Nebraska has recently become a battleground in the war against workers’ compensation subrogation being waged by trial lawyers. Nebraska is a “tweener” when it comes to workers’ compensation subrogation. It doesn’t provide a carrier with a first money right to recovery of third-party proceeds, as most states do, but neither does it employ a version of the Made Whole Doctrine sufficient to allow a workers’ compensation lien to be avoided merely because the employee hasn’t been fully compensated. Instead, it falls in the middle.
When an injured employee recovers from a third-party tortfeasor, § 48-118(2) provides:
(2) If the employee or his or her personal representative or the employer or his or her workers’ compensation insurer do not agree in writing upon distribution of the proceeds of any judgment or settlement, the court, upon application, shall order a fair and equitable distribution of the proceeds of any judgment or settlement. Neb. Rev. Stat. § 48-118.04 (2005).
Historically, case law indicates that this “fair and equitable” distribution power does not mean that Nebraska has adopted the Made Whole Doctrine. Turco v. Schuning, 716 N.W.2d 415 (Neb. 2006); Sterner v. American Family Ins. Co., 805 N.W.2d 696 (Neb. App. 2011) (subrogated carrier, Sentry Insurance, represented by Matthiesen, Wickert & Lehrer, S.C.). Instead the language of the statute is plain: The court “shall order a fair and equitable distribution.” Section 48-114.04 does not, however, provide an exact formula for the trial court to follow or factors for the court to consider when making such a distribution. Nebraska practitioners have been working on mysteries without any clues regarding third-party recovery allocations. On June 16, 2017, however, the Nebraska Supreme Court finally started handing out clues. Trial courts will no longer be allowed to simply zero out a workers’ compensation carrier’s subrogation lien, awarding everything to the employee.
Nebraska has only recently provided any guidance for determining how to fairly and equitably distribute a recovery. The Supreme Court has said that the trial court:
…shall order a fair and equitable distribution.” Because we apply statutory subrogation, we decline to further read into § 48-118 [now § 48-118.04] a requirement that the employee be made whole. Turco, supra.
It’s interesting that the genesis of the “fair and equitable” legislation was court decisions which talked about subrogation being equitable and the application of equitable principles to workers’ compensation subrogation. Yet, subsequent decisions have held that principles of equitable subrogation do not apply because a carrier’s subrogation rights are statutory. Erikson v. Abels, 2006 WL 538180 (Neb. App. 2006) (unreported decision). The court is simply left to determine a reasonable division of the proceeds among the parties. Sterner, supra.
Fair and Equitable Distribution Factors
The legislative history of L.B. 594 reveals that the purpose of what is now § 48-118.04(2) was to prevent a fair and reasonable settlement between the employee and third-party tortfeasor from being delayed because the parties could not agree on how the proposed settlement should be distributed. Burns, supra. As the introducing senator explained:
Workers’ compensation cases sometimes … move slowly through the court for no other reason other than [that] third parties, when you have a lot of parties involved you can’t seem to get the cases settled…. Oftentimes, in determining either under the doctrine of subrogation or third party medical providers or what have you can’t agree on a settlement amount, what percentage should be paid, or whatever in a disputed claim, and because of that the case itself slows down. This would allow the court to step in at that time and say, this is a reasonable settlement figure, it ought to go. This is a reasonable distribution of those proceeds. Id; Floor Debate, L.B. 594, Committee on Business and Labor, 93d Leg., 2d Sess. 8098-99 (Jan. 18, 1994).
Because § 48-118.04 directs the district court, when the parties cannot agree, to order a “fair and equitable distribution” of settlement proceeds, some Nebraska courts have said that the changes made by L.B. 594 called for application of the law of equity to the statutory right of subrogation. Jackson v. Branick Indus., 581 N.W.2d 53 (Neb. 1998). However, the Nebraska Supreme Court has confirmed that “subrogation in workers’ compensation cases is still based on statute, and not in equity.” Burns, supra. Nebraska has not adopted the Made Whole Doctrine or any other specific rule for determining how to fairly and equitably distribute the settlement. Turco, supra; Burns, supra. Section 48-118.04 was not intended to permit the subrogation interest of an employer or workers’ compensation insurer to be subject to any equitable defenses. Burns, supra.
