Iowa Workers’ Compensation Subrogation: Simple Steps To Avoid Subrogation Traps

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Iowa State FlagIowa seems like a very simple state for workers’ compensation subrogation. Subrogation rights are set forth in a single statute – I.C.A. § 85.22. It provides that either the employee or employer can file a third-party action. When the third-party case is resolved, the carrier is entitled to first-money reimbursement and a future credit, less attorneys’ fees to the employee’s attorney. Subrogation in the Hawkeye State appears to be as simple and routine as driving through Iowa itself. But, applying the statute is more akin to driving through a cyclone. Simply stated, the simplicity of subrogating workers’ compensation benefits in Iowa is an illusion riddled with confusing traps and pitfalls that can destroy a workers’ compensation carrier’s subrogation rights. Fortunately, these landmines can be easily side-stepped and avoided by instituting a few simple procedures.

First Trap: Timely Intervention/Notice of Lien

The first trap arises from carriers routinely neglecting to file a notice of lien intervention in the manner and time frame the statute requires. Section 85.22(1) reads as follows:

In order to continue and preserve the lien, the employer or insurer shall, within thirty days after receiving notice of such suit from the employee, file, in the office of the clerk of the court where the action is brought, notice of the lien.

Workers’ compensation claims professionals routinely get e-mails, letters, and phone calls from trial lawyers revealing that the employee has filed a third-party tort suit. In Iowa, this notification triggers a responsibility on the part of the carrier which must be completed in a very short period of time. Within thirty (30) days of receiving notice, the carrier must intervene into the third-party suit, which is the most effective way to give and preserve such notice. Technically, the statute requires that the employer/carrier must file its notice of lien in the office of the clerk of court where the action was brought. Filing an intervention, however, gives the carrier more control in and information from the litigation. It also provides the only known antidote for the second trap.

In enacting § 85.22(1), the legislature intended that the employee or his attorney would give the carrier all the information it would need to comply with its obligation to give notice and intervene. By receiving a copy of the original notice, the employer would have the caption of the third-party suit, the county in which it was filed, and the case number assigned by the clerk of court – everything necessary to prepare a notice of lien and file it. It is logical to conclude, then, that the thirty (30) day period for filing the notice of lien would commence only when the original notice of the lawsuit containing all of the information listed above is provided. Firstar Bank of Burlington, Iowa v. Hawkeye Paving Corp., 558 N.W.2d 423, 426–27 (Iowa 1997).

It is important for subrogation professionals to note that settlement of third-party claim alone does not invoke this duty. Id. Claims professionals must be trained that if they receive an e-mail or other communication providing information on a third-party lawsuit that the employee has filed, or notice of settlement, that subrogation counsel should be consulted immediately.

Even if this short deadline is missed, the carrier should still consult with subrogation counsel. In Armour-Dial, Inc. v. Lodge & Shipley Co., 334 N.W.2d at 144 (Iowa 1983), the Iowa Supreme Court recognized that § 85.22 includes separate rights of recovery that may be available to the employer or carrier, including:

  1. Indemnification: the right to recover (restitution) its past lien out of any recovery of damages by the employee as set forth in subsection (1) of 85.22; and
  2. Subrogation: the right of the employer to file and maintain the third-party lawsuit against the tortfeasor under subsection (2) of 85.22.

The Court further held that § 85.22(1) contains two sub-parts of indemnification including (1) a duty by the employee to indemnify the employer for past benefits; and (2) a lien on the employees’ third-party recovery. This distinction is crucial because the duty of the employee to indemnify the employer is not dependent on a timely § 85.22(1) notice. Conversely, the lien on the employee’s third-party recovery is subject to the statutory 30-day notice requirement. In so holding, the Court noted that “Notice of Lien” described in § 85.22(1) comes after the language establishing the carrier’s indemnity rights “to the extent of payment so made.” The rationale for the Court’s interpretation is perhaps illustrated by this author’s annotated rewrite of § 85.22(1):

If compensation is paid the employee or dependent or the trustee of such dependent under this chapter, the employer by whom the same was paid, or the employer’s insurer which paid it,

(1) shall be indemnified out of the recovery of damages to the extent of the payment so made, with legal interest, except for such attorney fees as may be allowed, by the district court, to the injured employee’s attorney or the attorney of the employee’s personal representative, and

(2) shall have a lien on the claim for such recovery and the judgment thereon for the compensation for which the employer or insurer is liable.

