On January 11, 2019, the Texas Court of Appeals issued an opinion which will have a profound effect on workers’ compensation subrogation in Texas. In New Hampshire Insurance Company v. Rodriguez, 2019 WL 168482 (Tex. App. 2019), the court 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 and the carrier is simply seeking reimbursement under § 417.001(b). This reduction could potentially apply even though the judgment is not reduced due to employer fault. The decision is even more dangerous for an unsuspecting carrier because it says that the carrier may be collaterally estopped by a Workers’ Compensation Division ruling on compensability, long before the third-party liability issues arise. Not only does this ruling run contrary to the clear language of the statutes, it opens the door for plaintiff’s attorneys in Texas to argue that your “lien” can now be eliminated based on employer negligence. Until now, alleged employer negligence hasn’t been a factor in negotiating workers’ compensation liens in the Lone Star State.
On September 1, 2007, Rodriguez was a general laborer assigned by temporary employment agency R.M. Personnel, Inc. to work on the Florence Street Project in El Paso, Texas, under the supervision of Perspectiva, the project architect and general contractor. Perspectiva sub-contracted drywall to Sunsets West, Inc. (SWI). SWI left a hole in a deck over the elevator shaft and a Perspectiva supervisor placed plastic over the opening to keep rain out. Rodriguez fell through the opening and down 30 feet, suffering catastrophic and permanent injuries.
R.M. Personnel’s workers’ compensation carrier was Liberty Mutual and Perspectiva’s workers’ compensation carrier was New Hampshire Insurance Company (AIG). Liberty Mutual began paying benefits, but a dispute between the two carriers arose over who was to pay benefits. The Texas Department of Insurance Workers’ Compensation Division determined that because Perspectiva controlled the details of Rodriguez’s work while he was at the job site, Perspectiva and not R.M. Personnel was Rodriguez’s employer under the Act. New Hampshire Insurance Company took over paying workers’ compensation benefits and its lien at the time of trial was approximately $2 million, along with a large exposure to future benefits due to the seriousness of the injuries sustained by Rodriguez.
Third-Party Lawsuit and Trial
On December 4, 2007, Liberty Mutual filed a subrogation suit against Perspectiva, and later added SWI. On September 16, 2009, Rodriguez filed a separate lawsuit against Perspectiva, R.M. Personnel, and SWI, and it was consolidated with the subrogation suit and Liberty Mutual later non-suited its suit. R.M. Personnel moved for Summary Judgment arguing it was immune because it was the “employer.” R.M. Personnel argued that both it and Perspectiva were Rodriguez’s “employer”, and since R.M. Personnel was a subscriber to workers’ compensation insurance, it, like Perspectiva, should be immune from suit. Rodriguez, SWI, and New Hampshire Insurance Company all filed responses to the Motion, arguing that R.M. Personnel was estopped from arguing exclusive remedy due to the Division’s order. The motion was denied.
At trial, Rodriguez faced three parties: (1) Intervenor New Hampshire Insurance Company, (2) R.M. Personnel, and (3) SWI. Jury found $20.5 million in damages and apportioned 61% of the fault to Perspectiva, the employer. Rodriguez recovered $6,166,222.72 and the trial court ordered that New Hampshire Insurance Company receive no reimbursement due to Perspectiva’s negligence but did grant it a future credit for $4,066,648.67. However, the trial court held the credit could only be applied after New Hampshire Insurance Company paid Rodriguez $11,542.588.75 in total benefits. New Hampshire Insurance Company, R.M. Personnel, and SWI appealed.
On appeal, the Court of Appeals made several significant rulings affecting Texas workers’ compensation subrogation which were matters of first impression:
- The order of the Division, which ordered New Hampshire Insurance Company to pay benefits and mistakenly believed there could be only one employer in employee leasing situations, was collateral estoppel to exclusive remedy protection for R.M. Personnel.
- New Hampshire’s reimbursement claim offset (e., eliminated) by the 61% fault found on the employer, Perspectiva, even though the trial court never “reduced” the judgment based on this fault. New Hampshire Insurance Company’s “lien” and reimbursement rights were reduced by the dollar amount the jury attributed to Perspectiva’s negligence – 61% of the $20.5 million, or $12,505,000.
