NC. Gen. Stat. §97-10.2. Workers’ Compensation Liens in North Carolina
Are Efforts to Recover Worth the Expense? (Threshold Analysis & Calculations)
For the purposes of this discussion, I’ll assume a hypothetical final lien value of $400,000.00 (which incorporates the out of work pay, medical costs, and settlement values arising from a resolved workers’ compensation claim).
There are at least three threshold issues faced in recovering on a NC WC lien.
First, the lien is only recoverable out of whatever value the Plaintiff receives in a claim against a would-be tortfeasor. As such, an initial threshold question for Defendants’ going into a subrogation effort aimed at recovering payments made within the WC context, will always be whether, and to what degree, the policies providing coverage for the tortfeasor (be they general liability policies, personal auto, or UIM), provide sufficient values from which both Plaintiff and the WC lien holder can sufficiently recover.
Type of vehicle, business, and/or nature of the accident involved deserve consideration in addressing this threshold question. Meaning, as far as indicators for a worthwhile lien recovery effort go, there is a difference between a would-be tortfeasor driving a Maserati and a Yugo. Likewise, there is a difference between an accident involving labor at a personal residence (implicating, at most, a home owners policy which may contain exclusionary clauses negating coverage for negligence) versus a construction site or rail yard (involving multiple tiers of interlocking and overlapping policies covering all manner of risk). In this context, it is worth noting that certain industries, by Statute, are required to carry much higher minimum limit coverages. At times, these minimum limits range into the millions.
In addition to the above threshold question of available ‘coverage’ with/for the tortfeasor, a lien holder has an additional analysis to undertake during the development of the lien-recovery claim – that of the range of anticipated recovery from those available coverages. Meaning, even where coverage exists, to what degree will an application of the governing law allow a full (or more robust) recovery for both the individual who was injured and the lien holder thereafter?
There is no short form method for assessing this, as the governing statutes, legal standards, burdens of proof, and evidentiary concerns for any given claim vary dramatically. Nonetheless, certain considerations are worth underscoring in North Carolina.
Statute of Limitations (as to the lien holder specifically):
Within the context of recovering on a NC WC lien, a lien holder may bring suit against the tort feasor in their own name beginning one (1) year from the date of the incident. This right to assert the claim for themselves ends two (2) months prior to the applicable statute of limitations running for the injured individual. (i.e. for a claim involving simple negligence from a motor vehicle accident, a three year statute of limitations would apply for the injured individual. The lien holder could bring the claim forward themselves up until 2 years and 10 months from the date of the accident).
Contributory Negligence:
The specter of “contributory negligence” defenses in North Carolina, while not unjustified, and certainly worthy of consideration, is arguably overblown. To frame this comment, I will simply state a North Carolina jury can be instructed that IF it finds an injured individual was even 1% at fault, it should conclude the injured individual is not entitled to any recovery from another involved party to the claim. The point being, that the defense requires certain facts to be present, AND is ultimately a jury instruction (in a world in which ‘nuclear verdicts’ and run away’ juries are as much a discussion on the Defense side as Contributor Negligence is a concern on the Plaintiff side). I conclude, then, that if the goal of subrogation is some degree of recovery from the tortfeasor via a pre-trial compromise, such jury instructions (while not to be wholly ignored if certain obvious fact issues are at play) are unlikely to be the lynchpin in deciding whether to engage in the first phases of litigation to obtain that compromised recovery.
Contractual Clause Considerations (Choice of Law & Contractual Indemnification):
“Choice of Law” clauses are enforceable and legal in North Carolina. I mention them in the context of this discussion because, if there are contractual relationships underlying the coverage questions being analyzed, make certain you know which State’s laws are governing the legal disputes under review (i.e. indemnification clauses are treated differently from State to State and may create limits on potential recovery).
Anti-indemnity statutes within North Carolina (and many other States) limit the legality and enforceability of contractual indemnification clauses memorialized between parties which may, ultimately, face off in subrogation matters. By way of example, N.C. Gen. Stat. §62-212 (2021) “Indemnity agreements in motor carrier transportation contracts,” prohibits, on public policy grounds, clauses purporting to indemnify, defend, or hold harmless a ‘promisee’ from liability arising from negligence. The statute specifically notes that it applies to prohibit indemnification for negligence while providing transportation of property, loading/unloading the property, or for services incidental to the same. Likewise, N.C. Gen. Stat § 22B-1, renders indemnification clauses within construction and design professional contracts void as against public policy.
