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Credit in Third-Party Cases:
How to Coordinate the Civil and
WC Cases

Interview with James G. Butler, Esq.

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Marjory Harris interviews Jim Butler, a civil litigator who is also a certified specialist in workers’ compensation law
HARRIS: Jim, you are one of the rare attorneys who does civil litigation but also knows workers’ compensation, and who will protect the referring workers’ comp attorney and not wipe out the comp case with a huge credit. What does the comp attorney have to do when there is also a civil attorney in the picture?
Labor Code §3852 allows an employee to sue a third party, but Labor Code §3861 allows the employer a credit for any recovery from the third party

BUTLER: First let me say that a WC attorney has a duty to ascertain if there are third party cases. As Justice Brandeis observed a century ago:

“The duty of a lawyer today is not that of a solver of legal conundrums: he is indeed a counsellor at law. Knowledge of the law is of course essential to his efficiency, but the law bears to his profession a relation very similar to that which medicine does to that of the physicians. The apothecary can prepare the dose, the more intelligent one even knows the specific for most common diseases. It requires but a mediocre physician to administer the proper drug for the patient who correctly and fully describes his ailment. The great physicians are those who in addition to that knowledge of therapeutics which is open to all, know not merely the human body but the human mind and emotions, so as to make themselves the proper diagnosis – to know the truth which their patients fail to disclose… “ (Mason, Alpheus Thomas: Brandeis: A Free Man’s Life (1946) p. 80)

What was true in 1893 is certainly true today in the increasingly complex and technologically advanced society in which we live. In the context of personal injury consultations between lawyer and layperson, it is reasonably foreseeable the latter will offer a selective or incomplete recitation of the facts underlying the claim; request legal assistance by employing such everyday terms as "workers' compensation," "disability," and "unemployment"; and rely upon the consulting lawyer to describe the array of legal remedies available, alert the layperson to any apparent legal problems, and, if appropriate, indicate limitations on the retention of counsel and the need for other counsel. In the event the lawyer fails to so advise the layperson, it is also reasonably foreseeable the layperson will fail to ask relevant questions regarding the existence of other remedies and be deprived of relief through a combination of ignorance and lack or failure of understanding. And, if counsel elects to limit or prescribe his representation of the client, i.e., to a workers' compensation claim only without reference or regard to any third party or collateral claims which the client might pursue if adequately advised, then counsel must make such limitations in representation very clear to his client. Thus, a lawyer who signs an application for adjudication of a workers' compensation claim and a lawyer who accepts a referral to prosecute the claim owe the claimant a duty of care to advise on available remedies, including third party actions. Nichols v. Keller (1993) 15 Cal. App. 4th 1672 at 1686.

California Civil Code §3517 states that “No one can take advantage of his own wrong.” The leading cases of Witt v. Jackson (1961) 57 Cal.2d 57 and Associated Construction & Engineering Co. v. WCAB (1978) 22 Cal.3d 829 hold the employer may not profit by its own wrongdoing by claiming a third party credit in the workers’ compensation case.
Thus, the worker’s comp attorney must be eternally vigilant for the presence of the third party. Winston Churchill said, “the price of freedom is eternal vigilance.”

The worker’s comp attorney must be eternally vigilant for the presence of the third party.
Where the compensation attorney refers a third party case to a third party specialist, the third party specialist may confirm the referral, as well as the specific amount, with a letter which is copied to the client. This affirms the commitment to pay the referral fee and further informs the client as to the existence of the referral fee as mandated by Rule 2-200 of Rules of Professional Conduct.

Not all third party attorneys are knowledgeable and compassionate enough to agree to protect the compensation attorney’s prospective fee. Indeed, in some small economic value cases of no employer fault, that may be economically feasible. Once the referral is confirmed, the notion of protecting “the referring attorney” from the credit is complicated. In a straightforward motor vehicle accident where the applicant/plaintiff is injured through the negligence of a third party, there is no method by which the compensation attorney’s referral fee can be protected against the inevitable claim of third party credit. Although in my firm, we have from time to time articulated employer fault involving, for example, the burned out filament at a turn signal or brake signal, the failure of a seat belt to accurately latch (we term this “false latching.”) In the more garden variety rear ender circumstances, the credit may in fact eat up the workers’ compensation case. The result is a balancing analysis. The astute advocate must consider the value of the compensation case and the value of the third party case. Sometimes knowing more may be helpful. In a motor vehicle accident which results in paraplegia with a $15,000 policy limit, the credit can be exhausted or used up by the payment by the injured (or her health insurer) of the amount of the credit asserted by the employer. In some, but not all, cases, the third party attorney may agree to pay the foreseeable attorney’s fee of the compensation attorney out of the third party recovery assuming that the third party recovery is sufficiently generous.

Rule 2-200 Financial Arrangements Among Lawyers (in relevant part)

(A) A member shall not divide a fee for legal services with a lawyer who is not a partner of, associate of, or shareholder with the member unless:
(1) The client has consented in writing thereto after a full disclosure has been made in writing that a division of fees will be made and the terms of such division; and
(2) The total fee charged by all lawyers is not increased solely by reason of the provision for division of fees and is not unconscionable as that term is defined in rule 4-200.
HARRIS: What are the exceptions to the employer’s right to a credit, and how can the workers’ comp attorney prove the exception applies?

BUTLER: With respect to the law of employer fault, California Civil Code §3517 states, “No one can take advantage of his own wrong.” The leading case of Witt v. Jackson (1961) 57 Cal. 2d 57 and Associated Construction and Engineering v. WCAB (1978) 22 Cal. 3d 829 hold that the employer may not profit by its own wrong-doing by claiming a third party credit in the workers’ compensation case where there is employer fault. I describe this as the employer “having the blood of the injured worker upon his hands.” The employer may not simply, like Pontius Pilate, attempt to wash his hands of the blood of the injured worker.

As is articulated above where the employer is at fault, the fault is the lever. The job of every attorney representing plaintiffs/applicants in injuries arising out of the workplace is to stealthily assemble evidence of employer fault and to put into play a plan of action aimed at defeating the employer’s claim for reimbursement. Here, creativity and cash for the joint client start with the same capital “C”. To fail to prepare for the reimbursement claim by the employer is to prepare to fail in the arena of economic justice for the joint client.

Just as there are 50 ways to leave your lover, so are there numerous ways to evade, eviscerate, and extirpate credit. One way referred to above is to “use up” the credit. So where applicant faces a credit generated by employer fault and there is a threshold of say $50,000, the employee may procure insurance which pays for medical treatment in the amount of $50,000. By submitting the paid bills which show $50,000 worth of credit and an employer’s claim of credit in the amount of $50,000, an employer’s claim of credit can be “used up” and the worker become entitled anew to any and all benefits and serendipitously the employee’s attorney becomes re-entitled to the attorney’s fee earned in engendering the benefits referred to previously.

There are a variety of other ways in which credit claims may be defeated. They may be defeated by litigating the issue of employer fault in the personal injury case. Every injured worker who receives workers’ compensation benefits and files suit is required by Labor Code §§3853, 3708.5, and 3860(a) to send the employer and the workers’ compensation carrier a notice of action pending with a copy of the complaint and to provide notice to these entities of settlement of the third party case. My practice is to serve on defendants an answer asserted by the civil defendant alleging employer fault with a copy of plaintiff’’s complaint. This puts the workers’ compensation carrier on notice of the fact that the civil defendant asserts employer fault. The injured workers’ spouse may also file a claim for loss of consortium. A loss of consortium claim is not subject to any employee’s claim of credit because the uninjured spouse is not a claimant under the compensation policy.
Just as there are 50 ways to leave your lover, so are there numerous ways to evade, eviscerate, and extirpate credit.
HARRIS: What if a serious and willful safety violation appears to be an available remedy in the comp case? Will the S&W interfere with the third party case? What are the strategy considerations?

BUTLER: Where there is employer fault, I always file a petition for Serious and Willful in the comp case. This is a nail through the heart of any fabricated employer fault argument on the part of the compensation defense attorney after settling of the third party case. Naturally the payment of the 50% in additional benefits in the compensation case does not harm the worker or the attorney who prosecutes the Serious and Willful.

There are some cases, however, where one might refrain from filing the Serious and Willful application. When it is filed, be aware that the defense attorney in the civil case may be able to introduce it into evidence in the civil case to enhance the allegation of employer fault.

The comp attorney needs to understand that in the civil case there are two types of damages: 1) special (damages paid out of pocket including past and future wage loss, past and future medical treatment, past and future vocational rehab, and past and future loss of household services damages). Liability for special damages is joint and several so if an employer has the blood of an injured worker on his hands, the civil defendant may not reduce his liability for special damages by the employer fault; and 2) General (damages payable for the damage to the person. They are colloquially pain and suffering and are paid on account of anxiety, embarrassment, pain, suffering, etc). Pursuant to California Civil Code §§1431 &1431.5 (“The Fair Responsibility Act of 1986”), liability for general damages after DaFonte v Up-Right, Inc. (1992) 2 Cal 4th 593 is several only. That means that no civil defendant may be required to pay for the employer’s percentage of the general damages.

An employee may settle a claim he or she may have against the third party without the consent of the employer pursuant to Labor Code section 3859(b). The Federal rule under the Longshore Act, however, is to the contrary, requiring not only notice but employer approval of employee’s third party settlements.

No civil defendant may be required to pay for the employer’s percentage of the general damages.
HARRIS: How is the credit calculated?

