Suburban Delivery v. W.C.A.B. (Fitzgerald), 2003 WL 23784081 (Pa. Commw., Sept. 17, 2004)

In a recent Pennsylvania matter, a sharply divided appellate court panel reversed its prior decisions relating to how a workers’ compensation carrier may calculate the value of an annuity obtained by an injured worker in a third-party action for the purpose of determining the carrier’s proportionate share of attorney’s fees and costs. This treatment of structured settlements has ramifications on both reimbursements for benefits paid to date, as well as the rate of reimbursement for future credits.

In the underlying Suburban Delivery case, the injured worker settled his third party tort action for an up-front cash payment of $807,777 plus an annuity, which had a purchase price (or present value) of $627,223. The annuity called for guaranteed monthly payments of $3,000 over thirty (30) years, as well as periodic lump sum payments. The sole question in the case was how to value the structured portion of the third-party settlement for the purpose of calculating the workers’ compensation carrier’s proportionate share of attorney’s fees and costs, and its rate of reimbursement for future credits.

The injured worker’s position was that the proper value of the settlement should be the up-front payment plus the costs of the annuity at the time of the settlement, or a total amount of $1,435,000. The workers’ compensation carrier took the position that the proper way to value the annuity was not to consider the cost of the structure at the time of settlement, but instead to add all of the payments to be made during the guaranteed period of the annuity. This was the method found to be appropriate in the most recent Commonwealth Court cases on this issue. If the court accepted the carrier’s argument, the total value of the third-party settlement would be viewed as $2,137,777. Because the attorney’s fees and costs charged in the case totaled $486,194.48, the net difference at issue in this case was whether the carrier’s proportionate share of attorney’s fees and costs was 23% or 34% for the purpose of determining both its net lien on compensation already paid, and for the purpose of establishing its rate of reimbursement for future payments.

The Workers’ Compensation Appeal Board ruled in favor of the injured worker, despite the fact that in several recent Commonwealth Court decisions it was established that the value of the structure should be the total payments to be made during the guaranteed period of the structure, not its cost at the time of settlement. On appeal, this full panel of seven Commonwealth Court Judges was divided four to three on the issue, in favor of the injured worker’s position.

The effect of this decision is to change the current law in Pennsylvania on the issue of structured settlements. Injured workers can now use the purchase cost of the structured settlement as its value for the purpose of calculating the overall value of the third-party settlement.

PRACTICE TIPS:

1. The court, in undue deference to prior opinions, distinguished the facts of this case from the earlier decisions. In turn, this opinion may allow for a carrier to continue to use the more favorable valuation method (adding up the payment to be made during the guaranteed period) in cases where the carrier does not receive any money from the lump sum portion of the settlement, and in cases where the injured worker has tried to conceal the terms of the settlement from the carrier. These were the circumstances in the prior cases where the aggregate payment method was employed.

2. In any case where a carrier needs to determine its proportionate share of attorney’s fees and costs, it is important to obtain and review the injured worker’s third-party attorney’s fee agreement; an itemized printout of all costs incurred during litigation; and a statement from such attorney in writing as to whether or not the third-party settlement includes a structured element.

3. On a related note, please keep in mind that when calculating the rate of reimbursement for future credits in Pennsylvania, instruction number 4 in Part I of the instructions provided on the reverse side of the official Pennsylvania Third-Party Settlement Agreement form is currently incorrect. This instruction relates to how to calculate the rate of reimbursement of expenses of recovery. The Workers’ Compensation Bureau is aware of the error, but has not yet updated the form.