Understanding Pennsylvania Work Comp Subrogation: When Does a Carrier Not Have a Lien, and What You Should Do When It Does

Greg Boles
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Partner at The Boles Firm | Experience Matters

In a separate library page, we describe the Third Party Settlement Agreement and the documents that need to be prepared if a workers’ compensation insurance company agrees to limit its lien against a third party recovery. Here we provide a brief guide and practice tips regarding common subrogation issues.

EMPLOYER IMMUNITY AND THIRD PARTY LIABILITY

Workers covered by the Pennsylvania Workers’ Compensation Act may not sue their employers for negligence resulting in a work-related injury unless the employer is uninsured. Under the Act, employees may collect certain special benefits, but commonly can collect only wage loss and medical expense benefits. If someone other than the employer is legally responsible for the injury, however, an injured worker may recover for damages such as pain and suffering, loss of earning power, and a spouse of an injured worker may recover for the loss of assistance and companionship (“loss of consortium”).   

Under Pennsylvania law, an employer or its workers' compensation insurance company has an absolute right of subrogation against any third-party civil action recovery or settlement proceeds.  77 P.S. § 671.  This means that the workers’ compensation insurance company has the right to collect workers’ compensation benefits it paid if there is a recovery from a legal action against someone else arising out of the work injury, typically a negligence action. The employer or its workers' compensation insurance carrier must pay a pro-rata share of the costs and attorney’s fees.  The proper division of a third-party recovery between the workers' compensation insurance company, employer, and injured plaintiff is done by preparing a third-party settlement agreement, which is discussed in greater detail below. 

The Pennsylvania Supreme Court calls subrogation an "absolute right" that an employer or its workers' compensation insurance company has from the date of injury.  Even if years go by without the workers' compensation insurance company taking any action, they have a right to pursue an action against an injured worker to recover any benefits they paid.  In Superior Lawn Care v. WCAB, 878 A.2d 936 (Pa. Cmwlth. 2005), an insurer placed the plaintiff on notice of a subrogation claim shortly after he filed a civil action in March 1993.  A civil action settlement was completed in April 1994, and the workers' compensation insurance company filed an action against the plaintiff in May 2002, claiming that their right of subrogation had not been properly protected. The Pennsylvania Supreme Court held that the plaintiff had an obligation to advise the insurer that a settlement of the civil action was achieved and rejected the claim that the insurance company had "slept on its rights." 

PRACTICE TIP: WHEN TO DEAL WITH A WORKERS' COMPENSATION INSURANCE COMPANY

Do not expose your client to the risk of legal action by the workers' compensation insurance company.  Advise your client to notify the workers' compensation insurance company of a third party action as quickly as possible.  In many cases, the amount the workers' compensation company paid can be used to increase the value of damages in your personal injury claim. Because the right of subrogation by a workers' compensation insurance company is absolute, do not settle a third-party case unless you deal with the lien first.  Once you enter into an agreement to settle a third-party case, you run the risk that the workers' compensation insurance company will refuse to compromise its lien.

RIGHT OF APPORTIONMENT

LOSS OF CONSORTIUM

Plaintiffs have the right to divide damages in a civil action settlement between wage loss and medical expenses and damages for spousal loss of consortium.  In Darr Construction Company v. WCAB, 715 A.2d 1075 (Pa. 1998) the Pennsylvania Supreme Court specifically found that there was no authority for a workers' compensation judge to determine the amount in a settlement that is properly payable to a spouse of the injured worker for loss of consortium.  The court did, however, caution that a plaintiff could not avoid honoring the employer's subrogation rights by fraudulently apportioning a large percentage of the proceeds to a loss of consortium claim.  Where that occurs, however, the employer's right of recourse is in the Court of Common Pleas, and not before a workers' compensation judge. 

PAIN AND SUFFERING

In Thompson v. WCAB, 801 A.2d 635 (Pa. Cmwlth. 2002), the Commonwealth Court ruled that an injured worker could not apportion a civil action settlement in such a way as to avoid an employer's subrogation right by attributing the settlement proceeds to a "pain and suffering" recovery, which is an item of damages that is not recoverable in a workers' compensation case, but in a footnote in a 2015 decision, the court opened the door for just such an apportionment: "The facts in this case do not indicate that any portion of the insurance proceeds received by Claimant were designated for pain and suffering. Therefore, we do not answer the question of whether an employer has the right of subrogation to insurance proceeds that are designated as compensation for pain and suffering." Davis v. WCAB, 131 A.3d 537 Pa. Cmwlth. 2015), cert. denied, 141 A.3d 482 (Pa. 2016).

SPECIAL SUBROGATION RULES IN MEDICAL NEGLIGENCE CASES

For an employer or its workers' compensation insurance company to be entitled to subrogation, it has to establish two things: (1) the fund that it is asserting its subrogation rights against was for the same injury for which the employer or its workers' compensation insurance company was liable under the Act; and (2) as a result of the negligent medical treatment, the employer or its workers' compensation insurance company was compelled to make compensation payments. 

This means that for an employer to establish that it is entitled to subrogation against a medical malpractice defendant, the employer has to prove that but for the negligence of the physician, the employee would be employable.  This limitation on the right of subrogation, however, is limited to wage-loss benefits. 

Where an injured claimant pursues a medical negligence lawsuit and the defendant's insurance company is placed in liquidation by the insurance carrier, the Pennsylvania Property & Casualty Insurance Guaranty Association assumes responsibility for a portion of the civil action liability.  In these circumstances, the workers' compensation insurance is precluded from seeking subrogation against the portion covered by the Association. 

