DTCI: Recovery of workers’ comp in third-party action

Because a good portion of my practice involves defending employers in workers’ compensation claims, I am often consulted by my partners and clients regarding the recovery of workers’ compensation liens in liability cases. An overview of the statutory rights of an employer/carrier to recover on such liens is often a good refresher as many attorneys tend to overlook this important aspect when seeking to settle their liability case.

Indiana Code 22-3-2-13 governs an employer/carrier’s right to reimbursement of workers’ compensation benefits paid to an employee from the proceeds of any settlement or judgment resulting from a third-party action. Under the statute, the employer/carrier has a lien on those proceeds. In addition, the statute provides that when an employee settles with a third party, the employer/carrier’s obligation to pay future compensation benefits is terminated. Because the statute provides that the employer/carrier has a lien, there are no steps required in order to perfect a lien. However, good practice dictates notifying all counsel involved in a third-party action concerning the amount of workers’ compensation benefits and contact information for the individual responsible for negotiating a lien.

When an employer/carrier pays out statutory benefits, including medical and TTD benefits, those amounts are recoverable from a judgment or settlement obtained by the employee against a third party. The employer/carrier’s lien, however, will be reduced by one-fourth for the attorney fees if recovered without suit and by one-third if recovered with suit. In addition, the employer/carrier shall pay the pro rata share of costs associated with the employee bringing the suit. This would include deposition fees, witness fees (i.e., experts), filing fees and so forth. If the employer/carrier elects to waive its right to recover on its lien, then it is not responsible for sharing in the cost of bringing the action. Likewise, any recovery on the lien can also be reduced by the comparative fault of the employee, which would reduce his ultimate recovery against the third party. See I.C. 34-51-2-19.

The Indiana Supreme Court decided the effect of failing to obtain consent from an employer/carrier to settle a third-party liability case in Smith v. Champion Trucking Co., Inc., 925 N.E.2d 362 (Ind. 2010). In Smith, the employee was involved in an auto accident and sustained injury. The employer moved to dismiss the workers’ compensation action arguing that the employee’s settlement with the driver of the other vehicle, before resolution of the workers’ compensation claim, barred his right to further benefits. The Indiana Supreme Court agreed with the employer. It noted that even when the amount of settlement recovered in the third-party liability suit is less than the potential recovery of workers’ compensation benefits, it does not alter the statutory language requiring the employer/carrier’s consent to settlement of the third-party liability suit, nor does it serve to allow an employee to continue receiving workers’ compensation benefits.

Following on the heels of Smith, the Indiana Court of Appeals was called upon to determine whether an employer/carrier must reduce its workers’ compensation lien in the same proportion that the employee’s full recovery was reduced in the third-party liability suit. Kornelik v. Mittal Steel USA, Inc., 952 N.E.2d 320 (Ind. Ct. App. 2011). In Kornelik, the employee filed a motion to adjudicate the employer/carrier’s lien on the third-party liability settlement and for declaratory judgment. The Indiana Court of Appeals decided that the employer/carrier was required to reduce its lien by one-third for attorney fees and its pro rata share of costs. However, the employer/carrier was not required to reduce its lien in the same proportion that the recovery in the third-party liability suit was reduced because the employee failed to obtain the employer’s consent. Without the written consent of the employer, a settlement of the third-party liability case is valid only if the employer/carrier is protected in full by court order.

As a result of these decisions, an employee can be barred from receiving continued workers’ compensation benefits. He may also be obligated to pay all of the recovery in the third-party liability settlement, less attorney fees and costs, to the employer/carrier if consent to settlement is not obtained. Such a dire result is certainly not in the best interest of the employee. As a best practice, attorneys involved in the third-party liability suit should always contact the employer/carrier before entering into settlement negotiations and ensure that the workers’ compensation lien is protected in full. Furthermore, obtaining the written consent of the employer/carrier can prevent future litigation regarding the amount of recovery on the workers’ compensation lien.•

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Libby Valos Moss is a partner in the Indianapolis office of Kightlinger & Gray and is a member of the DTCI Board of Directors. The opinions expressed in this article are those of the author.