Risk Transfer: New Jersey Supreme Court Affirms Carrier-Friendly Subrogation Decision

In a decision helpful to New Jersey’s workers’ compensation insurers, on May 12, 2020 the New Jersey Supreme Court found that a workers’ compensation carrier seeking risk transfer actually has greater rights as subrogee than the petitioner-subrogor possesses in motor-vehicle accident cases.

Facts from the Supreme Court Decision

A New Jersey Transit Corporation employee, David Mercogliano, sustained injuries in a motor vehicle accident while in the course of his employment. As a result, New Jersey Transit became obligated to pay workers’ compensation benefits. The petitioner was covered under standard automobile insurance policy, which included coverage for PIP benefits. Pursuant to the right of subrogation afforded to workers’ compensation carriers under NJSA 34:15-40 (“Section 40”), New Jersey Transit filed a complaint against the defendants seeking to recoup amounts paid in workers’ compensation benefits. The defendants raised the affirmative defense of the claim being barred pursuant to New Jersey’s Automobile Insurance Cost Reduction Act (“AICRA”).

The Defenses Raised

The affirmative defense invoked by the defendants arises from something called the “verbal threshold” in New Jersey. The verbal threshold is also known as the “limitation on lawsuit” option for automobile insurance policies. In an effort to reduce insurance premiums and to provide some docket relief for trivial motor vehicle accident cases, New Jersey adopted AICRA. Essentially, the plaintiff’s own automobile insurance policy affects the plaintiff’s right to sue the defendants in exchange for lower premiums. The defendants can invoke the verbal threshold affirmative defense based on what coverage the plaintiff possesses. The verbal threshold bars suits for noneconomic damages (i.e., pain and suffering) unless the plaintiff has one or more of six qualifying injuries/conditions:

  1. Death
  2. Dismemberment
  3. Significant disfigurement or scarring
  4. Displaced fractures
  5. Loss of a fetus
  6. Permanent injury other than scarring or disfigurement (this is the “catch-all” and the most litigated)

The permanent injury (#6 above) must be within a reasonable degree of medical probability. In the statute, it is defined as when a body part or organ, or both, has not healed to function normally and will not heal to function normally with further medical treatment. This is where most cases, particular those involving soft tissue injuries, are won and lost. The plaintiff must within 60 days of the defendant’s answer provide a certification from a physician under penalty of perjury based on, and referring to, objective clinical evidence. New Jersey Model Jury Charge 5.33 provides that there must be a preponderance of the evidence and a permanent injury via objective, credible medical evidence. The verbal threshold can be invoked by the defendants as an affirmative defense and can form the basis for a motion for summary judgment.

In New Jersey Transit Corp. a/s/o Mercogliano, the defendants made the argument that the petitioner’s suit was barred by the verbal threshold, and they prevailed on this argument at the trial level. However, the Appellate Division ultimately reversed the decision on the basis that New Jersey Transit’s pursuit of reimbursement was not for noneconomic loss, but rather for economic damages in the form of lost wages and medical expenses. New Jersey Tr. Corp. v Sanchez, 457 NJ Super 98, 197 A3d 1158 (App. Div. 2018). Citing to Lambert v. Travelers Indemnity Co. of America, 447 N.J. Super. 61 (App. Div. 2016), the Appellate Division held that the carrier’s right of subrogation arises under the Workers’ Compensation Law, which is separate and distinct from the policies of AICRA. Therefore, New Jersey Transit, as the employer, was permitted to pursue the claim even though the petitioner’s own suit would be barred, in theory. The carrier is evidently entitled to reimbursement from the tortfeasors even though the employee would not be able to recover medical expenses and wage loss from their own automobile insurer or noneconomic damages from tortfeasors. This would seem to be contrary to the concept of subrogation in that the carrier is being afforded a cause of action that the worker themselves could not bring. Unsurprisingly, appeal was taken to the New Jersey Supreme Court by the defendants and the Supreme Court granted certification.

The Supreme Court Ruling

In a decision reached on May 12, 2020, split 3-3 between the New Jersey Justices of the Supreme Court, the Appellate Division decision was affirmed. A copy of the decision can be found here.

The Supreme Court found no conflict between AICRA and the New Jersey Workers’ Compensation Law, noting that the pursuit of lost wages and medical benefits in a workers’ compensation claim arises under the Workers’ Compensation Law, not AICRA, as the primary source of recovery. The Supreme Court concluded that the petitioner had suffered economic damages in the form of lost wages and medical treatment, and that New Jersey Transit Corp., as the employer, was permitted to seek reimbursement via subrogation pursuant to Section 40, notwithstanding AICRA and the verbal threshold.

