Expert Commentary

Subogation Rights Against Personal Auto Uninsured Motorists Coverage

The statutory right of a workers compensation insurer or employer to subrogate against a third party generally does not include rights to personal auto uninsured/underinsured motorist (UM/UIM) benefits.


Courts and Coverage
March 2004

Most workers compensation acts afford the employer or workers compensation insurer a statutory right to subrogate against a third-party tortfeasor. Alternatively, the employer or workers compensation insurer is granted a lien on the proceeds of a recovery from such a party. Where the loss is occasioned by an uninsured motorist, the question arises whether the injured employee's personal auto uninsured motorist insurer is within the contemplation of such subrogation statutes, entitling the workers compensation insurer or employer subrogation rights to the uninsured motorist coverage.

This article examines this question. The analysis of this question begins with the statutory right of subrogation and the courts' interpretation of that right. Then, the courts may turn to analysis of public policy in determining whether to allow subrogation rights against the uninsured/underinsured (UM/UIM) coverage.

Statutory Right of Subrogation

Workers compensation acts include a section that affords the employer or workers compensation insurer the right to subrogate where the compensable injury was "caused under circumstances that created a legal liability for damages on the part of a party other than the employer." Workers compensation insurers argue that the words "legal liability" are operative words and subject the UM/UIM coverage to subrogation because the compensation insurer is under a legal liability to the employee to pay the loss caused by the uninsured motorist. However, the majority of courts have held that the word "damages" qualifies the words "legal liability" and thus permits subrogation only where the liability is in tort. The argument goes that because the UM coverage is strictly contractual, the UM insurer is not considered a "third party" within the contemplation of the subrogation statutes. See the following cases.

  • State Farm Mut. Auto. Ins. v Cahoon, 287 Ala 462, 252 S2d 619 (1971)
  • Allied Mut. Ins. v Larriva, 19 Ariz App 385, 507 P2d 997) (Div 2 1973)
  • Travelers Ins. v National Farmers Union P&C, 252 Ark 624, 480 SW2d 585 (1972)
  • State Compensation Ins. Fund v Commercial Union Ins., 631 P2d 1168 (Colo App 1981)
  • State Farm Mut. Auto Ins. v Board of Regents, 226 Ga 310, 174 SE2d 920 (1970), on remand, 121 Ga App 804, 175 SE2d 896
  • Knight v Ins. Co. of N. Amer., 647 F2d 127 (10th Cir 1981)
  • State Farm Mut. Ins. v Fireman's Fund Amer. Ins., 550 SW2d 554 (Ky 1977)
  • Gautreaux v Pierre, 254 S2d 476 (La App 3d Cir 1971)
  • Commissioners of State Ins. Fund v Miller, 4 AD2d 481, 166 NYS2d 777 (1st Dept 1957); Shutter v Philips Display Components Co., 90 NY2d 703, 665 NYS2d 379, 688 NE2d 235 (1997)
  • Standish v American Mfrs. Mut. Ins., 698 A2d 599, 601 (Pa Super 1997)
  • Hudson v Hudson Munic. Contractors, 898 SW2d 187 (Tenn 1995) (an insured's recovery of UM benefits should not be subject to both a deduction for workers compensation benefits and a subrogation claim by the workers compensation insurer)
  • Home v Superior Life Ins., 203 Va 282, 123 SE2d 401 (1962)1

These courts unanimously hold that the fact that the UM insurer's obligation stems from an accident for which the uninsured motorist is legally liable in tort does not alter the basic contractual nature of the coverage. The liability which the workers compensation insurer seeks to enforce is the injured employee's contractual right against the policy, not his right in tort against the tortfeasor.

Minnesota Statute § 176.061 grants an employer a right of indemnity notwithstanding provisions of the Minnesota No-Fault Act "or any law to the contract" does not create a right of indemnity where "contractual liability" such as that reflected in UM coverage, is concerned. See the following.

