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Texas has historically been a very favorable venue for workers’ compensation subrogation, but it has not been without its gray areas. In death cases, when an employee dies and surviving family members have received workers’ compensation benefits, a careful analysis is required in order to determine and protect the subrogation and future credit rights of a workers’ compensation carrier. Section 417.002(a) and (b) state:
(a) The net amount recovered by a claimant in a third-party action shall be used to reimburse the insurance carrier for [past] benefits, including medical benefits, that have been paid for the compensable injury.
(b) Any amount recovered that exceeds the amount of the reimbursement required under Subsection (a) shall be treated as an advance against future benefits, including medical benefits, that the claimant is entitled to receive under this subtitle.
The statute seems pretty straightforward—with subsection (a) dealing with the reimbursement of past benefits, and subsection (b) addressing the carrier’s right to a future credit. When an employee dies and death benefits are involved, however, the question of who is a “claimant” and how a third-party recovery is apportioned between a surviving spouse, minor children, adult children, and parents, becomes something of a subrogation Rubik’s Cube. A new Texas Court of Appeals decision sheds some light on the issue, but questions remain. In particular, should the carrier’s subrogation and future credit rights be determined on a beneficiary-by-beneficiary basis or on a collective-recovery basis?
Texas Wrongful Death/Survival Actions
Necessary to understanding the impact of this decision is an understanding of the types of lawsuits that can be brought in Texas when someone dies as a result of the negligence of a third party and what sort of workers’ compensation benefits can be recovered, and by whom.
Workers’ Compensation Death Benefits.
When an employee dies, death benefits equal to 75% of the employee’s average weekly wage (subject to minimum and maximum limits) are paid to surviving family members. A surviving spouse receives these benefits for the rest of his or her life. A surviving spouse who remarries will receive a lump sum payment of death benefits equal to two years (104 weeks) of the benefits. A child is eligible to receive death benefits until he or she reaches 18; or until age 25 if the child is enrolled as a full-time student. Grandchildren may be eligible to receive death benefits until age 18 if the grandchild was at least 20% dependent on the deceased employee at the time of the employee’s death, unless that the grandchild’s own parent is eligible for benefits. A person receiving death benefits is called a “beneficiary.”
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). Damages are paid directly to the estate of the deceased for distribution instead of directly to the surviving family members.
Wrongful Death Action.
A wrongful death action, however, is designed to compensate the deceased’s family members for their direct, personal losses and damages. These damages go directly to the family members and do not pass through the deceased’s estate. This type of action can be filed by the surviving spouse, children, and parents of the deceased person and damages include medical bills up to the date of death, funeral and burial expenses, and loss of the individual’s love, companionship, guidance, and financial support. The plaintiffs receive these damages directly. Tex. Civ. Prac. & Rem. Code Ann. § 71.004 (2008).
If the deceased employee has no legal beneficiaries as described above, the death benefits are to be paid to the Subsequent Injury Fund as set forth in Tex. Admin. Code § 132.10. As you can imagine, comparing who receives death benefits to who qualifies as a “claimant” under § 417.002 can be a bit confusing. Because the statute doesn’t define the term, a carrier’s reimbursement and future credit rights in death cases have been the subject of litigation.
Subrogation Rights in Death Cases
Beneficiaries and Non-Beneficiaries Involved.
A carrier has no right to recover 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 a recovery by both a non-beneficiary and a beneficiary must first be apportioned between each before the extent of the carrier’s rights under § 417.002 can be determined. A 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. As you can imagine, we routinely see creative trial lawyers attempt to gerrymander settlements so that non-beneficiaries receive the bulk of a third-party recovery, in order to limit subrogation rights out of the recovery. However, 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).
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 non-suit and dismissal purportedly meant it no longer involved a minor.
The Court of Appeals 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 non-suit 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.
In a win for subrogation, the Supreme 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 a case 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 multiple 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). Texas witnessed the sporadic application of 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). 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.
State Office of Risk Management v. Carty
On June 20, 2014, the Texas Supreme Court decided the case of State Office of Risk Management v. Carty, 2014 WL 2790810 (Tex. 2014). The Texas Supreme Court responded to three certified sent to it by the 5th Circuit Court of Appeals. 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 protect its right to reimbursement from those funds. Following a hearing at which Christy admitted that she intended to give her portion to her children (a common tactic used to avoid workers’ compensation liens in death cases but one that is no longer admitted to), 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, $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 “in the same ratio as they received death benefits.” SORM challenged the apportionment on appeal.
The 5th Circuit disagreed with the district court’s “ratio” apportionment, 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 the question to the Texas Supreme Court. This certification to the Supreme Court became necessary because § 417.002 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) and (c) operates in a multiple-beneficiary situation. No Texas case had yet applied the Frans apportionment rule to the new statute. Therefore, the 5th Circuit held that the notion that a trial court is bound by Frans’ settlement-apportionment methodology was erroneous. Carty, supra.