In Re Estate of Evertson
In 2016, the Nebraska Court of Appeals decided the case of In Re Estate of Evertson, 876 N.W.2d 678 (Neb. App.2016), review sustained (June 2, 2016), vacated, 889 N.W.2d 73 (Neb. 2016). Bruce F. Evertson, chief executive officer of Evertson Well Service, Inc., was killed after being involved in a motor vehicle accident with a tractor-trailer unit driven by Dennis Dobrinski. Travelers was the workers’ compensation carrier for Evertson Well Service and paid benefits to Darla Evertson, the surviving spouse, of $728 per week until she dies or remarries. If Darla remarries, Travelers will pay her a two-year lump sum settlement. Darla has a life expectancy of 27.6 years. Evertson’s estate settled its wrongful death/survival claims with Dobrinski’s insurance carrier, Employers Mutual Casualty (EMC). Travelers consented to the settlement without having a firm agreement regarding the distribution of the funds in place. EMC paid $500,000 from the policy to the Estate, of which $125,000 was allocated to Evertson’s adult son, $125,000 was allocated to Evertson’s adult daughter, and $250,000 was allocated to Darla Evertson. A hearing was held on November 17, 2014 to determine a “fair and equitable” division of the $250,000 settlement proceeds. Travelers claimed a subrogation interest in the entire $250,000 allocated to Darla pursuant to § 48-118. Six exhibits were received into evidence at the hearing:
- The settlement agreement;
- Darla’s affidavit with Evertson’s obituary attached;
- An affidavit by the chief financial officer of Evertson Operating Company, Inc., setting forth premiums paid by Evertson Operating Company for workers’ compensation insurance between May 1, 2009 and May 1, 2015;
- An affidavit setting forth that the attorney’s fees, expenses, and court costs billed by Darla’s attorneys in this case totaled $42,583.31;
- A negotiation letter; and
- The affidavit of the workers’ compensation adjuster showing that EMC had paid $26,208 in indemnity payments to Darla and $10,000 in funeral expenses.
The parties stipulated that the agreement referenced an underinsured motorists (UIM) policy for Evertson Well Service with a policy limit of $1 million. Travelers requested that a second supplemental transcript be filed with this court that showed that on March 18, 2015, the county court entered orders approving the settlement of the UIM claim and approving the distribution of $500,000 of UIM settlement proceeds. However, these were not considered by the county court at the hearing on November 17, 2014 and were not considered on appeal.
On December 29, 2014, the county court filed an order finding that a “fair and equitable” distribution of the settlement proceeds was:
- Darla: $207,416.69;
- Attorneys: $42,583.31 for their fees; and
- Travelers: $0
The county court set forth in its order that it considered the following factors contained in Evertson’s obituary:
- Decedent’s 25-year marriage to Darla;
- Their enjoyment of travel and family time;
- Fishing trips to Canada and Alaska;
- Their purchase of a “‘dream home’ ” in California in 2013;
- There was no evidence that Travelers helped finance the settlement between EMC and the Estate; and
- Travelers had charged and received the necessary premiums to provide workers’ compensation coverage for Evertson Operating Company; and under all the circumstances, Travelers’ financial risk was minimal and insurance companies are in the business of assuming risk.
On appeal, the Nebraska Court of Appeals approved the distribution, noting that the distribution of proceeds of a judgment or settlement under § 48-118.04 is left to the trial court’s discretion and there is an abuse of discretion standard on appellate review. The court, on appeal, did not consider the $1 million UIM policy and the settlement of $500,000 from that policy. This is because the record on appeal did not establish that UIM benefits had or would be received.
On December 16, 2016, the Nebraska Supreme Court reversed the Court of Appeals decision, but did so on jurisdictional grounds, holding that the county court which made the ruling that destroyed Travelers’ workers’ compensation lien despite a sizable third-party settlement, had no subject matter jurisdiction. In Re Estate of Evertson, 889 N.W.2d 73 (Neb. 2016). The court failed to give us any additional guidance.
Kroemer v. Omaha Track Equipment, LLC
On June 16, 2017, the Nebraska Supreme Court again revisited the “fair and equitable” distribution factors to be considered. Kroemer v. Omaha Track Equip., L.L.C., 2017 WL 2617136 (Neb. 2017). Kroemer was injured while employed for Ribbon Weld, LLC. Kroemer settled his third-party case of $150,000 and Ribbon Weld had a $207,555 workers’ compensation lien. The trial court held a “fair and equitable allocation hearing”, at which the following evidence was produced by Kroemer:
- There was a 90% chance of a defense verdict;
- Kroemer’s comparative fault was likely more than 50%;
- The case was worth $850,000 to $1.25 million;
- The settlement of $150,000 was in Kroemer’s best interest;
On the other hand, Ribbon Weld produced the following evidence:
- There was a 80% chance of a plaintiff’s verdict;
- Kroemer’s comparative fault was 25% to 30%;
- The case was worth $500,000 at trial;
- The $150,000 settlement was inadequate and was made with little or no intention of reimbursing the employer.
