New Jersey Supreme Court Confirms That Workers’ Compensation Subrogation Is Not Limited By No-Fault Laws

New Jersey Transit Corp. v. Sanchez, 2020 WL 2374054 (N.J. 2020).

On May 12, 2020, the New Jersey Supreme Court answered a long-standing subrogation question regarding whether a workers’ compensation carrier is entitled to subrogation and/or reimbursement from a third-party tortfeasor who is covered by New Jersey no-fault insurance, even though the employee does not otherwise meet the verbal threshold allowing him or her to sue the tortfeasor. The Supreme Court confirmed what we had long suspected the law to be—the subrogation rights of a workers’ compensation carrier are not affected by New Jersey’s no-fault and verbal threshold requirements, as has been suggested in at least two prior appellate decisions.

New Jersey workers’ compensation subrogation is governed by N.J.S.A. § 34:15-40 (2000).Known simply as “§ 40,” this statute allows an injured worker to simultaneously pursue a workers’ compensation claim under the New Jersey Act and a third-party action against any third party liable for the injuries he sustained. Id.

New Jersey has a version of no-fault auto insurance laws. Every owner or registered owner of an auto registered or principally garaged in New Jersey must maintain either a standard or basic auto liability insurance policy with certain minimum limits of coverage insuring against bodily injury, death or property damage sustained by any person “arising out of the ownership, maintenance, operation or use of an automobile.” N.J.S.A. §§ 39:6A-3, 3.1, and 4; N.J.S.A. § 39:6B-1. The no-fault law exempts holders of Personal Injury Protection (PIP) policies from tort liability for non-economic damages (e.g., pain and suffering) unless a “verbal threshold” is met. The verbal threshold applies to an accident and the injured party can recover for non-economic damages from an owner or operator of an auto eligible for PIP only if the injured party suffers:

  • Death;
  • Dismemberment;
  • Significant disfigurement or significant scarring;
  • Displaced fractures;
  • Loss of a fetus; or
  • Permanent injury. N.J.S.A. § 39:6A-8, et seq.

For years, there has been a debate about whether a subrogated workers’ compensation carrier could find its subrogation rights limited when the injured employee was subject to the verbal threshold. Following Sanchez, there is no longer any debate. The workers’ compensation carrier is entitled to subrogate and/or be reimbursed its statutory lien, unaffected by the no-fault laws.

Workers’ Comp Subrogation and No-Fault Generally

When an employee suffers an auto accident while in the course of employment, workers’ compensation is the primary source of payment of the employee’s medical bills. This is because the Collateral Source Rule (found at § 39:6A-6) relieves the PIP carrier from the obligation of making payments for expenses incurred by the insured which are covered by workers’ compensation benefits.” Lefkin v. Venturini, 550 A.2d 985 (N.J. App. 1988); Lambert v. Travelers Indem. Co. of Am., 2016 WL 4446157 (N.J. Super. 2016). In other words, the statutory scheme is that benefits collectible under workers’ compensation are to be deducted from the benefits collectible under PIP. Bernick v. Aetna, 386 A.2d 908 (N.J. Super. 1978) (This deduction is mandatory); Taureck v. Jersey City, 374 A.2d 70 (N.J. Super. Law Div. 1977).

Where a third-party tortfeasor has caused the accident, § 40 prevents a double recovery by requiring the employee to reimburse the workers’ compensation carrier once there is a third-party recovery. The argument against allowing a workers’ compensation carrier to subrogate against or seek reimbursement from a no-fault carrier is that, if the employee was not seriously injured in a work-related accident, he would have received PIP payments and would have been statutorily-barred from recouping these PIP medical payments from the tortfeasor. Therefore, the argument goes, the workers’ compensation carrier should be similarly barred. There are only two decisions that hold that a workers’ compensation carrier is subject to the same verbal threshold as the employee in a third-party situation: Patterson v. Adventure Trails, 836 A.2d 856 (N.J. Super. 2003) and Continental Ins. Co. v. McClelland, 673 A.2d 194 (N.J. App. 1996). The rest of New Jersey case law says otherwise.

In McClelland, the court seemed to imply that a workers’ compensation carrier was subject to the same verbal threshold as the employee when it is subrogating or seeking reimbursement of compensation benefits from a third party. The court held that the verbal threshold does apply to a work-related car accident and that a tortfeasor’s liability should be no different simply because the plaintiff was working at the time. The McClelland decision was based on § 39:6A-12, the Collateral Source Statute which prohibits recovery of amounts covered by PIP, rather than § 40, the workers’ compensation subrogation statute.

In Patterson, the court similarly said that although § 40 authorizes the workers’ compensation carrier to institute a third-party action if the employee does not do so, the third party is liable only to the same extent as it would have been liable had the employee himself instituted suit. Until the Supreme Court decision in Sanchez, Patterson was the case most frequently cited for the proposition that workers’ compensation subrogation is only possible where the verbal threshold is met.

