Donna Jean FOLSTAD, n/k/a Donna Jean Fairbanks, Respondent, v. Nancy Irene EDER, et al., Petitioners, Appellants.
No. C6-90-585.
Supreme Court of Minnesota.
April 5, 1991.
3. That the respondent shall pay to the Director the sum of $750 in costs and disbursements pursuant to Rule 24, Rules on Lawyers Professional Responsibility.
Douglas E. Schmidt, Sieben, Grose, Von Holtum, McCoy & Carey, Ltd., Minneapolis, for respondent.
SIMONETT, Justice.
If, prior to trial of the employee‘s tort action, the employer-insurer settles its subrogation claim with the defendant tortfeasor, does either the allocation formula of
Plaintiff-employee Donna Fairbanks sued defendant-appellants Nancy and Janos Eder for personal injuries sustained when plaintiff‘s car collided with defendants’ car (driven by Nancy Eder and owned by Janos Eder) in September 1984. Plaintiff‘s complaint claimed damages for hospital and medical expenses and loss of income, as well as for general damages.
Plaintiff Fairbanks was in the scope and course of her employment with the Westminster Corporation at the time of the accident. Fairbanks’ medical expenses of $7,717 were paid by her employer‘s workers’ compensation insurer, Wausau Insurance Company. When plaintiff commenced suit against the defendants Eder, she notified Wausau that the carrier‘s subrogation
On May 8, 1989, the case was called for trial. In chambers, before trial started, counsel for defendants Eder advised the court and plaintiff‘s counsel that defendants had settled Wausau‘s subrogation claim directly with Wausau, and had taken an assignment of any claims which Wausau might have. Counsel said he was waiving Wausau‘s claims, and that after trial he would move for “a complete set-off” pursuant to the collateral source statute or, alternatively, for “reimbursement” under
The jury awarded plaintiff damages to date of verdict of $9,657.14 for medical expenses, $10,000 for emotional distress, and $5,000 for pain and disability. The jury awarded no future damages and found defendant Nancy Eder 70 percent at fault and plaintiff Fairbanks 30 percent.1
The trial court first reduced the aggregate verdict of $24,657.14 by 30 percent to $17,260 (to account for plaintiff‘s 30 percent fault). The trial court then applied the collateral source statute,
The court of appeals in an unpublished opinion reversed and remanded. The appeals panel held that the jury‘s award of $17,260 ($24,657.14 reduced for 30 percent fault) should have been distributed under
The problem in this case arises from the interplay of two statutes, the Workers’ Compensation Allocation Statute,
When an employee recovers on her tort claim in its entirety, the subdivision 6 formula provides for allocation roughly as follows: (a) first, payment of collection costs, probably about one-third; (b) one-third of the remainder free and clear to the employee; (c) payment of the compensation carrier‘s subrogation claim less a pro rata share of the attorney fees; and (d) any balance remaining to the employee, subject to a credit to the employer for benefits yet to be paid.
The collateral source statute on the other hand provides that if (1) plaintiff‘s award includes damages to compensate plaintiff for losses for which she has already been compensated by a collateral source (such as workers’ compensation benefits); and if (2) plaintiff has not asserted the collateral source‘s subrogation rights in her action; then, to avoid a double recovery by plaintiff, the trial court deducts the amount of the collateral source from plaintiff‘s award. In this case, the trial court felt Wausau‘s subrogation claim had not been asserted and therefore deducted the medical expenses awarded by the jury from plaintiff‘s recovery. See footnote 5, infra.
In Keenan v. Hydra-Mac, Inc., 434 N.W.2d 463 (Minn.1989), after the jury‘s verdict but before post-trial motions were heard, the employer settled its workers’ compensation subrogation claim with the defendant tortfeasor; and then, claiming its subrogation claim was no longer being “asserted,” the employer sought to deduct the amount of compensation benefits paid to date of trial from plaintiff‘s award pursuant to the collateral source statute. We held the settlement of the subrogation
It is this issue, left open in Keenan, that is now before us.
I.
Some background might first be helpful. An injured employee who has received workers’ compensation benefits and who has a tort action against a third-party tortfeasor, has a number of options, including:
(1) The plaintiff-employee litigates her entire claim including the compensation carrier‘s subrogation interest through to a verdict; the aggregate recovery is then shared by the plaintiff-employee and the compensation carrier according to the subdivision 6 formula of the Workers’ Compensation Act. See, e.g., Kempa v. E.W. Coons Co., 370 N.W.2d 414, 419 (Minn.1985). Or,
(2) The plaintiff-employee settles her entire claim including the subrogation interest, and, again, the settlement recovery is shared by the employee and the compensation carrier in accordance with the subdivision 6 formula. If the injured employee has a spouse with a loss of consortium claim, the employee may elect to have an appropriate portion of the overall settlement set aside in satisfaction of the consortium claim, leaving only the remaining portion of the settlement subject to the subdivision 6 formula, as provided in Henning v. Wineman, 306 N.W.2d 550, 553 (Minn.1981). Or,
(3) The employee settles with the third party tortfeasor in a Naig settlement,2 i.e., she settles for all items of tort damage not covered by the Workers’ Compensation Act, and this settlement recovery is not subject to the subdivision 6 formula. The compensation carrier then pursues its subrogation claim alone against the third party tortfeasor.