Having stated that, it bears noting that these statutory limitations on indemnification agreements/clauses are drafted with a specific and narrow application in mind. As such, considerations surrounding a party’s duty to defend, incorporate a party as a named insured within its own policy coverages, and/or provide attorney fees arising from an action between the contracting parties, should remain a part of the strategic and fiscal claim analysis. I would add, a party’s own participation in the harm cannot be ‘voided’ as against public policy. Meaning, if ‘contract-party A’ agreed to indemnify ‘contract-party B’, so long as contract-party A’s actions were a contributing factor in the harm ultimately caused by contract-party B, Contract-Party A cannot avoid exposure for liability caused by its own negligence/actions simply because Contract-Party B’s actions joined in to cause the harm.
A final threshold question for any would be lien recovery effort involves the reality that, even if coverage exists, and even if recovery is a viable option under the law, the lien can be reduced or extinguished beyond said recovery in tort! Meaning, the statute governing WC lien recovery in North Carolina, N.C. Gen. Stat. §97-10.2, also provides a means by which a Plaintiff can move to have the workers’ compensation lien partially reduced or even fully extinguished based on a broad spectrum of factors (including the simple discretion of the court before which the motion to reduce/extinguish the lien is brought).
In opting for a lien recovery hearing (over lien resolution by compromise) a lien holder should consider that facts which support a more full recovery of a NC WC lien are rare – as they would necessarily entail an extremely robust recovery within the tort claim, without the injured individual being able to suggest to the court that they experienced/suffered much permanent injury extending beyond the values paid out in the WC claim. Put more simply, it would be rare that a significantly large recovery via a civil suit in Superior Court would arise from a benign injury otherwise paid out in small(er) values within the context of a related Workers’ Compensation matter.
Calculations:
Assuming a lien holder has reached the conclusion that 1) there is coverage; 2) the claim for recovery against a tort-feasor out of that coverage is viable; and 3) the facts of the underlying claim and the range of potential coverage is such that the lien has a reasonable chance to recovery without being wholly extinguished, a cost-benefit analysis becomes a reasonable next effort.
N.C. Gen. Stat. 97-10.2 details that out of any third-party claim, the workers’ compensation carrier/defendant may recover up to the entire value of the lien so long as it is taken from the remainder of the third-party recovery following payment of attorney fees, and court costs. Importantly, as it relates to the payment of the attorney fee, the WC lien holder provides a pro-rata portion of that fee out of the overall lien recovery.
Unfortunately, there is very little case law to provide guidance as to the meaning of how one is to understand/apply the meaning of N.C. Gen. Stat. §97-10.2(f)2 (dealing with the pro-rata sharing of attorney fees). I run through two applications I have argued through.
Claimant’s Calculation: While typically asserted by the injured individual’s attorney, the opposing subrogation/lien-recovery attorney may wish to point out that, were the court to adopt this application, no lien recovery would ever entail a full recovery of the total lien value (an outcome which the plain language of the statute suggest was not its intent).
Example:
25K lien
150K recovery in tort.
Plaintiff’s attorney gets $50,000.00 of the tort recovery for tort-attorney fees (1/3 of the recovery)
100K left over from the tort recovery.
Preliminary analysis suggests that 25K of the 100 would go to the lien holder, while 75K would go to Plaintiff (a 25/75 split of the available values)
But the ‘pro-rata sharing of attorney fees’ under this interpretation of the statute translates into 25% of the 50K attorney fee ($12,500.00) being paid by the lien holder before the lien holder walks away with the remainder of its perceived recovery.
This means that only $12,500.00 is left over for the lien holder at the end of the analysis (or 50% of the lien), and despite there being more than enough for both the plaintiff and lien holder to recover value under the claim.
Applying the statute in this manner unfortunately means, even if there is a policy, and even if the policy provides enough coverage for the tortfeasor to provide sizeable recovery to both the Plaintiff and the lien holder out of the tort claim, AND even when those values are recoverable, a less than full recovery of the lien is the outcome.