- New Hampshire Insurance Company’s reimbursement rights were offset by employer negligence even though the third-party suit was brought by the employee under 417.002 and New Hampshire Insurance Company 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 was not 61% of the subrogation interest, as New Hampshire Insurance Company alternatively argued, but 100% of the subrogation interest.
- The future credit was applied wrong by the trial court. New Hampshire Insurance Company 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 The trial court erred in holding that New Hampshire Insurance Company had to wait until millions more in benefits were paid before claiming the credit.
- The Workers’ Compensation Division – in an administrative case involving R.M. Personnel’s insurance carrier (Liberty Mutual) and Perspectiva’s insurance carrier (New Hampshire Insurance Company) – determined that Perspectiva was Rodriguez’s employer and that R.M. Personnel was not Rodriguez’s employer. This was collateral estoppel and R.M. Personnel cannot assert the exclusive remedy defense.
The Court of Appeals announced that the § 417.001(b) subrogation reduction provision (due to employer negligence) applies not only in employer/carrier-initiated litigation (subrogation), but also when the carrier is merely asserting a lien (reimbursement) under § 417.002 – a separate statute that makes no reference to reduction of a lien based on employer fault. The decision by the Court of Appeals is a valiant effort that gets it wrong on several counts. The court ignores the plain language of two of the primary statutes in Texas which concern themselves with workers’ compensation subrogation.
It could be argued that § 417.001 establishes the carrier’s subrogation rights which allows it to file a third-party action and prosecute the liability of the tortfeasor on its own, and § 417.002 deals with reimbursement of the carrier’s lien when, as in this case, the third-party action is filed and pursued by the employee. However, the Texas Supreme Court did not recognize (or reject) such a distinction in the majority opinion of its latest foray into worker’s compensation subrogation contained in Wausau Underwriters Ins. Co. v. Wedel, 557 S.W.3d 554, 558-59 (Tex. 2018). The two subrogation statutes at play are:
§ 417.001. Third-Party Liability
(a) An employee or legal beneficiary may seek damages from a third party who is or becomes liable to pay damages for an injury or death that is compensable under this subtitle and may also pursue a claim for workers’ compensation benefits under this subtitle.
(b) If a benefit is claimed by an injured employee or a legal beneficiary of the employee, the insurance carrier is subrogated to the rights of the injured employee and may enforce the liability of the third party in the name of the injured employee or the legal beneficiary. 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, attributable to the employer. If the recovery is for an amount greater than the amount of the insurance carrier’s subrogation interest, the insurance carrier shall:
(1) reimburse itself and pay the costs from the amount recovered; and
(2) pay the remainder of the amount recovered to the injured employee or the legal beneficiary. [Emphasis added].
- § 417.002. Recovery in Third-Party Action
(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.
The question on appeal was one of first impression: Whether the 2003 statutory amendment reducing the carriers’ subrogation interest depending on the employer’s negligence (61%) changes “well-settled” law on the carrier’s reimbursement rights as well? New Hampshire Insurance Company argued that the statutory reduction under § 417.001(b) shouldn’t have applied because (1) this is a § 417.002 reimbursement claim where the employee sued, and (2) the judgment was not reduced by the trial court.
New Hampshire Insurance Company argued that the only time the employer’s negligence can reduce a judgment due to the “claimant’s” negligence is when a self-insured employer brings a third-party suit and is found contributorily negligent. The court disagreed, rationalizing that § 417.001(b) is “redirected” toward § 33.003, which deals with the jury’s assessment of proportionate responsibility of not only claimant/plaintiffs, but also among defendants, settling persons, and responsible third parties designated under § 33.004. The court also said this reduction provision is not limited solely to those situations in which the employer is a claimant; it applies whenever a jury passes on the question of the employer’s liability regardless of which role the employer is cast in a lawsuit, be it claimant, defendant, settling party, or as in this case, a responsible third party. The 2003 amendments meant that even though the subscribing employer remained immune from suit, the employer’s negligence could for the first time be placed at issue before a jury and thereby (1) proportionally reduce an employee’s recovery, and (2) allow other parties’ negligence to be viewed in context of all potential negligence at large. The court also held that the Legislature amended § 417.001(b) to include the subrogation limitation cross-referencing the newly-updated proportionate responsibility provisions at § 33.012(a), thereby framing the subrogation interest reduction in terms of the employer’s proportionate responsibility. In exchange for allowing immunized employers to be designated as responsible third parties, one commentator surmised that “legislators provided that the worker’s compensation carrier’s subrogated lien will be reduced in accordance with the percentage of fault attributed by the trier of fact to the employer.” The court ruled that the set-off applies whenever a jury passes on the percentage of employer fault.
