The Alabama Court of Civil Appeals recently released its opinion in the case of Nuss Lumber Co., Inc. v. The Estate of Andy Monghan, in which the Court addressed the employer’s right to recoup workers’ compensation benefits paid when the employee recovers from third parties. In January 2002, Monghan was injured in an automobile accident while working for Nuss Lumber. Nuss ultimately paid Monghan a substantial amount of workers’ compensation benefits and incurred substantial expenses for medical treatment. Monghan sued Nuss Lumber and also named several third parties who he claimed caused the automobile accident as defendants in the action. Nuss then filed a counter-claim asserting its rights under §25-5-11 (a) of The Alabama Workers’ Compensation Act, seeking repayment of the benefits it had paid on account of Monghan, which totaled more than $1.3 million. In October 2005, Monghan entered into a settlement with the third parties, whereby more than $500,000 was paid in a lump sum, and whereby Monghan would receive nearly $30,000 per month over the next several years from an annuity. While the parties agreed on the amount that Nuss was entitled to recover from the third party settlement funds, there was a disagreement as to the matter in which Nuss’ interest would be satisfied. The Trial Court initially ruled that Nuss was entitled to a lump sum payment of approximately $350,000 and that the remaining balance of more than $1 million would be paid in monthly installments of approximately $15,000 per month. However, Nuss contended that it was entitled to recover the full amount of its lien before the estate could collect any funds from the settlement. The Court of Civil Appeals agreed and stated that Nuss was entitled to recover all of the currently available funds and that it also had priority as to funds that become available in the future through the annuity payments. The Court noted that §25-5-11 (a) of The Alabama Workers’ Compensation Act works to relieve an employer of the financial burden of a work related injury when there is a culpable third party to shift the burden to, and that it also prevents double recovery for the same injury by the employee. As such, the Court held that denying immediate recovery to Nuss would be a contravention of §25-5-11 (a). However, the Court ruled that Nuss could not force Monghan’s estate to liquidate the annuity so that Nuss could make an immediate and full recovery.

The Alabama Court of Civil Appeals recently considered a case where the Alabama Insurance Guaranty Association ("AIGA") sought reimbursement for money paid out to cover a workers’ compensation claim from a high-net-worth insured.

The AIGA is a state-run insurer that steps in to cover any unpaid claims that are made against state-licensed insurers by state residents when the insurer is judicially declared insolvent. However, high-net-worth insureds (those with assets greater than $25,000,000) are excluded from coverage by the AIGA.

This was the scenario presented in Alabama Insurance Guaranty Association v. Water Works and Santiary Sewer Board of the City of Montgomery. A dispute arose over payments made by AIGA to an injured employee of Water Works and Sanitary Sewer Board of the City of Montgomery ("the Board"). The Board’s workers’ compensation carrier had become insolvent and an injured worker’s claim was forwarded to AIGA. A number of years past before AIGA filed suit against the Board, believing it to be a high-net-worth insured.

The Board claimed that AIGA’s claim should be excluded as it was either a statutory "penalty" or a tort claim and a two year statute of limitations should apply. AIGA claimed that it was a contract action and a six-year statute of limitations should apply. After a number of hearings and summary judgment motions, the trial court found for the Board.

AIGA appealed the decision to the Court of Civil Appeals. The Court held that AIGA’s reimbursement claim was in the nature of a common-law action of debt and, as such, a six-year statute of limitations should apply. Therefore, AIGA’s filing of its claim against the Board was timely and the trial court was reversed.

In cases where a worker is injured by a third party’s wrongdoing the workers’ compensation insurance carrier is entitled to recover a portion of the benefits it pays out from the responsible third party (or their insurance company).  For example, if a delivery worker injures themselves during the course of a delivery on a third party’s property because of a third party’s negligence, the worker will have a workers’ compensation claim and the workers’ compensation insurance carrier will have a claim against the third party.  The workers’ compensation carrier’s derivative claim is called a subrogation lien.

There are many occasions where the cost of litigation makes it inefficient for the WC carrier to pursue this lien, especially in cases involving small compensatory medical benefits and no lost time at work.  Arbitration Forums’ Special Arbitration Agreement, however, provides a cost effective avenue for subrogation on these smaller claims.  Arbitration Forums (AF) has hundreds of members nationally that are either self-insured businesses or insurance carriers.  If the WC carrier and the third party’s insurance company are both AF members, and both are signatories to AF’s Special Arbitration Agreement, then the WC carrier will be able to compel arbitration for their subrogation lien under Article First (c) of the Agreement.  The Agreement allows for compulsory arbitration for recovery of the benefits paid to the worker only, and does not include additional damage that could have been sought by the injured worker.  AF will not be able to handle any claims where an injured worker is pursuing his or her own claim.

