Texas has historically been a very favorable venue for workers’ compensation subrogation. It has not been without its gray areas. In death cases, when an employee dies and either he and/or his surviving family members have received workers’ compensation benefits, a careful analysis is required in order to determine the subrogation and future credit rights of a workers’ compensation carrier. Until the June 20, 2014 Texas Supreme Court decision in State Office of Risk Management v. Carty, 2014 WL 2790810 (Tex. 2014), there has been a good deal of confusion with regard to how a carrier’s future credit is calculated when multiple beneficiaries are involved. Necessary to understanding the impact of this decision is an understanding of the two types of lawsuits that can be brought when someone dies as a result of the negligence of another.
Survival Act. A survival action allows the deceased’s estate to assert a claim for the decedent’s injuries before he died. In a survival action, the estate is allowed to assert the personal injury claim that the deceased had until he/she died. A decedent’s personal injury action “survives” death and may be prosecuted on the decedent’s behalf. Tex. Civ. Prac. & Rem. Code Ann. § 71.021 (2008); Borth v. Charley’s Concrete Co., 139 S.W.3d 391 (Tex. Civ. App. – Fort Worth, 2004, pet. denied). The heirs or legal representatives of a decedent’s estate may recover for the physical pain, suffering, and property damage sustained by the decedent before death, as well as for medical expenses and other damages. Elliott v. Hollingshead, 327 S.W.3d 824 (Tex. App. – Eastland, 2010, no pet).
Wrongful Death Action. A wrongful death action is designed to compensate the deceased’s family members for their losses. The damages go directly to the family members and do not pass through the deceased’s estate. The surviving spouse, children, and parents of a deceased are statutory beneficiaries for the purpose of bringing a wrongful death action. Tex. Civ. Prac. & Rem. Code Ann. § 71.004 (2008).
The law underpinning the calculation and distribution of workers’ compensation death benefits is beyond the scope of this article, but is nonetheless both related and important to workers’ compensation subrogation. This calculation and the determination as to who qualifies as a beneficiary is found in Chapter 132 of the Texas Administrative Code. 28 Tex. Admin. Code §§ 132.1, 132.2, 132.3, 132.7, 132.8, 132.9, 132.11, 132.12. If the deceased employee has no legal beneficiaries as defined by Texas law, the death benefits are to be paid to the Subsequent Injury Fund as set forth in § 132.10. Tex. Admin. Code § 132.10.
Allocation In Death Cases
Beneficiaries and Non-Beneficiaries Involved. A carrier has no right to any portion of a third-party recovery that represents a non-beneficiary’s interest. U.S. Fire Ins. Co. v. Hernandez, 918 S.W.2d 576 (Tex. App. – Corpus Christi, 1996, writ denied). Since a carrier’s rights are limited to “that portion of an award or settlement which represents a workers’ compensation beneficiary’s interest, a settlement that involves both a non-beneficiary and a beneficiary must first be apportioned to each before the extent of the carrier’s rights under § 417.002 can be determined. When both a non-workers’ compensation beneficiary and a workers’ compensation beneficiary enter into a settlement of a wrongful death case, the worker’s compensation carrier’s subrogation/reimbursement rights are limited to that portion of an award or settlement which represents a workers’ compensation beneficiary’s interest. Hodges v. Mack Trucks, Inc., 474 F.3d 188 (5th Cir. 2006). A trial court cannot “arbitrarily compromise” the carrier’s rights when apportioning the settlement between workers’ compensation beneficiaries and non-workers compensation beneficiaries. Hodges, supra. Beneficiaries and non-beneficiaries are not allowed to apportion a third-party settlement among themselves in a manner that prejudices a workers’ compensation carrier’s subrogation rights by preventing beneficiaries from receiving anything which otherwise be recoverable by the subrogated carrier. Insurance Company of North Am. v. Wright, 886 S.W.2d 337 (Tex. Civ. App. – Houston, 1994, writ denied). This is known as “gerrymandering” a settlement and allocating a third-party recovery among beneficiaries and non-beneficiaries is often where gerrymandering takes place.
