A new Texas Court of Appeals decision has clarified the process by which a workers’ compensation carrier can settle directly with a third-party tortfeasor and thereby avoid having to reduce its lien by a pro rata share of the employee’s attorneys’ fees. Meanwhile, the process of “selling your lien” has never been less complicated and more attractive to the liability carrier for the tortfeasor. and still get a “credit” against Workers’ compensation subrogation in Texas is controlled by Chapter 417 of the Texas Labor Code.[1] Chapter 417 governs third-party litigation and the subrogation/reimbursement rights of employers and the workers’ compensation carrier. Section 417.001 gives a subrogation interest or a direct right of recovery to the workers’ compensation carrier, providing the carrier with the authority to file suit against the tortfeasor independent of the employee.
Carrier Files Suit First
There are many advantages if aggressive subrogation counsel can file suit for the subrogated workers’ compensation carrier before the employee can hire an attorney and file suit. If the carrier prosecutes the third-party action, its recovery is governed by § 417.001. It is allowed to reimburse itself out of the recovery, including costs and attorney’s fees, and any reminder if paid to the injured employee.[2] Where the carrier files the third-party action it is authorized to seek all damages which the employee would have been entitled to recover if he had pursued the case himself. Texas law maintains that there is but one cause of action for an employee’s injuries, and it belongs to the employee.[3] If the employee claims compensation benefits, the carrier is subrogated to the employee’s rights against a third party who caused the injuries. The carrier can assert its subrogation claim independently of the employee, but that claim is still derivative of the employee’s claim. The carrier can recover damages greater than the benefits it has paid but must remit the difference to the employee. A carrier who asserts a subrogation claim asserts a claim that belongs to the employee, irrespective of whether the carrier sues in its own name or the employee’s name, or whether the carrier seeks recovery of all damages owed by the third party or disclaims recovery of damages exceeding the benefits it has paid or is obligated to pay.[4] After limitations has run, a carrier that originally limited its demand to benefits paid could amend its pleadings to demand full recovery of all damages owed.[5] An employee can intervene in the subrogation action filed by the carrier, even after limitations has run, to claim full recovery from the third party.[6] The employee’s intervention relates back to the filing of the subrogation claim, just as the carrier’s amendment to its pleadings to seek damages on the employee’s behalf would relate back to the original filing.
When the employee brings the third-party action and the employer merely intervenes or asserts a lien, the subrogation recovery is governed by § 417.002. In that instance, the “net amount” recovered by a worker is first used to reimburse the insurance carrier for all past benefits paid and any amount recovered that exceeds this reimbursement is paid to the worker.[7] Specifically, § 417.002 provides in part as follows:
(a) The net amount recovered by a claimant in a third-party action shall be used to reimburse the insurance carrier for 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.
(c) If the advance under Subsection (b) is adequate to cover all future benefits, the insurance carrier is not required to resume the payment of benefits. If the advance is insufficient, the insurance carrier shall resume the payment of benefits when the advance is exhausted.[8]
In Texas, the carrier is said to have a “first money” right of recovery from the tortfeasor. This “first money” right has been summarized as follows:
- Any net third-party recovery up to the amount of past benefits goes to the carrier;
- Any recovery great than past benefits, but less than all future benefits goes to the beneficiary, but releases the carrier from future payments to that extent; and
- Any recovery greater than past or future benefits combined goes to the beneficiary.[9]
In Texas, it is also possible for a workers’ compensation carrier to settle directly with a third-party tortfeasor, even though the injured employee has not settled. Usually this involves settling for some figure less than the total workers’ compensation lien of the carrier, and in exchange, assigning the workers’ compensation carrier’s subrogation interest to the third-party tortfeasor. Under such circumstances, the third party would then be able to claim a “credit” against any judgment or settlement effected by the injured worker in the amount of the original workers’ compensation lien which was assigned to the third-party tortfeasor.[10] The attractive thing about such a settlement is that the third party is credited with a full credit for the workers’ compensation lien regardless of the amount they pay in settlement with the workers’ compensation carrier.[11]
If a carrier sells its workers’ compensation lien to the third-party carrier and assigns its full lien and subrogation rights to them, cases have held that the carrier no longer owes the employee’s attorney any attorneys’ fees under Chapter 417 of the Labor Code.[12] In the new Texas Court of Appeals decision in Sentry v. Bravin, Sentry sold and assigned its subrogation cause of action and worker’s compensation lien to Germania for $ 25,000. Plaintiff’s counsel became aware of the assignment through an email from third-party carrier Germania’s counsel. In the email, Germania withdrew its prior offer to settle Bravin’s claim for $30,700 and made a new offer of $ 5,700. Sentry advised MAS of the sale and assignment on February 5, 2019. The employee filed suit against Sentry (workers’ compensation carrier), arguing that they were entitled to a pro rata share of attorneys’ fees. The court gave us confirmation that will help make it enticing for third party carriers to buy liens and take assignments. It held that because Sentry sold and assigned its worker’s compensation lien to Germania, the third-party carrier, if the employee prevailed at trial and recovered $ 42,303.56 or more, Germania could recoup the lien from the judgment, reducing any amount Germania owed to Bravin within its own policy limits. If Lankford prevailed at trial, Germania would not recoup anything on the $ 42,303.56 subrogation interest that it purchased from Sentry for $ 25,000. In other words, under such an assignment, the tortfeasor takes a risk that it could lose the entire subrogation interest it purchased from the workers’ compensation carrier, if the plaintiff prevailed at trial.
