Kansas Decision Introduces Concept of “Statutory Deficit”. The Kansas Court of Appeals is holding class on why it is important to have subrogation counsel in workers’ compensation subrogation third-party cases – even in states which are favorable to carriers. In the 2020 case of Hawkins v. Southwest Kansas Co-op Service, 2020 WL 1649867 (Kan. App. 2020), Hawkins was injured on the job and sued three defendants, (1) JLG Industries, Inc., (2) United Rentals Northwest, Inc., and (3) Western Steel and Automation, Inc.
- In 2008, Hawkins settled with Western Steel for $925,000 and the trial court approved a designation of the entire amount for the wife’s loss of consortium. There was no apportionment of fault.
- In 2011, Hawkins settled with JLG and received annual payments of $75,000 for 20 years, totaling $1.5 million. There was no apportionment of fault. Payments were received from 2012 through at least 2016.
- In 2011, the case against United Rentals went to trial and the jury found no fault on Hawkins, JLG, or United Rentals, but found Western Steel to be 75% at fault and the employer, Southwest Kansas Co-op, to be 25% at fault. The jury determined the damages to be $4,081,916.50.
The employer filed a request in the workers’ compensation case for a determination of its lien and future credit. The ALJ calculated the lien by reducing the JLG settlement (valued at $1.5 million) by 25% and subtracting that amount ($375,000) from the past lien of $852,460.34, leaving a lien reimbursement of $477,460.34. The future credit was determined to be $272,539.66, which was calculated by subtracting the past lien reimbursement from the JLG settlement, leaving a future credit of $647,539.66, which she then reduced by $375,000. The Court of Appeals ruled that the method for calculating past lien reductions due to employer fault set forth in Enfield should not be used with regard to future credits. Id.
With regard to a “recovery” which presents itself in the form of successive payments or settlements, the court in Hawkins held that the carrier’s lien comes into existence contemporaneously with the employee’s right and attaches to any money the employee receives then or later. The court held that the proper means of calculation is to take the jury verdict of $4,081,916.50 times the 25% fault of the employer to lead to a $1,020,479.10 reduction of the employer’s lien and future credit. The lien is reduced to zero and the employer would have a “deficit” of $168,018.80. As for the future credit, the court held that “the subrogation lien and the future credit function as an integrated whole” and the future credit calculation should be determined that way. The credit, like the lien must be reduced by the employer’s fault-based portion of the employee’s damages, so the employer would get a credit only after it pays additional benefits equal to the above-referenced “deficit.” The court in Hawkins determined the following;
- Hawkins never received any money based on the jury trial because the only parties found to have legal fault for his injuries were Western Steel (which had already settled) and the employer, which had immunity. The Western Steel settlement was for loss of consortium, and because the employer did not intervene, it could not challenge that award.
- The employer’s right to a lien out of Hawkins’ settlement with JLG was eclipsed by the jury verdict. But that did not extinguish its future credit. Each $75,000 installment becomes part of a future credit, assuming that the employer had paid an additional $168,018.80 in benefits (the “deficit”). Hypothetically, the court said that if the employer paid $25,000 per year in benefits starting in 2011, the employer would have no claim for a credit in years 2011, 2012, and 2013 because the difference between the $75,000 annual recovery and the $25,000 benefits paid each year would not total more than the $168,018.80 deficit. In 2014, however, the company would have a credit of $31,981.20, reflecting the difference between the $75,000 settlement payment and the $25,000 in benefits paid ($50,000), reduced by the remainder of the deficit. In each following year, the employer would have a credit equal to the difference between the $75,000 payment and the benefits paid up to then, as reduced by any existing credit.
In other words, the court allowed the fiction that the entire $925,000 settlement—and the only settlement until three years later, ensuring that the compensation carrier would have to continue paying benefits—constituted damages for loss of consortium because the employer didn’t bother to intervene or contest it. It then fabricated the concept of the statutory “deficit” which was never the intent of the original drafters. If a lien is diminished due to employer fault under the Brabander Formula but the diminished lien value is still a positive number, the Kansas Court of Appeals has held that instead of the automatic future credit simply being reduced and not lasting as long, the carrier must keep making benefit payments and is entitled to no future credit until this new “statutory deficit” is exhausted.
It seems this is not the first time the Kansas Court of Appeals has tried to warn the industry of the importance of being represented in third-party lawsuits. In 2017, it decided the case of Heimerman v. Rose, 414 P.3d 745 (Kan. App. 2017), which allowed the plaintiff to allocate a recovery to loss of consortium and services, effectively eliminating a $300,000 because the carrier was not represented at the trial court level. In retrospect, the Hawkins case is another stern lesson in why the workers’ compensation carrier must get qualified subrogation counsel involved early in Kansas. Doing otherwise can be very expensive, and not just for the carrier involved in Hawkins. Because the carrier in Hawkins was not represented by subrogation counsel, the entire industry will be saddled with the new subrogation and future credit-killing concept of a statutory deficit, which means reduced subrogation recoveries and credits thanks to this subrogation-damaging decision. It proves once again that subrogation is a right and a privilege that we can lose, and eternal vigilance is its price.
If you should have any questions regarding this article or subrogation in general, please contact Lee Wickert at firstname.lastname@example.org.