Workers’ compensation subrogation is always a tricky business, but nowhere is it more bewildering than in Michigan when a work-related injury arises out of a motor vehicle accident. The state’s unique and confounding no-fault system was designed to streamline compensation and reduce litigation, but for carriers attempting to assert subrogation rights, it has produced a maze of exceptions, statutory interplay, and judicial gloss that often leaves even seasoned practitioners scratching their heads. What follows is an overview intended for claims professionals grappling with this difficult terrain.
Michigan’s No-Fault Threshold Requirements
Michigan’s No-Fault Act establishes a compulsory first-party benefit scheme.[1] Under § 500.3135, tort liability for automobile accidents is abolished except where the injured person suffers death, a “serious impairment of body function,” or “permanent serious disfigurement.” These are the so-called threshold injuries. For subrogation purposes, this threshold test is the first barrier. Because a workers’ compensation carrier’s subrogation rights are derivative of the employee’s rights, the Michigan Supreme Court has declared that if the employee cannot maintain a tort action, neither can the carrier with its subrogation efforts.[2] Thus, minor injuries, however costly to the compensation system, almost never provide a basis for workers’ compensation subrogation.
Section 827 and the Workers’ Compensation Lien
Where a threshold injury does exist, the focus shifts to Section 827 of the Workers’ Compensation Act, M.C.L. § 418.827. This statute gives the compensation carrier a lien on “any recovery against the third party for damages resulting from personal injuries or death,” after deducting expenses of recovery. If the employee brings a successful third-party action, the lien is reimbursed “off the top,” before any distribution to the employee, and the carrier is entitled to a credit against future benefits. If the employee does not sue within one (1) year, the carrier may file its own third-party action in the employee’s name. Courts have consistently recognized this lien as statutory and automatic, although its scope in no-fault cases is sharply limited.
Economic vs. Non-Economic Damages and the Queen Exception
The difficulty lies in the relationship between economic and non-economic damages under the no-fault scheme. Workers’ compensation pays only economic losses—medical expenses and wage loss—while tort recoveries under the No-Fault Act typically involve non-economic damages like pain and suffering. In Queen, the Supreme Court held that a compensation carrier could not enforce its lien against a recovery limited to non-economic damages, because those did not duplicate compensation benefits. However, the Court carved out what has come to be known as the “Queen exception”: when a third-party recovery includes economic damages exceeding what no-fault provides—such as wage loss beyond the three-year statutory cap or allowable expenses above PIP limits—the compensation carrier’s lien does attach.
Practical Examples
Consider a practical example. An employee injured in the course of employment sustains only soft tissue injuries. He receives workers’ compensation benefits but fails the threshold test, so no tort action exists. No subrogation is possible. Another employee sustains a serious impairment and sues the negligent driver, but recovers only $100,000 in pain and suffering. Again, there is no lien, because the recovery consists entirely of non-economic damages. By contrast, in a catastrophic injury case where the plaintiff recovers $500,000, including $200,000 in excess wage loss beyond the three-year PIP limit, the carrier may enforce its lien, but only against the excess economic damages and claim a future credit. In wrongful death cases, the Michigan Supreme Court has gone further, holding that the lien applies to the entire recovery, even if damages are nominally allocated to non-economic components like loss of consortium, to prevent evasion of the statute.[3]
Other cases illustrate the narrow but critical contours of this doctrine. In 1984, the Court of Appeals reaffirmed that when no-fault applies, the carrier’s lien cannot reach noneconomic damages.[4] In 1986, the court emphasized that where the third-party recovery stemmed from noneconomic damages under no-fault, the carrier’s lien was unenforceable.[5] In other wrongful death cases, courts have confirmed that the lien encompasses the entire recovery to avoid manipulation of damage allocations.[6]
The 2019 No-Fault Overhaul and New Subrogation Opportunities
Complicating matters further is the 2019 overhaul of Michigan’s no-fault system, which introduced optional PIP medical benefit limits as low as $50,000.[7] This creates scenarios where workers’ compensation medical benefits can exceed no-fault medical limits, opening the door to reimbursement claims that previously were foreclosed because no-fault medical coverage was unlimited. Carriers should therefore closely scrutinize whether their medical payments substitute for or exceed PIP coverage, as this determines whether the Queen exception applies.