Only Beneficiaries Involved. Once the third-party recovery has been allocated between workers’ compensation beneficiaries and non-beneficiaries in a non-discriminatory fashion, or where only beneficiaries are involved, the question remains as to how and whether a third-party recovery should be apportioned between the various beneficiaries. This issue has a little bit of case history behind it. In 2008, the Texas Supreme Court issued an opinion in a case in which the plaintiff’s attorney attempted to gerrymander a settlement by dismissing all claims in a death case, except for the claims of the deceased’s estate. Texas Mut. Ins. Co. v. Ledbetter, 251 S.W.3d 31 (Tex. 2008). In Ledbetter, Charles Ledbetter was electrocuted while working on a job for his employer. The worker’s compensation carrier, Texas Mutual Insurance Company, paid $6,000 in funeral expenses and began paying $1,258 monthly death benefits to his widow and minor son. The family settled the third-party case for $4.5 million two weeks before trial, and the carrier quickly intervened. At a hearing on the settlement, the family dismissed all claims except those of the deceased’s estate, and claimed that the carrier wasn’t subrogated to the estate’s recovery, but could pursue the defendant on its own. The recovery was allocated $2,388,545.40 to Ledbetter’s estate (for pain and suffering before his death), $2,063,912.60 to their attorney, $47,542.00 to the ad litem, and nothing to the widow, the minor child, the adult daughters, or the compensation carrier. Ledbetter died intestate, so his widow was entitled to 1/3 of the estate and his children to the remainder. But there was no evidence regarding expenses or expected distributions from Ledbetter’s estate, or any testimony regarding how this settlement benefited the minor. To the contrary, the only reasons the ad litem stated for approving the settlement were (1) the minor would get nothing until he was 18 years of age or older, and (2) his mother “understands her obligation to her child” in the meantime. The trial court noted that the carrier had done nothing to further the litigation and had only recently intervened, struck the late-filed intervention, and approved the settlement – even though the nonsuit and dismissal purportedly meant it no longer involved a minor.
The Court of Appeals in Ledbetter held that the trial court erred in striking the carrier’s intervention and in allocating 100% of the settlement to the estate, citing the limited evidence that Charles suffered pain before his death and the undisputed evidence that his widow and son suffered the loss of their sole means of support. However, the court declined to set aside the trial court’s nonsuit and reinstate Ledbetter’s wife and son as parties. The Supreme Court reversed and invalidated the gerrymandering attempt because the trial court did not award the carrier “first money.” The court held that a carrier can even intervene after a judgment if it is being manipulated by the parties, and that a third party is liable to the carrier for conversion of the lien if it is complicit in the scheme. Although the exact cause of action against the third party was not made clear, it should be referred to as “reimbursement pursuant to Texas Labor Code Chapter 417.” The Supreme Court said:
When an injured worker settles a case without reimbursing a compensation carrier, everyone involved is liable to the carrier for conversion – the plaintiffs, the plaintiffs’ attorney, and the defendants. As between those parties, we have held that generally those who received the funds unlawfully (the plaintiffs and their attorney) should disgorge them rather than making the tortfeasors pay twice. Ledbetter, supra.
The Court ordered the carrier’s intervention reinstated and remanded the case with instructions for the trial court to protect the carrier’s subrogation interests.
In 2013, the Court of Appeals decided the double appeal case of Long v. Elliott in which the minor children and parents of a decedent conspired to award 75% of a $4,016,461.99 third-party recovery to the survival claims brought on behalf of the estate and 25% of the settlement proceeds to the wrongful death claims. Long v. Elliott, 327 S.W.3d 824 (Tex. App. – Eastland, 2010) (“Elliott I”); Long v. Elliott, 416 S.W.3d 152 (Tex. App. – Eastland, 2013) (“Elliott II”). Because the carrier’s subrogation rights and future credit extended only to the recovery by the minor plaintiffs for their wrongful death claims, the Court in Elliott I reversed this allocation as being unsupported by the evidence, saying, “…at most, a minimal allocation of the settlement proceeds to the survival claims may have been justified, such as an award of funeral expenses.” (Elliott I).