In order to continue and preserve the lien, the employer or insurer shall, within thirty days after receiving notice of such suit from the employee, file, in the office of the clerk of the court where the action is brought, notice of the lien.

As shown above, first right of indemnification under § 85.22(1) pertains to payments “so made” (i.e., past benefits) and is not conditioned on any prior notice. The lien right that follows, however, pertains to benefits “for which the employer or insurer is liable” (i.e., future benefits) and is conditioned on a timely notice of lien. The Armour-Dial decision explicitly separates the right to a lien and the right to recovery by indemnification, and clearly confirms that a failure to give the notice described in § 85.22(1) would not be fatal to the carrier’s right of indemnification which exists as a separate and sufficient basis for the right of intervention.

Second Trap: Demand to File Suit

The second trap arises when the carrier chooses to enforce its right to file a third-party action. Section 85.22(2) provides that if the carrier wants to file suit, it must first make a “demand” on the employee to file suit. If the employee thereafter doesn’t file suit within ninety (90) days, the carrier inherits the right to do so. This seems innocuous enough, because it is usually ignored when the employee has filed suit. But, that is where the danger arises. Most claims professional assume that if the employee has or is going to file suit, no such notice is necessary. They might be right; they might also be wrong.

A workers’ compensation carrier has an independent right to file a third-party action to recover benefits it paid to the employee so long as two elements are established:

(1) a proper written “demand” upon the employee to initiate the action, and,

(2) a refusal or failure to take action within ninety (90) days by the employee (thirty days for municipal defendants). Id.

Without the employer’s 90-day demand for the employee to commence suit, there can be no transfer of rights to maintain the action. Compliance with § 85.22(2), on the other hand, vests the employer/carrier with authority to maintain the action against the third party and may recover damages for the injury to the same extent as the employee could. I.C.A. § 85.22(2) (1998). When the carrier files a third-party action pursuant to § 85.22(2), it must, at a minimum, allege that the employee was working for the employer, was injured while in course and scope of employment, that the carrier paid and is continuing to pay workers’ compensation benefits to the employee, and that the employer/carrier has a subrogation interest in any recovery the employee may obtain against the defendant for the damages he sustained as a result of the third-party’s negligence. Horak v. Reames & Son Const. Co., 2014 WL 4925071 (M.D. Ga. 2014).

The hidden trap here is illustrated in Rollins Corp. v. Guessford, 741 N.W.2d 822 (Iowa App. 2007), a case in which the employee was injured in a motor vehicle accident. The employee settled his third-party claim before suit was filed and agreed to release the defendant. The employee failed to reimburse the carrier for the benefits it had paid in the amount of $59,221. Because the carrier had an independent right under §85.22(2) to institute a subrogation action against a third party, it filed suit within the statute of limitations. The carrier also included claims against the employee under theories of indemnification and unjust enrichment. The Court of Appeals held that because the carrier failed to issue a 90‐day demand, there was no direct right of action against the third party. The Court noted that this ruling did not preclude the carrier from seeking indemnification from the worker who settled her claim with the liable third party without knowledge of the carrier.

In order to avoid this trap, a workers’ compensation carrier should routinely and immediately issue a 90-day demand for the employee to file suit, even if the employee is still treating and is represented. At a minimum, this will preserve the carrier’s rights to proceed against the third party should the employee settle and not repay the carrier, as occurred in Guessford.

