Subrogation Rights Are Preserved Despite a Denied Workers' Compensation Claim at the Time of the Third Party Settlement

07.26.17

Category: Pennsylvania

In Kalmanowicz vs. WCAB (Eastern Industries, Inc.) No. 1790 C.D., 2016, filed July 7, the Commonwealth Court of Pennsylvania held that an employer had not waived its right to assert a subrogation claim later, even though it was actively contesting the workers' compensation claim at the time of the third party settlement.

In this case, an employee was injured in a motor vehicle accident. His claim for workers' compensation benefits for physical injuries and post-traumatic stress disorder was denied. A Claim Petition was filed. Before the Claim Petition was decided, the employee reached a settlement agreement with a third party involved in the motor vehicle accident for $15,000, with a net recovery (after fees and costs) of $9,498.25. More than two years later, the workers' compensation Claim Petition was granted and the employer was required to pay wage loss and medical benefits for injuries sustained in the motor vehicle accident.

When the employee then refused the employer's subrogation claim against the third party recovery, the employer filed a Petition for Modification to assert its subrogation rights. The Workers' Compensation Judge (WCJ) denied the petition, but the Workers' Compensation Appeal Board reversed and remanded the case eventually resulting in a WCJ decision adopting a stipulation that the employer would satisfy its subrogation claim by taking a credit of $65 per week against indemnity benefits until the $9,498.25 was paid in full. The stipulation also preserved the legal issue for appeal of whether the employer was entitled to subrogation under the circumstances of the case.

In a two to one panel decision, the Commonwealth Court held that the employer was entitled to subrogation despite the fact that it was contesting the workers' compensation claim at the time of the third party settlement. The Court rejected the employee's argument that the employer effectively waived its right to subrogation by contesting the Claim Petition. The Court reasoned that the employer was well within its rights to contest the Claim Petition and had no obligation to accept the work-relatedness of the injuries alleged in the motor vehicle accident. The Court noted that an employer's right to defend a workers' compensation claim cannot be held hostage to a potential loss of subrogation rights if the third party case settles before workers' compensation compensability is determined. The Court explained that there are very narrow circumstances where a court may find that an employer has waived its subrogation rights under the Pennsylvania Workers' Compensation Act. Those circumstances include an express waiver by contract and a failure to exercise "due diligence" in asserting the subrogation claim. However, those circumstances did not exist under the facts of this case.

A dissenting opinion reasoned that an employer's bad faith conduct in contesting a claim and whether the employer's actions impacted the pursuit of the third party claims should be considered in determining whether subrogation is allowed.

Comment: The majority opinion is another in a long line of decisions that affirm and protect the employer's "absolute" right to subrogation for workers' compensation benefits paid despite numerous challenges raised over the years by employees' counsel. However, while those rights are absolute, they can be lost through waiver or failure to exercise "due diligence."

For more information, please contact Stephen T. Potako at spotako@wglaw.com or 267.765.4132.

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Sara L. De Long
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sdelong@wglaw.com

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