Employer Subrogation in Alabama

Of all the calculations and formulas used to calculate benefits and liabilities in worker’s compensation case, none have proven to be as frustrating and perplexing as the formula used to determine the subrogation rights of the employer when there has been a third-party recovery by the injured employee.  Alabama Code Section 25-5-11 bestows subrogation rights to the employer/worker’s compensation carrier when benefits have been paid and the employee makes a separate third-party recovery.  However, §25-5-11 (e) provides that the employer is responsible for pro rata share of attorney’s fees and expenses incurred in bringing about the third-party recovery.  The pertinent language is as follows:

     ‘In a settlement made under this section with a third-party by the employee or, in the case of his death, by his dependents, the employer shall be liable for that part of the attorney’s fees incurred in the settlement with the third-party, either with or without a civil action, in the same proportion that the amount of the reduction in the employer’s liability to pay compensation bears to the total recovery had from such third-party.’

What does all this mean?  it means that the employer, who benefits from the third-party recovery, does not get a ‘free ride’.  While some commentators argue that the subrogation provisions of this Alabama Code section are largely aimed at preventing a double-recovery by the employee, it is clear that a separate and important goal is to prevent the employer from benefiting from the employee’s third-party recovery and not paying their fair share of the attorney fees incurred by the employee.  Stated differently, the employer must take the bitter with the sweet.  “The obvious purpose of [this section] is to require the employer to pay something for having been saved from paying compensation which he would have paid for the third-party action.” [emphasis added] J.B. Baggett v. Webb, 248 So. 2d (Ala. Civ. App. 1971).

The first question to be answered is whether or not there has been recovery from a “third-party.” Mere recovery by an employee, after an on-the-job injury, from someone other than the employer does not always equate to a “third-party recovery.”  For example, the employer has no subrogation rights against an employee’s recovery of an uninsured/underinsured motorist benefits.  Bunkley v. Bunkley Air Conditioning, Inc., 688 So. 2d 827 (Ala. Civ. App. 1996).  §25-5-11 only applies to arecovery from a “third-party wrongdoer,” not from a “contract of insurance that is separate and apart from the wrongful conduct that injures the worker.” Id. at 831-832.  That said, once it is apparent that the recovery is from  a “third-party wrongdoer,” we begin the analysis to determine the amount owed, if any, to the employer.

The Alabama Court of Civil Appeals squarely addressed this issue for the first time in Fitch v. Insurance Company of North America, 408 So. 2d 1017 (Ala.Civ. App. 1981).  For instances where an employee receives worker’s compensation benefits and also obtains a third-party recovery, the court adopted an algebraic formula to ascertain the pro rata share of the attorney’s fee owed by the employer.  It is as follows:

Employer’s Reduced Liability =                          X                       

Third-Party Recovery                 Attorney’s Fees & Expenses

a. “X” equals the employer’s liability for attorney’s fees and expenses.  Ignoring the complicated nature of this formula, it has been loosely expressed in case law as follows: ‘[the employer] is obligated to pay one-third of the amount reimbursed to it nad one-third of the future liability from which it is released as it’s proportionate amount of this attorney’s fee.’ [emphasis added] Maryland Casualty Company v. Tiffin, 537 So. 2d 469 (Ala. 1988).  In other words, whatever the attorney’s contract is, whether it be one-third (as in Tiffin), forty percent, or fifty percent, the employer’s past subrogation interest is reduced by a pro-portionate share of the attorney’s fees and they must also pay the same proportion of their future liability, which was reduced or extinguished by virtue of the third party settlement.  The fact that the employer or worker’s compensation carrier intervenes in the third-party lawsuit or participates through an attorney is irrelevant.  The employer must still pay their proportionate share under the Fitch formula.  See Lewis Trucking Company v. Skinner, 671 So. 2d 696 (Ala. Civ. App. 1995)

b. “Employer’s Reduced Liability” represents the amount “saved” by the employer due to the third-party settlement.  In most third-party settlements, it will usually be the total amount of worker’s compensation benefits paid by the employer, plus any future liability extinguished by virtue of the third-party settlement.  If the worker’s compensation case is still pending at the time of the third-party settlement, the future liability can be established by agreement.

c. “Third-Party Recovery” is simply the full amount of the third-party settlement.

d. “Attorney Fees and Expenses” is the Plaintiff’s attorney fee plus expenses incurred.  “The Fitch formula allows for expenses.” Lewis Trucking v. Skinner, 671 So. 2d 696, 698 (Ala. Civ. App. 1995)

Once the formula is applied, “X” serves to reduce what the workers comp carrier is claiming and operates, when future medical treatment is anticipated, to require the carrier to pay a fee on what they will save in the future.