On the other hand, the compensation carrier also has some options with respect to its subrogation claim, such as—
(1) Leaving the initiative with the plaintiff-employee to collect its subrogation claim as part of the employee‘s tort action, the recovery being subject to the subdivision 6 formula. Or,
(2) Settling the subrogation claim directly with the third party tortfeasor, leaving the employee free to pursue her remaining claim against the third party tortfeasor. See Johnson v. Farmers Union Cent. Exchange, 414 N.W.2d 425, 428 (Minn.App.1987) (employer-insurer “waived” its subrogation rights prior to trial). If this settlement occurs after trial of the employee‘s tort action has commenced, Keenan holds the subdivision 6 formula applies so as to require the compensation carrier to share in the costs of collection.
It should be kept in mind that the compensation carrier, by statute, has its own “separate additional cause of action” for medical expenses paid and for other compensation payable.
pensation carrier is pretty much free to dispose of its subrogation claim as it sees fit. If the compensation carrier permits its claim to be included in the employee‘s claim, however, the subdivision 6 formula contemplates that the compensation carrier will share in the costs of collection incurred by the employee. Part of the problem here is how are the collection costs to be borne when the employee and the compensation carrier go their separate ways prior to trial.
II.
So much for background. The issue in this appeal is what happens if the compensation carrier selects its second option and settles with the third party tortfeasor prior to trial? Does the subdivision 6 formula still apply? We think not. Neither do we think there is any need to apply the collateral source deduction.
A.
An employee is entitled under a Naig settlement to settle her claim for all damages not covered by workers’ compensation free and clear of the subdivision 6 formula. Defendants argue the compensation carrier should likewise be able to settle its subrogation claim with the tortfeasor free and clear of the subdivision 6 formula. We believe there is merit to this argument.
By “free and clear of the subdivision 6 formula,” we mean that the employee keeps intact her Naig recovery, pays her own collection costs, and waives any rights she might have under the subdivision 6 formula to what the compensation carrier might subsequently recover from the tortfeasor on its subrogation claim. In other words, the employee waives her right to the “one-third” outright share she would otherwise receive under the formula. Likewise, when the compensation carrier independently settles its subrogation claim, it waives any rights it might have to the employee‘s subsequent recovery, specifically, the right to claim a portion of the employee‘s recovery as a credit against future compensation payable. Cf. Johnson, supra. In other words, when either the employee or the compensation carrier settles their own claim, the employee‘s third party tort action has been effectively separated into one claim for damages recoverable under workers’ compensation and another claim for those damages not recoverable under workers’ compensation. There is, consequently, no need to use the subdivision 6 formula.
An objection, however, may arise with respect to collection costs. Is it fair for the employer-insurer to settle its subrogation claim without sharing in the attorney fees and costs incurred by the plaintiff-employee whose prosecution of her tort claim may have contributed to the employer-insurer‘s ability to negotiate a settlement? Should not the employer-insurer bear a proportionate share of the expenses of collection as required by the subdivision 6 formula? In Keenan, supra, for example, the employer-insurer asserted its subrogation claim throughout the trial to a verdict, and then settled with the defendant tortfeasor. We thought it unfair that the employer could take advantage of the employee‘s successful prosecution of the entire tort claim to a verdict without sharing in the costs of prosecution. Id., 434 N.W.2d at 466-67. We held, therefore, that notwithstanding the postverdict settlement, the subdivision 6 formula must be applied to the entire verdict, including the subrogation claim.
We think, however, the Keenan rationale has much less force when the employer-insurer settles its subrogation claim prior to trial. Presumably the employer-insurer gets the benefit of the pretrial preparation conducted by the employee‘s attorney, but, ordinarily, this pretrial preparation would have been conducted anyway by the plaintiff-employee in preparing for trial of her damages not covered by workers’ compensation. Ordinarily it would be no great burden for plaintiff‘s attorney to carry the compensation carrier‘s subrogation claim through pretrial; indeed, not to have the employer intervening in plaintiff‘s suit as a
We conclude the best solution is to hold the subdivision 6 formula does not apply if the compensation carrier settles any time prior to the commencement of trial. Trial commences with selection of the jury. It seems desirable to have a bright line cutoff for the application of the subdivision 6 formula, and commencement of the trial serves as a workable demarcation line.