Equitable Calculation: Instead of interpreting §97-10.2(f)2 as outlined above, another proposed application of the ‘pro rata attorney fee split’ I have seen applied, is as follows:
Example:
25K lien
150K recovery in tort.
Plaintiff’s attorney gets $50,000.00 of the tort recovery for tort-attorney fees (1/3 of the recovery)
100K left over from the tort recovery to split between the injured claimant and the lien holder.
In order distribute the values between the injured claimant and the lien holder, the parties to the WC claim must file a proposed order for distribution with the NCIC. It is possible that the Plaintiff will use and/or retain an attorney to accomplish that effort (or that the already retained tort attorney will be required to expend time/energy/effort to the task). This adds a cost element to the distribution required under 97-10.2(f).
The pro rata split of attorney fee discussed at §97-10.2(f)2 is more reasonably interpreted to express that these additional attorney costs (expended to get the remainder of the tort funds distributed) are to be split pro rata between the injured claimant and the lien holder. The provision is located at that point in the statutory explanation for the division of value amongst the interested parties; and, it specifically references the distribution issue by the NCIC as the aspect of the value being discussed.
Assume, then, that it takes an additional $2,000.00 (or 10 hours at $200.00 per hour) for the distribution attorney to accomplish the distribution of funds between the injured employee and the lien holder. If the lien of $25,000.00 is 25% of the value being distributed between the injured individual and the lien holder, than 25% of the $2000.00 attorney fee is paid by the lien holder, and the outcomes are as follows:
Of the overall 150K recovery in tort:
$50,000.00 to tort-attorney
All paid out of the tort recovery before any analysis of distribution is undertaken (in line with the plain language of the statute that precedes §97-10.2(f)2
$24,500.00 to lien holder
$2,000.00 to the distribution attorney
($1,500.00 paid out of Plaintiff’s share; and $500.00 paid out of the lien holders’ recovery)
$73,500.00 to Plaintiff.
Under this analysis/calculation, the outcomes are perpetually closer to the plain intent of the statute (to provide a recovery to the lien holder for up to the full value of their lien where possible).
Overall Conclusion.
A workers’ compensation lien holder has a great deal to consider before expending time, effort and attorney fees toward lien recovery efforts. Even when the threshold analysis arrives at the conclusion that available coverage could likely provide some recovery, the issues of distribution of final values cannot be avoided. Depending on the facts, the judge, and the attorneys involved, even ‘best-case-scenarios’ may land at a 50% or below outcome. For this reason, where attorney fees arising from lien recovery efforts would eclipse the value of a 50% outcome, a lien holder may very well conclude that ‘compromise is king.’
Calculation in the Context of an additional UIM policy providing some recovery to Plaintiff within the Tort Claim.
I have a personally autographed copy of George L. Simpson, III’s book, “UNINSURED AND UNDERINSURED MOTORIST INSURANCE.” It is a prized possession which I lift from the shelf to show people whenever the topic of WC lien recovery in the context of a UIM policy is brought up. With deference to the education Mr. Simpson’s book provided me in my early years of practice, in the below paragraphs I attempt to apply the workers’ compensation lien recovery calculations dictated by N.C. Gen. Stat. 97-10.2 to a scenario involving a UIM policy payout.
Preliminarily, in certain cases, the same insurance carrier may provide UIM coverage for an employer who’s worker is injured. In that context, and if the facts and coverages at play with the underlying injury allow for it, such an injured worker might have claims for recovery against both the employer’s WC policy and the employer’s UIM policy. In that subset of cases, the carrier will reasonably be asking itself whether it could accomplish some self-serving balancing of exposures /recoveries between the WC lien recovery and UIM policy payouts during settlement negotiations. Put more plainly – ‘is it the case that the more UIM pays into Plaintiff’s tort recovery, the greater the possible recovery the WC policy may ‘enjoy.’ If so, is it, then, worthwhile for UIM to pay more, so that it can pay itself back in lien recovery?!?’
