On Oct. 13, California Gov. Gavin Newsom signed Senate Bill 487 into law, and it takes effect Jan. 1.

Katherine A. Sandoval

The new law makes sweeping changes to California’s workers’ compensation subrogation framework in cases involving peace officers and firefighters. SB 487 limits an employer’s or insurer’s right to reimbursement, lien recovery and subrogation to no more than one-third of a third-party defendant’s liability insurance limits in certain circumstances, and prohibits any future credit or offset against continuing workers’ compensation benefits.

While the bill was promoted as a measure to help first responders retain a greater share of their civil recoveries, its passage marks a significant curtailment of traditional subrogation rights and will have far-reaching implications for public entity risk management, underwriting and municipal workers’ compensation costs throughout California, beginning in 2026.

The governor has assisted trial lawyers at the expense of California taxpayers. And if this anti-subrogation/anti-insurance measure can become law in California, the elimination of all workers’ compensation subrogation can’t be far behind. After all, every injured employee is a victim.

California Senate Bill 487, now enacted as Chapter 763 of the 2025 statutes, dramatically reshapes the long-standing balance among injured public safety workers, their employers and workers’ compensation carriers. Marketed as a measure to “help” peace officers and firefighters keep more of their civil recovery, SB 487 amends six sections of the Labor Code — §§ 3852, 3858, 3859, 3860, 3861 and 3862 — and limits the subrogation, reimbursement and lien rights of employers and insurers in third-party cases. The measure was heavily favored by trial lawyers around the state, a major constituency of Newsom.

At first glance, the bill seems fair — patriotic even. Injured police officers and firefighters will retain a greater share of any third-party tort recovery when injured on the job. Nobody is more pro-law enforcement and first responder than the employees of MWL. In practice, however, it should be recognized that this legislation dismantles a century-old cost-control mechanism, exposing towns, cities and counties to increased loss costs, undermining underwriting assumptions and pushing the inevitable burden onto taxpayers. The hidden tax underpinning this new legislation is very real and yet was not even discussed in the hurriedly passed bill.

From shared recovery to statutory cap

Before SB 487, California’s Labor Code allowed an employer or insurer paying workers’ compensation to pursue subrogation or reimbursement against a negligent third party. The carrier could recover compensation payments, medical expenses, wage continuation and related costs. Settlements required consent from the employer and employee, and the Workers’ Compensation Appeals Board could grant the employer a credit in the amount of the employee’s net third-party recovery, offsetting future benefits and holding down future workers’ compensation premiums.

SB 487 rewrites that framework when peace officers and firefighters employed by a city, county, city and county, or fire protection district are involved. Under the new subdivision (b) of Section 3852, when such an employee is injured by a third party, the employer or insurer is now statutorily limited to no more than one-third of the third-party defendant’s liability insurance policy limits. The restriction applies only if the employee proves that his total damages exceed the net recovery available after satisfaction of the employer’s claim and that the available insurance limits are insufficient to make both employer and employee whole.

This one-third ceiling is deemed the employer’s “exclusive” share and is “subordinate” to the employee’s allocation. Sections 3858 and 3860 now prohibit the employer from using any portion of the employee’s civil recovery as a credit or offset against future workers’ compensation obligations. The future credit function of the statutes is one of the biggest cost-containment measures holding down workers’ compensation premiums. Section 3859 now also removes the long-standing requirement that an employer must consent to a settlement when first responder cases are involved. Sections 3861 and 3862 extend the same limitation to credits, liens and future benefit calculations. The combined effect is to strip the employer and its carrier of traditional subrogation leverage, relegate them to a fixed minority share and eliminate their right to apply that share toward ongoing benefit exposure.

Third-party litigation and claims management

The statute’s language effectively elevates the injured employee’s position in third-party litigation. Where once settlements had to consider both the employee’s tort recovery and the employer’s lien, now peace officers and firefighters may settle directly with a tortfeasor without the employer’s consent. Their settlement must simply specify that the employer’s reimbursement will not exceed one-third of policy limits.

It should be noted that if policy limits are not an issue — meaning the third party’s available insurance coverage is sufficient to fully compensate both the employee and the employer — then the new one-third cap and subordination provisions of SB 487 do not apply. SB 487’s limitation appears in the new subdivision (b) of Labor Code § 3852, which restricts the employer’s reimbursement to “no more than one-third of the third-party defendant’s applicable liability insurance policy limits” only if both of the following are true:

• The employee establishes that her total damages exceed the net recovery after satisfaction of the employer’s claim.
• The total liability insurance limits available are insufficient to fully compensate both the employer and the employee’s proven damages.

If those two conditions are not met, the case remains governed by subdivision (a) of § 3852, and the traditional Labor Code §§ 3852-3862 framework continues to apply. Under that law, the employer or its insurer retains a first lien against the employee’s third-party recovery for all compensation, medical and related payments made, subject only to statutory deductions for attorney’s fees and costs under § 3856. In other words:

• When limits are insufficient, the carrier’s recovery is capped at one-third and subordinated.
• When limits are sufficient, the carrier still has its full lien and first priority against the employee’s third-party recovery, exactly as before SB 487.