It is also worth noting that subrogation rights are not eliminated by an employee’s settlement with the tortfeasor. Section 418.827 expressly provides that a settlement by the employee does not bar an action by the carrier “for any interest or claim it might have.”[8] Michigan courts have even recognized a conversion cause of action against tortfeasors who settle with employees despite notice of a compensation lien.[9] This underscores the statutory nature of the lien and the duty of all parties to honor it.
Despite these avenues, the reality is sobering. Workers’ compensation subrogation in Michigan auto accident cases is viable only in limited circumstances: when a threshold injury exists, and when the employee’s recovery includes economic damages beyond PIP coverage. Smaller-dollar cases are often not worth pursuing, given the complexity and the near-certainty of opposition from plaintiff’s counsel, who will invoke the made whole doctrine or attempt to gerrymander allocations. Subrogation opportunities tend to cluster in catastrophic cases, wrongful death claims, or situations where PIP limits have been exhausted.
Priority of Payment Between Workers’ Compensation and No-Fault
Another recurring source of confusion in Michigan is the issue of payment priority between workers’ compensation and no-fault carriers. Under § 500.3109(1), workers’ compensation is considered primary to no-fault personal protection insurance (PIP) benefits. This means that when an employee is injured in the course of employment in a motor vehicle accident, the workers’ compensation carrier must pay wage loss and medical benefits first, and the no-fault carrier is secondarily liable. As a result, no-fault carriers are generally permitted to coordinate their policies to exclude items that are payable under workers’ compensation, leaving the compensation carrier with the initial financial responsibility. This statutory allocation often leaves workers’ compensation carriers frustrated, as they pay benefits that would otherwise fall within no-fault, but it also underscores why subrogation rights are so important to preserve whenever possible.
How Priority Impacts Subrogation Analysis
The priority framework also complicates subrogation analysis. Because workers’ compensation is primary, much of what the comp carrier pays is duplicative of what no-fault would have provided absent the employment nexus. Courts, therefore, view the compensation carrier as stepping into the shoes of the no-fault system. The Michigan Supreme Court in Great American Ins. Co. v. Queen emphasized this substitution role in explaining why liens cannot attach to purely non-economic recoveries. Only when the employee’s damages exceed no-fault’s statutory limitations—such as wage loss beyond three years or medical expenses above purchased PIP limits—does the comp carrier’s lien come into play. Understanding this priority of payment is essential because it highlights that workers’ compensation subrogation in auto cases is less about “double dipping” and more about recouping amounts that sit outside of no-fault’s carefully defined coverage boundaries.
In sum, workers’ compensation subrogation in Michigan auto accident cases is a riddle wrapped in a mystery inside an enigma. The interplay of the No-Fault Act and the Workers’ Disability Compensation Act narrows the field of recovery and demands careful, fact-specific analysis. Adjusters and carriers should be alert to the threshold injury requirement, the distinction between economic and non-economic damages, and the scope of the Queen exception. When the stars align, the statutory lien of § 418.827 can unlock significant reimbursement and future credit, but only in cases where no-fault’s protections give way to traditional tort remedies. But subrogation begins with understanding the law. If you or your recovery team is in need of a live webinar or in-house seminar to go over the nuts and bolts of workers’ compensation subrogation, with or without its interplay in no-fault states, please let us know.
For more information about workers’ compensation subrogation in Michigan and other states, please contact Lance Jones at ljones@mwl-law.com.
[1] M.C.L. § 500.3101 et seq.
[2] Great American Ins. Co. v. Queen, 300 N.W.2d 895 (Mich. 1980).
[3] Franges v. General Motors Corp., 274 N.W.2d 392 (Mich. 1979).
[4] Osterhart v. Detroit Auto. Inter-Insurance Exch., 355 N.W.2d 241 (Mich. App. 1984).
[5] Michigan Bell Telephone Co. v. Short, 395 N.W.2d 81 (Mich. App. 1986).
[6] Estate of Eddington v. Eppert Oil Co., 490 N.W.2d 872 (Mich. App. 1992).
[7] M.C.L. § 500.3107c.
[8] M.C.L. § 418.827.
[9] Ohio Farmers Ins. Co. v. Meff, 291 N.W.2d 106 (Mich. App. 1980).
