Arizona Allows Court To Reduce Workers’ Compensation Lien On Third-Party Settlement Due To Employer Fault

In May 2016, we published an article listing the ten best and the ten worst states for subrogating workers’ compensation. Arizona was near the top because it didn’t allow reduction of the carrier’s lien for attorneys’ fees and provided for reimbursement of the carrier “off the top” of a third-party recovery. It didn’t make the top ten, however, because if a case was tried to a jury and the employer’s negligence was submitted to the jury for assigning a percentage of fault, Arizona allowed for reduction of the workers’ compensation lien by the percentage of fault assigned to the employer. This potential hurdle was limited in its application, however, only to cases which were tried to a verdict. Aitken v. Indus. Comm’n of Ariz., 904 P.2d 456 (Ariz. 1995), cert. denied, 517 U.S. 1208. As a result, workers’ compensation carriers had plenty of notice and could monitor a trial to see if the defense was going to argue a large portion of the fault belonged to the employer. Carriers also had plenty of time to engage subrogation counsel in order to avoid large subrogation liens disappearing into thin air. As of August 31, 2017, with the Arizona Supreme Court decision in Twin City Fire Insurance Co. v. Leija, No. CV2012-004506 (Ariz. 2017), subrogated carriers no longer enjoy that minimal protection. Workers’ compensation carriers everywhere will have to be more proactive and engage subrogation counsel much sooner, in order to protect their subrogation and/or reimbursement dollars.

For years, Arizona practiced joint and several liability. In 1988, however, with the passage of A.R.S. § 12-2506, joint and several liability was abolished and the state adopted only “several liability” and pure comparative fault. Pure “several liability” places the risk of insolvency and burden of identifying non-party tortfeasors on the plaintiff. Each defendant is only liable for their assigned portion of damages based on their percentage of responsibility. Fourteen (14) states practice pure several liability. This system of fault allocation allows a defendant to ask a jury to assign blame to a non-party if it believes that non-party is at fault. As a result, in workers’ compensation third-party tort cases, defendants routinely try to throw blame on the employer – not only to reduce its own percentage of fault, but also to allow the opportunity to reduce the workers’ compensation lien by the percentage of fault found against the employer by a jury. Because the assigning of fault to the employer could only occur with a jury verdict, workers’ compensation carriers would have plenty of notice in the rare situation where the third-party case actually proceeded to trial. That cushion of comfort is now gone.

In Twin City Fire Insurance Co. v. Leija, Victor Leija was killed while working as a window washer. Twin City Fire Insurance Company was the workers’ compensation carrier for Victor’s employer, and became obligated to pay Victor’s widow, Graciela, monthly benefits to the tune of $575,000. Graciela hired a lawyer and made demands of several defendants, including the City of Glendale, and eventually settled her lawsuit for $1.6 million. Twin City did not object to the settlement, but urged reimbursement of its workers’ compensation statutory lien. The plaintiff argued that its lien should be reduced by the employer’s percentage of fault, but because no suit had been filed and no jury had determined such a percentage, Twin City refused. Twin City filed a Complaint for Enforcement of Lien and Graciela counter-claimed for bad faith, for refusing to reduce its lien.

The trial court ruled that there was a genuine issue regarding whether Twin City had promised to reduce its lien in good faith, and held that a separate action after a settlement, such as the one Twin City had filed, wasn’t the “appropriate vehicle” to enforce its lien or allocate fault to the employer. The Supreme Court cited the Aitken v. Indus. Comm’n of Ariz., 904 P.2d 456 (Ariz. 1995), cert. denied, 517 U.S. 1208, decision which stated:

Without an equitable adjustment or apportionment, employers and their carriers will continue to obtain full liens against third-party recoveries even where those awards have been effectively reduced by virtue of the employers’ own fault.

Of course, there was no mention in Aitken about the fact that society has determined that the employer is on the hook for unlimited amounts of medical expenses and workers’ compensation benefits even in cases in which it is not at fault at all. However, the Aitken case did limit such an “equitable apportionment” of the workers’ compensation lien based on the employer’s negligence to cases that were tried to a jury.