Why This Is Helpful to Workers’ Compensation Carriers

Practically, this decision represents an uncommon boon for workers’ compensation carriers. This is a rare instance where the carrier actually has greater rights as subrogee than the petitioner-subrogor possesses. Whereas the petitioner’s claim would have been barred by the verbal threshold based on his election for the limitation on lawsuit option in his automobile insurance policy, the employer’s action as subrogee survived summary judgment and, in the view of the New Jersey Supreme Court, should be allowed to continue. The practical implication of this ruling is that the carrier should liberally pursue reimbursement via subrogation pursuant to Section 40 in New Jersey motor vehicle accident cases. One of the most powerful defenses afforded to defendants in such actions does not hamper the carrier’s ability to prosecute the claim, even where the petitioner would have no cause of action. Therefore, there is little harm, and potentially substantial upside, in filing a subrogated civil complaint on behalf of the carrier in a New Jersey Superior Court in cases where liability of the defendants (and the adverse carrier thereby) seems clear. This should permit recovery via subrogation in cases where, previously, there was no opportunity for reimbursement because the petitioner’s own action would be barred by the verbal threshold based on their injuries.

What is Risk Transfer?

The concept of risk transfer refers to the idea that if someone else can (or should) be blamed for the petitioner/claimant’s injuries, fundamental fairness dictates that the carrier’s liability for payment of workers’ compensation benefits should be passed on to such other person or entity. The workers’ compensation carrier has several metrics for measuring the success of defense efforts, including the time from opening to closure and keeping total costs under claim reserves. The “30,000-foot view,” however, includes the costs and expenses that were transferred or shared with another party. From a commonsense perspective, the end-of-the-day “balance sheet” for the carrier is every bit as important as any other metric.

For instance, assume that the carrier successfully litigates a claim and is able to settle for $30,000. Assume that, in a different claim, the carrier is able to settle a claim for $90,000 but is later able to recover two-thirds ($60,000) from a third-party settlement or judgment. The resolution of the former claim is seemingly more favorable, however from the perspective of overall exposure, the latter claim is just as favorable. This is why a thorough and effective pursuit of risk transfer is every bit as vital and essential as any of the other foregoing defense tactics.

Ways of Pursuing Risk Transfer

The most common method of risk transfer is the assertion of a lien on any settlement or judgment obtained by the petitioner/claimant in a civil action against a third party. Both New York Workers’ Compensation Law Section 29 (“Section 29”) and New Jersey Statute 34:15-40 (Section 40) provide for this right. Oftentimes, enforcing a lien is viewed as a simplistic, almost academic exercise: the petitioner/claimant is settling their third-party case, and as the workers’ compensation carrier we are permitted a right of recovery. This viewpoint fails to account for the necessity of properly perfecting that reimbursement right and maximizing its impact on the underlying workers’ compensation claim.

While New York’s Section 29 is by and large self-executing, Section 40 in New Jersey requires affirmative action on the part of the carrier to truly perfect the right of reimbursement. Most carriers or defense firms will serve a Section 40 lien notice on the petitioner’s workers’ compensation attorney or the petitioner’s third-party civil counsel and assume that they have properly exercised their rights under Section 40. However, subsection (d) of Section 40 actually requires service of a lien notice via registered mail on the liable third parties themselves or their attorneys. The serving of such notice gives the Section 40 lien priority. Before paying anything to the petitioner, the third parties are required to inquire as to the total extent of the Section 40 lien as well as the petitioner’s third-party attorney’s fee and “expenses of suit.” Thereafter, the third parties are obligated to pay the Section 40 lien before issuing dollar one to the petitioner. This serves as powerful leverage in negotiating a favorable and proper lien reimbursement, as third-party attorneys will often insist on “1/3rd, 1/3rd, 1/3rd” for each party. There is no rule requiring an even split of the settlement or judgment proceeds in either New York or New Jersey, and the carrier should never consent to such a structure without first demanding full reimbursement.

The potential impact of a lien extends beyond just the concept of obtaining a reimbursement, however. In many cases, the Section 40 or Section 29 lien can be used to leverage a “global settlement” encompassing an ongoing workers’ compensation claim. For instance, if the petitioner/claimant is classified with a permanent disability, they may be unmotivated to settle given the weekly benefit payments and the fact that medical treatment remains open. However, if there is a substantial Section 40 or Section 29 lien, the prospect of having this money go into their pocket immediately can serve as strong motivation for the petitioner/claimant to close out their workers’ compensation claim. The total value of a permanency award may not be significant enough to motivate the petitioner/claimant to accept a lump-sum settlement; however, the workers’ compensation lien could be substantial. For instance, the total value of the permanency award could be $25,000, however the third-party settlement could be $150,000 with a $50,000 workers’ compensation lien. The prospect of walking away from the third-party settlement with an extra $50,000 if the lien is waived can serve as strong motivation for a petitioner/claimant to finally agree to settle the workers’ compensation claim. This effectively ends the carrier’s exposure without paying any additional money in to the case.

