During most of the 20th Century, Texas boasted a workers’ compensation subrogation scheme which was in the top five most favorable for carriers. That all began to change when the state began a series of legislative changes and issued a number of case decisions began to erode the rights of a subrogation workers’ compensation carrier. Tort reform in the form of House Bill 4 passed the Texas Legislature in 2003 and, for the first time, negligence of the employer (who is strictly liable for unlimited amounts of medical and indemnity benefits even when it is entirely blameless for causing an employee’s injuries or death) could be considered in order to reduce the employer’s subrogation interests. Section 33.004 of the Texas Civil Practice & Remedies Code was amended to allow a defendant to “designate” an employer as a responsible third party, which will allow the jury to take into consideration the negligence of the employer or a co-employee in allocating negligence percentages with regard to a work-related injury. The statute had previously excepted employers from the term “responsible third party” in workers’ compensation third-party settings. At the same time, § 417.001 was amended to allow the third-party defendant to join the employer as a “responsible third party” in the suit brought by the carrier and by then reducing the judgment based on the percentage of responsibility found to be attributable to the employer. Its lien is reduced by the amount by which the court reduces the judgment due to the employer’s negligence.
Employer Negligence / “Employer Responsibility Offset”
Since 2003, §33.004 of the Texas Civil Practice & Remedies Code allows a defendant to “designate” an employer as a responsible third party, which will allow the trier of fact to take into consideration the negligence of the employer or a co-employee in allocating negligence percentages with regard to a work-related accident or injury. [1] This section of the Texas Civil Practice & Remedies Code, which dealt with designation of responsible parties and proportionate responsibility, previously had a section which excepted employers from the term “responsible third party” in workers’ compensation third-party settings. That exception was taken out of the statute in 2003.
Although there is a growing body of case law available to interpret the statute, it appears that Texas has now officially joined the minority of states requiring a reduction of the workers’ compensation carrier’s lien by an amount attributable to the percentage of fault found on the employer or co-employee—also known as the “employer responsibility offset” or “ERO.”
In addition to the amendment to § 33.004, the actual workers’ compensation subrogation statute was also amended. Section 417.001 of the Labor Code deals with situations in which the carrier files suit on its own against a third party (without the employee). Section 417.001(b) was amended, and the following was added:
The insurance carrier’s subrogation interest is limited to the amount of the total benefits paid or assumed by the carrier to the employee or the legal beneficiary, less the amount by which the court reduces the judgment based on the percentage of responsibility determined by the trier of fact under Section 33.003, Civil Practice and Remedies Code, 417.001 attributable to the employer. [2]
These amendments alter the rights of workers’ compensation carriers in third-party suits which they bring directly against third-party tortfeasors. Under § 417.001 of the Texas Labor Code, the workers’ compensation insurance carrier is entitled to bring an action directly against third parties to recover any benefits that the carrier paid out to the injured worker. These new amendments alter this subrogation right, by allowing the third-party defendant to join the employer as a “responsible third party” in the suit brought by the carrier and by then reducing the judgment based on the percentage of responsibility found to be attributable to the employer. Furthermore, if the judgment is reduced because of the employer’s fault, the workers’ compensation insurance carrier is not allowed to recoup those sums from the money it previously paid to the worker. In other words, its lien is reduced by the amount by which the court reduces the judgment due to the employer’s negligence. Subsequent decisions make clear that the insurer’s subrogation interest is to be reduced by “the amount by which the court reduces the judgment based on the percentage of responsibility determined by the trier of fact … attributable to the employer.” In considering whether this reduction is calculated “pro rata or by dollar amount,” reasoned as follows:
The statute refers to a reduction in an “amount” based on a “percentage.” Further, the word “amount” is used twice in that sentence; in the first instance, “amount” clearly refers to a dollar amount of “total benefits paid.” We generally interpret words the same way in a given text, meaning that the most natural reading of “the amount by which the court reduces the judgment” is a dollar amount as well. Had the Legislature intended to limit the carrier’s subrogation interest proportionally, it could have written the statute differently. But as written… Section 417.001(b)’s reduction provision applies in dollars and not as a percentage. [3]
Although there is little case law to aid us in interpreting this new statutory scheme, the above interpretation seems to be the most likely. [4] It should be remembered also that this statutory provision for contribution by an employer does not affect an employer’s immunity from liability as a result of the Exclusive Remedy Rule. The employer still cannot be sued as a third party.