The trial court first determined that the settlement of $150,000 was reasonable. It then made the following allocation:
- $94,834.27 to Kroemer;
- $55,165.73 for attorney fees and expenses; and
- $0 to Ribbon Weld.
In allocating the recovery, the trial court considered:
- The nature of Kroemer’s loss,
- The substantial damages he suffered,
- The insurer’s charging and receiving a premium of nearly $175,000 for the insurance coverage; and
- The “comparative risk to the insurance carrier versus Kroemer.”
On appeal, the Supreme Court held that the trial court did not abuse its discretion in determining that the amount of Kroemer’s settlement was reasonable. However, they concluded that the trial court did abuse its discretion in not allocating any of the settlement proceeds to Ribbon Weld. Accordingly, they reversed that portion of the court’s order and remanded the case back to the trial court with direction to make a fair and equitable distribution of the $94,834.27.
In reversing the trial court’s award of $0 to the compensation carrier, the Supreme Court noted that in determining the fairness and reasonableness of a settlement of a third-party case, the trial court may consider “liability, damages, and the ability of the third party and third-party liability carrier to satisfy any judgment.” It then considered each of these elements:
Ability To Satisfy Judgment. The record did not contain evidence as to defendant’s ability to satisfy the judgment. However, the plaintiff admitted that the settlement of $150,000 did not reflect the limits of the defendant’s insurance policy. Therefore, the Supreme Court held that the ability of the defendant and its liability insurance carrier to pay was not an impediment to a greater settlement.
Damages. The Supreme Court admitted that the damages in this case were significant. Kroemer sustained a 95% loss of vision in his left eye. Kroemer’s expert valued Kroemer’s claim between $850,000 to $1,250,000. Ribbon Weld’s expert agreed with an assessment of damages set forth in a demand letter valuing the case at $858,989.86.
Liability. The Supreme Court held that the deciding factor on the reasonableness of the settlement was the issue of liability. Kroemer’s two experts opined that there was a high probability of a jury verdict in favor of Omaha Track Equipment. Ribbon Weld’s expert, on the other hand, opined that it was “more than likely” a jury would return a verdict in Kroemer’s favor and that the jury would assess contributory negligence in the range of 25% to 35%.
Therefore, the trial court did not abuse its discretion in finding that the settlement was reasonable.
With regard to the allocation of the settlement, however, the Supreme Court noted that Nebraska rejects both the “carrier gets paid first” and “made whole” approaches to workers’ compensation subrogation. The distribution is left to the court’s discretion and “simply requires the court to determine a reasonable division of the proceeds among the parties.” However, the employee does not need to be made whole. The Supreme Court noted that the trial court relied on the Court of Appeals decision in In Re Estate of Evertson, discussed above. The Supreme Court said that the reasoning in that decision was “flawed” because:
- The court can’t consider premiums collected by a workers’ compensation carrier;
- The court can’t consider the comparative risk assumed by an insurance carrier as opposed to an employee;
- The court shouldn’t consider the parties’ participation in effecting the recovery; and
- The right of the carrier to recover its subrogation recovery was given “short shrift.”
The Court noted that § 48-118 encourages prompt payment of benefits, even when a third-party is responsible for the injury, by providing the carrier with the means to recover what it pays out. Burns, supra. The Court expressly disapproved of the decision in In Re Estate of Evertson, and concluded, “Frankly, it is difficult to imagine a situation in which an allocation of $0 to an employer or insurer with a sizable subrogation interest would be a fair and equitable distribution of proceeds.” It held that the trial court abused its discretion in allocating the third-party settlement, reversed that portion of the court’s order and remanded the case to the trial court with a directive to make a fair and equitable distribution between Kroemer and Ribbon Weld of the remaining $94,834.27 of the settlement proceeds.
The Kroemer decision pulls Nebraska back from a Bizarro World in which a trial court can gut a workers’ compensation carrier’s lien worth millions of dollars because the employee and his spouse just bought their dream house or planned on travelling together in their golden years. It adds some structure and backbone to a fair and equitable distribution provision which has long been abused in that state, and restores some integrity and primacy to the fundamental right of a workers’ compensation carrier to recover its benefit payments when a third-party tortfeasor is responsible for causing the injury and pays money via settlement or judgment.
If you should have any questions regarding workers’ compensation subrogation in Nebraska or subrogation in general, please contact Gary Wickert at [email protected].