The Structure of New Mexico’s Employees’ Compensation Subrogation Scheme
The structure of New Mexico’s employees’ compensation subrogation scheme is unlike that of many other states, and it creates a vulnerability that subrogation professionals must understand before it is too late. Unlike most states, New Mexico’s employees’ compensation statute, § 52-5-17, gives the injured employee exclusive control over the third-party tort action. The employee alone sues the negligent tortfeasor. The employee alone negotiates the settlement. The employee alone decides what categories of damages to plead and pursue. The employer and its employees’ compensation carrier have no independent right to file its own third-party lawsuit, no mechanism to force the employee to genuinely and honestly plead all compensable elements of damage, and no statutory authority to prosecute the case if the employee chooses not to. It is a structure that leaves the carrier’s statutory reimbursement rights in the hands of the very party with every incentive to make the lien disappear. In seasoned subrogation circles, this is a perfect formula for gerrymandering settlements and efforts to avoid paying your lien.
The Statutory Purpose and Judicial Interpretation
New Mexico appellate courts have long recognized that the statutory purpose of § 52-5-17 is to prevent double recovery. In cases such as Brown v. Arapahoe Drilling Co. and Draper v. Mountain States Mutual Casualty Co., the courts explain that while the employee may pursue both employees’ compensation and a third-party tort claim, the employee is not entitled to keep both recoveries for the same injury.[1] The employer or carrier is entitled to reimbursement for those amounts it has paid that overlap with the tort recovery. That principle is also reflected in Transport Indemnity Co. v. Garcia, which describes the statute as creating a debtor-creditor relationship in which the employee receives the third-party recovery and must reimburse the employer out of it for duplicative elements.[2] The law is designed to ensure that third-party tortfeasors, not the employees’ compensation system, bear ultimate responsibility for the losses they cause.
Yet the very structure of the statute undermines the purpose it was designed to enforce. Because the carrier cannot bring its own third-party action, the entire tort claim belongs to the employee. This means the carrier’s subrogation rights depend on what the employee chooses to plead, prove, and settle. In practice, trial lawyers routinely and purposely omit medical expenses and wage loss from their demand letters and the complaint, may decline to offer such damages in discovery, and may instruct a mediator and liability carrier that the case will be pursued as one exclusively for non-economic harm. There is only one explanation for such an extraordinary approach to personal injury law.
Engineered Settlements and the Risk of Double Recovery
A settlement can then be reached that labels the entire payment as “pain and suffering only,” even when employees’ compensation paid significant medical bills and indemnity benefits (wage loss) arising from the same accident. When that happens, the tortfeasor pays less than the full value of the claim—which would explain the otherwise malpractice in not demanding a release by the employee from damages that encompass the most basic of all personal injury case damages: medical expenses and lost wages. The employee keeps both the employees’ compensation benefits and the civil settlement, and the carrier is left empty-handed. If the employee and liability carrier cooperate in this strategy, the end result is a perfectly engineered double recovery that directly contradicts the legislative intent behind § 52-5-17.
The Gutierrez Framework and Its Limitations
The New Mexico Supreme Court addressed this problem in part in Gutierrez v. City of Albuquerque, but did not address it entirely.[3] In Gutierrez, the Court held that the employer’s right to reimbursement extends only to that portion of the third-party recovery that represents elements of damage duplicating compensation benefits, typically medical expenses and lost wages. Unlike most states, New Mexico holds that non-economic damages, such as pain and suffering and loss of enjoyment of life, fall outside the carrier’s subrogation and/or reimbursement interest because employees’ compensation does not provide payment for these harms. To guide courts in determining whether a settlement is duplicative, the Court adopted a burden-shifting framework. The employee must prove that the settlement was fairly and reasonably calculated in good faith to compensate only for those damages not covered by compensation benefits. If the employee meets that burden, the Employees’ Compensation Judge must determine the reasonable elements of the tort recovery and compare them to the elements of the compensation benefits paid, ordering reimbursement only for duplicative portions.
How the Statutory Structure Enables Abuse
This framework sounds reasonable in theory, but its practical application exposes the statute’s structural weakness. If an employee and defendant simply avoid pleading medical expenses, decline to offer evidence of wage loss, and engage in a charade to characterize their settlement as entirely non-economic, they can argue that the settlement has no duplicative component at all. A release may be drafted that expressly disclaims medical expenses and lost wages and states that the settlement was paid solely for pain and suffering or other hedonic losses. Yet this characterization may bear no resemblance to reality and/or the underlying facts. Every injury that produces medical treatment necessarily implies medical expenses. Most injuries that generate impairment necessarily have an economic component, including lost earning capacity, even if the employee did not miss time from work immediately. The omission of these damages from the civil action does not eliminate them from reality; it simply removes them from the third-party recovery so that the lien cannot attach to them. What may look like a legitimate allocation is actually an engineered evasion of the statute’s purpose.
Hartnett v. Papa John’s Pizza and the Courts’ Warning
The Court of Appeals confronted New Mexico’s fertile opportunity to deceive the court and the compensation carrier in Hartnett v. Papa John’s Pizza.[4] In that case, the employee argued that certain wage-related benefits should not be considered duplicative because they were tied to his termination rather than the accident. The court rejected the argument, explaining that all benefits awarded by the Employees’ Compensation Judge (WCJ) derived from the accident and that the employee’s position effectively sought to keep two recoveries for the same harm. The court emphasized that the law does not permit the employee to avoid reimbursement through clever characterization. Hartnett reaffirmed that the WCJ must allocate the recovery into its reasonable elements and compare those elements to the nature and purpose of the compensation payments. It illustrated that New Mexico courts are willing to look beyond the employee’s labels when those labels do not reflect the economic reality of the injury.
