Workers’ Compensation Liens Affect Settlement

People who are harmed by products often receive their injuries while at work. As in many other states, New Jersey workers typically may not sue their employers by filing a civil tort action (so-called “employer immunity”) but rather may pursue recovery for their injuries via the workers’ compensation system (the claimant’s “exclusive remedy”). However, these injured workers may file a separate tort suit against third parties such as a product manufacturer.

While the civil action against the manufacturer is separate, it is nonetheless affected by the workers’ compensation action. Monies paid by an employer or its workers’ compensation insurer must be repaid by the injured worker if he later recovers money from the manufacturer (known as the third party tortfeasor). New Jersey’s workers’ compensation law is specifically designed to prevent double recovery by the plaintiff and therefore grants subrogation rights to the employer/workers’ compensation insurer to recoup its payouts.

While attorneys for plaintiffs are directly concerned with the lien held by the employer/insurer, counsel for defendants need also be cognizant of the size of the lien as it may interfere with the plaintiff’s ability or willingness to settle the civil law suit.

This situation is more easily described in an example. Plaintiff machine operator in the course and scope of employment gets her hand caught in machinery. Parts of four fingers are involved. She needs four surgeries but eventually returns to work at similar duties after one year.

During that year, her employer’s workers’ compensation insurer pays medical bills totaling $50,000 and another $20,000 in disability benefits to partially compensate the worker for lost wages. The insurer is obviously interested in recouping its $70,000, not to mention the money it will surely have to pay in the near future for permanent disability benefits (assume another $30,000 for $100,000).

The only way the insurer has a hope of recovering all or part of the $100,000 is if the injured worker pursues a civil lawsuit against some third party tortfeasor such as the manufacturer of the machine on which she was injured. In fact, if the plaintiff herself does not pursue this option within one year, New Jersey law allows the employer/insurer to step into her shoes and pursue a subrogation claim in her name. If the plaintiff does file a lawsuit against the manufacturer, the employer/insurer places a $100,000 gross lien on any amount the plaintiff may recover as a result of her suit against the manufacturer.

The lien is not problematic if the case against the third party manufacturer yields a significant verdict or settlement. To simplify, let’s assume no expenses. If Plaintiff’s case resolves for $300,000, her attorney would receive about $100,000 in fees, leaving $200,000 to satisfy Plaintiff and her employer/insurer. The employer/insurer will grant offsets for its lien in recognition of plaintiff’s attorney’s fees and costs. The employer/insurer will receive repayment of $66,666. Plaintiff will recover the remainder, $133,333.

Designed to prevent double recovery by plaintiffs, the subrogation statute serves as a disincentive for plaintiffs to pursue third party claims unless the potential recovery is much higher than the employer/insurer’s lien. Using the same example of a $100,000 lien, a $100,000 offer of settlement by the manufacturer gives Plaintiff little incentive to resolve the matter before trial. Plaintiff’s obligation to repay the employer/insurer will eat up her entire portion of the award. For a plaintiff’s attorney optimistic at the start of the case, who only learns later that his case has problems, the workers’ compensation lien becomes a major stumbling block to settlement. Plaintiff has no incentive since the lien has to be paid first. Trial is more likely than settlement, even if both attorneys would rather settle the claim, but for the workers’ compensation lien.

Given a sizable lien, counsel for either the plaintiff or the manufacturer may approach the lienholder and explain that if the lien is not voluntarily reduced, the manufacturer may win and neither the plaintiff nor employer/insurer would receive any money. Knowing that some money is better than no money, and recognizing that the plaintiff needs to have at least some additional money in her pocket in order to have some incentive to forego taking her chances at trial, the insurer may agree to reduce its lien. One common formula is the “three way split” where the plaintiff, plaintiff’s attorney, and the employer/insurer each receive one third of the settlement from the manufacturer.

While these machinations come at the end of a case, counsel must be keenly aware of the size of the workers’ compensation lien throughout the litigation. The lien may influence prospects for resolution throughout the case.

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