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Wickert: Which Workers' Compensation 'Benefits' Can Be Subrogated?

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It’s the question every claims professional and trial attorney claims to know, but few fully understand.

Gary Wickert

Gary Wickert

In addition to paying for medical expenses, death benefits, funeral costs and/or indemnity benefits for lost wages resulting from a compensable injury, workers’ compensation insurance carriers also expend considerable dollars for case management costs, medical bill audit fees, independent medical exam (IME) fees, expert fees, rehabilitation benefits, third-party vendor costs, nurse case management fees, workers’ compensation case attorneys’ fees and the like. They pay significant attorney’s fees on permanency awards and incur other expenses in conjunction with the handling and adjusting of workers’ compensation claims.

Which of these benefits are recoverable in workers’ compensation subrogation remains a point of considerable confusion and contention, and an article that discusses the nuances of this issue can be viewed here.

Subrogation professionals, lawyers, judges, and administrative judges are all equally confused on the law in this area, and very little clear guidance one way or the other can be found.

This issue has been decided in only a handful of jurisdictions. Judges like things that fit neatly into legal categories and clearly established rules. Where such things are not available, the best argument usually wins. We must be the ones to establish it.

The first place to look is the underlying workers’ compensation subrogation statute and its wording. While rarely determinative of the issue, it can frequently provide hand- and footholds that can enable us to craft persuasive legal and public policy arguments as to why costs other than medical expenses and indemnity benefits should be reimbursable under a state’s workers’ compensation subrogation law.

Take, for example, Texas’ statute (VTCA Labor Code § 417.002), which reads as follows:

… the net amount recovered by a claimant in a third-party action shall be used to reimburse the carrier for benefits, including medical benefits that have been paid for the compensable injury.

The question becomes whether such things as case management costs and medical bill audit fees are considered benefits or medical benefits that have been paid “for the compensable injury.” Each state should be evaluated and argued differently because each state’s statute is different.

Another interesting and cogent argument is an analogy to the right to a future credit. When a recovery by an employee is made, the carrier is given a credit toward future “benefit” payments. A close look at this law reveals that “medical-legal” costs should be costs against which a carrier can press a credit, implying that they constitute “compensation” under California law and should be recoverable by a workers’ compensation carrier (Adams v. WCAB, 18 Cal.3d 226 (1976)).

Arguments in each state in which there is no clearly established rule on this issue should be fashioned from the only tools available: statutory language and common sense. In North Carolina, for example, the workers’ compensation statute provides for reimbursement to the carrier of “all benefits by way of compensation or medical compensation expense paid or to be paid” (NCGSA § 97-10.2).

Further legal archaeology reveals the definition of compensation as follows:

The term "compensation" means the money allowance payable to an employee or to his dependents as provided for in this Article, and includes funeral benefits provided therein” (NCGSA § 97-2).

North Carolina case law reveals no further clarification on exactly what “medical compensation expenses” refer to, but the door seems open wide enough to include some of the case management costs referenced above, yet not quite wide enough to include interest (Buckner v. City of Asheville, 438 S.E.2d 467 (N.C. App. 1994)).

A few states have decided the issue, and not always in the subrogation industry’s favor. For example, Illinois has totally ignored the cost savings to the claimant of such case management fees and expenditures. It has declared such items unrecoverable because such medical rehabilitative services provided by the claim coordinator at the insurance company’s direction were presumably provided for the benefit of the carrier and were not reimbursable necessary medical or rehabilitative services (Cole v. Byrd, 656 N.E.2d 1068 (Ill. 1995)).

The particular expense at issue was the medical rehabilitation coordinator services of a licensed professional nurse provided by Professional Rehabilitation Management (PRM).

Allocated vs. unallocated fees, costs and expenses

Fees and costs for services such as nurse case management, medical bill audits, vocational rehabilitation, utilization reviews, independent medical reviews and nurse caseworkers are generally referred to as allocated loss adjustment expenses (ALAE). ALAE are attributed to the handling of a specific workers’ compensation claim, as opposed to unallocated loss adjustment expenses, which constitute general overhead of an insurance company, such as claims adjuster salaries and benefits.