For many years, Texas law did not explain how a “net recovery” in excess of the amount of benefits paid by the workers’ compensation carrier should be apportioned among wrongful death beneficiaries when multiple beneficiaries recover from a third-party tortfeasor. Carty v. State Office of Risk Mgmt., 733 F.3d 550 (5th Cir. 2013). Lawyers and courts often made the mistake of applying the 1995 Court of Appeals decision in Performance Ins. Co. v. Frans, 902 S.W.2d 582 (Tex. App. – Houston [1st Dist.] 1995, writ denied) to resolve this issue. Frans held that a settlement in a death case should be divided and applied in the following sequence: (1) costs; (2) attorney’s fees; (3) reimbursement of the carrier; and, finally, (4) the excess, if any, to the beneficiaries.
The Court also held that the excess should be apportioned among beneficiaries in the same ratio as they received death benefits. The rationale of this holding was simple – the old law governing the case at that time, Article 8307 of the Texas Statutes, explicitly contained that wording. In 1989, however, Article 8307 was repealed, and a new, substantively revised statute was enacted in its place. In 1993, the 1989 Act was amended and recodified as part of the enactment of the Texas Labor Code. Although the sequence mandated by former Article 8307 described in Frans is similar to that mandated by current law, the requirement that any recovery in excess of the amount required to reimburse the carrier be apportioned in the same ratio as death benefits were received by the beneficiaries was eliminated in the 1989 Act and is nowhere to be found in the current version of the Workers’ Compensation Act. No Texas case has applied the Frans apportionment rule to the new statute. One could certainly argue that the Frans holding remains valid today since the 1993 enactment of the Labor Code was intended to be a non-substantive recodification of existing labor statutes. At the same time, the statute interpreted in Frans, Article 8307, had already been substantively changed prior to the enactment of the Labor Code. Therefore, the 5th Circuit held that the notion that a trial court is bound by Frans’ settlement-apportionment methodology is erroneous. Carty, supra.
In 2014, the Texas Supreme Court decided the case of Carty. Jimmy Carty died in a training accident while employed by the Texas Department of Public Safety. He was survived by his wife, Christy, and their three minor children. Carty’s wife, individually, as representative of Jimmy’s estate, and as next friend of the children, filed a third-party action in federal court against Ringside, Inc. and Kim Pacific Martial Arts. The suit asserted product liability claims and claims under the Texas wrongful death and survival statutes. The Cartys settled with Ringside for $100,000, agreeing to pay the state’s workers’ compensation carrier (State Office of Risk Management or “SORM”) $20,000 from the settlement proceeds in partial satisfaction of SORM’s reimbursement claim for benefits paid. The Cartys then settled with Kim Pacific Martial Arts for $800,000 and SORM intervened into the action to assert its right to reimbursement from those funds. Following a hearing at which Christy testified that she intended to give her portion to her children (a common tactic used to avoid workers’ compensation liens in death cases), the federal district court approved the settlement and apportioned it among the parties. The court determined that SORM’s subrogation claim for past benefits was $153,306.62, representing funeral and medical benefits, weekly death benefits to the wife and the children, and a lump sum payment to the wife for the remaining death benefits owed following her remarriage. After reducing the gross amount by SORM’s portion of the Ringside settlement and its share of the attorney’s fees and expenses, the trial court calculated SORM’s net reimbursement as $78,295.55. The remainder of the settlement was apportioned, $290,316.87 for attorney’s fees and expenses, (Amicus Texas Mutual Insurance Company argued that the district court erred in calculating the attorney’s fee on the gross settlement amount before deducting SORM’s lien, but because the parties didn’t brief this issue and it was well beyond the scope of the certified questions, the Supreme Court did not address it), $351,278.91 to Christy (individually and as representative of Jimmy’s estate), and $80,108.67 to the children.
The federal district court also determined that the recovery that SORM was entitled to treat as an advance against future benefits owed to the children equaled their share of the settlement. In other words, as soon as the amount of suspended benefits equaled $80,108.67, SORM was required to resume payment to the children. The court made the apportionment between Christy and the children based on the relative ratio of benefits they had already received. SORM challenged the apportionment on appeal.
