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Pennsylvania Supreme Court decision changes landscape of workers' compensation liens

Written by James P. Goslee, Esq.

The Pennsylvania Supreme Court recently issued an important decision that changes the familiar landscape of workers’ compensation liens. Once considered to have an “absolute and automatic” right to subrogate against an employee’s third-party tort recovery, in some instances a workers’ compensation insurer’s right to reimbursement is no longer so clear.

Section 319 of Pennsylvania’s Workers’ Compensation Act grants employers and insurers the right to recover claims paid to an employee from the employee’s third-party tort recovery. Section 319 states that “[w]here the compensable injury is caused in whole or in part by the act or omission of a third party, the employer shall be subrogated to the right of the employee . . . against such third party to the extent of the compensation payable under this article by the employer.” However, in 1993 the General Assembly amended the Act to immunize the Commonwealth from subrogation claims when it pays out on a personal injury claim. To this end, Section 23 of Act 44 provides sovereign immunity to the Commonwealth, its subdivisions and employees “from claims of subrogation or reimbursement from a claimant’s tort recovery with respect to workers’ compensation benefits.”

The intersection of these two provisions of the Workers’ Compensation Act became the subject of significant scrutiny in Frazier v. Bayda Nurses Inc. In Frazier, an employee of Bayda Nurses, Lillian Frazier, was injured on a SEPTA bus during the scope of her employment. Immediately after the accident, Frazier filed a claim for workers’ compensation which was granted.

Approximately one year later Frazier filed a lawsuit against SEPTA contending that it was liable for her injuries. SEPTA eventually settled the suit for $75,000. The settlement agreement included a provision whereby SEPTA agreed it would “defend, indemnify and hold Claimant harmless with respect to any claim . . . for payment of [the] workers’ compensation lien” filed by Bayda Nurses. Shortly after settlement, Bayda Nurses sought reimbursement from Frazier for the compensation benefits it had paid. Frazier argued that since her tort recovery was from a Commonwealth entity, Act 44 prohibited Bayda Nurses from seeking reimbursement. Naturally, Bayda Nurses disagreed. It claimed that Act 44 only immunized the Commonwealth from direct subrogation or reimbursement claims. Nothing in the Act prohibits employers from seeking reimbursement from employees who recover from the Commonwealth. Since Bayda Nurse was seeking reimbursement from its employee, Act 44 was not a bar to recovery.

The Supreme Court began its analysis by acknowledging that the right to subrogation “has been described as absolute and automatic.” Nevertheless, it also noted that “sovereign immunity . . . is just as fundamental.” It then took a close look at the “claims of subrogation or reimbursement” language used in Act 44. The Court noted that in “subrogation” an insurer stands in the shoes of its insured and seeks recovery from third-party tortfeasors. Because the tortfeasor in this case is the Commonwealth, subrogation “is clearly prohibited by Act 44.” A “reimbursement” proceeding on the other hand, “occurs only after a settlement or award has been garnered by the injured employee from the third-party tortfeasor, which is the factual scenario we are faced with instantly.” The Court then considered why Act 44 would include “reimbursement” language in its grant of sovereign immunity if reimbursement only involves actions between employers and employees? It concluded that “reimbursement” was included in the statute to address cases just like the one before it: where the Commonwealth structures a settlement that does not include workers’ compensation benefits and agrees to defend and hold harmless the claimant from subrogation or reimbursement claims. Interpreting Act 44 to immunize claimant’s who recover from the Commonwealth in these circumstances allows the Commonwealth and its subdivisions to enter into reduced settlement agreements. This result is consistent with Act 44 because protecting the public treasury is a primary purpose of sovereign immunity.

The Supreme Court also concluded that Act 44’s sovereign immunity provision would be meaningless if employers could seek reimbursement from claimants. “Section 23 [of Act 44] would be impossible to execute, because employers would simply forgo direct claims against Commonwealth agencies and simply assert subrogation liens against claimants’ tort recoveries making the grant of sovereign and official immunity by Section 23 of Act 44 illusory and rendering the statute superfluous.” The Court did acknowledge that its interpretation of Act 44 may require employers to make some compensation payments despite the negligence of a government entity, but “this is occurring as a matter of legislative prerogative to protect the public treasuries.”

The upshot of the Frazier decision is that workers’ compensation liens are no longer as “automatic” as they used to be. Where a settling tortfeasor is the Commonwealth or a subdivision, workers’ compensation insurers cannot seek reimbursement from the claimants’ tort recovery if that recovery is structured not to include workers’ compensation benefits. For lawyers who have clients with potential workers’ compensation liens, this decision should serve as a guide to drafting settlement agreements with Commonwealth defendants that will maximize their clients recoveries.

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