The Texas Supreme Court in Carty 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’s rights to a future credit as a result of a third-party settlement are determined by treating it as a single, collective-recovery rather than separate recoveries by each beneficiary. This is known as the “collective-recovery theory.”
Fort Bend County v. Norsworthy
In 2019, the Texas Court of Appeals addressed the right of a carrier to apply a future credit for death benefits owed to a spouse in a multiple-beneficiary situation who did not claim or receive a third-party recovery. Fort Bend County v. Norsworthy, 2019 WL 1291526 (Tex. App. [Houston-14th] 2019). John Norsworthy, working for Fort Bend County, died and a third-party suit was brought by his wife and two minor children, Jacob and Katlyn. Each were receiving their statutory proportionate share of the worker’s compensation death benefits. The County intervened and Jacob and Katlyn settled for $1.7 million ($849,000 each). They allocated only $2,000 to John’s estate and Katlyn claimed her recovery was for “bystander recovery.” The County’s lien was $442,959.32. The County settled with Jacob’s estate (recovering $145,057.58 after fees/costs were deducted from $221,219.20), leaving a lien of $221,740.12. Melissa and Katlyn resisted paying any part of the lien and the trial court dismissed the County’s subrogation claim against Melissa because she made no recovery. Because the carrier recovered part of its lien from Jacob, Melissa and Jacob argued that the one satisfaction rule prevented the County from any further recovery.
On appeal, the court held that Melissa made no recovery, so the County could not subrogate against her. The recovery by her children is not imputed against her. Id. The trial court correctly applied a “beneficiary-by-beneficiary” standard rather than a “collective-recovery” standard. Melissa made no individual recovery. Her son Jacob had filed a wrongful death suit on behalf of all beneficiaries. However, he did not name Melissa in the petition. No portion of her adult children’s settlement was allocated for Melissa’s individual benefit. As a result, the County received no future credit and was required to continue to pay her death benefits.
Under the Texas Wrongful Death Act, a wrongful death claim derives from the cause of action the decedent could have asserted for personal injuries had he lived. Russell v. Ingersoll–Rand Co., 841 S.W.2d 343 (Tex. 1992). All or anyone of the parties, to whom the right of action is given, may bring suit and where it is brought by only one [or some but not all] of the parties, it must appear that the suit was brought for the benefit of all. Tex. Civ. Prac. & Rem. Code § 71.004(b). Moreover, the suit may be brought for the benefit and use of those not actually prosecuting the claim without their knowledge or consent. Dennis v. Gulf, C. & S.F. Ry. Co., 224 S.W.2d 704 (Tex. 1949).
When multiple beneficiaries recover compensation benefits through the same covered employee, the carrier’s rights to a third-party settlement are determined by treating it as a single, collective-recovery rather than separate recoveries by each beneficiary.” Carty, supra. However, the dissent argued that the Court is bound by the dicta in Carty, seemingly conflating a workers’ compensation “claimant,” which Melissa was, with a Texas Labor Code § 417.002 “claimant in a third-party action,” which Melissa was not.
The court noted that a carrier’s right to a future credit based on recoveries by the various beneficiaries was also still in limbo. The right to a future credit addressed in § 417.002(b), which 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 instead of a “beneficiary-by-beneficiary” basis. However, because Melissa did not (to the court’s knowledge) receive any portion of the third-party recovery, the County was not allowed to take a future credit toward death benefits she was owed. The elephant in the room, here, is that it should be obvious that spurious third-party allocations such as this are obviously going to be made in order to defeat future credits and lien reimbursements. Back-door secret deals which funnel portions of a recovery to family members such as Melissa and Katlyn (who claimed to make only a “bystander recovery”) after the case is over will clearly be taking place under the radar. It may be that Melissa didn’t make a claim because the statute of limitations on her claim had expired by the time suit was filed. Perhaps the plaintiffs in Fort bend County v. Norsworthy didn’t attempt to “game” the system as they did in Carty, and Fort Bend County should have been on the ball and filed a subrogation suit within the two-year statute of limitations. However, in order to prevent future abuses, the court should have stuck to the first-money right of the carrier or urged the legislature to add back the language relied on in Performance Ins. Co. v. Frans, which protected the carrier against such shell games by reimbursing the carrier before any of the beneficiaries recover anything.
Death cases present potential complications and obstacles for a subrogated workers’ compensation carrier in Texas, and this once-favorable state for workers’ compensation subrogation now requires subrogation counsel for all but the smallest of liens. 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, things get confusing when there are multiple beneficiaries, some who are entitled to a third-party recovery and some who are not. Calculated allocations of third-party settlements in order to defeat a workers’ compensation lien should not be tolerated and should be fought at every turn. 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). The decisions in State Office of Risk Management v. Carty and Fort Bend County v. Norsworthy tell us that while subrogation reimbursement and future credit rights must be determined on a collective-recovery basis instead of a beneficiary-by-beneficiary basis, under the table agreements which affect lien reimbursement and future credits must be anticipated and challenged.
If you should have any questions regarding Texas subrogation, please contact Lee Wickert at [email protected].