Third Party Credit In California Workers’ Compensation Cases


This summary, written by Davil Vasquez, provides useful information for our clients regarding third party credit in California Workers’ Compensation cases.

Under California subrogation law, when an injured employee recovers civil damages for his or her industrial injuries, the employer becomes entitled to a potential credit, or off-set, against further and future Work Comp liability. This is the rule of Labor Code Section 3861. The credit is the amount the employee nets after payment of civil legal fees and litigation expenses, and any reduction for a subrogation claim.

So, if an employee grosses $100,000 from a settlement, and after legal fees, costs, and the employer’s lien are deducted, the employee nets $35,000, the employer can petition for a credit off-set against further and future WC liability in the amount of $35,000. If the WC claim’s residual value is $40,000, for example, then an award of $35,000 credit will reduce its residual value to $5,000. This would make your clients decidedly jolly (for Christmas, or otherwise). So it’s a subrogation right that’s worth understanding.

The credit is subject to reduction for employer fault, but that is the subject for another day.

One of our clients raised the question of whether third party credit may be taken if the claimant (EE) recovers a medical malpractice judgment or settlement.

The general rule is credit (and subrogation recovery) claims are prohibited by California Civil Code 3333.1. The rationale is that medical malpractice defendants are entitled, under Civil Code 3333.1, to credit against their civil liabilities for any amounts paid by a collateral source of compensation, such as workers’ compensation benefits.

Note: The rationale behind that rule is a theory that by giving doctors credit against medical malpractice judgments, the cost of malpractice insurance premiums, and therefore the cost of patient health care, will be kept down. (We’re still waiting for that theory to prove itself true…)

An exception to this general rule was recognized in the case of Graham v. WCAB, 54 Cal Comp Cases 160. In that case, the Judge concluded: “To harmonize Civil Code section 3333.1 with the Labor Code credit provisions [3861], we interpret section 3333.1 as impliedly creating an exception to the credit provisions whenever an injured party has demonstrably had his recovery reduced to reflect collateral source contributions”…. “In this case, the parties in the underlying medical malpractice case made an adequate factual record that [plaintiff/employee] Graham’s settlement was reduced to exclude any recovery for collateral source benefits [meaning the payment of WC benefits].”

In plain English, if, during a medical malpractice case, the evidence or negotiations demonstrate the malpractice settlement was less than what it would have been, because the defendant took into account evidence of what the employee recovered under his or her Workers Compensation claim, then credit will be denied. Similarly, if during trial of the medical malpractice case the defendant introduced evidence of the WC payments the plaintiff-employee received, then credit will likely be denied.

If, on the other hand, such a showing is not made, then credit may be awarded. Here are some examples:

1.  The employee demands the doctor’s policy limit, and it is paid in settlement of the case. In such cases, it would be difficult to demonstrate the settlement was reduced by the WC benefits paid because the defendant paid its entire policy.

2.  A settlement is paid, and at no time is any evidence of the WC payout discovered in the proceedings prior to settlement, or raised in the negotiations.

3.  The malpractice case proceeds to trial, and the defendant fails to introduce any evidence of the WC payments prior to suffering a judgment.

We hope you find this useful for the rare occasion when this issue may arise. For questions about third party credit, contact David at dvasquez(at)adelsonmclean(dot)com.

In good health,

The team at Adelson McLean

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