Understanding The Third Party Settlement Agreement Under The Pennsylvania Workers’ Compensation Act

In a separate article, we addressed the employer’s right of subrogation and negotiating compromises with the insurance company, including practice tips. Here we describe the drafting of third party settlement agreements and other documents needed to memorialize the rights of the workers’ compensation insurance company, including documents to be drafted when the workers’ comp carrier has compromised its lien.

WORKERS’ COMPENSATION INSURANCE COMPANIES ARE BOUND BY PROPERLY DRAFTED AGREEMENTS COMPROMISING THEIR LIENS

In SKF USA, Inc. v. WCAB, 714 A. 2d 496 (Pa. Cmwlth. 1998), the Pennsylvania Commonwealth Court considered whether an employer could escape its legal obligation to honor an agreement limiting a subrogation recovery in a negligence case arising out of a work injury because the agreement lacked consideration.

In connection with a personal injury claim filed by an injured claimant arising out of his work injury, the parties entered into an agreement in which the employer voluntarily agreed to reduce the amount it could recover out of the proceeds in the third party case. The Commonwealth Court recognized that the right of an employer or its workers' compensation carrier to subrogation was absolute, but could be limited by agreement. The employer argued that because the claimant was already legally bound to repay the amount set forth in the third party settlement agreement and release, the agreement lacked consideration.


The court rejected this contention on a number of grounds, the most important which for our purpose is that the release contained language that complied with the Uniform Written Obligations Act, 33 P.S. § 6.  Furthermore, the release contained the language, "we have hereunto set our hands and corporate seal" and the word “seal” was printed next to the signature of the employer on the release.


A third party settlement agreement in which the employer is compromising its claim for recovery out of a third party case should be substantially in accordance with the requirements of SKF and Fortwangler v. WCAB, 113 A. 3d 28 (Pa. Cmwlth. 2015) in which the Commonwealth Court ruled that a release has to explicitly state that the agreement applies to past, present and future workers' compensation benefits.


To effectuate a proper settlement in which the employer or its workers' compensation insurance carrier limits its recovery from the proceeds of a third party case, the third party settlement agreement should contain the following language in the section entitled "further matters agreed upon":  

The undersigned parties have agreed to apportion the proceeds that have been offered in the matter of [insert name and identification information for third party case] as follows:  Of the proceeds recovered in this matter, [insert settlement amount], the employer/insurer agrees to accept [insert amount accepted by employer/insurer] in full satisfaction of its asserted lien.  To the extent that employer/insurer's lien exceeds this amount, all right to recover these proceeds is assigned to claimant.  Employer/insurer further agrees to continue paying indemnity and medical expense benefits to claimant in accordance with the requirements of the Pennsylvania Workers' Compensation Act, without obtaining any reimbursement rate on future compensation liability pursuant to Paragraph 8.  To effectuate this agreement, employer/insurer has signed a general release, a copy of which is attached hereto as an exhibit and incorporated herein by reference.

For a sample agreement containing this language, click here and read hypothetical 3 below.


The following examples describe the ways in which third-party settlement agreements can be drafted depending upon the situation faced in the third-party case. 

HYPOTHETICAL 1: THE BASICS

Plaintiff has a $50,000.00 third-party recovery.  He has an accrued workers' compensation lien of $10,000.00 consisting of $7,000.00 in wage loss benefits and $3,000.00 in medical expense benefits.  He has recovered in full and returned to work, and there is no anticipation that he will receive any additional workers' compensation benefits in the future.  The expenses of recovery consist of a $20,000.00 attorney's fee and $2,000.00 in out-of-pocket costs for a total of $22,000.00. 


The portion of the accrued workers' compensation lien that the Workers' Compensation Insurance Company must pay in costs is $4,400.00 (workers' compensation lien $10,000.00/total recovery $50,000.00 equals 20 percent.  20 percent times $22,000.00 equals $4,400.00).  The net lien that the employer/workers’ comp carrier is to receive is therefore $5,600.00 ($10,000.00 minus $4,400.00 equals $5,600.00). Click here for a sample Third Party Settlement Agreement covering this case.