One argument is that the reduction of the carrier’s lien, described above, should only be applicable in situations in which § 417.001 applies – suits brought by carriers. In all third-party actions brought by injured workers, § 417.002 applies. Section 417.002 does not provide for reduction of the judgment OR the carrier’s lien as a result of employer negligence. Unfortunately, a pair of Court of Appeal decisions, discussed below, all but eliminated the ability of the carrier to take this position. [5] In New Hampshire Ins. Co. v. Rodriguez, a third-party action went to trial and the jury apportioned 61% of negligence on the employer, allowing the lien to be reduced.
In Morales v. Michelin N. Am., Inc., another lower appellate court stated the opposite, holding that the carrier’s lien should not be reduced for employer negligence when the case settles prior to trial. [6] This draws the arbitrary distinction which leads to disparate results depending on whether a case settles or is tried, providing incentive to try cases instead of settling them.
Since the 2003 employer reduction provisions were added, there has been only a few appellate decisions reviewing a judgment where the carrier’s recovery was reduced for employer negligence. [7] The argument is that in order for the lien reduction provision to apply:
- The employer must have been found responsible by the trier of fact;
- The court must have reduced the judgment based upon this percentage of responsibility; and
- The reduction must be based on Chapter 33 of the Civil Practice and Remedies Code.
But what about when there is a settlement and no trial? Texas courts have said that any determination of an employer’s percentage of responsibility by a court or jury after settlement of a third-party action is “advisory” and thus impermissible. [8]
On January 11, 2019, the Texas Court of Appeals issued an opinion which announced for the first time that a workers’ compensation lien can be reduced and even eliminated by the percentage an employer’s fault bears to the total recovery or judgment in a case—even when the third-party suit or claim is brought by the employee, the carrier is simply seeking reimbursement under §417.001(b), and the judgment is not reduced due to employer fault. [9] In New Hampshire Ins. Co. v. Rodriguez, the workers compensation carrier filed a subrogation suit against and the employee later filed a separate lawsuit. The suit was consolidated with the subrogation suit and the carrier later non-suited its suit. At trial, Rodriguez faced three parties: (1) Intervenor New Hampshire Insurance Company, (2) R.M. Personnel, and (3) SWI. The jury found $20.5 million in damages and apportioned 61% of the fault to the employer. Rodriguez recovered $6,166,222.72 and the trial court ordered that New Hampshire receive no reimbursement due to the employer’s negligence, but did grant it a future credit for $4,066,648.67 which it said could only be applied after New Hampshire Insurance paid Rodriguez $11,542,588.75 in total benefits. Everyone appealed.
On appeal, the Court of Appeals made several significant rulings:
- New Hampshire’s reimbursement claim was offset (i.e., lien reduced) by the 61% fault found on the employer, even though the trial court never “reduced” the judgment based on this fault. New Hampshire’s “lien” and reimbursement rights were reduced by the dollar amount the jury attributed to the employer’s negligence – 61% of the $20.5 million, or $12,505,000.
- New Hampshire’s reimbursement rights were offset by employer negligence even though the third-party suit was brought by the employee under § 417.001(a) and New Hampshire was merely asserting a lien and a right of reimbursement rather than filing suit and subrogating under § 417.001(b).
- The reduction for employer negligence is calculated proportionately rather than by dollar amount. [10]
- The future credit was applied incorrectly by the trial court. New Hampshire was entitled to an immediate future credit for $4,066,649.97 – the “net recovery” by Rodriguez after the $6,166,222.72 award was reduced by fees and costs.
