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Jun 18, 2018

Supreme Court of Texas Upholds Precedent that Workers’ Compensation Carriers Who Issue Endorsements Waiving the Right of Recovery from Third Parties Cannot Seek Reimbursement from Settlement Proceeds Paid by Third Parties

By: Julie Shehane

           Typically, workers’ compensation carriers have the right to seek reimbursement of the amounts they pay to an injured employee from a liable third party.  It is increasingly common, however, for employers to pay an additional premium for endorsements that waive the carriers’ rights to seek recovery from any third parties sued by covered employees.  In fact, it is a common practice for general contractors, construction managers, and owners to require subcontractors to include a waiver of subrogation on the subcontractors’ workers’ compensation policies. 

            Recently, the Texas Supreme Court considered a carrier’s argument that, although the waiver acts to prevent the carrier from pursuing the third party directly, it can still recover indirectly from the settlement proceeds a liable third party pays to the employee in Wausau Underwriters Ins. Co. v. Wedel.[1]  In the majority opinion, the Texas Supreme Court rejected the carrier’s argument.

            James Wadel was a truck driver for Cactus Transport, Inc. (“Cactus”) and sustained injuries while loading asphalt.  His employer’s workers’ compensation carrier, Wausau Underwriters Ins. Co. (“Wausau”), provided Mr. Wadel with workers’ compensation benefits.  Mr. Wadel sued Western Refining Company, L.P. (“Western”), who owned the terminal where Mr. Wadel had been loading asphalt when he was injured.  He alleged that Western’s negligence caused his injuries and damages.  For Mr. Wadel’s employer, Cactus, to gain access to Western’s facility, Western required that Cactus obtain workers’ compensation benefits and purchase a “waiver of subrogation” endorsement in favor of Western.  In other words, Western required Cactus to pay an additional premium for an endorsement that provided that Wausau could not subrogate against Western for amounts Wausau paid in workers’ compensation benefits to employees of Cactus.

            After Mr. Wadel sued Western, Wausau intervened in the action to assert its subrogation rights for past and future medical expenses and indemnity payments made to Wadel.  Western asserted that Wausau had no right to recover against it due to the “waiver of subrogation” endorsement contained in the Wausau policy.  That endorsement read:


.           .           .           .

We have the right to recover our payments from anyone liable for an injury covered by this policy. We will not enforce our right against the person or organization named in the Schedule [Western], but this waiver applies only with respect to bodily injury arising out of the operations described in the Schedule where you are required by a written contract to obtain this waiver from us.

This endorsement shall not operate directly or indirectly to benefit anyone not named in the schedule.

.           .           .           .

The premium charge for this endorsement shall be 2 percent of the premium developed on payroll in connection with work performed for the above person(s) or organization(s) arising out of the operations described.

            Wausau argued that, while the language in the endorsement precluded its right to seek reimbursement directly from Western, it did not waive its right to pursue reimbursement from Mr. Wadel’s recovery from Western.  Wausau sought to reimburse itself for the payments it made/would pay from the settlement proceeds received by Mr. Wadel.  Wausau further argued that to construe the endorsement to allow an employee to retain his/her recovery from a third party, without reimbursing the workers’ compensation carrier, would violate the endorsement’s language that it not “operate directly or indirectly to benefit anyone not named in the schedule.” 

            In considering the issue, the Texas Supreme Court first noted that the Texas Department of Insurance has not substantively changed the language of the endorsement, even after twenty years of case law unanimously holding that the endorsement does not allow a workers’ compensation carrier to recover from the proceeds paid to an employee from a third party.  Had the Department believed that courts had been misinterpreting the endorsement, it could have re-written the endorsement. 

            Second, the Texas Supreme Court found that prior court decisions and the interpretations from the Texas Department of Insurance reflected the plain language of the endorsement.  The Court determined that the carrier’s attempt to collect from settlement proceeds, rather than pursue the third party directly, is no less an attempt to “enforce” the right that the carrier waived through the endorsement.  According to the Court:

Under either scenario, the reimbursement the carrier attains flows from the third party. True, the waiver speaks to the carrier’s right to recover from liable third parties, not injured employees. But any settlement the employee receives from the carrier is a recovery from a liable third party. Once paid, the money belongs to the employee, but it did not exist before the third party made the payment to dispose of the employee's lawsuit. The waiver’s language does not compel us to ignore the source of the proceeds the carrier seeks to capture simply because they flowed through the employee.

            The dissent and the carrier argued that the right to subrogation and the right of reimbursement are two, separate and distinct rights found in Texas Labor Code sections 417.001 and 417.002.  The endorsement, they argued, only addresses the carrier’s subrogation rights, but not its interest to recover proceeds from the injured employee’s settlement.  The Court, however, rejected the argument and relied on precedent finding no such distinction. 

In reaching its decision, the Court held that the carrier and dissent’s reading of the waiver vitiates the purpose of having the waiver.  The employer paid an increased premium for the waiver specifically so that the carrier could not seek reimbursement from liable third parties.  If the carrier is permitted to wait and seek recovery of settlement funds from the employee, it would cost more to resolve the case and the carrier’s reimbursement right would influence the amount it would take to settle the third-party claim.  The Court noted it was not speculating on the impact on litigation, as it was exactly what had transpired in the case:  settlement negotiations halted once Wausau intervened and asserted its right to seek reimbursement of any settlement proceeds. 

            The Court additionally was not persuaded by the argument that the waiver’s language—stating it “shall not operate directly or indirectly to benefit anyone not named in the schedule”—functions to allow the carrier to seek reimbursement from the proceeds of the settlement.  Although the Court conceded its decision could benefit the employee, it reasoned that it actually benefits the third party more because the third party then can negotiate freely without the carrier’s reimbursement claim increasing the cost to settle.  Indeed, benefitting the third party is the exact purpose of the waiver in the first place, and why the employer paid the higher premium. 

            Liens and reimbursement claims often drive up the settlement value of claims and force cases to trial that otherwise could have been settled.  This recent decision from the Texas Supreme Court will allow third parties and injured employees to continue to freely negotiate settlements without workers’ compensation carriers’ claims for reimbursement looming over the settlement and increasing the costs, where there is an applicable subrogation waiver endorsement on the employer’s insurance policy.          

[1] No. 17-0462, 2018 WL 2750567 (Tex. Jun. 8. 2018).  The full opinion can be found here: