McKnight v. Work Environment Associates, 596 S.E.2d 573 (Va. Ct. App. June 1, 2004)

A workers’ compensation insurance carrier maintains its right to offset future benefits with an injured worker’s third-party settlement even where the carrier had agreed, in reaching such settlement, to compromise its lien for benefits already paid, according to this recent decision from the Virginia Court of Appeals. In reaching this conclusion, the court reiterated the long-standing purposes behind workers’ compensation subrogation in Virginia: to reimburse the employer for expenses incurred as a result of negligence of a third party, and to prevent an injured worker from obtaining a double recovery of funds already paid him by his employer.

In McKnight, a worker suffered injuries when he fell through the roof of a building while on the job. The injured worker filed suit against a third-party tortfeasor, and settled that action for $36,000. At the time of the settlement, the injured worker’s employer had paid approximately $100,000 in workers’ compensation medical and indemnity benefits. Prior to the settlement, the injured worker’s employer agreed to reduce its pending $100,000 lien to only $12,000, and consented to the settlement with the tortfeasor for $36,000. The issue of future benefits was not discussed when the settlement discussions were undertaken and the present lien was compromised.

After the settlement was resolved, the injured worker requested that his settlement papers with the employer reflect that any future workers’ compensation benefits would not be affected by the third-party settlement. The employer refused to honor this request, arguing that it was due an offset on any future entitlements to workers’ compensation benefits due to the injured worker’s third-party recovery. The injured worker disagreed, contending that the employer had completely compromised its lien (including any future lien) in the third-party settlement, and had essentially waived any offset against future benefits.

On appeal from a ruling of the Workers’ Compensation Commission, the Virginia Court of Appeals concluded that Section 65.2-313 of the Virginia Code presumes that an employer is entitled to recover its lien and claim an offset for future workers’ compensation benefits. It affirmed that if any third-party recovery is less than the past payment of workers’ compensation benefits, then the entire recovery must be used to pay the employer’s lien, in which case there would be no recovery for the injured worker.

In this case, the court was not persuaded by the injured worker’s argument that there should be no offset because the third-party recovery was less than the past payment of benefits, though it was supported by certain precedents wherein a third-party settlement was less than the past payment of benefits. The court distinguished those cases by noting that in this case the injured worker actually made a recovery after the employer compromised its lien.

The court acknowledged that the Virginia Code does not specifically address the situation where the workers’ compensation insurance carrier agrees to reduce its lien pursuant to a settlement reached between the parties. However, in examining the public policy behind workers’ compensation subrogation, the court concluded that in this situation the carrier should be permitted to recover its negotiated lien and claim an offset of future benefits. Otherwise, the injured worker would unfairly acquire two remedies for a single injury – one in tort against the third party for a partial recovery, and the other under the Workers’ Compensation Act for the full amount.

PRACTICE TIP:

WAIVING FUTURE CREDITS WHEN COMPROMISING PRESENT LIEN.
In a footnote to the opinion in this case, the court noted that it was not asked to determine whether the employer had specifically waived its right to an offset as part of the negotiated settlement agreement. The Court of Appeals was suggesting that the parties in the case should have expressly addressed future credits when settling the third party matter, so as to avoid the uncertainty leading to the litigation. Accordingly, when negotiating the compromise of any workers’ compensation lien, the issue of future credits should always be incorporated into the discussion and agreement, so that later on an injured worker is forestalled from making such an argument. Though things played out in favor of the carrier in this case, another court might be more receptive to the injured worker’s argument.