In a recent case, decided on June 19, the Supreme Court of Pennsylvania granted appeal to clarify the scope of subrogation reimbursement under the Pennsylvania Workers Compensation Act (the “Act”).
By way of background, the Act makes an employer liable for paying disability benefits and medical expenses of an employee who sustains an injury in the course of his/her employment, regardless of whether the employer was negligent. Under Section 319 of the Act, however, employers are entitled to reimbursement for certain expenses where a third party caused the employee’s injury. Specifically, an employer (or its insurance carrier) has the absolute right to collect the workers’ compensation benefits it paid if the employee recovers from the third party who caused the injury. This is known as subrogation.
The Supreme Court in its recent decision addressed the scope of the reimbursement under Section 319 of the Act. Section 319 states, in pertinent part:
Where the compensable injury is caused in whole or in part by the act or omission of a third party, the employer shall be subrogated to the right the employe…against such third to party to the extent of the compensation payable under this article by the employer; reasonable attorney’s fees and other proper disbursements incurred in obtaining a recovery or in effecting a compromise settlement shall be prorated between the employer and employe…Any recovery against such third person in excess of the compensation theretofore paid by the employer shall be paid forthwith to the employe…and shall be treated as an advance payment by the employer on account of any future instalments of compensation.
The critical question the Court addressed was whether the term “future instalments of compensation” encompasses both future disability benefits and payment of future medical expenses. In other words, the Court addressed whether an employer can credit the excess third part recovery against both future disability and future medical payments.
The Commonwealth Court, our intermediate appellate court, concluded that the term “instalments of compensation” encompasses both disability and medical expenses. The Commonwealth Court reasoned that since the objective of subrogation is to protect the presumably innocent employer from ultimate liability, the credit should apply to both medical expenses and disability benefits.
In its June 19th ruling, the Supreme Court disagreed. The Court’s assessment of the issue was in some ways quite straightforward, but it requires an understanding of how an employer must pay disability and medical expenses. The long and short of it is that disability benefits are required to be paid in installments, while medical expenses are not. Accordingly, the Court found that the term “instalments of compensation” under Section 319 spoke for itself and meant “compensation that is paid in installments” which can only include disability benefits, not medical expenses.
In a nutshell, the Court found that when a workers’ compensation claimant recovers proceeds from a third-party settlement under Section 319, the employer (or the insurance carrier) is limited to drawing down against that recovery only to the extent that future disability benefits are payable to the claimant.
What does this mean in plain language?
If the third-party recovery exceeds the employer’s accrued subrogation lien (workers’ compensation payments made prior to resolution of the third-party claim), the employer can treat the excess recovery (which will be paid to the employee) as a credit against future workers’ compensation payments. However, the credit may only be taken against future disability (aka wage loss or indemnity) benefits. There may be no credit taken against future medical benefits.
For this reason, employers looking to settle with an employee who has sustained a serious work injury that was caused by the negligence of a third party should proceed with caution! This is especially true when only the wage loss portion of the claim is resolved in the settlement and the medical portion is left open (either indefinitely or for some set time in the future). When resolving a claim in this way, employers must remember that no excess recovery credit can be taken against future medical benefits. This new reality should be factored into the valuation of the case.
If you need any assistance with subrogation rights or have any questions regarding this Article, please feel free to reach out to any member of our Labor and Employment group for assistance.