The question in Sentry v. Bravin was whether proceeds from Sentry’s sale and assignment of its subrogation cause of action and lien was a “recovery of the insurance carrier’s interest” for purposes of determining attorney’s fees under labor code § 417.003(a). The trial court concluded that because Sentry did not actively participate in the Bravin Lawsuit, “the plain language of Section 417.003(a) is in favor of [Bravin/MAS’s] rights to attorneys’ fees.” The trial court reasoned that Sentry’s lien and subrogation claims were “strictly derivative to [Bravin’s] causes of action against the Lankfords and Germania,” and noted, “ ‘there is but one cause of action against the third-party tortfeasor—that of [Plaintiffs], who own it—burdened by the right of [Sentry] to recoup for itself compensation paid,’ ” quoting Guillot v. Hix, 838 S.W.2d 230, 232 (Tex. 1992)(argued by Matthiesen, Wickert & Lehrer, S.C.). The trial court concluded that Sentry did not “actively participate” in the Bravin Lawsuit, and accordingly, § 417.003(a) required Sentry to pay Bravin/MAS “a reasonable fee for recovery of the insurance carrier’s interest,” not to “exceed one-third of the insurance carrier’s recovery,” plus “a proportionate share of expenses.”
On appeal, the Court of Appeals reversed, reminding us that the legislature only intended to compensate employees who perform work for the benefit of a subrogated insurance carrier and to prohibit the worker’s compensation carrier from obtaining a ‘free ride’ from the efforts of the claimant’s attorney. Where subrogation counsel initiates and consummates a sale of the workers’ compensation lien and assigns the third party tortfeasor the carrier’s lien, the carrier will not owe the employee any attorneys’ fees under the Labor Code—at least under facts similar to those in the Bravin case.
Matthiesen, Wickert & Lehrer, S.C. aggressively pursues recovery of workers’ compensation subrogation liens, both initiating third-party settlements and, where appropriate, selling those liens and assigning them to the third parties who caused the injuries in the first place.
For more information on successful workers’ compensation subrogation in Texas and in all 50 states, contact Lee Wickert at leewickert@mwl-law.com.
[1] V.T.C.A. Labor Code § 417.001, et seq. (1996).
[2] Traders & General Ins. Co. v. West Texas Utilities Co., 165 S.W.2d 713 (Tex. Comm. App. 1942, op’n adopted); Fort Worth Lloyds v. Haygood, 246 S.W.2d 865 (Tex. 1952); Pan Am. Ins. Co. v. Hi-Plains Haulers, Inc., 350 S.W.2d 644 (Tex. 1961); Capitol Aggregates, Inc. v. Great Am. Ins. Co., 408 S.W.2d 922 (Tex. 1966).
[3] Guillot v. Hix, 838 S.W.2d 230 (Tex. 1992).
[4] Franks v. Sematech, et al., 936 S.W.2d 959 (Tex. 1997).
[5] Id.; Tex. Civ. Prac. & Rem. Code § 16.068.
[6] Franks, supra.
[7] V.T.C.A. Labor Code § 417.002 (1993).
[8] Id.
[9] State Office of Risk Mgmt. v. Carty, 436 S.W.3d 298 (Tex. 2014).
[10] Erivas v. State Farm Mut. Auto Ins. Co., 141 S.W.3d 671 (Tex. App. – El Paso, 2004); Brandon v. Am. Sterilizer Co., 880 S.W.2d 488 (Tex. App. – Austin, 1994); Foster v. Langston, 170 S.W.2d 250 (Tex. Civ. App. – San Antonio, 1943); Hartnett v. Hampton Inns, Inc., 870 S.W.2d 162 (Tex. App. – San Antonio, 1993); Simon v. Chevron U.S.A., Inc., 795 S.W.2d 340 (Tex. App. – Beaumont, 1990), rev’d on other grounds, 813 S.W.2d 491 (Tex. 1991); Snydgrass v. Am. Surety Co., 156 S.W.2d 1004 (Tex. Civ. App. – Austin, 1941); Caesar v. Bohacek, 176 S.W.3d 282 (Tex. App. – Houston [1st Dist.] 2004).
[11] Brandon, supra.
[12] Sentry Casualty Company v. Bravin, 2024 WL 3083299 (Tex. App. 2024).