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Workers’ Compensation Subrogation: Can Injured Workers Be Made Whole?

A workers’ compensation claim coupled with third-party negligence brings to light the tension in the law between the “made whole” doctrine and the statutory prohibition against double recovery. Whether you represent the client on the workers’ compensation claim, the negligence claim, or both, you must understand the implications of subrogation to maximize recovery for your client.

The Basics

Workers’ compensation benefits are limited to income and medical benefits. Other types of special damages, such as loss of consortium or pain and suffering, are not compensable under workers’ compensation.

An injured employee may recover from both the employer and the tortfeasor, but he cannot collect from both.1 If a civil action is filed against the tortfeasor, notice consistent with the requirements of KRS 411.188(2) must be given to the employer so that it can exercise its statutory right to intervene in the third party claim to recoup income and medical benefits paid.2

Fortunately for the injured employee, the employer’s subrogation right applies only to the award, minus the employee’s attorney fees and expenses. The offset is on a dollar for dollar basis, not pro rata, even if the majority of the attorney fees were expended for damages not covered by workers’ compensation.3 For example, if the employer pays $10,000 for income and medical benefits, but the injured employee paid $15,000 in legal fees and expenses to recover pain and suffering from the third party, the employer’s subrogation right is extinguished. Otherwise, the employer/insurer would benefit from the injured
employee’s endeavor without sharing in its costs.4

The injured worker is entitled to have an independent and impartial trier of fact allocate the elements of damages.5 Moreover, the employer is not bound by the allocation of damages by the injured worker and the tortfeasor if a settlement agreement is reached.6 If a civil action is filed against the tortfeasor, then the jury (or judge in the case of a bench trial) allocates the elements of damages. If the third party claim is settled prior to the workers’ compensation claim but does not provide allocation, the administrative law judge in the workers’ compensation claim has jurisdiction to allocate damages and resolve subrogation issues.7 Finally, if the employer provides prima facie evidence of a subrogation credit, the burden shifts to the employee to prove that a portion of the recovery is not available for subrogation credit.8

Methods Used to Apportion Awards and Settlements Absent Specific Allocation

Many of us became lawyers because we hate math. I recall that during law school, you could palpably feel the anxiety level rise in the room each time our tax professor wrote numbers on the board, even if the figures involved were simple. Although the professor often assured us it was third-grade math, the mere thought of adding and subtracting sent many students into a dither. Even if you are mathematically inclined, trying to make heads or tails of workers’ compensation subrogation law can make you reach for antacid tablets and aspirin. For instance, pursuant to Hillman v. American Mutual Liability Ins. Co., 631 S.W.2d 848 (Ky. 1982), if a judgment cannot be satisfied out of the insurance funds, you may be forced to use a formula whereby the injured worker and the workers’ compensation carrier each recover a pro rata share of the available funds in an amount directly proportionate to the relationship between the portion of the judgment subject to subrogation and the portion that is not. This situation is more easily understood by hypothetical.

Let’s say an injured worker files a third-party complaint against a negligent tortfeasor. The workers’ compensation carrier intervenes to protect its subrogation interest for $75,000 paid in medical expenses and income benefits. The jury awards $75,000 for lost wages and medical benefits and $25,000 for pain and suffering. For now, ignore whatever offset might exist for attorney fees and expenses. Thus, the damages total $100,000, and the employer is entitled to recoup $75,000, or 75 percent of the total damages. What if the tortfeasor’s only asset is a $25,000 insurance policy? Shouldn’t the injured employee be
made whole and take the entire policy to compensate him for his pain and suffering?

Unfortunately, Kentucky courts have said no. Per Hillman, the injured employee gets 25 percent of the $25,000, and the employer gets the remaining 75 percent. While at one time efforts were made to reconcile the made whole doctrine with statutory subrogation,9 in AIK Selective Insurance Fund v. Bush,10 the Supreme Court explicitly refused to apply the made whole rule. Further muddying the waters, the subsequent decision of AIK Selective Self-Insurance Fund v. Minton11 used the made whole doctrine to “explicate” the primary functions of statutory subrogation. As the concurring opinion pointed out in
Minton, the discussion of made whole in the opinion is more or less dicta. While the Minton court did not go so far as to overturn the Bush decision,
its reasoning should be used in highly disputed subrogation issues or to effectuate change in the law.

Apportionment becomes especially complex if the tortfeasor files a third-party complaint against the employer for contribution. For instance, an injured worker files a product liability suit against the maker of a press that caused his injury. The employer intervenes for subrogation against what it paid out in workers’ compensation benefits. The maker of the press then files a third-party complaint again the employer, alleging fault on the part of the employer for failure to install guards on the machine.

