party action. See London Lancashire Indem. Co. of Am. v. Reid, 156 F.Supp. 897 (E.D. Pa. 1957); Ledford v. Central Medical Pavilion, Inc., 90 F.R.D. 445 (W.D. Pa. 1981). Obviously, these cases represent a judiciary immune to the charms and solicitations of the trial lawyers. Section 671 could not be clearer and it strains credulity to argue that the carrier does not have the right to file suit. A few Pennsylvania state courts join the federal court decisions. Bumbarger v. Bumbarger, 155 A.2d 216 (Pa. Super. 1959).

A possible solution to this controversy – and perhaps the best way to approach it – is known as the “use” practice. Early cases demonstrate that this “use” practice was commonplace in the enforcement of an employer’s subrogation rights. Smith v. Yellow Cab Co., 135 A. 858 (Pa. 1927); Mayhugh v. Somerset Tel. Co., 109 A. 213 (Pa. 1920); Moltz v. Sherwood Bros., Inc., 176 A. 842 (Pa. Super. 1935). Even the Pennsylvania Supreme Court has indicated that the employer is not to be denied its right of subrogation because the employee does not sue, but may institute the action in the latter’s name. Scalise v. F. M. Venzie & Co., 152 A. 90 (Pa. 1930). “Use” practice is not specifically provided for in the Civil Procedure Rules, but Rule 2002 implicitly suggests that it is still a valid method of assertion of such subrogation rights. Pa. R.C.P. Rule 2002. The carrier filing a third-party action through the “use” practice is clearly consistent with the legal principle espoused by some courts that the cause of action “abides” in the injured employee. Through “use” practice, the subrogee is attempting to exercise not its own cause of action, but that of the injured worker. The better rule, accordingly, is that the subrogee may assert its subrogation right through an action brought “on behalf of the injured employee” through “use” practice. Florists’ Mut. Ins. Co. v. Uniontown Hosp., 13 Pa. D. & C. 4th 93 (1991) (permitting action); Nationwide Ins. Co. v. Rigid Ply Rafters, Inc., 1989 WL 229395 (1989). The court allowed action in the case denominated as “Nationwide Ins. Co. as subrogee of Springfield Floor Company and Eric E. Schneztka,” holding that case complied with Reliance Ins. Co. v. Richmond Machine Co., 455 A.2d 686 (Pa. Super. 1983): “a cursory look at plaintiff’s complaint indicates that the plaintiff is seeking to establish the liability of defendants to Schneztka, the injured employee. The action was brought on behalf of Schneztka.”

Two Pennsylvania Superior Court (intermediate appellate court) decisions and one Delaware Superior Court decision (interpreting Pennsylvania law) have cast doubt on the ability of the carrier to sue a third party on its own. Reliance Ins. Co. v. Richmond Machine Co., 455 A.2d 686 (Pa. Super. 1983); Mottas v. Eberhard, 2013 WL 4716235 (Del. Super. 2013); Liberty Mut. Ins. Co. v. Domtar Paper Co., 2013 WL 5423850 (Pa. Super. 2013). In Reliance Ins. Co. v. Richmond Machine Co., a workers’ compensation carrier tried to sue a product manufacturer after the underlying statute of limitations had run. The Superior Court held that the carrier could not sustain its suit because in order for a compensation carrier to succeed in a third-party subrogation suit, it must show that the third party is liable, which was hard to do in that case seeing as the statute of limitations had run. However, the Court, seemingly in dicta, added the following comment:

"Our appellate courts have not hitherto construed Section 319 as providing the employer or its insurer with a cause of action against a third party in its own right. We see no reason to do so at this stage, where the Legislature has not chosen to do so, where the liability of the alleged third-party tortfeasor has not been determined and where the statute of limitations for personal injury actions has barred an action in trespass against the alleged tortfeasor."

While some have cited the above language from the Richmond Machine Company decision for the proposition that the carrier may not bring a third-party action on its own, the points the court was truly trying to make were:

(1) That the carrier could not sue the third party where the third party was not liable (as where the statute of limitations had expired); and

(2) When the carrier does proceed on its own, it must do so in the name of the injured employee, as it does not have a cause of action in its own name – only a right to be reimbursed from a suit brought in the name of the injured employee.