Beyond this, Section 40 and Section 29 both provide the workers’ compensation carrier a statutory right of subrogation. In New York, six months after the awarding of compensation or one year after the date of loss (whichever comes first), the carrier is permitted to serve the claimant with a Section 29(2) notice of intent to file a subrogated civil action thirty days after the notice if the claimant does not file the suit themselves. In New Jersey, the Section 40(f) notice can be served one year after the date of loss and, if no suit is filed by the petitioner within 10 days of the notice, the carrier is permitted to subrogate the claim. The carrier’s subrogation rights can be weaponized for pushing timely closure. New Jersey has a two-year personal injury statute of limitations, and New York has a three-year personal injury statute of limitations. This means that, conceivably, the carrier could resolve the workers’ compensation claim within six months but end up waiting another year, possibly even two years, before they receive their reimbursement. Serving the Section 40(f) or Section 29(2) notice when the claim is first eligible may, at the very least, motivate the petitioner/claimant to retain counsel and file their own claim. However, if they fail to do so the carrier can file a complaint against the third party and secure a settlement immediately if they so choose.

In some instances, the carrier may have rights of recovery that the petitioner/claimant does not possess. For instance, the 2018 New Jersey Appellate Division case New Jersey Transit Corp. v. Sanchez (457 N.J. Super. 98) held that the carrier’s right of subrogation under Section 40 was separate and distinct from the Automobile Insurance Cost Reduction Act. Where the petitioner’s own claim would have been barred by the so-called “verbal threshold” in New Jersey, the carrier was still permitted to prosecute their subrogation action under Section 40. Similarly, the right to intercompany loss transfer under New York’s Section 29(1-a) and Insurance Law Section 5105 is a right of recovery directly against the liable third-party defense carrier that the claimant does not possess. When a motor vehicle accident case qualifies for intercompany loss transfer (if any vehicle in the accident either weighs over 6,500 pounds unladen or is used principally “for hire” for the transportation of persons or property), the workers’ compensation carrier can file for intercompany loss transfer to seek reimbursement from the third-party directly.

In New York motor vehicle accident cases, oftentimes the third-party attorney will assert that there is an inviolable, blanket, non-negotiable $50,000 “carve out” to the workers’ compensation carrier’s Section 29 lien based on New York’s “No-Fault Law” (Article 51 of the New York Insurance Law). This is not the case, however, and it should never be conceded without proper investigation. Accidents outside the State of New York are not subject to the “carve out,” even if it is a New York workers’ compensation claim. The accident must arise from the “use or operation of a motor vehicle” in the State of New York. Therefore, when the facts do not qualify as “use or operation” (using the motor vehicle as a motor vehicle) or the vehicle at issue is not a motor vehicle for the purposes of the “No-Fault Law” (motorcycles, caterpillar-type equipment on construction sites, etc.), there is no “carve out.” Amounts that are not paid “in lieu of first-party benefits” are subject to lien rights under Section 29. For instance, indemnity paid in excess of $2,000 per month or indemnity paid more than three years after the date of loss are both subject to Section 29 whether or not $50,000 has been paid. Moreover, the workers’ compensation carrier is not solely responsible for payment of the $50,000 before there are Section 29 lien rights; the first $50,000 in “basic economic loss” is from all sources. If the claimant is receiving any additional wage replacement benefits from their employer or their own automobile liability carrier, or if their automobile liability carrier pays for treatment that may have been deemed noncompensable under the workers’ compensation claim, these amounts are added to the workers’ compensation payments to determine whether $50,000 has been paid in first-party benefits.

How LOIS Can Help You Assess and Pursue Risk Transfer

Risk transfer is one of the most powerful yet underutilized tools in the workers’ compensation carrier’s tool belt. At LOIS, we commence aggressive investigation into the feasibility of pursuing risk transfer immediately. Timely and thorough discovery is essential to preserve and protect all statutory lien, reimbursement, future credit/offset, subrogation and loss transfer rights. By assessing the facts of the underlying accident, we determine whether there is another party potentially responsible for the petitioner/claimant’s injuries at file intake. We take special notice of all deadlines, including when the claim is first eligible for filing a subrogated civil action and, thereafter, we can file a civil complaint on the carrier’s behalf. We assert the carrier’s statutory demand for reimbursement via continuous service of lien notices pursuant to Section 40 and Section 29 and close monitoring of the third-party action case dockets. When a claim is eligible for intercompany loss transfer, we serve the third-party carrier with the Intercompany Reimbursement Notification immediately to commence the process and can take the matter to intercompany arbitration if a favorable settlement is not offered.

LOIS handles all aspects of reducing exposure in workers’ compensation claims, including pushing risk transfer from day one. With our “cradle-to-grave” approach to handling workers’ compensation claims we develop an intimate familiarity with the facts of the underlying workers’ compensation claim, which serves as a powerful foundation in assessing and pushing risk transfer in each and every claim we defend. Lois LLC has a dedicated civil practice team to handle all lien reimbursement, subrogation, “global settlement,” and intercompany loss transfer issues as part of our comprehensive defense efforts.

The time to assess for risk transfer is now!

Christopher Major is an attorney who handles workers' compensation and general litigation at Lois LLC. Christopher defends the rights of carriers and self-insureds in reimbursement claims under New York WCL § 29 and New Jersey’s Section 40 (N.J.S.A. 34:15-40) as well as any other related litigation. He can be reached at 201-880-7213 x 103.