The 5th Circuit disagreed with the district court’s apportioning the settlement funds among Christy and the children “in the same ratio as they received death benefits,” noting that this method was required by prior versions of the governing statute, but “was eliminated in the 1989 Act and is nowhere to be found in the current version of the Workers’ Compensation Act.” Carty v. State Office of Risk Mgmt., 733 F.3d 550 (5th Cir. 2013) (citing Act of Dec. 13, 1989, 71st Leg., 2d C.S., ch. 1, § 4.05(f) [amended 1993], and Tex. § 417.002). It declined to elaborate on how the district court should have apportioned the settlement, concluding that “the current Texas statute does not clarify how a net recovery in excess of the amount of benefits paid by the workers’ compensation carrier should be apportioned among beneficiaries when multiple beneficiaries recover from a third-party tortfeasor.” Accordingly, the 5th Circuit certified to the Texas Supreme Court. This certification to the Supreme Court became necessary because, although § 417.002 specifically requires a “carrier whose interest is not actively represented by an attorney in a third-party action” to pay a fee to the claimant’s attorney in the agreed-upon amount, or, absent an agreement, to pay “a reasonable fee for recovery of the insurance carrier’s interest that may not exceed one-third of the insurance carrier’s recovery,” plus “a proportionate share of expenses,” it does not explicitly contemplate the situation in which multiple beneficiaries obtain a recovery against a third-party tortfeasor and Texas case law has not clarified how § 417.002(b)-(c) operates in a multiple-beneficiary situation. Tex. Lab. Code § 417.003(a).
The Texas Supreme Court responded to the following certified question from the 5th Circuit: How should a workers’ compensation carrier’s right under § 417.002 to treat a recovery as an advance of future benefits be calculated in a case involving multiple beneficiaries? Should the carrier’s right be determined on a beneficiary-by-beneficiary basis or on a collective-recovery basis? The Court responded by clarifying that, where there are multiple beneficiaries, the carrier recovers its past lien off the top. The net amount recovered by “a claimant” should be used to reimburse the carrier for past benefits paid. The carrier’s future credit, however, is addressed in subsection (b) which subsection (b) allows the carrier to treat any excess recovery as an advance against future benefits that “the claimant” is entitled to receive. Therefore, because the carrier is entitled to the “first money” received from a tortfeasor, a carrier’s right to treat a third-party recovery as an advance against future benefits in a case involving multiple beneficiaries of the same covered employee should be determined on a collective-recovery basis.
Death cases present potential complications and obstacles for a subrogated workers’ compensation carrier in Texas. A carrier is not subrogated to a recovery by a non-beneficiary such as any amount legitimately allocated as loss of consortium to a spouse or widow. Insurance Co. of North Am. v. Wright, 886 S.W.2d 337 (Tex. Civ. App. – Houston, 1994, writ denied). However, a carrier that has paid benefits to a legal beneficiary of an employee has a subrogation right in the legal beneficiary’s claims against third parties. Tex. Lab. Code § 417.001-.002 (2006). The Workers’ Compensation Act defines “legal beneficiary” as a person who is entitled to receive a death benefit under the Act. Tex. Lab. Code § 401.011(29). When a workers’ compensation beneficiary settles a claim against a tortfeasor, the compensation carrier has a right of reimbursement from the first monies paid by the tortfeasor. Texas Mut. Ins. Co. v. Ledbetter, 251 S.W.3d 31 (Tex. 2008). The carrier has subrogation rights over that portion of an award or settlement in a third-party action which represents the interest of the workers’ compensation beneficiary. Elliott v. Hollingshead, 327 S.W.3d 824 (Tex. App. – Eastland, 2010, no pet.). The trial court may not enter a judgment that arbitrarily compromises the carrier’s right to subrogation by structuring the award so that a non-beneficiary recovers, but a beneficiary does not. U.S. Fire Ins. Co. v. Hernandez, 918 S.W.2d 576 (Tex. Civ. App. – Corpus Christi, 1996). When the allocation of a settlement impacts a carrier’s right of reimbursement, the trial court must allocate the proceeds based upon the relative merits and worth of the claims involved. Id. Trial courts cannot apportion settlement proceeds in a manner that circumvents the carrier’s right of subrogation. Texas Workers’ Comp. Ins. Fund v. Travis, 912 S.W.2d 895 (Tex. Civ. App. – Fort Worth, 1995, no writ). And now, thanks to the new Texas Supreme Court decision in Carty, a workers’ compensation carrier’s right under § 417.002 to treat a third-party recovery as an advance against future benefits in a case involving multiple beneficiaries should be determined on a collective-recovery basis. Carty, supra.
If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at [email protected].