As attorneys, we are often asked what is recoverable by an insurance company in a subrogation case. This is a very good question to begin with as an answer can assist an adjuster in determining the value of the recovery compared to the cost involved in obtaining that recovery. From there, an educated decision can be made as to the best method of seeking a recovery in a subrogation case.

Before a discussion can be had regarding the best methods of subrogation, a brief refresher as to what subrogation should be our starting point.

In California, the Labor Code provides for statutory subrogation. Statutory subrogation is the independent right of an employer to recover the compensation paid to an employee from a third-party whose fault resulted in the employee’s industrial injury. It is important to note that the Labor Code provides that insurance carriers are also considered employers for purposes of subrogation. As such, employers and carriers have a statutory right to recover the expenses they have paid when a third-party is responsible for the industrial injury prompting a payment of compensation to an employee.

The Labor Code provides three methods for an employer to recover the compensation it has paid as a result of a negligence of a third-party. First, the employer may bring an action directly against the negligent third-party. Second, the employer may intervene in an action brought by the employee against the negligent third-party. Third, the employer can allow the employee to prosecute the action against the negligent third-party and then apply for a first lien against the resulting judgment or settlement.

The policy behind allowing an employer to recover for the compensation that is paid as a result of a negligent third-party is to prevent the injured employee from receiving a double recovery, i.e. recovery for past medical and wage loss expenses from both the employer and the negligent third-party. “Where an employer is required to provide benefits to an employee for injuries caused by a third-parties negligence, the statutory scheme assures that the employer, not the employee, shall at least ultimately be entitled to recover the value of those benefits from the tortfeasor.” (Abdala v. Aziz (1992) 3 Cal. App. 4th 369, 376.)

Now we can return to the initial question as to what is recoverable. While the Labor Code has produced a multitude of cases regarding subrogation, the issue still arises as to what an employer is entitled to recover in a subrogation case.

Labor Code section 3856(b) provides that, “[i]f the action is prosecuted by the employee alone, the court shall first order paid from any judgment for damages recovered the reasonable litigation expenses incurred in preparation and prosecution of such action together with a reasonable attorney’s fee which shall be based solely upon the services rendered by the employee’s attorney and affecting recovery for both the benefit of the employee and the employer.” (Lab. Code § 3856(b).) After the payment of such expenses and attorney’s fee, the court shall, on application of the employer, allows a first lien against the amount of such judgment for damages. Id. The amount of the employer’s expenditure for compensation together with any amounts to which he may be entitled as special damages under Labor Code section 3852. Id.

While this language is seemingly clear in giving an employer a first right of recovery against any settlement or judgment obtained by an injured employee, the matter is still frequently litigated. This was the issue in the recent case of Duncan v. Walmart (2017) 2017 Cal. App. LEXIS 1111.

In that case, Ms. Duncan was injured at a Walmart store while in the course and scope of employment for Acosta, Inc. As a result of her industrial injury, Acosta’s insurance carrier paid more than $152,000.00 in benefits, including $115,000.00 in medical expenses and $37,000.00 in temporary disability indemnity. Ms. Duncan’s case proceeded to a bench trial where judgment was entered against Walmart for $355,000.00. The judgment included $178,000.00 in past medical expenses, $102,000.00 in future medical expenses, and $75,000.00 in past and future pain and suffering. Ms. Duncan did not claim lost wages or lost earning capacity at the trial of this matter and, as such, the Court did not award any amounts for those categories of damages.

Acosta Inc’s insurer filed a lien against Ms. Duncan’s judgment against Walmart. Ms. Duncan’s attorney requested a reduction in the lien amount based on his fees and costs. In addition to the reduction for fees and costs, he also requested that the lien be reduced by $37,000.00 as Ms. Duncan did not receive any award for lost wages or lost earning capacity. As such, Ms. Duncan’s attorney argued, the carrier was not entitled to recovery of the temporary disability payments. While the trial court did not specifically state as much, it reduced the insurance carrier’s lien by the requested fees and costs, as well as the $37,000.00 being paid for temporary disability indemnity.