Old Republic Ins. Co. v. Morris (2024)
(Application of Employer Responsibility Offset to Pre-Trial Settlements)
On September 30, 2024, we were given another Court of Appeals decision parsing the application of the “employer responsibility offset” in workers’ compensation third-party cases. [11] The main issue on appeal was whether or not the reduction of a subrogation lien under § 417.001(b) due to employer negligence (dubbed the “employer responsibility offset” or “ERO”) applied to pre-trial settlement amounts recovered by the employee. The court acknowledged that no statutory authority directly addresses the interaction or simultaneous application of § 417.001(b) of the Labor Code and Section 33.012(b) of the Civil Practice and Remedies Code. Nor was there any case law addressing the “employer responsibility offset” in a situation involving multiple substantial pretrial settlements as well as a subsequent jury verdict. Therefore, the issue in Morris was of first impression. The court ruled that the employer responsibility offset triggered by the jury verdict against the sole remaining defendant should not apply to pre-trial settlements.
The facts were that several employees of Georgia Pacific were injured in an explosion, with one employee dying. Old Republic Insurance Company (ORIC) was the worker’s compensation carrier, and it paid total benefits of over $3 million. The employees settled with multiple defendants, but went to trial against Global Asset Protection (GPS) only. The jury found damages of $18,460,279, awarded as follows:
- $13,349,176 Jimmy Williams,
- $2,500,000 to Debra Morris,
- $2,424,785 to the estate of Kenneth Morris,
- $87,149 to Roy McCullough,
- $79,169 to Orlando Ordaz
Responsibility was apportioned as follows, with the employer found to be 65% at fault:
- Georgia Pacific (employer): 65%
- Aircon: 20%
- MidSouth: 10%
- GAPS: 5% (sole defendant at trial)
- Employees: 0%
The Court of Appeals explained that where one defendant goes to trial after the employee settles with multiple other defendants, following the trier of fact’s rendition of a verdict awarding damages to the employee, the court must:
- reduce the claimant’s damages recovery “by the sum of the dollar amounts of all settlements,” and
- limit the claimant’s damages recovery from a particular defendant to “the percentage of the damages found by the trier of fact equal to that defendant’s percentage of responsibility” for the claimant’s injuries. [12]
It explained that where only a single defendant remains, these provisions operate independently of one another—Section 33.012 reduces the employee’s recovery by his comparative fault and any pre-trial settlements, while Section 33.013(a) limits a defendant’s joint and several liability if 50% at fault or less, and the employee will recover the lesser of these two amounts. [13] The carrier’s subrogation interest is limited to the amount of the total benefits paid or assumed by the carrier to the employee, less the amount by which the court reduces the judgment based on the percentage of responsibility determined by the trier of fact under Section 33.003, attributable to the employer.