Using the numbers from the previous hypothetical, the jury awards $100,000 in damages to the injured worker, with $25,000 allocated for pain and suffering, and $75,000 for medicals and lost income. The jury further finds the maker of the press 75 percent at fault and the employer 25 percent at fault. The employer is allowed to recoup the percentage of benefits it paid under workers’ compensation that was caused by the negligent third party’s fault. Thus, if the employer paid $75,000 medical and income benefits, the employer can recoup 75 percent of that amount, or $56,250.

The analysis is not over, however. The injured employee can only collect 75 percent of his damages because the exclusive remedy provision bars direct recovery from the employer, even though the employer was found to be at fault.12 Now, the total judgment recoverable by the injured employee is $75,000.

What if the tortfeasor only has $25,000 in assets to cover the judgment? The answer seems to require reconciliation of Hillman and Bush—not a simple task. Hillman requires us to distribute the judgment pro rata, so we must compare the portion of the judgment subject to subrogation, and the portion that is not.
The jury awarded $25,000 for pain and suffering, not subject to subrogation. Must we discount the pain and suffering by 25 percent, the portion of pain and
suffering caused by the employer? While the Bush decision rejected the “made whole” doctrine, it did not provide instruction on how to reconcile its reasoning with Hillman. Toss Minton into the equation and the subrogation issues become even more complex.

Keep in mind that UM and UIM coverage can throw another interesting kink into the process. An injured worker cannot recover UIM benefits duplicating workers’ compensation since he could not recover those same damages from the tortfeasor. 13 This is the case even if the workers’ compensation carrier is not a party to the action. Even though the UIM carrier may be entitled to an offset, the workers’ compensation carrier has no subrogation claim against the UIM benefits since payment of UIM benefits is the performance of a contractual obligation, not the payment of damages.14

An Ounce of Prevention is Worth a Pound of Cure

Placing allocation and offsets exclusively into a judge’s hands is a dangerous endeavor in light of the complexities of subrogation law. Being proactive is a better strategy. If you include both the tortfeasor and employer in settlement negotiations, it is possible to engineer a “global settlement” which removes the risk of the trial judge getting it wrong.

If global settlement cannot be reached, try to obtain an assignment of the workers’ compensation carrier’s subrogation rights. Keep in mind, the comp carrier’s waiver of subrogation is not enough. 15 Otherwise, the negligent defendant will still receive an offset for benefits paid by the employer. If the third party claim settles prior to the workers’ compensation claim, carefully structure the third party settlement language to allocate as much of the award as is realistically possible to pain and suffering. It may not be prudent to allocate the entire third-party settlement to pain and suffering since the ALJ is not bound
by the terms of the agreement.16 Depending on the circumstances, a wiser choice might be to structure the terms of the settlement to include some compensation for lost wages but not impairment of the ability to earn income into the future. While the workers’ compensation carrier would still be entitled to subrogation as to lost wages, the carrier may lose the right to recoup future income benefits paid.

Finally, it is possible to settle the injured workers claim against the tortfeasor and include terms in the settlement agreement that specifically exclude the subrogation claim of the workers’ comp carrier.17 As a practical matter, it may be difficult to get the tortfeasor to agree to such an arrangement since the workers’ comp carrier can pursue the claim against the tortfeasor on its own if it so desires.

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1 KRS 342.700(1).
2 Id.
3 AIK Selective Self-Insurance Fund v.
Bush, 74 S.W.3d 251, 257 (Ky. 2002).
4 See AIK Selective Self-Insurance Fund
v. Minton, 192 S.W.3d 415 (Ky.2006)
5 Mastin v. Liberal Markets, 674 S.W.2d
7 (Ky. 1984).
6 Id.
7 Whittaker v. Hardin, 32 S.W.3d 497 (Ky. 2000).
8 Id. at 499.
9 See Great American Insurance Companies v. Whitt, 964 S.W.2d 428 and Whittaker v. Hardin, 32 S.W.3d 497
(Ky. 2000).
10 74 S.W.3d 251 (Ky. 2002)
11 192 S.W.3d 415 (Ky.2006)
12 KRS 342.690(1).
13 Cincinnati Ins. Co. v. Samples, 192
S.W.3d 311 (Ky. 2006).
14 G&J Pepsi-Cola Bottlers, Inc. v. Fletcher, 229 S.W.3d 915 (Ky. App. 2007).
15 Krahwinkle v. Commonwealth
Aluminum Corp., 183 S.W.3d 154 (Ky. 2005).
16 See Whittaker v. Hardin, 32 S.W.3d 497 (Ky. 2000).
17 See AIK v. May, 957 S.W.2d 257 (Ky. App. 1997).