It is said that compromise is the best and cheapest lawyer. Workers’ compensation claim’s handlers depend on compromise in their handling of disputed compensation claims. Recently, however, we have seen a growing number of our clients settling workers’ compensation claims without taking proper precautions to protect valuable subrogation rights. They often assume that money paid pursuant to a lump sum workers’ compensation compromise settlement will be recoverable under A.R.S. § 23-1023, Arizona’s workers’ compensation subrogation statute. As some are learning, however, this is not always the case.
When an underlying workers’ compensation claim is settled via a compromise settlement agreement, there is a risk that the carrier may inadvertently waive its rights of subrogation. As a result, great care must be taken in drafting any such compromise settlement agreements. A.R.S. § 23-1023(C) provides as follows:
If [the employee] proceeds against [a third party], compensation and medical, surgical and hospital benefits shall be paid as provided in this chapter and the insurance carrier or other person liable to pay the claim shall have a lien on the amount actually collectable from such other person to the extent of such compensation and medical, surgical and hospital benefits paid.
Arizona provides all workers’ compensation carriers with a strong lien against any third-party recovery for any compensation and medical, surgical and hospital benefits paid. A workers’ compensation carrier is only liable for wage compensation and medical benefits. Therefore, any sums paid in settlement must be in lieu of such benefits. Settlements by nature involve a quid pro quo. In settlement, the carrier generally pays the employee a sum of money in exchange for giving up or compromising a claimed right. While that sum will usually be in lieu of benefits the claimant might otherwise be awarded, without further direction from the legislature or without more specific provisions in the settlement agreement, Arizona courts have refused to declare that this will always be the case.
In the case of EBI Companies/Orion Grp., Casa Grande Union High School v. Industrial Comm’n of Arizona, 875 P.2d 857 (Ariz. App. 1994), the court was presented with an issue of first impression and warned that when an underlying workers’ compensation claim is settled via a compromise settlement agreement, there is a risk that the carrier may be waiving its rights of subrogation. In that case, Billy James was injured in an auto accident while working for Casa Grande Union High School. His workers’ compensation claim was accepted by the employer’s carrier, EBI Companies, as a “no time lost” claim and closed with no permanent disability. Some six months later, EBI issued two notices of claim statuses. The first, which James protested, denied liability for a claimed left knee injury. The second, issued in response to an earlier protest by James, rescinded the earlier notice closing his claim. The parties subsequently entered into a settlement agreement, approved by the ALJ in which they agreed that 1) the carrier would pay James $10,000 in addition to the $1,998.29 it already paid him as benefits, 2) James’s claim would be closed with no permanent disability, 3) James waived any claim with regard to his left knee condition, 4) James waived any entitlement to supportive medical benefits, and 5) the carrier was entitled to a $10,000 credit for any compensation benefits that may subsequently be awarded James. Soon thereafter, EBI asserted a lien over James’s third-party recovery in the amount of $11,536.29. James protested and, in lieu of a hearing, the parties submitted the matter on stipulated facts and memoranda.
The Court of Appeals noted that the settlement agreement did not unambiguously express the bargain entered into and, more importantly, did not indicate that the money paid to James was in lieu of compensation, medical, surgical and hospital benefits. The court interpreted A.R.S. § 23-1023(C) literally to mean that the carrier has a lien on a claimant’s third-party recovery only to the extent of compensation, medical, surgical and hospital benefits paid by the carrier. Because the agreement didn’t state that the money paid in the settlement was paid in lieu of such benefits, the court couldn’t make that assumption. The court could not determine how much of the sum paid was intended to be in lieu of compensation for one condition as opposed to another. As a result, it denied EBI subrogation rights as to the settlement lump sum.
It is often not easy to determine from the terms of the settlement agreement how much of the settlement is paid in exchange for the employee’s agreement to close the claim without permanent disability and how much, if any, was paid in exchange for his agreeing that the carrier was not liable for injury to a specific body part. Because the drafting of the contract is, in part, in the hands of the carrier or its attorney, the carrier must be careful to specifically provide in the settlement agreement that the carrier has a lien for the settlement amount, that sums paid by the carrier are in lieu of wage compensation and medical benefits, or that benefits are being paid for a specific condition.
If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at [email protected].