Written by Attorney Patrick C. Timoney

Ex parte City of Brundidge, 2004 WL 1233967 (Ala. June 4, 2004)

Benefits paid by the Alabama Insurance Guaranty Association (AIGA) on behalf of a liquidated carrier’s insured to an injured worker had to be reimbursed to his workers’ compensation carrier with any surplus to act as a credit against future obligations according to the Alabama Supreme Court. The court permitted such treatment despite the wording in the underlying guaranty association statute that prohibited payments to subrogating insurance carriers on behalf of liquidated carriers’ insureds.

The City of Brundidge ("the City") and its workers' compensation carrier petitioned the trial court seeking reimbursement and credit for workers' compensation payments to an injured employee of the City in the same amount he recovered from a third-party tortfeasor. The tortfeasor was insured by Reliance Insurance Company, which had filed for protection under Chapter 11 of the Bankruptcy Code and is in liquidation.

As a result of such liquidation, AIGA assumed Reliance’s litigation liability obligations. Under Alabama’s Guaranty Association Act, AIGA’s total liability was capped at $150,000 per incident. The injured worker settled his claim with AIGA for $124,900. Subsequently, the City and its carrier petitioned the court to recover the funds received from AIGA pursuant to Alabama’s Workers’ Compensation Statute.

The injured worker argued that the settlement he obtained from AIGA was not subject to the City’s right of recovery under the workers’ compensation statute because the Guaranty Association Act specifically provides that a “covered claim … shall not include any amount due any … insurer … as subrogation recoveries or otherwise .…” Ala. Code §27-42-5(4).

The Alabama Supreme Court ruled that the Guaranty Association Act only protects AIGA from direct subrogation claims of other insurance carriers, and does not prevent an employer or carrier from seeking a recovery directly from the injured worker for monies received from AIGA pursuant to the workers’ compensation code. The court acknowledged that AIGA could have taken the position that, because of the amounts received by the worker from the workers compensation carrier, AIGA had no obligation to make any additional payments. However, the court found that once a payment was voluntarily made by AIGA to the injured worker, AIGA no longer had an interest in the funds paid, and the injured worker could not use the statutory protection afforded AIGA to protect the monies he received.

The sole issue in this case after such conclusion was reached was whether the funds paid were damages recovered from a third party. Since there was nothing in the workers’ compensation recovery statute that prevented the employer from claiming a credit against funds obtained from AIGA, the court held that the total net recovery obtained from AIGA was payable to the employer as reimbursement for workers’ compensation benefits paid, and/or would act as a future credit against further benefits owed.

PRACTICE TIPS:

1. Under similar circumstances, the practical approach for workers’ compensation carriers is to simply place the injured worker and his/her attorney on continuous notice of the compensation lien (so as to foreclose any later argument that the lien was waived), and seek notice of any payments. A direct claim against AIGA would not be beneficial, as the direct claim is barred, and may act to unnecessarily alert AIGA of the comp lien. In addition, it might provide incentives to limit settlement with the injured worker (as AIGA will know that the monies will be eventually going to the carrier).

2. In a related interpretation, Florida courts have held that even though a carrier cannot make a direct claim against its guaranty association, it may still be able to assert a lien against funds recovered by an injured worker from the guaranty association. See e.g. Sandrew Construction v. DeFourny, 515 S.2d 1351 (Fla.App., 1987). With this new case in a carrier’s arsenal, similar arguments should be attempted in other jurisdictions where the issue has not yet been raised.

3. Self-insured employers and state government-administered workers’ compensation funds should be aware that some courts have ruled that the guaranty association statutes in their states do not bar direct subrogation claims made by such entities. See Doucette v. Pomes, 724 A.2d 481 (Conn. 1999) (self-insured employer); Washington Insurance Guaranty Association v. The Department of Labor and Industries 859 P.2d 592 (Wash. 1993) (state-administered fund); Beyer’s Cement Inc. v. North Dakota Insurance Guaranty Association, 417 N.W.2d 370 (N.D. 1987) (state-administered fund).