The Evidence Problem: When the Record Is Empty
The difficulty arises when those labels are all that exist because the employee never pleaded the economic components in the first place. If subrogation counsel is not involved early, the civil action may proceed entirely without medical specials, wage information, vocational analysis, or any evidence needed to demonstrate overlap between the tort recovery and the employees’ compensation benefits paid. Settlement negotiations may take place without acknowledgment of medical bills or impairment ratings, and the liability carrier may pay a discounted non-economic award, knowing that the absence of economic claims limits the employees’ compensation lien. When the carrier later requests reimbursement, it is presented with a settlement agreement reciting that the payment contained no economic damages and is told that the lien therefore attaches to nothing. Even if the carrier demands a Gutierrez allocation hearing, the record is barren because the employee constructed it that way. The carrier is left to argue that the injury necessarily contained economic harms, but the tort record contains no evidence supporting that position because subrogation counsel was not present to guide the discovery or settlement process.
The Necessity of Early Subrogation Involvement
This reveals why subrogation counsel must be involved from the beginning in every New Mexico case with third-party potential. Because the employee alone controls the litigation, the carrier must remain vigilant. Early involvement allows subrogation counsel to monitor the pleadings, request inclusion of medical expenses and wage loss, participate informally in discovery, evaluate the liability carrier’s position, and ensure that economic damages are not silently omitted. Counsel can require production of medical bills, wage records, impairment ratings, and vocational assessments, and can insist that these be included in settlement negotiations. Counsel can notify plaintiff’s counsel and the liability carrier of the statutory lien and provide guidance on how to structure an allocation that complies with Gutierrez and prevents double recovery. If red flags appear—such as efforts to disclaim all economic damages, artificially inflated non-economic claims, or sudden exclusion of medical evidence—subrogation counsel can move to intervene, or at least create a written record demonstrating the employee’s attempt to circumvent the lien. Without early involvement, the carrier is left to reconstruct the case through a hostile lens, often in the face of a fully executed settlement agreement designed to eliminate any trace of duplicative recovery.
Red Flags That Demand Scrutiny
Red flags that should trigger immediate scrutiny include pleadings that omit any claim for medical expenses; discovery responses stating that the employee will not seek lost wages; mediation statements asserting that the employee will not request any economic damages; releases that disclaim medical expenses, lost wages, and punitive damages; and settlements for large non-economic amounts in cases where the employee has not missed work. None of these circumstances, standing alone, establishes collusion, but taken together, they strongly suggest an effort to make the employees’ compensation lien disappear. Subrogation counsel should be prepared to expose the economic reality underlying such claims and argue that the employee cannot meet the Gutierrez good-faith burden simply by labeling the damages as non-economic. The WCJ should be asked to consider the medical evidence, the nature of the injury, the treatment rendered, the presence or absence of impairment, and the functional consequences of the accident. Even if the employee did not miss work, loss of earning capacity often remains, and medical bills paid by employees’ compensation remain economic losses compensable in tort. If the settlement amount is disproportionate to the absence of economic claims, the WCJ should investigate whether the allocation reflects reality or strategy.
Broader Consequences for the Compensation System
If employees and liability carriers are permitted to eliminate the statutory lien through engineered allocations, the consequences extend far beyond the individual claim. Employees’ compensation premiums are driven by loss experience. When carriers lose their ability to recoup losses caused by negligent third parties, the cost of those losses is passed on to employers. Premiums rise. Experience modifiers inflate. Small businesses and municipalities shoulder financial burdens they did not create. Meanwhile, the negligent tortfeasor benefits from a reduced settlement value, and the employee receives a windfall. This is precisely the outcome the legislature sought to prevent when it enacted § 52-5-17. The statute is not meant to be a drafting game in which the employee can choose which damages exist for subrogation purposes and which exist for tort purposes. It is meant to ensure that the economic consequences of workplace injuries are borne by the responsible parties, not by the compensation system and the employers who fund it.
The Solution: Early, Active, and Persistent Subrogation Strategy
The remedy for these concerns is simple: carriers operating in New Mexico cannot afford to be passive. Subrogation counsel must be engaged early. They must monitor the civil action, ensure proper discovery of economic damages, and challenge efforts to exclude medical expenses and wage loss for strategic purposes. They must remind plaintiff’s counsel and liability carriers of the statutory purpose and the employee’s burden under Gutierrez. When necessary, they must request intervention or, at a minimum, document objections to settlement structures that appear to evade the lien. And when the matter reaches the WCJ, they must demand a full evidentiary hearing to ensure that the tort recovery is allocated according to its reasonable elements, not according to the labels created by the employee and tortfeasor.
In New Mexico, the only way to protect the carrier’s statutory lien is to be present in the fight from the beginning. Waiting until the settlement papers arrive is almost always too late. When the employee controls the only cause of action and the liability carrier sees an opportunity to reduce its exposure, the temptation to structure a non-economic-only settlement is powerful. Carriers who fail to recognize this risk may find themselves trapped in a post-settlement allocation hearing with no evidence and an employee insisting that no economic damages were ever on the table. Subrogation counsel must prevent the “tangled web” from being woven in the first place.
[1] Brown v. Arapahoe Drilling Co., 370 P.2d 816 (N.M. 1962), and Draper v. Mountain States Mutual Casualty Co., 867 P.2d 1157 (N.M. 1994).
[2] Transport Indem. Co. v. Garcia, 552 P.2d 473 (N.M. App. 1976).
[3] Gutierrez v. City of Albuquerque, 964 P.2d 807 (N.M. 1998).
[4] Hartnett v. Papa John’s Pizza, 2013 WL 4513907 (N.M. Ct. App. 2013), cert. denied, 308 P.3d 133.