HYPOTHETICAL 2: FUTURE CREDIT/ NO COMPROMISE OF LIEN

The same claimant has a $500,000.00 recovery and an accrued workers' compensation lien of $175,000.00.  There is no agreement by the workers' compensation insurance company or employer to compromise its lien.  Out of the $500,000.00 proceeds, the employer is entitled to receive $98,000.00.  Furthermore, the reimbursement rate on future compensation liability is 44 percent of all wage loss and medical expense benefits.  Because this compensation rate is $1,000.00 per week, the reimbursement rate on future compensation liability will be $440.00 per week until the subrogation interest is exhausted.  This occurs when the employer or its insurance carrier pays out a total of $123,200.00 in workers' compensation indemnity or medical expense benefits after the date of the settlement agreement.  Thereafter, the insurance company is responsible for 100 percent of any compensation liability. For a sample agreement covering this scenario, click here.

HYPOTHETICAL 3: WORKERS’ COMPENSATION LIEN COMPROMISED

Claimant is receiving indemnity benefits at a compensate rate of $1,000.00 weekly.  He has a workers' compensation lien consisting of $150,000.00 in indemnity benefits and $50,000.00 in medical benefits, for a total of $200,000.00.  The parties are in the process of trying to negotiate a resolution of the third-party case.  $400,000.00 has been offered, and the workers' compensation insurance company has agreed to accept $50,000.00 in full satisfaction of its subrogation lien, despite the fact that they would be entitled to $82,500.00 of the settlement proceeds and a credit into the future in the absence of an agreement concerning the distribution of the proceeds.  A release and a separate third-party settlement agreement should be prepared for execution by the employer and its workers' compensation insurance carrier in substantial accordance with the suggested language here and here.  


As a practical matter, the parties may not always be able to get a signature from a representative of the employer on the accompanying release, though this is the preferred method.  For cases involving small third-party proceeds, such as a $15,000.00 recovery in a third-party case where the parties have agreed to resolve the case with a division of one third to the attorney, one third to the claimant and one third to the insurance company, it should be sufficient to obtain a signature of the claims representative on behalf of both the employer and the workers' compensation insurance company. The signature line would be revised in these circumstances to be substantially in accordance with what is set forth here.

HYPOTHETICAL 4: FULL COMPROMISE OF LIEN

Where the carrier has agreed to completely give up its third party lien in connection with the full settlement of the workers' compensation claim, it is sufficient to place language in the compromise & release agreement that memorializes the assignment of the carrier's subrogation rights to claimant (do not characterize the transaction as a "waiver" of the carrier's claim). If claimant's counsel has a fee agreement that calls for a fee based on the amount assigned by the carrier to claimant, the agreement should so state. The following language should suffice for paragraph 10 of the agreement:

Claimant will receive $[workers' comp gross settlement amount] less a 20% attorney fee of $[attorney's fee] netting $[net workers' comp recovery] plus the assignment described below, in full resolution of past and future indemnity, medical, specific loss benefits, any and all benefits and petitions as well as any and all workers' compensation claims for benefits for any injuries, known or unknown, that Claimant suffered or may allege occurred while employed by Defendant.  

Pursuant to Paragraph 11, Defendant has assigned to claimant any subrogation rights it has against third parties arising out of its work injury.  Of the net sum obtained by claimant in any third-party action, claimant's counsel is entitled to 20 percent of the net sum received, to the extent that the sum would otherwise be recoverable by Defendant/insurer but for its assignment of its subrogation rights to claimant.  Defendant/insurer makes no warranty that claimant is entitled to any sum of money other than the $[workers' comp gross settlement amount] set forth above and this Compromise and Release will be legally enforceable even if no distribution is ever made pursuant to Paragraph 11.   

Defendant is responsible for payment of reasonable, necessary and causally-related medical bills incurred by claimant up to and including [insert date that medical coverage ends] for the work injury. These bills must be submitted in accordance with the Act, as amended, and are subject to fee reduction under the Act, as amended.

Paragraph 11 should contain the following language:

Defendant has agreed to assign to claimant all actual or potential subrogation rights it has arising out of any third-party action filed or any claim pursued by claimant in connection with his work injury.

If you have any questions regarding the drafting of these agreements, call Greg Boles anytime at 877-959-1811. There is no charge.