One year after Aitken, the Arizona Supreme Court reversed a scheme devised by a plaintiff and a trial court by which a “summary trial” was held after a settlement, in which the employer was held to be 100% at fault and, therefore, had no lien. Grijalva v. Arizona State Comp. Fund, 912 P.2d 1303 (Ariz. 1996). The scheme completely exonerated the defendants who had just paid significant sums in settlement, but the court held that such an equitable reduction did not apply to settlements.

Four years later, the issue reared its head again in Stout v. State Compensation Fund, 3 P.3d 1158 (Ariz. App. 2000), but the Court of Appeals in that case again held that the equitable reduction procedure did not apply when there was a settlement.

In 2017, the Arizona Supreme Court, comprised of six justices appointed by Republican governors and only one by a Democratic governor, was faced with the Twin City Fire Insurance Co. v. Leija appeal. It ruled for the first time that when an employee settles a third-party case for less than the limits of third-party liability insurance, the employee may seek a ruling by the court that the carrier’s lien should be reduced to account for the employer’s comparative fault. The court noted that Aitken “did not lay out a clear path for an injured worker [when there was a settlement].” Arizona provided no rules as to how an employee and a workers’ compensation carrier are to resolve an “Aitken issue” when that is the only issue in dispute.

The Court emphasized the carrier’s lien may be apportioned under Aitken as long as the worker’s damages and the employer’s comparative fault are determined in a fair proceeding. In one Court of Appeals case, an injured worker settled with one defendant but went to trial against another. Weber v. Tucson Elec. Power Co., 47 P.3d 1142 (Ariz. App. 2002). Using the jury’s damage verdict and finding of the employer’s comparative fault, the trial court reduced the carrier’s lien against the proceeds of the settlement with the defendant that did not go to trial. The carrier in Weber did not argue the trial “was a sham or collusive proceeding” and reduced the lien by 25%.

The Supreme Court in Twin City Fire Insurance Co. v. Leija made special note of the fact that the employer was given several safety citations following the accident and that the estimate of the employer’s percentage of fault “undoubtedly affected the amount the Leijas were able to recover in settlement.” As a result, the Supreme Court announced for the first time that the fact that an injured employee settles his or her claims rather than proceeding to trial does not preclude equitable apportionment of the lien under Aitken.

This new ability of an employee to quickly settle and seek a court determination of the employer’s percentage of fault, necessitates that a workers’ compensation carrier intervene early into any third-party litigation in order to prepare for and protect against such an eventuality. Waiting until there is a settlement will be too late. Twin City argues correctly that such a trial would be a sham, because the employee, who sought to minimize the employer’s fault during the proceeding, would now be incentivized to maximize it. If such a trial takes place and the workers’ compensation carrier has not been involved in the third-party litigation from the start, the trial apportioning fault to the employer will result in an “artful contrivance.” The workers’ compensation carrier will be put to the burden of proving that the employer wasn’t at fault. If the carrier wasn’t involved in the discovery during the litigation as a result of intervening through subrogation counsel, its chances of prevailing will dwindle to almost nothing. Arizona now becomes like California, where subrogation counsel must be involved early in order to avoid and/or be prepared for the employee settling around the carrier.

The Arizona Supreme Court obviously has never litigated for or a workers’ compensation subrogation lien or experienced the lengths parties will conspire in order to reduce or eliminate it. This lack of experience is illustrated in its last sentence, which reads, “So long as properly motivated parties are accorded a fair adversarial proceeding conducted in accordance with due process, the concerns of a sham proceeding are avoided.” Yeah, right.

For information or assistance in protecting workers’ compensation subrogation interests in Arizona (or in other states where Arizona benefits are paid), contact Gary Wickert at gwickert@mwl-law.com.

SHARE THIS:
Gary L. Wickert
Partner

Gary L. Wickert is an insurance trial lawyer and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C. Gary has nearly four decades of litigation experience and is regarded as one of the world’s leading experts on insurance subrogation. He is the author of several subrogation books and legal treatises and a national and international speaker and lecturer on subrogation and motivational topics.