Kentucky has not been kind to workers’ compensation subrogation. In our 2023 article, “The Ten Best and Ten Worst States for Subrogating”, we ranked Kentucky as the fifth-worst state in the country. We wrote:
Only recently has Kentucky become a bad jurisdiction for workers’ compensation subrogation. It drops to No. 5 thanks to Arkansas being even worse lately. The carrier must intervene, or it risks losing its subrogation rights. No reimbursement is allowed from non-economic damages and a modified Made Whole Doctrine is applied. To make matters worse, the plaintiff can settle around the workers’ compensation carrier, necessitating active and qualified subrogation counsel in every case. Nobody knows why, but there is no future credit if the past lien does not exceed the amount of the plaintiff’s attorney’s fees and costs.
The last sentence referred to the peculiar manner in which Kentucky courts had historically interpreted § 342.700(1). A new Kentucky Supreme Court decision has now removed much of that uncertainty and delivered one of the most pro-subrogation decisions Kentucky carriers have received in years. In K-VA-T Food Stores, Inc. v. Blackburn, the Court held that an employer or carrier does not have to continue paying workers’ compensation benefits until those payments exceed its share of the employee’s attorney’s fees and costs before it can obtain reimbursement or begin taking a future credit. Kentucky may not yet be ready for the workers’ compensation subrogation honorable mention, but it should move appreciably upward when the rankings are revised.
Workers’ compensation subrogation begins with a straightforward bargain. When an employee is injured through the fault of a third party, the employer or its carrier pays medical and indemnity benefits without waiting for the employee to prove negligence. In exchange, the carrier receives a statutory right to recover benefits duplicating damages later recovered from the responsible third party. The employee may pursue both remedies, but may not collect twice for the same elements of damage.
Kentucky complicates that basic arrangement in several ways. A carrier generally must intervene in the employee’s third-party action or risk losing its subrogation rights. The carrier may recover only from damages duplicating workers’ compensation benefits, such as medical expenses and lost wages. It has no interest in pain and suffering or other non-economic damages. Employer negligence can proportionally reduce the carrier’s recovery. Moreover, an employee and tortfeasor may enter into a partial settlement excluding the carrier’s subrogation interest, leaving the carrier to pursue its claim separately. These rules make early intervention and active subrogation counsel indispensable.
Attorney’s fees have been another formidable obstacle. Before 2018, K.R.S. § 342.700(1) provided that the carrier’s recovery could not exceed compensation benefits paid and payable, “less the employee’s legal fees and expense.” The Kentucky Supreme Court interpreted this language literally. The employee’s entire legal expense, not merely the portion attributable to recovering the carrier’s lien, could reduce or completely eliminate the carrier’s subrogation recovery.
The legislature amended K.R.S. § 342.700(1), effective July 14, 2018, by inserting the critical words “a pro rata share of.” The statute now limits the employer’s or carrier’s recovery to indemnity and medical expenses paid and payable, less “a pro rata share of the employee’s legal fees and expense.” The amendment clearly improved the statute, but left an important question unanswered: From what amount should the carrier’s pro rata share of fees and expenses be deducted, and when does reimbursement or a future credit begin?
That question produced Blackburn. Chantella Blackburn was injured while working for K-VA-T Food Stores when she fell from a stepladder onto a cart being used by a third-party vendor. She received temporary total disability benefits, permanent partial disability benefits, and medical benefits. She also sued the vendor and settled for $295,000.
Because the settlement did not allocate the recovery among the various elements of damage, the administrative law judge made the allocation. One-third, or $98,333.34, was allocated to pain and suffering and was therefore beyond the carrier’s subrogation interest. The remaining $196,666.66 duplicated workers’ compensation benefits. Blackburn’s contingent fee was 40%, making $78,666.66 the employer’s proportional share of the attorney’s fee attributable to the duplicative recovery. After another $1,198.36 was deducted as the employer’s proportional share of litigation expenses, $116,801.64 remained available for subrogation.
K-VA-T had already paid $25,246.43 in medical and indemnity benefits. The ALJ ordered immediate reimbursement of that amount and allowed the remaining $91,555.21 to operate as a credit against future benefits. The Workers’ Compensation Board agreed with the basic methodology.
The Kentucky Court of Appeals did not. It concluded that the carrier could not begin recovering until the benefits it paid exceeded its pro rata share of Blackburn’s attorney’s fees and expenses. Because those fees and expenses greatly exceeded the $25,246.43 already paid, the Court of Appeals’ methodology required K-VA-T to pay tens of thousands of dollars in additional benefits before recovering anything. In practical terms, a large contingent fee could still postpone or defeat reimbursement and a future credit, despite the 2018 amendment.
The Kentucky Supreme Court unanimously reversed. It held that the 2018 amendment establishes a proportional allocation of fees and expenses, not a “fee-first” threshold the carrier must exhaust through additional benefit payments. The Court prescribed a clear order of operations.
First, determine the portion of the third-party recovery that duplicates workers’ compensation benefits.
Second, subtract the employer’s or carrier’s pro rata share of the attorney’s fees and litigation expenses attributable to obtaining that duplicative recovery.
Third, use the resulting amount to reimburse the carrier immediately for benefits already paid. Any remaining balance is available as a credit against benefits payable in the future.
This is a significant pro-subrogation holding. It recognizes both halves of the carrier’s statutory interest: reimbursement of benefits “paid” and a credit against benefits “payable.” It prevents an employee from retaining a double recovery merely because the carrier’s past lien is smaller than its allocated share of attorney’s fees and expenses. It also gives meaningful effect to the legislature’s 2018 decision to replace the employee’s entire legal expense with only the carrier’s “pro rata share.”
One important caution is necessary. The Supreme Court’s opinion states that it is not final and may not presently be cited as authority in Kentucky courts. Although the opinion provides a clear and unanimous answer to the statutory question, carriers and their counsel should not cite or rely upon it as controlling authority in pending Kentucky litigation until it becomes final. Its status should be checked before publication of this article and before it is used in a brief, motion, lien calculation, or settlement negotiation. If the decision becomes final without material alteration, the cautionary language can be removed and the holding treated as controlling Kentucky law.
The decision does not transform Kentucky into Wisconsin. Carriers must still intervene diligently. Non-economic damages remain outside the lien. Employer fault and allocation disputes can reduce recoveries, and partial settlements can leave carriers litigating independently. Qualified subrogation counsel remains essential.
But one of Kentucky’s strangest and most destructive barriers to reimbursement and future credits has now been removed. The mystery described in our 2023 rankings article has an answer: the carrier’s proportional litigation costs are deducted from the duplicative third-party recovery before reimbursement and credit are applied. They are not a toll the carrier must pay through additional workers’ compensation benefits before its subrogation rights come to life.
Kentucky remains challenging, but it is no longer quite as bad as once advertised. When the next rankings are published, K-VA-T should move the Commonwealth considerably farther from the bottom.
