In Illinois, workers’ compensation insurers are granted a statutory right of subrogation under Section 5(b) of the Illinois Workers’ Compensation Act (820 ILCS 305/5(b)). This section allows the carrier to recover amounts paid as compensation from any third-party tortfeasor. Typically, when an injured employee files a third-party lawsuit, the employer or its workers’ compensation carrier intervenes to protect its lien. The goal of subrogation is not only reimbursement but also to reduce the employer’s experience modification factor (X-mod), which directly affects future premium costs.
However, an inherent ethical conflict arises when the same counsel defending the employer in the workers’ compensation claim is also tasked with prosecuting the subrogation interest. In that dual role, the attorney may be forced to compromise the subrogation recovery—such as by waiving the lien or settling cheaply—to secure a favorable result for the employer in contribution or indemnity claims. This is especially problematic in Illinois, where an employer can be named a third-party defendant and exposed to contribution liability up to the amount of the workers’ compensation lien, under the Kotecki v. Cyclops Welding Corp., 146 Ill. 2d 155 (1991) doctrine. Notably, many employment contracts waive the Kotecki cap, increasing the employer’s potential liability and complicating the subrogation landscape further.
The Illinois Rules of Professional Conduct, particularly Rule 1.7(a), prohibit representation involving concurrent conflicts of interest, which exist if “the representation of one client will be directly adverse to another client” or if “there is a significant risk that the representation…will be materially limited by the lawyer’s responsibilities to another client” (Ill. R. Prof’l Conduct R. 1.7(a)). When the defense counsel attempts to serve both the employer’s interest (e.g., avoiding contribution liability) and the insurer’s interest (i.e., maximizing subrogation recovery), they are inevitably faced with conflicting objectives. A decision that benefits one party (e.g., waiving the lien to close contribution exposure) may severely prejudice the other (e.g., loss of recovery and X-mod benefits).
Furthermore, Illinois courts have recognized that “where an attorney represents two clients with differing interests in the same matter, the attorney must withdraw from the representation entirely if informed consent is not obtained from both clients” (In re Estate of Kirk, 292 Ill. App. 3d 914, 927 (1st Dist. 1997)). Even with consent, the nature of these conflicting interests—often structural, non-consentable, and antagonistic—suggests that such dual representation may be inappropriate per se. An attorney cannot zealously advocate for subrogation recovery while simultaneously defending the employer against third-party claims that might be resolved by sacrificing that very recovery.
Understanding the Experience Modification Factor (X-Mod) and Its Impact on Workers’ Compensation Premiums
The Experience Modification Factor (X-Mod) is a critical element in workers’ compensation insurance underwriting. It is a numeric representation of an employer’s claim history relative to similarly classified businesses, used to adjust the premium an employer pays for workers’ compensation insurance. The X-Mod is calculated annually and reflects the employer’s loss experience over a three-year period, excluding the most recent year, to allow for claim development. The National Council on Compensation Insurance (NCCI) or state-specific rating bureaus (e.g., the Illinois Workers’ Compensation Commission (IWCC) and Illinois Department of Insurance (IDOI)) oversee and apply this rating mechanism.
Under 50 Ill. Adm. Code § 2902.30, Illinois adopts the NCCI Experience Rating Plan Manual, which includes rules for calculating X-Mods. Employers with better-than-expected loss experience receive a credit (X-Mod < 1.0), thereby reducing premiums, while employers with worse-than-expected losses receive a debit (X-Mod > 1.0), increasing their premiums.
Subrogation and Its Impact on Experience Rating
When a workers’ compensation claim results in a subrogation recovery, the recovered amount is credited against the employer’s total incurred losses used in the X-Mod calculation. According to NCCI’s Experience Rating Plan Manual (Rule 2-F), if a third-party recovery is obtained (whether by settlement or judgment), the claim value used in the X-Mod calculation may be reduced by the amount of recovery, provided the recovery is properly reported to the rating bureau. This reduction benefits the employer by potentially decreasing its X-Mod, thereby avoiding future premium increases. For example, if a claim originally cost $250,000 and a third-party recovery of $200,000 is obtained, the net incurred loss becomes $50,000 for experience rating purposes—a drastic difference in long-term premium obligations.
By contrast, if the workers’ compensation lien is waived—often as part of a litigation strategy to resolve contribution or indemnity claims against the employer (e.g., under a Kotecki waiver scenario)—no credit is given to the employer’s loss history. The full amount of benefits paid remains on the books as part of the employer’s claims history and inflates the X-Mod. This waiver sacrifices a significant opportunity to reduce future workers’ compensation premiums, and the employer may face increased premiums for up to three policy years.
Kotecki Waivers and the Strategic Tension
In Illinois, under Kotecki v. Cyclops Welding Corp., 585 N.E.2d 1023 (Ill. 1991), an employer’s liability in contribution to a third-party defendant is capped at the amount of its workers’ compensation liability. It is known as the “Kotecki Cap.” However, this protection is frequently contractually waived, especially in the construction and logistics industries where indemnification agreements are prevalent. In such cases, employers are exposed to uncapped, unlimited contribution or indemnity liability, creating incentives for the workers’ compensation carrier to resolve third-party actions by waiving the subrogation lien in exchange for dollar contracts settling the underlying workers’ compensation claims, dismissal of indemnity claims, etc.
