60.4.2 Non-Negligent Employer

The right of the non-negligent employer, or its insurance carrier, to recover its expenditures does not prevent the injured employee from initiating his or her personal injury action against the third party who caused the injury. If the third party's liability exceeds the expenditure of the employer, or its insurance carriers, the difference belongs to the injured employee. This procedure prevents the employee from getting a double recovery.

In the event of a settlement, with or without suit, the entire amount of the settlement is subject, after the payment of litigation costs and attorney fees, to the nonnegligent employer's full claim for reimbursement for compensation the employer has paid or has become obligated to pay and any special damages to which the employer may be entitled. (Lab. Code Secs. 3860 and 3859.)

Although Labor Code sections 3860 and 3859 do not specifically refer to the employee's expenditures for medical-legal costs, the District Court of Appeal, First Appellate District, held in State Compensation Insurance Fund v. W.C.A.B. (McDowell) (1977) 42 Cal.Comp.Cases 1023 (Published), that a defendant workers' compensation insurance carrier may assert as a credit, in a third party recovery, its expenditures for medical-legal costs.

Likewise, rehabilitation benefits including temporary disability indemnity in connection therewith, and additional costs for items such as books and tuition, are compensation against which an employer is entitled credit to the extent of an employee's net third-party recovery. (Oldaker v. McGrath Steel Co. (1981) 46 Cal.Comp.Cases 186 (En Banc).) See also Salazar v. General Electric Company (1981) 46 Cal.Comp.Cases 233 (Panel Decision).

In Simmons v. L&S Lighting Fixture Co. (1978) 43 Cal.Comp.Cases 594 (En Banc), the Board, held that an award of further medical treatment is compensation and therefore the employer or its insurance carrier is entitled to credit its liability for such further medical treatment against an injured employee's third party recovery.

If the recovery in a third party action benefits both the employee and the employer, then responsibility for the attorney's fee must be apportioned between the employee and the employer. If the amount of recovery does not suffice both to compensate the attorney and to satisfy the employer's lien, the attorney's fee has prior claim on the monies. (Quinn v. The State of California (1975) 40 Cal.Comp.Cases 597 (Published).) See also, Permanente Medical Group/Kaiser Foundation Hospitals v. W.C.A.B. (Nichols) (1977) 42 Cal.Comp.Cases 1006 (Unpublished).

See also Summers v. Newman (1999) 64 Cal.Comp.Cases 852, discussed in section 40.1.1 of this book, where the California Supreme Court held that under Labor Code section 3860(e), when attorneys for applicant and employer both actively participated in a successful third-party civil action and settlement, the employer's attorney's fees and share of the litigation costs were to be deducted from the amount paid to the employer out of the settlement proceeds as reimbursement for its workers' compensation expenses.

Even if a lien claimant is represented by its own counsel in an action, employee's counsel may be entitled to an attorney fee from any lien claimant's recovery if employee's counsel can prove that it was solely as a result of his or her efforts that the lien claimant recovered monies in the action. (Kaplan v. Industrial Indemnity Co. (1978) 43 Cal.Comp.Cases 563 (Published).)

It is now possible under Labor Code section 3859 for an employee to settle and release any claim he or she may have against a third party without the consent of the employer. Such a settlement or release is however subject to the employer's right to proceed against the negligent third party to recover compensation the employer has paid in accordance with Labor Code section 3852.

Labor Code section 3859 provides:

(a) No release or settlement of any claim under this chapter as to either the employee or the employer is valid without the written consent of both. Proof of service filed with the court is sufficient in any action or proceeding where such approval is required by law.

(b) Notwithstanding anything to the contrary contained in this chapter, an employee may settle and release any claim he may have against a third party without the consent of the employer. Such settlement or release shall be subject to the employer's right to proceed to recover compensation he has paid in accordance with Section 3852.

However, this is a limited exception permitting the employee to segregate only his or her own claim from that of the employer and to settle such claim exclusive of the amount of workers' compensation benefits paid by the employer. Only if a settlement by the employee meets this requirement is the settlement free from the employer's claim for reimbursement. Otherwise, the settlement is subject to the employer's lien in the amount of benefits paid by it. (Marrujo v. Fidelity & Cas. Co. of N.Y. (1977) 42 Cal.Comp.Cases 697 (Published).)