So, the new statute doesn’t eliminate traditional subrogation in all cases — only in those where low policy limits and large damages make the employee’s civil recovery inadequate. In standard or well-insured tort cases, the carrier’s full lien and right of reimbursement remain intact.

This change alters the negotiation dynamic among claimants, defense counsel and subrogated carriers. Subrogation counsel representing municipalities or insurers will find themselves negotiating from a position of diminished standing. Where policy limits are an issue, plaintiffs’ attorneys for peace officers and firefighters can now bypass employer approval, structure settlements to favor the employee and restrict carrier recovery to the statutory maximum. However, if policy limits are not an issue — meaning the third party’s liability coverage is sufficient to make both the employee and employer whole — then the carrier’s consent is still required for settlement under California Labor Code § 3859(a)(1).

In practice, the bill will encourage smaller settlements structured around policy limits and disincentivize insurers from pursuing third-party litigation for reimbursement. With recovery capped in these instances, the cost-benefit equation for subrogation becomes unfavorable, especially for modest indemnity claims that now carry limited recovery potential.

Underwriting professionals, carriers and third-party administrators managing municipal workers’ compensation programs must also adapt to new accounting realities. Because credits against future medical or indemnity benefits are now prohibited, carriers will be required to continue paying all future benefits even after the employee’s civil settlement. This double-payment exposure undermines the original rationale for subrogation — the “great trade-off” that sought to prevent double recovery while ensuring fairness between worker and employer. It should be noted here, too, that future credits are not prohibited in all cases involving peace officers or firefighters; they are prohibited only if the case falls under subdivision (b) of Section 3852, when third-party liability limits are insufficient to fully compensate both the employee and the employer.

Another bright spot in this new legislation appears to be that if the injured peace officer or firefighter voluntarily settles for less than full case value (for example, 50% of provable damages), but the third-party liability limits are not insufficient — meaning there is enough coverage available to fully compensate both the employee and the employer — then SB 487’s special limitations do not apply, and the case remains governed by the traditional Labor Code §§ 3852-3862 framework.

Underwriting and public finance

The consequences of SB 487 reach far beyond the courtroom. Subrogation recoveries are integral to underwriting assumptions and experience rating for self-insured municipalities and public entity risk pools. When recoveries disappear, the pure premium component of the rate must rise to cover the unreimbursed loss cost. For self-insured cities and counties, this translates into higher annual assessments, depleted reserves and pressure on general funds.

For private carriers underwriting public entity risk, the elimination of subrogation potential affects actuarial projections and expected loss ratios. Subrogation offsets often represent several percentage points of premium adequacy in workers’ compensation pricing. With those recoveries curtailed in an entire class of public safety claims, carriers will either withdraw from the market or increase premiums to reflect the diminished recovery expectation. Either way, taxpayers pay the difference.

Ironically, though the bill purports to “support” first responders, it imposes a hidden tax on the very communities that employ them. Cities already struggling with pension obligations and unfunded medical liabilities will see additional strain as workers’ compensation costs climb. Smaller fire protection districts, many of which operate on narrow budgets, may face renewed pressure to consolidate or cut personnel.

What the Legislature missed

The legislative digest for SB 487 describes the bill as a fairness measure, ensuring that injured peace officers and firefighters retain more of their recovery. What it fails to acknowledge is that subrogation is not simply about insurers recouping payments; it is about accountability, deterrence and economic efficiency.

Subrogation enforces the principle that the party who caused the injury bears the financial burden. It prevents windfalls to negligent third parties, encourages safer practices and holds down the system-wide cost of providing statutory benefits. When subrogation is curtailed, losses are socialized: Taxpayers, rather than wrongdoers, fund the cost of injury.

California’s workers’ compensation system has always been a delicate equilibrium of competing interests, a social compact between labor and management. SB 487 disrupts that balance, not by modernizing it, but by selectively rewriting the rules for one class of workers. The bill’s moral appeal to support public safety workers obscures its economic reality: Every unrecovered dollar will eventually surface in higher premiums, higher payroll assessments or reduced public services.

The unintended consequences of 'reform'

Subrogation professionals, claims handlers and public-sector risk managers must now operate under a fundamentally different legal landscape in California. SB 487 ensures that first responders will keep more of their third-party settlements, but at a cost borne collectively by every Californian.

In the long run, SB 487 may erode incentives to investigate third-party liability, discourage insurers from writing municipal risk, and increase the cost of doing business for local governments. It represents another well-intentioned but economically shortsighted policy that sacrifices system integrity for political optics. One can be pro-law enforcement and pro-first responder without dismantling the mechanisms that keep workers’ compensation affordable.

Unfortunately, California’s newest “reform” blurs that line, and the bill for it will arrive soon: Paid not by insurers, but by taxpayers.

Katherine Sandoval is a partner at Matthiesen, Wickert & Lehrer S.C. and is in charge of the firm’s Irvine, California, branch office. This blog post is reprinted with permission.