This ability to compel arbitration greatly reduces the costs of pursuing payment from the third party insurance carrier.  These lower costs vastly increase the number of claims where it is worth pursuing subrogation and could potentially result in millions of dollars saved over the long run.

According to AF’s website, “Recovery in Special Arbitration is ideal when: [a] third party tortfeasor is denying your lien; claimant will not be pursuing the bodily injury claim and recovery is allowed by state law; workers’ compensation benefit that were paid are relatively low and it isn’t costeffective to pursue through third party litigation; the foreign state provides for an independent right of recovery; claimant acknowledges that he is not represented and will not be pursuing a third party action.  Recovery in Special Arbitration for workers’ compensation may be problematic when: claimant is represented by counsel and either pursuing or planning to pursue a third party action, depending on the state you are in; claimant is pursuing an injury claim and by state law your lien is subject to that recovery; the foreign state does not provide for an independent right of recovery for the workers’ compensation carrier; the time period in which a carrier has to initiate a third party action has expired and the right to file now belongs to the claimant; future credit concerns overshadow the carrier’s interest in recovery of its lien.”

My Two Cents:

Ala. Stat. 25-5-11 doesn’t give an employer the pursue a subrogation lien independently until the statute of limitations has passed for the worker to pursue his own claim against the third party tortfeasor.  Once the statute of limitations has lapsed, the workers’ compensation insurer will have a six month window to file suit.  It is during this period that the Special Arbitration Agreement member workers’ compensation insurance carrier should determine if the opposing insurance company is also a signatory to the agreement.  If both companies are, then the workers’ comp carrier should submit their claim to AF and compel arbitration.

Ala. Stat. 8-1-41 (3) says that pre-dispute arbitration agreements are unenforceable under Alabama law.  However, this statute is preempted by the Federal Arbitration Act, 9 U.S.C. 1-14, in contracts affecting interstate commerce.  The United States Supreme Court has rejected the Alabama Supreme court’s stringent test that a contract must have a “substantial effect on interstate commerce” and instead has held that a contract must only “affect commerce” (which gives the broadest permissible exercise of Congress’ Commerce Clause Power) in order for the Federal Arbitration Act to apply.  Citizens Bank v. Alafabco, Inc., 539 U.S. 52 (2003).  Arbitration Forums’ Special Arbitration Agreement has signatories from insurance companies and self-insured employers all over the country.  It would almost definitely fall within the “broadest permissible exercise” of the Commerce Clause.  Therefore, the Federal Arbitration Act should govern any subrogation dispute that would arise from the Agreement, and 9 U.S.C.   2 specifically states that pre-dispute arbitration agreements are valid.

There are two of Arbitration Forums’ Rules that must be followed if the Special Agreement is being used to compel arbitration.  Rule 2-1 has a clause stating, “Special Arbitration should be filed within 180 days of payment to the claimant or the delay may be asserted as an affirmative defense if it can be shown to have caused prejudice to the party raising the defense.”  Since Alabama law only allows the workers’ comp carrier 6 months (180 days) to file a claim all legitimate Alabama claims should meet this rule.

Rule 1-2 states, “When a matter that should have been filed in arbitration under one of the Agreements is placed in litigation, the party filing in litigation must dismiss/discontinue the suit within 60 days of notification of the adverse party’s signatory status . . . if suit is not dismissed/discontinued, the party seeking removal may be entitled to statutory interests and all costs and expenses the court may deem appropriate.”  This basically places an affirmative duty on the party seeking subrogation to find out if the opposing party is also a signatory to the Special Arbitration Agreement.  If both parties are signatories, then Arbitration Forums is the only appropriate forum where subrogation can be sought.

One area that is unclear under Alabama law is whether or not filing for arbitration will toll a statute of limitations.  It is suggested that the comp carrier file arbitration as soon as they verify that the defendant company is a signatory to the Agreement, but if there are any unforeseen circumstances that make the possibility of arbitrating seem uncertain between filing and the end of the six month window, that the company go ahead and file the claim in state court in order to preserve the subrogation lien.

 For more information be sure to check out Arbitration Forums website and Gary L. Wickert’s article, “Sweating the Small Stuff: Arbitrating Workers’ Compensation Subrogation Files.”

www.alabamaworkerscompblawg.com