What Is the Difference Between Third-Party Credit and Subrogation in the California Workers’ Compensation System?

Lately, we have received questions about the meaning of credit in the context of a workers’ compensation subrogation practice. We draw your immediate attention to California Labor Code § 3861.

It’s important to understand the right to subrogation recovery is distinct from the right to third-party credit.

Simply stated, the subrogation right of recovery is the right to recover civil damages to compensate past benefits paid under a workers’ compensation claim, as a result of a third-party’s negligence. The right to credit is the right to an offset (credit) against future liability for workers’ compensation benefits to an employee injured by a third-party’s negligence. In other words, subrogation recovery compensates for past damages, whereas credit compensates for future damages.

To obtain credit, it is necessary for the injured worker to recover civil damages for his/her industrial injuries. These damages must be paid by the third-party (or the third party’s insurer) via a settlement or judgment.

Examining California Labor Code § 3861

California Labor Code § 3861 states, in essence, the amount of the credit is the amount the employee pockets (nets) after deductions from a gross civil recovery for civil legal fees, civil litigation expense, and any amount paid to satisfy the subrogation claim from the civil recovery.

For example, if a case settles for $100,000, and the plaintiff’s attorney deducts $40,000 (40 percent) for a civil fee, $10,000 for civil litigation expenses, and then from this $100,000 the subrogation claim is resolved for $20,000, the employee would pocket $30,000. This would be the employer’s or its workers’ compensation carrier’s potential right of credit under California Labor Code § 3861.

Note, if a subrogation claim recovery is paid separate and apart from the employee’s settlement, then the potential credit calculation would differ: If the third-party pays $100,000 gross to the employee, alone, and separately pays the workers’ compensation carrier $20,000 on its lien, then the employee would net $50,000, not $30,000, and the carrier’s potential credit would be $50,000.

To secure the credit, the employer (or its carrier) must file a Petition for Credit at the Workers’ Compensation Appeals Board. Credit should be taken only after the Workers’ Compensation Appeals Board issues an order of credit.

Except in very rare circumstances, the workers’ compensation carrier should never stop paying workers’ compensation benefits due unless, and until, the order of credit issues. Failure to take this precaution could subject that workers’ compensation carrier to penalties for the unreasonable delay of benefits.

Referring back to the example above, in which the employee nets $30,000 from the civil recovery, if less than $30,000 is due to the injured employee under the workers’ compensation claim, then the credit would effectively terminate further liability for workers’ compensation benefits to the employee. If, however, the employee is owed another $50,000 in workers’ compensation benefits under the claim, then the $30,000 credit award would act as an offset against the $50,000 future workers’ compensation exposure, leaving the employer with a future exposure of $20,000 ($50,000 future exposure – $30,000 credit = $20,000 future exposure).

Settling a Third-Party Case Involving a Subrogation Claim

When settling a third-party case involving a subrogation claim, consideration must be given to the potential credit rights. If the carrier faces further workers’ compensation exposure when the civil case settles, then a request to the plaintiff’s attorney should be made for an accounting of how much of the employee’s civil recover was paid for legal fees, for litigation expense, and to the employee as his or her share. This net share will be the employer’s potential credit right. (The word “potential” is emphasized because credit is subject to reduction based on a finding of employer fault, which will be the topic of a future article).

To preserve the credit right, care must be taken to ensure any settlement and release agreement does not inadvertently result in a waiver of credit. This can happen if a joint release is executed by both the carrier and the employee, which contains broad or boilerplate waiver language, such as, “All parties hereto agree to waive, dismiss, and release each other from any and all claims and rights whatsoever arising from the incident.”

To address such common language, subrogation claims handlers should seek an inclusion of the following:

“Nothing stated herein is intended to, nor shall it, constitute a waiver or release of the [name of employer or its industrial insurer]’s defenses against the workers’ compensation claim of [name of the injured worker] arising from the Incident, including the right to third-party credit.”

Final Thoughts

As noted, the foregoing explanation is just a primer for what should become a more thorough understanding of credit when negotiating, adjusting and litigating third-party claims. The evaluation of this potentially very valuable right can be affected by evidence of employer fault, co-worker fault, the presence of injuries or disabilities caused in part by a third party, but in part by other industrial causes, and by the participation of the injured worker’s spouse or surviving heirs in the third-party case.

These factors will be the topic of future articles. In the meantime, we welcome with pleasure any questions you may have regarding either subrogation recovery or credit. Feel free to contact our office at any time.

About Davil Vasquez

Davil R. Vasquez has over 25 years of litigation experience before both the State and Federal courts of California, before the Workers’ Compensation Appeals Board, and before the California Court of Appeal. His practice focuses on representing employers, businesses and their insurers in a wide range of legal matters, including the defense of civil liability tort actions, employee discrimination (Labor Code 132a) and misconduct (Serious & Willful) claims, and business disputes. He is a founding partner and shareholder with Adelson-McLean. 

Click here to read more about Davil.

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