The court further reminded us that the “primary purpose” of §§ 417.001 and 417.002 of the Labor Code is “ensuring carriers are fully reimbursed in order to decrease costs to the carrier (and, in turn, the public).” [14] “First money reimbursement” is further “crucial to the workers’ compensation system” because it “prevents double recovery by workers.” [15] Allowing the “employer responsibility offset” to apply to pre-trial settlements would enable precisely such a double recovery, allowing employees to attempt an end-run around the first-money rule and § 417.002(a) by settling with the majority of third-party defendants, trying the case with only one remaining defendant to obtain a verdict and apportionment of responsibility, and then retroactively applying that apportionment to all of the settlement funds received from third parties (upon whom the verdict and fault findings otherwise have no effect). While such an interpretation would produce a favorable outcome for employees, the court in Morris stated that this is not an outcome they could endorse. Otherwise, employees could retain (1) all of the workers’ compensation benefits paid by ORIC; (2) all of the settlement funds paid by Aircon, Mid-South, Grecon, and the Georgia-Pacific parties; and (3) any amount remaining of the damages awarded in the jury’s verdict after applying §§ 33.012(b) and 33.013(a), while the carrier receives no reimbursement at all. The court said that “the Legislature cannot reasonably be thought to have intended such a result.” [16]
The court went on to explain that there still must be some employer responsibility offset in cases like Morris involving pre-trial settlements. For example, in the case of employee Jimmy Williams, because GAPS was found 5% at fault, the most GAPS could have been responsible for was $667,458.80 ($13,349,176 x 5%). In addition, the jury award must be reduced by the amount of all settlements. Because of that reduction, no matter how the jury apportioned responsibility Jimmy Williams could never have recovered more than $701,426.00, which represents the amount of the jury’s $13,349,176 award less the dollar amount of the settlements they received from entities other than GAPS. Therefore, the difference between the amount Mr. and Mrs. Williams actually received and the maximum they could have received presuming a jury finding apportioning less or no responsibility to Georgia-Pacific is $33,967.20. The court held that this was the greatest possible amount that the jury’s apportionment of responsibility to Georgia-Pacific could have cost Mr. and Mrs. Williams, and the court also concluded that this is the correct amount of the employee responsibility offset by which ORIC’s subrogation interest should be reduced—at least as to Jimmy Williams’ workers’ compensation lien. The decision then did similar computations for the other plaintiffs. Because the amount of the settlement received by the other plaintiffs exceeded their award against GAPS, the employer responsibility offset (ERO) did not apply to reduce the carrier’s subrogation interest as to benefits paid to the other employees. The court further concluded that the trial court erred in ruling that the other employees were entitled to any judgment offset against past or future workers’ compensation benefits paid to them. It is a confusing, but very significant decision.
[1] Tex. Civ. Prac. & Rem. Code § 33.002 (2003) (applicable to lawsuits filed on or after July 1, 2003).
[2] Tex. Labor Code § 417.001(a).
[3] New Hampshire Ins. Co. v. Rodriguez, 569 S.W.3d 275 (Tex. App. 2019).
[4] Hanks, Contribution and Indemnity after HB 4, 67 Tex. B.J. 936 (2004).
[5] New Hampshire Ins. Co. v. Rodriguez, 569 S.W.3d 275 (Tex. App. 2019); Old Republic Ins. Co. v. Morris, 2024 WL 4350334 (Tex. App. 2024).
[6] Morales v. Michelin N. Am., Inc., 351 S.W.3d 120 (Tex. App. 2011).
[7] Rodriguez, supra.
[8] Morales, supra.
[9] New Hampshire Ins. Co. v. Rodriguez, 569 S.W.3d 275 (Tex. App. 2019).
[10] The reasoning of the court was that the statute refers to a reduction in an “amount” based on a “percentage.” Further, the word “amount” is used twice in that sentence; in the first instance, “amount” clearly refers to a dollar amount of “total benefits paid.” We generally interpret words the same way in a given text, meaning that the most natural reading of “the amount by which the court reduces the judgment” is a dollar amount as well. Had the Legislature intended to limit the carrier’s subrogation interest proportionally, it could have written the statute differently. But as written, they felt that § 417.001(b)’s employer responsibility offset provision applies in dollars and not as a percentage.
[11] Old Republic Ins. Co. v. Morris, 2024 WL 4350334 (Tex. App. 2024).
[12] Tex. Civ. Prac. & Rem. Code §§ 33.012(b), 33.013(a).
[13] Roberts v. Williamson, 111 S.W.3d 113 (Tex. 2003) (“Although related, the two sections pose separate inquiries. Section 33.012 controls the claimant’s total recovery, while section 33.013 governs the defendant’s separate liability.”).
[14] Carty v. State Office of Risk Mgmt., 756 F.3d 436 (5th Cir. 2014).
[15] Texas Mutual Ins. Co. v. Ledbetter, 251 S.W.3d 31 (Tex. 2008).
[16] Morris, supra.
