SUBROGATION RIGHTS OF WORKER’S COMPENSATION INSURANCE COMPANIES IN TEXAS

Injured worker.jpgIf you are injured on the job and your injury was caused by the negligence of a third party and not your employer you can still recover workers’ compensation from your employer’s worker’s compensation insurance carrier. However, if you bring a suit against the third party for your injuries after receiving worker’s compensation benefits, you might be surprised to learn that the worker’s compensation carrier is expecting to be reimbursed from your recovery for the benefits it paid to you. This is known in insurance law as subrogation.

The subrogation interest of the workers’ compensation insurance carrier is generally granted in Chapter 417 of the Texas Labor Code. Section 417.001 gives a subrogation interest or a direct right of recovery to the workers’ compensation carrier. Section 417.002 requires that the third party recovery be exhausted before the carrier is obligated to resume benefits to the injured worker. Section 417.003 sets forth rules for compensating the attorney who obtains the recovery out of which the subrogation interest is paid. Section 417.004 bars the negligent third party from seeking contribution or indemnity from a negligent employer in the absence of a prior agreement.

The statute authorizes the recovery by the carrier to take priority over common law, including the made whole doctrine. Any employee who receives workers’ compensation benefits for an on the job injury must repay the carrier out of the proceeds of any third party settlement or judgment. “Third party” may include certain first party uninsured or underinsured motorist benefits.

Section 417.002 also provides that the net amount recovered by the employee in a third-party action shall be used to reimburse the insurance carrier for benefits. The term “net amount” means the amount recovered by the injured employee after payment of all attorney’s fees and expenses incurred by the injured employee in obtaining the judgment or settlement. The Act further provides that, as compensation for pursuing the third-party action, the employee’s attorney may also recover fees for services rendered to the carrier. Such fees are payable out of the carrier’s subrogation recovery in an amount not to exceed one-third of the insurance carrier’s recovery. Tex. Lab. Code Ann. ยง 417.003(c) (Vernon 1996). However, any agreement between the employee’s attorney and the workers’ compensation carrier for the payment of attorneys fees to the employee’s attorney must be disclosed to the employee.

The employee’s attorney and the employee may be jointly and severally liable for the failure to reimburse a workers’ compensation carrier for its subrogation interest. The attorney does not owe a fiduciary duty to the workers’ compensation carrier if the carrier did not separately contract with the attorney and is not liable to the carrier under a breach of contract theory or fraud theory for failing to reimburse the carrier. But the attorney’s liability is not limited to the amount of his fee. In Garriga v. Ace American Ins. Co., 321 S.W. 3d. 187, (Tex. Civ. App. – Eastland 2010) the worker’s compensation carrier was entitled to recoup the entire amount of the $12,600 settlement from the injured employee and his attorney after the attorney settled the injured employee’s claim for less than the amount of the $44,287.90 subrogation lien. Garriga, the employee’s attorney, and the employee were jointly and severally liable for the $12,600 although Garriga received only $2,706.83 from the settlement in attorney’s fees.

The subrogation rights of the carrier are derivative of the injured employee. In Smith v.
Financial Insurance Co. of America, 229 S.W.3d 405 (Tex. App.- Eastland 2007), the court noted that the worker’s compensation carrier did not have to file its own medical malpractice expert report, after intervening to protect its subrogation lien, because the injured employees had done so and the carrier’s rights were derivative of the employees. However, because the worker’s compensation carrier has the independent right to pursue its cause of action, a release of the negligent third party by the injured employee will not bar the carrier from pursuing its own cause of action.

In wrongful death cases, the courts have treated the recovery of a spouse and children as derivative causes of action. The derivative cause of action is subordinate to the right of the injured employee and the injured employee’s rights are burdened by the subrogation interest. Therefore, the derivative recoveries of the spouse and children are similarly burdened by the obligation to reimburse the workers’ compensation carrier out of the first dollars recovered for anyone’s causes of action.

The employee and his or her attorney may not circumvent the subrogation provisions of the statute by arguing the made whole doctrine. The worker’s compensation lien may not be defeated by a creative allocation of the recovery only to elements of damages such as pain and suffering, disfigurement or physical impairment that were not paid by the carrier. The only way to try to circumvent the workers’ compensation lien is to obtain a jury verdict, or to obtain findings of facts in a contested hearing, which allocates the award or verdict to elements of damages not paid by the the insurance company. The past subrogation interest may, arguably, be limited to the amount actually recovered from the jury on the medical bills and indemnity for lost wages.

The employee and the worker’s compensation carrier each share the same two year statute of limitations for filing a third party liability suit against a negligent tortfeasor. A suit to preserve the subrogation interest may be filed by the carrier in the name of the employee or in the name of the carrier. However, if the employee is not the named as a plaintiff, then the employee’s cause of action has not been preserved. The carrier’s subrogation interest need not be filed within two years of the date of the employee’s injury if the employee’s rights are preserved within the two year period by the filing of a petition, alleging the employee’s causes of action against the third party defendant, because the employee is obligated to honor the statutory lien. However, an intervention filed by the carrier after the two year statute of limitations will relate back to the filing date of the employee’s suit.

At the Law Office of Stephen O’Rear, P.C. we fight for the rights of injured workers.