In the 2016 Superior Court case of Lambert v. Travelers. Indem. Co. of Am., 145 A.3d 1095 (N.J. Super. 2016), the court dealt directly with the right of an employer/workers’ compensation carrier to seek reimbursement of benefits it pays from PIP carriers from whom benefits would also be recoverable by the employee. It decided that workers’ compensation reimbursement/subrogation claims are not limited by § 39:6A-12 and that nothing in New Jersey’s no-fault law suggests the Legislature meant to treat employees injured in a work-related auto accident as if they were limited by the Automobile Insurance Cost Reduction Act’s (AICRA) no-fault system. But there was still confusion and disagreement among practitioners and the court with regard to a workers’ compensation carrier’s subrogation rights when they intersected with no-fault.

New Jersey Transit Corp. v. Sanchez

The new Sanchez case decided by the Supreme Court on May 12 cleared the air. David Mercogliano was injured in a work-related auto accident with Sandra Sanchez and received workers’ compensation benefits from his employer, the New Jersey Transit Corporation (NJTC). Mercagliano was not allowed to file a tort action because his injuries did not meet any of the verbal thresholds under the New Jersey No-Fault Act. So, NJTC filed its own subrogation action under § 40 against Sanchez seeking to recover its workers’ compensation benefit payments, which included medical expenses and indemnity benefit payments. The defendant moved to dismiss the case arguing that the employer’s subrogation claim was similarly barred by the lack of a verbal threshold injury under the No-Fault Act. They also argued that some portion of the permanent partial disability payment made to Mercogliano represented pain and suffering and was, therefore, not recoverable in a case where the injured employee did not meet the verbal threshold. Relying on the Continental case, the trial court ruled in favor of the defendant and dismissed the case.

On appeal, the Appellate Division reversed the trial court, noting that in § 40 subrogation actions against tortfeasors, the reimbursement rights of employers and/or their workers’ compensation carriers are governed by the New Jersey Workers’ Compensation Act, not the New Jersey No-Fault Act. It ruled that a workers’ compensation carrier is entitled to reimbursement from the negligent tortfeasors, even though the injured employee himself or herself could not have recovered the medical expenses and wage losses from his own auto insurer or non-economic damages from the tortfeasors. Sanchez appealed to the New Jersey Supreme Court.

The Supreme Court affirmed the ruling of the Appellate Division by a 3-to-3 decision which leaves the Appellate Division’s ruling intact. It agreed with the Appellate Division that New Jersey Transit’s subrogation action comported with the objectives and terms of the Workers’ Compensation Act. They found no evidence that when the Legislature enacted AICRA, it intended to bar employers and insurers that have paid workers’ compensation benefits for economic loss from seeking reimbursement from third-party tortfeasors in cases such as this, in which the employee’s losses were covered by workers’ compensation benefits and he neither sought nor received PIP benefits. The court established that NJTC’s subrogation action—limited to workers’ compensation benefits paid for economic losses—did not contravene AICRA’s provisions or undermine its goals. In essence, it confirmed the important societal role workers’ compensation subrogation plays in our society.

In short, the Court held that because workers’ compensation benefits are the primary source of recovery for injuries suffered by employees in a work-related auto accident, and PIP insurers are relieved from the obligation to pay medical expenses under § 39:6A-6, any recovery obtained by the employee from a third-party tortfeasor is subject to the workers’ compensation carrier’s lien, and if the employee doesn’t pursue a third-party action, the workers’ compensation carrier can. The Court further established that in a third-party action, the evidentiary bar of the Collateral Source Rule (found in § 39:6A-12) does not apply. There is no requirement that a subrogated workers’ compensation carrier meet any no-fault threshold before this reimbursement right arises.

Of some note is the fact that both the trial court and appellate court rejected the pain and suffering argument made by the plaintiff. All the Supreme Court wrote was that on the minimal record before them they did not see any facts to overturn the lower courts’ determination, but that Sanchez was welcome to ask the trial court to reopen the record on this issue.

The new Supreme Court confirmation of the Appellate Division’s ruling means that McClelland is no longer good law. The court in McClelland had held that although § 34:15-40 authorizes an employer to institute the action against the tortfeasor if the injured person does not do so, “the third party shall be liable only to the same extent as he would have been liable had the employee himself instituted suit within a year of the accident.” Thus, since the employee in McClelland was subject to the verbal threshold, his workers’ compensation carrier was also subject to that defense in an action seeking recovery from defendant.

It is very important to note that the Sanchez case involved a direct subrogation action filed by the workers’ compensation carrier. Workers’ compensation carriers should still be on their guard in cases where the employee files a third-party lawsuit against the negligent driver but does not meet the no-fault verbal threshold, and the carrier must merely assert its statutory lien. Such a case is likely to be dismissed. It is now more important than ever for the carrier to promptly file its own direct subrogation action or intervene into the employee’s action and assert its own independent subrogation claims against the tortfeasor. While intervening is not always favored in New Jersey, the Sanchez case probably provides the substantive basis for arguing that the workers’ compensation lien will not be adequately protected with allowing intervention.

For questions relating to workers’ compensation subrogation and its interface with no-fault auto insurance, please contact Gary Wickert at [email protected].

Gary L. Wickert

Gary L. Wickert is an insurance trial lawyer and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C. Gary has nearly four decades of litigation experience and is regarded as one of the world’s leading experts on insurance subrogation. He is the author of several subrogation books and legal treatises and a national and international speaker and lecturer on subrogation and motivational topics.