Third Trap: Settlement of Compensation Claim

The third potential trap concerns itself with the settlement of workers’ compensation claims under I.C.A. § 85.35. The peculiar language of that statute, entitled “Settlement of Workers’ Compensation Contested Claims”, suggests that a compromise settlement of a contested or potentially contested workers’ compensation claim under § 85.35(3) automatically waives the carrier’s lien and right of subrogation. This occurs before the file is referred to those responsible for subrogation. Section 85.35 provides for four different types of settlements involving workers’ compensation claims:

  • Agreement for Settlement – 85.35(2): This is an agreement as to the nature and extent of an employee’s current right to accrued benefits and establishes an employee’s right to future accrual of benefits. It keeps an employee’s right to future medical benefits open and may be the subject of future litigation.
  • Compromise Settlement – 85.35(3): This is a full and final disposition of a claim. It bars any right to future benefits and approval by the Commissioner of a Compromise Settlement is binding on all parties and terminates the jurisdiction of the Commissioner. Therefore, a compromise settlement automatically waives the carrier’s lien rights under § 85.22.
  • Combination Settlement – 85.35(4): This merges an agreement for settlement and a compromise settlement. This settlement can establish liability for part of a claim and extinguish liability for other potions of a claim.
  • Contingent Settlement – 85.35(5): This type of settlement is conditioned upon approval by a court, governmental agency, or upon an event expected to occur within one (1) year from the settlement date. If approval does not occur, the workers’ compensation commissioner can vacate the settlement upon petition or agreement of the parties. When a contingent settlement is vacated the statute of limitations is tolled from the date of the approval until the date the settlement is vacated. The settlement becomes final if no action is taken to vacate the settlement or to extend the time period for approval within one (1) year from the settlement date.

The problem is that a compromise settlement of a “contested workers’ compensation claim” under § 85.35(3) waives a carrier’s statutory rights to indemnification or subrogation under § 85.22. Section 85.35(9) provides as follows:

(9) Approval of a settlement by the workers’ compensation commissioner is binding on the parties and shall not be construed as an original proceeding. Notwithstanding any provisions of this chapter and chapters 85A, 85B, 86 and 87, an approved compromise settlement shall constitute a final bar to any further rights arising under this chapter and chapters 85A, 85B, 86, and 87 regarding the subject matter of the compromise and a payment made pursuant to a compromise settlement agreement shall not be construed as the payment of weekly compensation.

The “final bar” language underlined above represents a real risk to the unsuspecting claims professional. It was the subject of a 2003 Iowa Supreme Court decision. In Bankers Standard Ins. Co. v. Stanley, 661 N.W.2d 178 (Iowa 2003), the court stated that § 85.35(9) provided, without qualification or limitation, that an approved settlement of a contested workers’ compensation claim constitutes “a final bar to any further rights” under the workers’ compensation chapter and successive compatible chapters. Id. Thus, if § 85.35 means what it says, a contested case settlement destroys the carrier’s rights to subrogation against the third party or reimbursement from the employee. Strangely, if the workers’ compensation carrier went forward with the contested claim instead of settling, and it was later determined the carrier had to pay, then the carrier would not lose its rights of subrogation – essentially backwards.

As illustrated above there are many traps, pitfalls, nuances, and procedural hurdles that can reduce or even eliminate the path to recovery. The path contains even more twists and turns when other issues such as choice-of-law are at play. Knowing all the ins-and-outs of 50 ever-changing workers’ compensation schemes throughout the country is often not feasible. A savvy adjustor, however, will recognize that overly-complicated states – like Iowa – require the assistance of subrogation professionals at the onset to preserve and aggressively pursue statutory rights of recovery.

If you should have any questions about this article or subrogation in general, please contact Steve Smith at [email protected].

Stephen A. Smith
Sr. Associate Attorney

Stephen A. Smith is an insurance litigation attorney with Matthiesen, Wickert & Lehrer, S.C. His practice focuses on insurance litigation and subrogation, including automobile, property, workers’ compensation, and product liability. He is licensed to practice law in Illinois, Minnesota, and Wisconsin and is admitted to practice in all federal courts in Wisconsin, Illinois, and Indiana.