One of the most powerful tools available to an adjuster to close workers’ compensation claims is a “third party credit.” A “credit”, in this context, refers to an employer’s or carrier’s right to be fully or partially relieved from the obligation to furnish workers’ compensation benefits after the employee has received money for the injury from a third party.

The entitlement to credit is set forth in Labor Code Section 3861 which provides:

The appeals board is empowered to and shall allow, as a credit to the employer to be applied against his liability for compensation, such amount of any recovery by the employee for his injury, either by settlement or after judgment, as has not theretofore been applied to the payment of expenses or attorney’s fees, pursuant to the provisions of Sections 3856, 3858, and 3860 of this code, or has not been applied to reimburse the employer.

In order to understand “credit” one has to understand that in most instances an injured worker will continue to receive benefits after he or she has made a recovery from a defendant or liability carrier for injuries sustained in the industrial accident.  Since you cannot recover what you have not yet paid, a credit offsets those future payments.

For instance, an employee delivering product for his employer is involved in a motor vehicle accident. The injured employee was not at fault, nor was the employer. The driver of the at fault vehicle has a $100,000 automobile policy. The injured worker has an immediate entitlement to temporary disability as well as medical benefits to cure or relieve the injuries suffered in the motor vehicle accident. The employer/carrier will pay for those benefits. The automobile carrier ultimately pays all or a portion of the $100,000 to injured employee (and potentially to employer for reimbursement). That money, after attorney’s fees, employer reimbursement and litigation expenses, represents a “credit” to offset future workers’ compensation benefits. Because the injured worker derived a recovery, the employer can cease all payments for permanent disability, temporary disability, medical expense and other payments until the injured worker “expends” his third party recovery money on those future benefits. Once the amount of future workers’ compensation benefits exceed the amount of the third party “credit” pocketed by the injured worker, the carrier or employer once again begins payments.

It is important to note that an employer or carrier should only assert the credit after a Petition has been filed with the WCAB. Typically, a Declaration of Readiness to Proceed is filed concurrently with the Petition for Third Party Credit.

The assertion of a credit before an Order granting credit has been signed may expose a carrier or employer to penalties for failing to pay benefits when due. Legal counsel should be sought when a questions arises over how and when to assert the credit.

So what kinds of payments can be excused by a third party credit? In addition to temporary disability and permanent disability the following have been offset for a third party recovery:

• Medical expenses and future medical expenses (Simmons v. L&S Lighting Fixture Co. (1978) 43 CCC 594 (en banc),
• Medical-Legal expenses of the employee (SCIF v. WCAB (McDowell) (1977) 76 Cal.App.3d 136,138 and SCIF v. WCAB (Brown) (1982) 130 Cal.App.3d 933,941,
• Attorney’s fees to applicant’s attorney (SCIF v. WCAB (Borges) (1977) 53 Cal.App.4th 579,
• Penalties (SCIF v. WCAB (Brown) (1982) 130 Cal.3d 933, 940), arguably including Labor Code 4553 (S&W) penalties (but not Labor Code 132a penalties).

“Targeting” the credit during the pendancy of a workers’ compensation case can be a powerful tool to end the case and acquire a “Third Party Compromise and Release.” Most judges are loath to grant a credit against medical benefits despite the dictates of the Labor Code and existing case law. Nonetheless, pressure to settle can be exerted with a third party credit if used effectively. In fact, the potential for a large credit can be a compelling reason for an applicant to agree to a Third Party Compromise and Release.

Credit rights (like recovery rights) can be denied or diminished where employer fault exists. A discussion of employer fault and its effect on recovery or credit will be the topic of a later article.

PKNW will provide educational seminars regarding subrogation, third party credit, employer fault and identifying subrogation upon request.