This introduces a strategic conflict: the carrier avoids further indemnity exposure, but at the employer’s expense, both in terms of lost recovery and inflated future premiums. Since the X-Mod directly affects per-employee costs across the board, the financial consequence of a lien waiver may far exceed the face value of the workers’ compensation claim itself. Moreover, it shifts the financial burden from the responsible tortfeasor back to the employer, contrary to the purpose of subrogation and experience rating. As a result, where workers’ compensation defense counsel is engaged to also handle the subrogation/lien recovery aspect of the litigation, loyalties become blurred.
The Inherent Conflict Involved
When an insurance company retains an attorney to defend an action against one of its insureds, the attorney-client relationship between the insured and the attorney imposes the same professional obligations as if the insured personally retained the attorney. Illinois Mun. League Risk Mgmt. Ass’n v. Siebert, 585 N.E.2d 1130, 1135 (Ill. App. 1992). Illinois courts and those of other jurisdictions have noted that an attorney hired by an insurance company may feel more aligned with the carrier’s interests, rather than those of the insured. Illinois Masonic Medical Center, 522 N.E.2d 611 (Ill. App. 1988); Purdy v. Pacific Automobile Insurance Co. (1984), 157 Cal.App.3d 59 (Cal. App. 1984); United States Fidelity & Guaranty Co. v. Louis A. Roser Co. 585 F.2d 932 (8th Cir.1978). Workers’ compensation defense counsel may find it more financially advantageous to protect the insurer’s interest. Tews Funeral Home, Inc. v. Ohio Casualty Insurance Co., 832 F.2d 1037 (7th Cir. 1987. The attorney is ethically obligated to recognize and address potential conflicts between the insurer and the insured.
This conflict comes to life when you look at a hypothetical employer’s premium impact model in the context of subrogation. For a mid- to large-sized employer with a $2 million base premium, the impact of subrogation recovery decisions becomes even more pronounced. Using a three-year horizon and industry-standard X-Mod adjustments, compare the following three scenarios:
Scenario X-Mod Annual Premium 3-Year Total
Lien Waived (No Recovery) 1.25 $2,500,000 $7,500,000
Partial Recovery 1.10 $2,200,000 $6,600,000
Full Recovery 1.00 $2,000,000 $6,000,000
The cost to the employer when workers’ compensation defense counsel is asked by the insurance company to waive the lien as opposed to aggressively subrogating and effecting a full subrogation recovery is $1.5 million over three years, illustrating how waiver decisions can profoundly affect long-term premium costs—often dwarfing the immediate value gained in litigation. It is the employer who suffers when workers’ compensation defense counsel listens to “one of his clients” and not the other. It is a textbook conflict.
In the comparative financial model above, the effect of three different X-Mod outcomes based on generalized levels of subrogation recovery is abstractly represented, without regard to lien size. The X-Mod values (1.25, 1.10, and 1.00) were selected to demonstrate a realistic range of impact that might result from no recovery, partial recovery, or full recovery. However, the larger the lien, the more of an impact successful subrogation has on future premiums. Larger lien recoveries (or failures to recover) can swing premiums by hundreds of thousands or even millions of dollars over 3 years.
Same Result In Other States
This issue is also not unique to Illinois, but extends to most states. States such as California (where Cal. Lab. Code § 3852 governs subrogation and employer intervention), Texas (with its nuanced interplay between Tex. Labor Code § 417.001 and indemnity contracts), and New York (which requires careful coordination under N.Y. Workers’ Comp. Law § 29) face similarly tangled legal terrain where dual representation often invites divided loyalties. In all such jurisdictions, engaging dedicated subrogation counsel is not only best practice—it is a legal and ethical imperative.
Conclusion
In conclusion, the potential conflict that arises when workers’ compensation defense counsel is asked to put on their subrogation hat in Illinois is not theoretical—it is inherent and structural. The defense counsel’s duty to minimize the employer’s liability in a workers’ compensation claim often runs squarely against the carrier’s financial interest in closing exposure via lien waiver or indemnity negotiation. This conflict is especially potent in Illinois, where Kotecki exposure and contractual indemnity frequently put the employer in the crosshairs of contribution claims. It is precisely to navigate this ethical and strategic divide that independent subrogation counsel are to be utilized. There are no shortcuts to the fiduciary and ethical duties owed to each client, and splitting those loyalties compromises both representation and results.
Another compelling reason to engage independent subrogation counsel lies in their unique orientation and skill set—they are, in essence, plaintiff’s trial lawyers for the insurance industry. Unlike defense counsel, whose training and instinct are geared toward minimizing liability and often reflexively doubting the viability of claims, subrogation attorneys are trained to uncover liability, identify hidden avenues of recovery, and aggressively pursue third-party tortfeasors. This plaintiff-side mindset brings a creativity and persistence essential to unlocking subrogation opportunities that might otherwise go unnoticed. In many cases, subrogation is not obvious—it must be discovered, developed, and litigated with a mindset that mirrors personal injury prosecution. That added layer of strategy and tenacity can spell the difference between leaving money on the table and achieving a recovery that not only reimburses the carrier but also improves the employer’s X-Mod, delivering real, long-term premium savings.
For more information on this subject or about workers’ compensation subrogation in all 51 jurisdictions, or under the Longshore and Harbor Workers’ Compensation Act, contact Gary Wickert at gwickert@mwl-law.com.