BUTLER: The Supreme Court in Associated Construction and Engineering v. WCAB (1978) 22 Cal. 3d 829, 843 held: “When the issue of an employer's concurrent negligence arises in the context of his credit claim based on a third party settlement, the board must determine the appropriate contribution of the employer since the employee's recovery does not represent a judicial determination of tort damages. Specifically, the board must determine (1) the degree of fault of the employer, and (2) the total damages to which the employee is entitled. The board must then deny the employer credit until the ratio of his contribution to the employee's damages corresponds to his proportional share of fault. Once the employer's workers' compensation contribution reaches this level, he should be granted a credit for the full amount available under section 3861. Only when such level of contribution has been reached, however, will grant of the statutory credit adequately accommodate the principle that a negligent employer should not profit from his own wrong.”

Thus, where the employer’s negligence is 40% and the total value of the case is $1,000,000 the threshold number is $400,000. Under this scenario, the comp carrier would not be entitled to lien reimbursement until it has paid more than $400,000 in benefits. Similarly, the carrier will get no credit in the WC case against future benefits until it has paid out $400,000 in benefits. The employer’s credit rights can only be asserted against the amount the injured worker actually receives from the third party after deduction of attorney’s fees and cost. It should be noted that where credit is issued, it applies not only against indemnity but also against the employee’s award of future medical treatment absent an express waiver by defendant. The right of the employer\carrier to credit also extends to the employer’s liability to provide vocational rehabilitation or job retraining benefits.

It is possible to get the compensation carrier to agree to waive credit when it obtains reimbursement of lien rights in the third party case. The specific wording of the release will control credit. Where there has been no determination of employer fault in the civil arena, the employer must file a Petition for Credit before the WCAB and proceed pursuant to Roe v. WCAB (1974) 12 Cal. 3d 884. In Roe the California Supreme Court held that the issue of employer fault should be raised in the compensation proceedings where an allegedly negligent employer seeks a credit against its future compensation liability to the extent of the employee’s recovery against a third party. To be determined in a Roe proceeding:

1. an employer’s degree of fault
2. the employee’s total damages
3. The employer’s proportional responsibility pursuant to Associated Construction and Engineering Code v. WCAB (supra).

The “board must determine (1) the degree of fault of the employer, and (2) the total damages to which the employee is entitled. The board must then deny the employer credit until the ratio of his contribution to the employee's damages corresponds to his proportional share of fault. Once the employer's workers' compensation contribution reaches this level, he should be granted a credit for the full amount available under [Labor Code] section 3861.”
HARRIS: What kind of wording is required to protect the comp case from credit?

BUTLER: As a rhetorician (with a degree in Rhetoric from UC Berkeley), I find that the polemic language used to protect the workers’ compensation case from the assertion of credit by an employer is multi-faceted and multi-factorial. The first step is engaging the compensation carrier who seeks reimbursement through a lien in a third party case (this is usually the pattern where the employer recognizes that it has the blood of the injured worker upon its hands) or a complaint in intervention (generally speaking, where the employer who does not recognize the fault of the employer in contributing to or causing the injury to the worker will be actively intervening in the case and attempting to protect its claim for reimbursement through the active involvement of an attorney).

In the instance where the carrier obtains reimbursement for its lien rights the astute plaintiff’’s attorney will structure the negotiation in such a way that the individual representing the comp carrier in the lien claim agrees to waive its claim for credit. There, the language should be conspicuous, plain and clear: “The lien claimant (insert name of industrial carrier) agrees that by payment of this reimbursement claim it waives any and all claim of credit in the workers’ compensation matter.” The clearer the reality the sharper the language. Like much else in the law, there are a variety of fields of grey between the black of full reimbursement and the white of the waiver of reimbursement. Thus, there are a number of subtleties that the astute advocate can bear in mind. The language might read: “The lien claimant\complainant in intervention agrees to accept the sum of _____ for its lien of ______. It does so with full recognition that pursuant to the case of Southern California Edison v. WCAB (Tate) (1997) 58 Cal.App. 4th 766, asserted “credit is reduced by the payment from the third party defendant” or “the workers’ compensation carrier which receives reimbursement for its claim of credit recognizes that applicant\plaintiff contends that the employer has substantial fault in causing the third party case and recognizes the weakness of any claim of credit in the compensation arena should it be so bold as to assert same.” Such language is generally negotiable and as in arena wrestling, the stronger advocate trumps.

There is no clear answer to this conundrum. As we said back in the days of Students for a Democratic Society, “Dare to struggle. Dare to win.”

Butler Viadro LLP handles significant personal injury and wrongful death claims arising out of construction and other general industry accidents, dangerous premises, defective products, vehicle accidents, maritime accidents, and other general negligence matters.

Jim Butler, Esq.
Butler Viadro, LLP
414 13th Street, 7th floor
Oakland, CA 94612
Tel: 510-287-2400

For Jim Butler's CV, click here.