Fortunately, this paradoxical inquiry is resolved by precedent which dictates that a UIM policy is entitled to a dollar for dollar offset of its exposure to the tune of the full value of a known WC lien (whether or not the WC lien is compromised by/through negotiation or a §97-10.2(j) hearing. So, UIM in this context is ‘unbothered’ by the implications of a WC lien settlement/reduction/extinguishment. Likewise, when one runs the math, the WC lien recovery analysis is vastly ‘unbothered’ by UIM’s participation in the tort-recovery side of the matter (as the §97-10.2(f)2 attorney fee calculation serves to cap the WC recovery against larger ‘contributions’ via UIM settlement.
Enough ‘talking,’ here is the math:
Assumptions:
Tortfeasor’s own policy Coverage ($30,000.00)(tendered)
Actual value of tort claim (by settlement or verdict) ($300,000.00)
WC lien ($70,000.00)
UIM coverage ($1,000,000.00)
Available UIM coverage in light of actual tort value, but after credits of the tendered policy and WC lien are applied ($200,000.00)
Plaintiff’s tort-attorney fees are set at 1/3 Plaintiff’s actual recovery.
*****
Outcomes if UIM pays its full exposure (of $200,000.00):
Tortfeasor policy tendered and paid its 30K.
UIM is exposed to only $200,000.00K
The total recovery is not 300,000K, but $230,000.00.
Plaintiff’s attorney gets: $76,668.20 of the $230,000.00
WC Lien and Plaintiff are left to divide $153,331.80
$70,000.00 lien value is 45.65% of the distributable $153,331.80
45.65% of the $76,668.20 attorney fee is $34,999.03
Meaning, WC can, at most, recover $35,000.96 of its 70K lien; and pays $34,999.04 toward the attorney fee
Plaintiff can recover $118,330.84 and pays $41,669.16 toward the attorney fee.
Outcomes if UIM pays 150,000.00 (of $200,000.00 in exposure):
Tortfeasor policy tendered and paid its 30K.
UIM is exposed to only $200,000.00, but settles for $150,000.00
The total actual recovery is $180,000.00.
Plaintiff’s attorney gets: $60,000.00 of the $180,000.00
WC Lien and Plaintiff are left to divide $120,000.00
$70,000.00 lien value is 58.33% of the distributable $120,000.00
58.33% of the $60,000.00 attorney fee is $35,000.00
Meaning, WC can, at most, recover $35,000.00 of its 70K lien, while it pays $35,000.00 toward the attorney fee
Plaintiff can recover $85,000.00 and pays $25,000 toward the attorney fee.
Outcomes if UIM pays $100,000.00 (of $200,000.00 in exposure):
Tortfeasor policy tendered and paid its 30K.
UIM is exposed to only $200,000.00, but settles for $100,000.00
The total actual recovery is $130,000.00.
Plaintiff’s attorney gets: $43,290.00 of the $130,000.00
WC Lien and Plaintiff are left to divide $86,710.00
$70,000.00 lien value is 80.73% of the distributable $86,710.00
80.73% of the $43,290.00 attorney fee is $34,948.02
Meaning, WC can, at most, recover $35,051.98 of its 70K lien, while it pays $34,978.02 toward the attorney fee
Plaintiff can recover $51,658.02 and pays $8,341.98 toward the attorney fee.
Outcomes if UIM pays $50,000.00 (of $200,000.00 in exposure):
Tortfeasor policy tendered and paid its 30K.
UIM is exposed to only $200,000.00, but settles for $50,000.00
The total actual recovery is $80,000.00.
Plaintiff’s attorney gets: $26,672.00 of the $80,000.00
WC Lien and Plaintiff are left to divide $53,328.00
$70,000.00 lien value is 131% [100%] of the distributable $53,328.00
100% of the $26,672.00 attorney fee is $26,672.00
Meaning, WC can, at most, recover $26,656.00 of its 70K lien, while it pays $26,672.00 toward the attorney fee
Plaintiff can recover $26,672.00 and pays $0.00 toward the attorney fee.
What the above calculations express is the fact that the statutory provisions surrounding WC lien distributions out of available tort recoveries ensure UIM will never act as a windfall to the WC lien recovery effort. If UIM paid far and above the worth of the claim, WC lien would still only enjoy a 50% recovery, at most, of its lien. The inverse is true as well, since, UIM does not increase or decrease its exposure to Plaintiff’s damages where the WC lien is compromised or settled at a higher or lower value (as, the dollar for dollar offset is baked into the calculous from the start).