MCARE

The Medical Care Availability and Reduction of Error (MCARE) Act, 40 P.S. § 1303.508 has eliminated subrogation for past wage loss and medical expense benefits, though not with respect to future wage loss and medical payments.

UNINSURED/UNDERINSURED RECOVERIES

If an employee suffers injuries in a motor vehicle accident while on the job, the workers' compensation insurance company does not have a right of subrogation against proceeds received by an employee from his own uninsured or underinsured insurance coverage.  If, however, the uninsured or underinsured motorist coverage is paid for by the employer, a right of subrogation exists. 

COMMONWEALTH PARTIES

In Frazier v. Workers' Compensation Appeal Board, 52 A.3d 241 (Pa. 2011) the Pennsylvania Supreme Court considered a case in which a passenger was injured riding a SEPTA bus while working and subsequently received worker's compensation benefits from his employer.  SEPTA settled the tort claim and agreed to defend and indemnify the employee in the event of a claim for subrogation or reimbursement from the passenger's employer or its workers' compensation insurance company.  Section 23 of Act 44 provides sovereign immunity to the Commonwealth, its subdivisions and employees from claims of subrogation or reimbursement against a claimant's tort recovery with respect to workers' compensation benefits. This means that if a work injury results from the negligence of the Commonwealth, its entities, or employees, a workers' compensation insurance company or employer cannot obtain any reimbursement out of the tort recovery.

MOTOR VEHICLE CASES INVOLVING POLICE OFFICERS, FIREFIGHTERS AND OTHER EMPLOYEES COVERED BY THE HEART AND LUNG ACT 

In motor vehicle cases, the Commonwealth has no right to recover Heart and Lung Act benefits it paid to police officers, firefighters, and certain other public safety employees. The Heart and Lung Act provides police officers, firefighters and certain other public safety employees their full salary while they are temporarily disabled from performing their job duties due to a work injury.  The purpose of the favorable wage loss benefits provided in the Heart and Lung Act is to "attract employees to and keep them in the essential and dangerous jobs."  McWreath v. Department of Public Welfare,  26 A.3d 1251, 1255 (Pa. Cmwlth. 2011).  

Until 1993, the Motor Vehicle Financial Responsibility Act provided that in actions arising out of the maintenance or use of a motor vehicle, there "shall be no right of subrogation or reimbursement from a claimant’s tort recovery with respect to workers' compensation benefits.”  The Workers' Compensation Act was subsequently amended to restore an employer's right of subrogation with respect to workers' compensation benefits in motor vehicle accident cases.  In Oliver v. City of Pittsburgh, 11 A.3d 960 (Pa. 2011), the Pennsylvania Supreme Court ruled that benefits paid pursuant to the Heart and Lung Act are not subject to subrogation in motor vehicle accident cases.  In Stermel v. W.C.A.B., 103 A.3d 876 (2014), the Commonwealth Court ruled that the City of Philadelphia was not entitled to pursue subrogation for benefits the City would have been required to pay under the Workers’ Compensation Act even if the employee had not received Heart and Lung Act benefits.  The Stermel Court did not address whether medical benefits that were payable both under the Workers' Compensation Act and the Heart and Lung Act were subject to subrogation.  In Pennsylvania State Police v. W.C.A.B., 149 A.3d 118 (Pa. Cmwlth. 2016), the Commonwealth Court reaffirmed the principle that there is no right of subrogation in a motor vehicle collision case for any benefits paid under the Heart and Lung Act, including medical expense benefits, regardless of the fact that medical benefits were also required to be paid under the Pennsylvania Workers' Compensation Act.  

SUBROGATION WAIVERS MUST BE EXPLICIT

When settling a workers' compensation claim, the parties enter into a compromise and Release Agreement on a form prepared by the Bureau of Workers' Compensation.  On the form is a box that requires the parties to acknowledge whether there was an actual or potential lien for subrogation.  Even if the parties check the “No” box, a waiver probably has not been effectuated.

PRACTICE TIP: WAIVER OR ASSIGNMENT?

When a claimant and his lawyer enter into a Compromise and Release Agreement in which the workers' compensation insurance company "waives" its entitlement to benefits, it is probably better to call it an assignment of subrogation rights rather than a waiver.  It is possible that some creative defendant in a third-party case will claim that a waiver of subrogation rights precludes a plaintiff from putting the workers' compensation payments "on the board" as part of his or her damages.  If, on the other hand, the workers' compensation insurance company or its employer assigns its right of subrogation to the claimant, no such argument can be made in any subsequent third-party case.

COMPROMISING A LIEN           

In small personal injury cases where the recoverable amount in the third-party case is lower than the workers' compensation insurance company's subrogation lien, workers' compensation insurance companies will often enter into agreements in which the proceeds are divided one‑third to the insurance company, one-third to the claimant, and one‑third to the lawyer, though the company is not required to do so. 

PRACTICE TIP: AT MEDIATION, MAKE SURE THAT THE ATTORNEY REPRESENTING THE INSURANCE COMPANY IS EXPERIENCED

When you mediate a third-party case with a large workers’ compensation lien, make sure that the attorney representing the workers' compensation insurance company is a senior attorney with the authority to make decisions in the case.  It is also much better for a claims representative from the workers' compensation insurance company to be present at the time of mediation. Too often the workers' compensation insurance companies send junior lawyers to third-party mediations.  Inexperienced lawyers repeat the mantra that the insurance company is asserting its full lien.  They do so even when it is obvious that taking this position is entirely self-destructive.  Unless you get the workers’ compensation carrier to take the case seriously and prepare in advance, you run the risk that your negotiations will fail. Make sure that there is an experienced lawyer representing the insurance company and that a representative of the workers' compensation insurance company is either present at the mediation (much preferred) or is available by telephone.