Introduction

To minimize the economic impact of claims caused by a third party’s actions, those in the workers’ compensation community must be aware of the right of subrogation. “Subrogation,” as provided for in sections 3850, et seq., of the California Labor Code, is the independent right of an employer and an employer’s insurance carrier against a third party, by whose fault the employee has sustained an industrial injury, to recover the amount of compensation paid to the employee (or his or her dependents) resulting from the injury. See Harvey v. Boysen, (1975) 50 Cal.App.3d 756, 760-761. This includes an independent right of an employer to recover compensation paid to the employee, regardless of whether the employee files a third party lawsuit alleging tortious conduct. Thus, reimbursement can be pursued as a lien claimant, an Intervenor in an action filed by the employee, or as a Plaintiff in an independent action against third parties. This article explains the difference between the three and the advantages and disadvantages of each.

Role of Employer Negligence

First, the issue of employer negligence should be evaluated carefully. Theories of employer negligence may impact whether a lien, a complaint in intervention or an independent action against the third party is preferred. More importantly, no matter what the employer’s role, it is only entitled to reimbursement (or credit, discussed below) to the extent that the benefits paid exceed its proportionate share of the employee’s recovery in the third party action. Arbaugh v. Procter & Gamble Mfg. Co., (1978) 80 Cal.App.3d 500, 507-508. This is commonly referred to as the “Arbaugh threshold.” For example, if the employer is 20% negligent and the employee’s total damages are $100,000.00, the employer is not entitled to reimbursement (or credit) unless the total benefits paid in the workers’ compensation claim exceed $20,000.00.

Pursuing Subrogation Rights as a Lien Holder

Where an employee has filed his or her own third party lawsuit against other persons or entities responsible for causing the employee’s injuries, the employer or insurer may serve a Notice of Lien on all parties in the lawsuit. The lien is a first lien against any recovery by the employee, and prompt service of the notice of the lien may insure participation in settlement negotiations. The lien is payable after payment of expenses and attorney’s fees. Lab. Code §3856(b).

The advantages of asserting the first lien is that you can often minimize your legal costs associated with recovery. Because you are not a party to the lawsuit, your obligation to participate in discovery and other costly activities is limited. Additionally, if the defendant(s) is the “prevailing party,” either by motion for summary judgment or verdict, you will not be liable for its costs under section 1032 of the Code of Civil Procedure. It is rarely advisable to informally assert a lien by notifying the parties of it in writing, but not file a notice of lien with the Court. Unless a notice of lien is filed, you forfeit your right to have your lien addressed by the court at the time of entry of judgment and the parties have little motivation to address your lien during settlement negotiations. The rights of the lien holder are addressed by the court after entry of judgment, not by the jury in its verdict, and no satisfaction of judgment is valid without giving the employer notice and a reasonable opportunity to satisfy its lien. Lab. Code §3858. Also, if all parties agree and no claim of employer’s comparative negligence is raised by the third party, the lien can be established by stipulation.

By contrast as a lien claimant, since you are not a party to the action, you may not be kept informed of the status of the litigation. It is good practice to request that the parties place you on their proof of service list as a courtesy. Moreover, even though the parties are on notice of your lien, it is easier to “settle around you,” or negotiate settlement without your participation. Further, if there are substantial issues of employer negligence, which can impact the level of your recovery, unless you are a party to the action, you may not be in a good position to defend against employer negligence arguments during discovery, settlement negotiations or at trial.