On appeal, the Fourth District Court of Appeals found that the trial court had exceeded its authority. Based on the plain language of Labor Code § 3856 and its surrounding case law, the insurance carrier has a first lien for all compensation it has paid against Ms. Duncan’s judgment.

“When an injured employee alone prosecutes a lawsuit against a third-party tortfeasor, section 3856(b)’s plain language grants the employee’s employer a ‘first lien’ against any judgment the employee obtains against the tortfeasor in ‘the amount of the employer’s expenditure for compensation together with any amounts to which he may be entitled as the special damages under section 3856(b).’” (Duncan v. Walmart (2017) 2017 Cal. App. LEXIS 1111, 10; citing Labor Code §3856(b); see Abdala, supra, 3 Cal. App. 4th at 378.)

In Heaton v. Kerlan (1946) 27 Cal. 2d 716, the court determined that compensation includes expenditures for all benefits conferred on the employee by sections 3201 to 6002 of the Labor Code and, therefore, include expenditures for medical and hospital treatment, as well as for disability benefits awarded. (Heaton v. Kerlan (1946) 27 Cal. 2d 716, 719.)

In examining the relevant case law, the Duncan court held that the first lien granted to an employer includes all amounts the employer paid an employee regardless of whether the employee sought recovery or recovered those amounts from the third-party tortfeasor. “Unless the employer’s recovery is barred by his contributory negligence, [the employer]. . . will be entitled to a first lien on the entire amount the employer recovers after litigation expenses regardless of what elements of damage the employee proves.” (Duncan, supra, 2017 Cal.App. at 11-12, citing Tate v. Superior Ct. (1963) 213 Cal.App.2d 238, 248, emphasis added.) If the employee does not intend in his or her action to recover any elements of damage which duplicates compensation benefits, that fact will not prevent the employer from asserting the lien which Sections 3856 and 3857 give him for benefits paid. Id.

“Moreover, the employer’s lien attaches to the entire judgment the employee obtained including any award for pain and suffering, or other damages that the employee cannot recover through the workers’ compensation systems.” (Heaton, supra, 27 Cal. 2d at 723, emphasis added.)

As such, the only deduction that is permissible, other than those for employer negligence, is the deduction for attorney’s fees and costs. These expenses are deducted from the judgment first and thereafter the employer has a first lien against the entire settlement or judgment. “It is irrelevant that the judgment Duncan obtained against Walmart did not include the lost wages based on Duncan’s failure to seek them as damages.” (Duncan, supra, 2017 Cal. App. at 13.)

The Fourth District Court of Appeals concluded that the trial court exceeded its authority by deducting the amount paid for temporary disability from the lien of the insurance carrier. “Allowing the employee to manipulate the employer’s reimbursement rights by selectively seeking only certain item of damages from the third-party tortfeasor would undermine the system created by the legislator.” (Duncan, supra, 2017 Cal. App. at 14.) The Court went on to hold that the principles of equitable subrogation do not apply as the right of an employer to recover the compensation it had paid is statutory subrogation and is not dependent upon principles of common law. “[T]he employer is entitled to full reimbursement up to the amount of the judgment and the employee is entitled to nothing other than attorney’s fees and costs until the employer is fully reimbursed.” (Duncan, supra, 2017 Cal. App. at 13; citing Gapusan v. Jay (1998) 66 Cal. App. 4th 734, 741-742 and fn. 5.)

It is often the case that the principles of subrogation are confused and misunderstood by those involved at the trial court level. For this reason, it is important that you seek the services of a well qualified attorney who has an understanding of the principles of subrogation. By doing so, you can ascertain the value of your recovery at an early stage and make determinations as to which recovery method will provide for the recouping of compensation paid to the injured employee. Doing so provides for educated decision making coupled with qualified representation to achieve the maximum result.