Written by Attorneys John M. Popilock and Patrick C. Timoney

In June 2003, the Virginia Supreme Court dramatically altered workers’ compensation subrogation in Virginia in the landmark decision Yellow Freight v. Courtaulds, 580 S.E. 2d 812 (Va. 2003). In Yellow Freight, the court held that in order for a workers’ compensation insurance carrier to perfect its right of subrogation, the carrier must either intervene in the third party action filed by the injured worker, or initiate its own third party action. Otherwise, according to the court, there was nothing in Virginia law preventing the injured worker from settling around the workers’ compensation carrier’s interest.

The Court’s decision in Yellow Freight was a significant departure from how workers’ compensation subrogation was traditionally handled in Virginia. Historically, the carrier would put the injured worker and his attorney on notice of its subrogation interest, and then be included in any recovery or settlement with a third party tortfeasor. Yellow Freight essentially cut the carrier out of the loop by holding that the carrier had no right to recovery until it either filed a third party action, or intervened in the injured workers’ third party action. This holding allowed the injured worker to settle with a third party tortfeasor without consideration of the workers’ compensation carrier’s interests. In the wake of Yellow Freight, carriers scrambled to intervene in countless third party actions filed by injured workers, and also file their own third party actions for other workers’ compensation losses in Virginia.

In response to the unfair and burdensome result of Yellow Freight, the Virginia Senate sought to revise the sections of the Virginia Code addressing workers’ compensation subrogation. After months of political wrangling, Senate Bill 558 was approved by the Governor of Virginia on April 15, 2004, and becomes effective July 1, 2004. This law amends section 65.2-309 of the Virginia Code and creates a lien (rather than a mere subrogation interest) on behalf of an employer against any injured worker’s verdict or settlement against a third party.

Senate Bill 558 also amends section 65.2-311 of the Virginia Code to separate to some extent the injured worker’s expenses and attorney fees from that of the employer or its carrier. The law now provides that if an employer institutes its own action against a third party to recover its lien, the employer is not required to pay any share of the expenses or attorney’s fees associated with the lien portion of the total claim.

The full text of the legislation, and links to the statutory provisions, can be viewed at: (http://leg1.state.va.us/cgi-bin/legp504.exe?041+ful+CHAP0941).

PRACTICE TIPS:

1. The changes to section 65.2-309, et seq., do not become effective until July 1, 2004, so insurers are encouraged to continue intervening and filing third party actions to protect their workers’ compensation subrogation interests until that time.

2. It is also unclear at this point what connection the July 1, 2004, effective date of the statute has to the substance of the law (for example, whether it will apply to losses after July 1, 2004; or claims asserted after July 1, 2004; or verdicts and settlements after July 1, 2004, etc.). Until this is clarified, interventions and third party actions should continue as noted above.

3. Senate Bill 558 does not provide any guidance on whether the proposed changes to the Virginia Code will be retroactive to accidents occurring before its effective date. As a general rule of thumb, when a statute is silent concerning retroactivity, the statute will typically apply only prospectively. In this situation, given the Virginia Supreme Court’s decision in Yellow Freight, it is highly unlikely that the Court would retroactively apply the new law for the benefit of a workers’ compensation insurer.

4. After July 1, 2004, workers’ compensation insurers have an added incentive to independently pursue third party actions. With the changes to the Virginia Code, insurers will no longer have to pay any share of the reasonable attorney’s fees and expenses to an injured worker’s lawyer when the insurer institutes a separate action against a third party to recover its lien. This is similar to the statutory scheme of Virginia’s neighbors, Maryland and the District of Columbia. Of course, carriers and employers should always weigh these benefits against the risks of not presenting a unified front or in exposing the carrier as an involved party.