Commenting on this right in O'Dell v. Freightliner Corp., et al., (1992) 57 Cal.Comp.Cases 689 (Published), the Court of Appeal, Second District, stated, in part:

Prior to 1971, no settlement of any claim against a third party tortfeasor by either the injured employee or the employer was valid without the written consent of the other. (Former §§26, 3859.) This provision prevented both the employee and the employer from settling with a third-party tortfeasor at the expense or disadvantage of the other and encouraged employers and employees to settle their claims simultaneously. (Brown v. Superior Court (1970) 3 Cal.3d 427, 431-432 [90 Cal.Rptr. 737, 476 P.2d 105]; Ellis v. Wells Manufacturing, Inc. (1989) 216 Cal.App.3d 312, 315 [264 Cal.Rptr. 648, 54 Cal. Comp. Cases 503].)

However, when the Supreme Court in Witt held the third party tortfeasor could assert the employer's concurrent negligence to defeat the employer's subrogation rights, the mutual consent provision gave the negligent employer "bargaining power in the settlement context unrelated to the likelihood of its success in any litigation. By taking advantage of an employee's or third party's interest in a quick settlement, a contributorily negligent employer could conceivably coerce an employee or third party into allowing it to share in a settlement." (County of San Diego v. Sanfax Corp., supra, 19 Cal.3d at p. 883; Associated Construction & Engineering Co. v. Workers' Comp. Appeals Bd. (1978) 22 Cal.3d 829, 837 [150 Cal.Rptr. 888, 587 P.2d 684, 43 Cal. Comp. Cases 1333].)

In order to free the employee from the necessity of obtaining the employer's consent before settling with a third-party tortfeasor, the Legislature amended sections 3859 and 3860 in 1971. Subdivision (b) was added to section 3859. It states: "Notwithstanding anything to the contrary contained in this chapter, an employee may settle and release any claim he [or she] may have against a third party without the consent of the employer. Such settlement or release shall be subject to the employer's right to proceed to recover compensation [the employer] has paid in accordance with Section 3852." (§3859, subd. (b).)

Section 3860, subdivision (b), was amended to read in part: "Except as provided in section 3859, the entire amount of such settlement, with or without suit, is subject to the employer's full claim for reimbursement for compensation [the employer] has paid or become obligated to pay."

These amendments permitted an employee to segregate his or her own damage claim from the employer's claim for reimbursement for workers' compensation benefits paid. "The employee thus is permitted to settle his [or her] own claim for a sum exclusive of amounts already received in the form of a workers' compensation award without jeopardizing the employer's subrogation right." (Board of Administration v. Glover, supra, 34 Cal.3d at pp. 913-914; Ellis v. Wells Manufacturing, Inc., supra, 216 Cal.App.3d at p. 316.)....

In Breese v. Price (1980) 45 Cal.Comp.Cases 1319, the Court held that where a defendant in a third party action stipulated to liability it was not entitled to introduce evidence to attack the reasonableness of the amount of a Compromise and Release approved by the Workers' Compensation Appeals Board.

However, the California Supreme Court in Breese v. Price (1981) 29 Cal.3d 923, 176 Cal.Rptr. 791, reversed the Court of Appeal and held that a defendant who is not a party to compensation proceedings, and who has had neither notice nor opportunity to be heard, is not bound by the terms of any settlement between the workers' compensation insurance carrier and the injured employee. In a subsequent personal injury action against a third party, the burden remains upon the workers' compensation insurance carrier to prove (1) that the defendant was negligent; (2) that defendant's negligence was the proximate cause of the plaintiff employee's injuries; and (3) the amount of the defendant's tort liability for such injuries.

If the trier finds that defendant's tort liability equals or exceeds the amount of the settlement, then the carrier is entitled to full reimbursement. Where the defendant's tort liability is less than the settlement amount, however, the carrier is entitled to reimbursement only up to the amount of defendant 's tort liability. The disposition of the tort claim has no effect upon the compromise settlement of the workers' compensation claim already concluded between the carrier and the employee.

The Court stated, in part:

From the foregoing it follows that an employer seeking reimbursement for compensation payments bears the burden of establishing that a defendant's negligence is the proximate cause of an employee's injuries and the amount of tort damages reasonably resulting therefrom. The defendant, in such a third party tort action, must be permitted the opportunity of presenting evidence to the contrary, and this is so whether the claim is asserted by an employee for his own injury, or by an employer (or carrier) for reimbursement of compensation paid. To the extent that they are inconsistent, Ames and Williams, both supra, are disapproved.