The court also said that § 417.001 is not triggered only when a carrier files a third-party action. It says that “if a benefit is claimed by an injured employee” the carrier is subrogated to the rights of the injured employee and the two statutes are linked. Here the court misses the important distinction between subrogation and reimbursement and appears to incorrectly conflate the two. It incorrectly determines that § 417.001(b) “defines the scope of the carrier’s subrogation interest.” This is evident from the fact that § 417.001(b)(2) says that when there is a recovery (clearly, a recovery by the carrier), it must “pay the remainder of the amount recovered to the injured employee or the legal beneficiary.” The court magically “links” the two statutes with no basis for doing so other than it allows the decision to make sense. In the portion of its decision discussing the future credit, it suddenly begins referring to the carrier’s “subrogation/reimbursement” right. It pulls from waiver of subrogation cases (Wausau Underwriters Ins. Co. v. Wedel, 557 S.W.3d 554 (Tex. 2018)) in announcing that “an insurance carrier’s right of subrogation encompasses the right of reimbursement.” This was an easy conflation to make when determining the extent and effect of a waiver of subrogation endorsement, but has little place in the blending of two statutes which clearly have different purposes, intents, and conditions attached to them.
New Hampshire Insurance Company alternatively argued that even if the reduction provision applied, the statute requires the lien to be reduced only by the percentage attributable to Perspectiva’s negligence. In other words, because Perspectiva was found 61% negligent, New Hampshire Insurance Company’s potential recovery would be reduced 61% and it could only recover a 39% share of its lien. New Hampshire Insurance Company argued that under the reduction provision only that particular claimant’s judgment amount could be proportionately reduced, not the total judgment. In this case, New Hampshire Insurance Company’s portion of the judgment was approximately $2 million, and New Hampshire Insurance Company argued in the alternative that it should recover 39% of the $2 million paid. The court held that the statute requires a calculation of the amount of the reduction of the total judgment, i.e. the $20.5 million in damages sustained by Rodriguez – as opposed to a proportionate reduction – meaning that New Hampshire Insurance Company’s first money lien was reduced by $12,505,000.
Section 417.001(b) says that a carrier’s “subrogation” interest is to be “less the amount by which the court reduces the judgment based on the percentage of [employer negligence].” The court did not reduce the judgment based on employer fault and, therefore, the lien should not have been reduced. Instead, the trial court awarded the percentage amount for which SWI and R.M. Personnel were liable.
Importance of Decision
There is something beyond the significant issues described above that makes this case extremely noteworthy and potentially very dangerous for an unsuspecting insurance industry. It opens the door for plaintiff’s attorney to concoct theories of employer negligence in every case and threaten significant reduction or elimination of the lien if the carrier does not aggressively negotiate its lien. If the decision stands, Texas will join the ranks of other states whose laws allow the carrier’s lien to be reduced when the employer is at fault. As you might imagine; they will almost always be argued to be at fault.
The “collateral estoppel” aspect of the case is also troubling. Carriers subrogating in Texas must now think three chess moves ahead when making decisions regarding accepting coverage as the “employer” or not, especially in cases involving employee leasing and/or temporary employment services. Binding a defendant in a tort case based on the position taken during a workers’ compensation claim where the parties and interests aren’t all the same seems a little unfair. This is especially true with employer leasing companies/temporary employment services, etc. Insurance companies go to great lengths to say “Not it!” when it comes to being the “employer” in catastrophic losses, not realizing they are now “buying into” a potential eight-figure liability as a third party. In hindsight, and assuming there is a reimbursement right at the end of the day, Liberty Mutual and New Hampshire Insurance Company should have been doing the exact opposite at the Division – arguing that they were both the employer. This issue also drives home the high cost of not getting subrogation counsel involved from Day 1.
Appeal to Texas Supreme Court
It is anticipated that the case will be appealed to the Texas Supreme Court. MWL has been engaged by the National Association of Subrogation Professionals (NASP) to draft and file an amicus brief in support of New Hampshire Insurance Company. How this case ends up is anyone’s guess.
For questions regarding Texas workers’ compensation subrogation or subrogation in general, contact Gary Wickert at firstname.lastname@example.org.