The possibility of unfairness to plaintiff‘s attorney, as suggested by the concurrence, may at times exist but is unlikely and is outweighed by the need for a bright line to guide the parties in their settlement negotiations. In commencing a third party tort action on behalf of an injured employee, prudent counsel will take into account the many factors bearing on an ultimate recovery. For example, in a case where the value of the lawsuit lies in the subrogation interest and there is no contribution claim under Lambertson v. Cincinnati Corp., 312 Minn. 114, 257 N.W.2d 679 (1977), prudent counsel might well make suitable fee arrangements with the compensation carrier before undertaking the lawsuit.
B.
We see no need for the collateral source statute to apply in this case either.4
Under
When the subrogated damages have been separated out of plaintiff‘s action and settled by the compensation carrier prior to trial, there is nothing left for the collateral source statute to act upon. Ordinarily there is no need to continue to assert in plaintiff‘s action a subrogation claim that has been settled and is now out of the lawsuit. There is no need to deduct what is no longer there to be deducted.
There may be instances, however, where the jury might still be asked to determine the amount of a subrogation claim that has been settled. As in the case before us now, the plaintiff-employee may need to prove medical expenses of $4,000 or more for the limited purpose of meeting the threshold for maintaining her tort action, and she should, of course, be permitted to prove her threshold. See footnote 1, supra. The jury need not know the subrogation claim has been settled.
III.
We turn now to the facts of this case. Wausau settled its medical expenses claim of $7,717 prior to trial. Consequently, in adding up the jury‘s award, the item of $7,717 for past medical expense is simply ignored. Plaintiff‘s gross award is $16,940.14, which, reduced 30 percent for plaintiff‘s fault, leaves plaintiff a net recovery (before attorney fees) of $11,858.10.
In this case defendants’ counsel, operating in uncharted waters, did not ask that the subrogated medical expenses be dropped from the lawsuit but said he would move post-trial for a deduction. Consequently, the trial court, after the trial, deeming the settled subrogation claim as nonasserted, applied the collateral source statute. The result is the same as we reach in the preceding paragraph.5
Plaintiff Fairbanks argues the Wausau settlement should be invalidated because made without prior notice to her. She cites Easterlin v. State of Minnesota, 330 N.W.2d 704, 707 (Minn.1982), where we held that the employee‘s failure to notify the employer-insurer of negotiations for a Naig settlement would entitle the compensation carrier to a credit for future benefits payable against the employee‘s Naig recovery. But Wausau‘s failure to give advance notice of a settlement of its subrogation claim did not prejudice the employee‘s continued prosecution of her lawsuit, and we see no reason to disturb the settlement.
The defendant tortfeasors took a somewhat convoluted approach in settling with Wausau. Defendants say they took an assignment of Wausau‘s subrogation rights and, as assignees, then waived those rights. In this case the subrogation claim consisted solely of past medical expenses. It seems incongruous to take an assignment of a claim against one‘s self that one has already settled. The fact of the matter is that defendants simply settled a claim against themselves outright. Supposedly defendants took this circuitous route to make sure that the compensation carrier could not later contend a right to use the employee‘s tort recovery as a credit against possible future compensation payable. Because we here hold the compensation carrier waives any such right by settling, there was no need for any “assignment and waiver” maneuver by the defendants.
If in this case Wausau had been paying continuing compensation benefits, the settlement dynamics would have been different. The carrier‘s right under the subdivision 6 formula to a credit against future compensation to be paid might be quite valuable to the carrier, and Wausau might not have wanted to waive these rights by settling for only $3,000.6 But that is a different case.7 With respect to settlement of future benefits, the collateral source statute, of course, is not involved because
Reversed and remanded to the trial court for further proceedings in accordance with this opinion.
YETKA, Justice (concurring specially).
Although I concur in the result, the majority opinion fails to address some issues that may arise when the employer and the third-party tortfeasor reach a settlement just before trial. If the entire amount of workers’ compensation paid is removed from the injured employee‘s claim, the plaintiff may be penalized in several ways.
First, the plaintiff may not meet the threshold requirements to bring a lawsuit. See
Finally, plaintiff‘s attorney fees would be subject to dramatic reduction when the employer and the third party reach an eleventh-hour settlement. Lawyers would be discouraged from taking cases in which the chances of recovery against the tortfeasor in excess of workers’ compensation are not great. Consequently, many injured employees with tort claims would go unrepresented. The system would create a bonanza for insurance companies at the expense of injured workers.
Allocation of attorney fees pursuant to
STATE of Minnesota, Respondent, v. Brent Charles NIELSEN, Appellant.
No. C1-89-2271.
Supreme Court of Minnesota.
April 5, 1991.