We are further persuaded to our conclusion herein by a consideration of its practical effects. Even in a truly adversary setting a guarantee of reimbursement of the employer's losses would, in our view, inevitably tend to lessen the incentive to dispute questionable claims. In such a case the third party tortfeasor, as "guarantor," may be obligated to pay an improper premium beyond fair and just compensation for the harm which he has caused. No valid public policy would be served thereby.

Finally, although the difference is more one of degree than of kind, adoption of a rule of automatic reimbursement is particularly disturbing when, as here, the compensation benefits to be reimbursed are fixed by a negotiated settlement between the employee and the employer's carrier. In the case before us, for example, the reimbursement sought to be compelled is of a compromise settlement 435 times larger than the minuscule award of the referee who, having heard the evidence, concluded that no compensable industrial injury resulted and only nominal expenses were incurred. Under such circumstances, not only is the defendant third party tortfeasor a nonparticipant who is denied both notice and opportunity to be heard, but there is also lacking the ameliorative effect of a workers' compensation hearing and the evaluation and judgment of a neutral referee. Such a consequence is manifestly unfair....

If an injured employee fails to properly inform his or her employer of his or her filing a complaint against a third party and thereafter settles the suit and voluntarily dismisses the action, the employer has no standing to set aside the dismissal pursuant to Code of Civil Procedure section 473.

Further, the third party has no duty to advise the employer of the settlement and dismissal. In such a case, the employer's remedy may lie in an action against the employee or taking a credit against future workers' compensation payments that may be due the employee. (O'Dell v. Freightliner Corp., et al., supra, 57 Cal.Comp.Cases 689.)

In Insurance Company of North America v. T.L.C. Lewis, Inc. (1996) 61 Cal.Comp.Cases 1166 (Published), Lonnie Ray Guidry sustained an industrial injury while driving a company vehicle. He and his wife settled a third-party case which arose out of the injury with a third-party tortfeasor without the tortfeasor having knowledge of the employee's workers' compensation action. In holding that the employee's employer had no cause of action against the third party, the Court of Appeal, Fifth District, stated, in part:

The case was briefed by the parties, argued before Judge Arthur Wallace on September 29, 1994, and submitted. Judge Wallace subsequently ruled by minute order, finding that the settlement was entered into by TLC "in good faith and without any knowledge or notice of a potential for a worker's compensation claim being filed by [Guidry]. [¦] [INA] has received full benefit of the settlement by setting it off against it's [sic] total worker's compensation liability and although [they] are, by virtue of the release of [TLC], precluded from making a further claim against [TLC], this is compatible with their derivative right of subrogation, since the party to whose rights they are subrogated [Guidry] is likewise precluded."...

In our view, the holding in Glover stands for the general proposition that an employer which is not given notice of a non-segregated (footnote 4) settlement (in the instant case, INA) has a cause of action against the third-party alleged tortfeasor (here, TLC) if an only if that third party knew or should have known of the existence of or potential for a compensation claim and failed to notify the employer. In other cases, the good-faith settlement and release will serve to protect the third party from further liability, and the employer's rights will be limited to recovery from the employee (Guidry) or credit against the settlement proceeds. This conclusion, although not expressly spelled out, is easily inferred from the various portions of the opinion set forth above. We note that at least one other court has similarly summarized the holding in Glover. In Conservatorship of Edwards (1988) 198 Cal.App.3d 1176 [244 Cal.Rptr. 330], the court cited Glover for the proposition that "where the tortfeasor settles with an insured in good faith without knowledge that the insured has received benefits from the insurer, the insurer's right to recovery from the tortfeasor is barred but the insurer may be able to recover from its insured." (198 Cal.App.3d at p. 1184.)...

The equities in the instant case are not as clear as were those in Glover. Here, INA has made a timely effort to pursue what it perceives to be its right to reimbursement from TLC. TLC, meanwhile, has admitted (in the stipulated facts) liability for the accident. These facts, however, do not change the basic truth that TLC has in good faith bargained for and obtained a release from all liability for the accident. Since any right INA might have to seek reimbursement from TLC arises from principles of equitable subrogation (see County of San Diego v. Sanfax Corp., supra, 19 Cal.3d 862, 876, fn. 7), we must conclude, as did the trial court, that INA's rights against TLC were extinguished by the settlement and release....Footnotes omitted.