ALAE, along with unallocated loss adjustment expenses (ULAE), represent a carrier’s estimate of the money it will pay out in claims and expenses. Some commercial liability policies contain endorsements, which require the policyholder to reimburse its insurance company for loss adjustment expenses (ALAE or ULAE).

The terms “nurse case management” and “utilization review” are often inappropriately conflated. “Nurse case management” is the coordination and organization of medical care in order to expedite the employee’s return to work. It is usually the responsibility of the nurse case manager.

“Utilization review,” on the other hand, is the review of actual medical services being provided to the employee to determine if it is a medical necessity and appropriate for the injury. The utilization review is conducted by a nurse who has a utilization review physician available for medical opinions and guidance.

Recovery of case attorneys’ fees

In addition to the allocated fee and costs, workers’ compensation carriers also pay significant amounts in attorneys’ fees to lawyers representing injured employees when a workers’ compensation disability claim is settled or compromised. Such fees are sometimes paid out of the employee’s settlement and other times awarded independently and paid by the carrier apart from the settlement.

Whether such attorneys’ fees can and should be reimbursed to the carrier as part of its workers’ compensation subrogation lien when a third-party case is settled is equally as confusing and unclear in most states.

The fee paid to an attorney for representing an injured employee in a workers’ compensation claim varies by state and is usually governed by state laws or regulations. In most states, the attorney represents the employee on a contingent basis. While not technically “compensation,” such fees are often paid directly out of the disability benefits paid to the employee and in such cases should be considered part of the carrier’s subrogation lien.

In New York, for example, a workers’ compensation judge is responsible for establishing the fee to be awarded to the employee’s attorney. This fee is deducted from the benefits awarded to the injured employee (Workers’ Compensation Law (WCL) § 24, and Title 12 NYCRR 300.17).

In Texas, an employee’s attorney is paid fees by the carrier out of the income benefits received by the employee. This means out of the benefits the employee received in a settlement or an award after a contested case hearing, not including the value of medical benefits or any undisputed benefits paid without the lawyer’s help.

The attorney fees must be approved by the Division of Workers’ Compensation and are determined by the attorney’s time and expenses. Once the division approves the attorney’s fees, the insurance carrier is ordered to deduct the fee amount from the employee’s benefits, up to 25% of the recovery amount (Tex. Labor Code § 408.221(b), 28 Tex. Admin. Code § 152.5 (2019)).

When attempting to recover for costs or expenses beyond the basic indemnity and medical benefit payments, a subrogation professional’s first strategy should be to look at the law of the particular state involved, determine exactly what the subrogation statute allows the carrier to recover, and craft an argument accordingly.

For example, if it allows for recovery of “benefits” or “compensation” paid, then the definitions of those terms in other areas of the workers’ compensation law should be determined, and an argument fashioned that those definitions include case management type fees and expenses.

If that proves to be a dead end, a logical argument should be made that by discouraging the spending of such amounts, the subrogation lien will actually increase and the recovery of the injured worker will decrease. Such expenditures actually assist in holding down the cost of workers’ compensation insurance premiums, and every incentive to hold down liens and reduce fraud will make workers’ compensation systems more cost-effective and affordable for businesses.

As a last resort, simply include these reasonable costs in the lien totals provided to plaintiffs’ lawyers, putting the burden on them to affirmatively challenge such expenses. A court may be asked to decide, and voilà: We have precedent, good or bad.

Where the recovery of such costs is not proscribed, it is reasonable to expect reimbursement of expenses and costs that fall within the definition of the amount recoverable under the applicable workers’ compensation subrogation statute or that actually benefit the employee by keeping the benefits total to its absolute minimum.

If the totals are not questioned, there is no foul. If they are, remember the words of Mark Twain: “Whatever you say, say it with conviction.”

For a chart that provides definitions, explanations and arguments that can be used when the issue of which “benefits” can be subrogated has not been established, click here.

Gary Wickert is a partner with the Matthiesen, Wickert & Lehrer law firm in Hartford, Wisconsin. This blog post is reprinted with permission.

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