The confusing language of the Richmond Machine Co. decision has led some to cite it for the proposition that the carrier cannot file a third-party suit under § 671, even if that suit is filed as subrogee and it names the injured worker as the plaintiff subrogor. All the Richmond Machine Company decision truly does, however, is awkwardly state that the cause of action is owned by the worker, not the employer or compensation carrier, who are clearly subrogated to that right.

The Richmond Machine Co. decision also cites to a couple of other cases, including the case of Scalise v. F.M. Venzie & Co., Inc., cited for the proposition that the right of action is not in the employer/insurer, but in the injured employee under § 319. But, in the Scalise case, the appellee was arguing that only the employer could sue the third party. The Court stated that the employer is not the only person who can sue – the employee can also sue. Richmond Machine Company further cited to “the first case which considered the question of action by the employer.” In Mayhugh v. Somerset Telephone Co., which held that § 319, by saying “subrogated…to the extent of compensation payable” did not contemplate that the sole right to recover against the tortfeasor is in the employer. In Mayhugh, the subrogated carrier brought suit against the third party and the court upheld that right.

In Scalise, the Court further held that while the right of action remains with the injured employee, a subrogated carrier may do any of the following:

(1)      Appear as “an additional party plaintiff” as it did in Gentile v. Philadelphia & Reading Ry., 118 A. 223 (Pa. 1922), or

(2)      Intervene as a “use plaintiff” as it did in Mayhugh v. Somerset Tel. Co., 109 A. 213 (Pa. 1920), or

(3)      Notify the tortfeasor of its statutory lien as done in Scalise.

The Scalise Court further emphasized that: “The employer, moreover, is not to be denied his right of suit because the employee does not sue, but may institute the action in the latter’s name.” The Gentile case is cited as an example of the employer bringing suit as a “party plaintiff” while Mayhugh is cited as an example of bringing it as a “use plaintiff.”

It is within this paradigm that the Scalise Court states that the right of action is for one indivisible wrong abiding in the employee. Therefore, the notion that there is “one indivisible wrong that abides in the insured through whom the carrier must work out its subrogation rights” should not be considered a limitation on the right of the carrier to file a third-party action.

In 2013, a Delaware Superior Court interpreting Pennsylvania law sided with the trial lawyers, opining that a workers’ compensation carrier’s right to reimbursement of monies paid under the compensation claim is subrogated to the injured party’s claim against the tortfeasor, and the carrier “has no independent cause of action for indemnification and contribution” from the tortfeasor.” Mottas v. Eberhard, 2013 WL 4716235 (Del. Super. 2013).

Then along comes Liberty Mutual v. Domtar Paper Co., Inc., a Pennsylvania Superior Court faced with the identical issue of whether a workers’ compensation carrier could initiate a third-party suit on its own. That Court announced that Scalise did not stand for the proposition that the Workers’ Compensation Act provides carriers with the ability to proceed independently against a tortfeasor. The new Liberty Mutual decision also emphasizes that a few decisions rendered after Scalise state that the carrier has no independent right to pursue the tortfeasor, but, rather, that the right of action remains with the employee.

A common sense reading of § 671 and a simple understanding of the meaning of the word “subrogation” dictate that Liberty Mutual has the right to sue the tortfeasor as the subrogee of George Lawrence. To claim that the wording in Scalise to the effect that “the right of action remained with the injured employee” means that the subrogated carrier cannot initiate a third-party action defies both logic and the time-honored definition of “subrogation.” The Liberty Mutual case is currently on appeal. National Association of Subrogation Professionals member Robert Horn is handling the appeal and NASP member Patrick Timoney is drafting the NASP amicus curiae Brief.

Life is actually pretty simple until the trial lawyers get involved. The Pennsylvania Legislature could have done what some states have done – simply grant workers’ compensation carriers a mere right of reimbursement and no right of subrogation (see New Mexico). It did not. It’s time for Pennsylvania courts to recognize that fact and stop playing politics with our industry’s statutory right of workers’ compensation subrogation.

Gary L. Wickert is an insurance trial lawyer and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C. in Wisconsin. This column was reprinted with his permission from the firm's Subrogation Knowledge blog.