Pursuing Subrogation Rights as an Intervenor

If you determine for reasons described above that your participation in the litigation, despite the cost, is necessary to maximize recovery, then you may file a Complaint in Intervention, which asserts your subrogation rights derivative of the employee’s action. You then become a party to the case referred to as the “Intervenor.” Courts across the State have different rules, but generally, leave to intervene is granted liberally at any given stage of litigation, and the statues authorize intervention “at any time before trial on the facts.” Code of Civ. Proc. §387; Lab. Code §3853. The closer a matter is to trial, however, the more likely you run the risk of your request being denied based on prejudice to other parties. Under those circumstances, the court may not preclude your claim in its entirety, but may limit your role to that of a lien holder only. Though derivative of the employee’s action, the Intervenor has a right to name other third party tortfeasors as defendants and to allege additional causes of action. Thus, unlike a lien, you have some control over the nature of the litigation and the basis for recovery, rather than being at the mercy of the employee’s attorney and his or her skill and/or strategy. You also can pursue a judgment against third parties, enforceable by the courts. Lab. Code §§3852, 3856(c).

In some respects, however, it is important to have a good working relationship with the employee’s attorney. You do not want that attorney to undertake discovery efforts that undermine the overall tort value of the claim. You want to discourage formal discovery between the employee and the employer that must also be shared with the other parties and could provide evidence supporting employer negligence. Communication regarding theories of the case and litigation strategy is an important part of maximizing recovery for both the employee and the employer.

Pursuing Subrogation in an Independent Action

Thirdly, if the employee chooses not to pursue a third party lawsuit, the statute of limitations is applicable to the employer’s independent right to subrogation. Service of the Summons and Complaint is required on the injured worker by personal service or certified mail. Lab. Code §3853. Under these circumstances, third parties are sued by the employer or insurer, who is the named plaintiff. The employer has the burden of proving all elements necessary to show liability, causation and damages against the third parties. Demkowski v. Lee, (1991) 233 Cal.App.3d 1251, 1258 n.2. The Complaint filed by the employer is the operative pleading in the case and must describe all causes of actions and explain the basis of the same as subrogation pursuant to Labor Code sections 3850, et seq. The employer will be responsible for moving the case forward, developing a discovery plan and executing it, and litigating the case through resolution either by settlement or trial. The employee may intervene in your action to become a party. Even if the employee does not, you can pursue damages for the full tort value of the claim. Limited Mutual Etc. Ins. Co. v. Billings, (1946) 74 Cal.App.2d 881, 883. Any excess after satisfaction of your subrogation claim, and payment of costs and attorney’s fees, will be paid to the employee (or other persons entitled thereto). Lab. Code §3856(a).

Employer’s Right to Credit

Finally, no matter which role you assert in pursuit of your subrogation rights, you must be aware of the right to assert credit against future workers’ compensation benefits provided for in Labor Code sections 3856, 3858 and 3860. Basically, after reasonable attorney’s fees and costs are paid, the employer has a right to assert a credit by filing a Petition for Credit with the Workers’ Compensation Appeals Board (WCAB). The amount of the credit is determined by the net recovery achieved by the employee in the third party suit less costs and attorney’s fees. This right to credit is limited by any employer negligence, which may be the subject of litigation if the Petition for Credit is disputed by the employee. The WCAB has jurisdiction to determine that issue, as well as determining the jury verdict value of the case. Where it is agreed there is no employer negligence, or the amount of negligence can be agreed upon, it is advisable to negotiate a Stipulation to Credit as part of the settlement in the third party action to avoid the cost and delay of litigating the credit before the WCAB. See Bonner v. W.C.A.B., (1990) 225 Cal.App.3d 1023. Any credit is a dollar for dollar credit against all liability including medical treatment, all forms of indemnity, penalties, and all other benefits except any additional compensation awarded for a violation of Labor Code section 132a. State Comp. Ins. Fund v. W.C.A.B., (1997) 53 Cal.App.4th 579, 583; See Corner v. W.C.A.B., (1992) 57 Cal.Comp. Cases 579.

To those in the workers’ compensation field who have limited or no experience in civil litigation, the very idea of pursuing subrogation rights in that arena can be intimidating. As in any aspect of risk management, however, reduction of costs is an essential consideration and subrogation is a useful tool to consider where third parties have contributed to the cause of an injury.