  • Janzen v Land O'Lakes, 278 NW2d 67 (Minn 1979)
  • Allstate Ins. v Eagle-Picher Ind., 410 NW2d 324, 327-28 (Minn 1987) (remains the law in Minnesota that an employer's subrogation against UM coverage is not allowed)

The Minnesota Supreme Court and lower courts have continuously rejected the contention that that the employer and workers compensation insurer may subrogate against a UIM policy in which the employee is the named insured. See the following.

  • Cooper v Younkin, 339 NW2d 552 (Minn 1983)
  • Hewitt v Apollo Group, 490 NW2d 898 (Minn App 1992) (UIM coverage)
  • Western Nat. Mut. Ins. v Casper, 549 NW2d 914 (Minn 1996) (UM arbitration award)
  • Fryer v National Union Fire Ins., 365 NW2d 249 (Minn 1985) (subrogation is not allowed against an arbitration award of UIM benefits)

Furthermore, the workers compensation subrogation rights do not extend to no-fault benefits. See Backhauls, Inc. v Thake, 393 NW2d 427 (Minn App 1986).

The Texas statute gives the workers compensation insurer subrogation rights of the injured employee against a third party and may enforce the liability of the third party in the name of the injured employee or the legal beneficiary. Tex Labor Code § 417.001 (b). The San Antonio Court of Appeals in Texas recently interpreted this statute in Liberty Mutual v Kinser, 82 SW3d 71 (Tex App—San Antonio 2002, no. pet.) and held that a workers compensation insurer, who has paid benefits to an employee for injuries suffered in an automobile accident, does not have a subrogation right to benefits paid the employee under the employee's personal uninsured/underinsured insurance coverage.

The court analyzed Texas Labor Code § 417.001(b) as follows.

  • Section 417.001(b) of the Texas Labor Code defines a workers' compensation insurer's subrogation rights. Tex Lab.Code Ann. § 417.001(b) (Vernon Supp. 2001). Under that provision, the insurer is entitled to enforce the liability of "the third party" in the name of the injured employee and is subrogated to the injured employee's rights. Id. The reference to "the third party" in section 417.001(b) necessarily refers to the third party referenced in section 417.001(a). The fact that section 417.001(b) refers back to the "third party" in section 417.001(a) is clearer in the statutory language that existed prior to the recodification in which section 4.05(b) refers to the liability of "that other person," since the phrase "that other person" could only refer back to the person mentioned in section 4.05(a). Act of December 11, 1989, 71st Leg., 2nd C.S., ch. 1, § 4.05, 1989 Tex Gen. Laws 33, repealed by Act of May 12, 1993, 73rd Leg., R.S., ch. 269, § 5, 1993 Tex Gen. Laws 1273.

Read in context, the court held that the term "third party" is a "third party who is or becomes liable to pay damages." Therefore, according to the court, an insurer is only entitled to subrogation against damages paid to an injured employee by a third party who is or becomes liable to pay damages, not contractual benefits such as UM/UIM.

Kinser contended that the subrogation provision is not applicable because State Farm was liable for contractual benefits not damages. Kinser's policy stated that State Farm will pay damages that a covered person is legally entitled to recover. However, Kinser maintained that this contractual right to receive benefits is distinguishable from the right to recover damages from a third party.

The court agreed with Kinser that the term "damages" as used in section 417.001(a) does not include UIM benefits, but is limited to damages recovered from a third party who is liable to the injured employee because the third party breached a contract or committed a tortious act against the injured employee. Therefore, the San Antonio Court of Appeals held that the workers compensation insurer does not have a subrogation right to benefits paid to Kinser by State Farm under Kinser's UIM coverage—a holding that is consistent with the view of a majority of other jurisdictions. Id.2 See also the following cases all for the similar proposition that a workers compensation insurer should not be given the benefit of coverages for which an employee has paid the premiums.

  • Casualty Reciprocal Exchange v Demock, 2002 WL 244281 (Tex App—El Paso 2002) (unpublished opinion)
  • Jeneary v Com., 262 Va 418, 551 SE2d 321 (Va 2001); (Virginia Supreme Court held that in the absence of express statutory authority, there is no right of subrogation to UM/UIM benefits so that the Uninsured Employers Fund is not entitled to a lien against UM/UIM proceeds)
  • Adams v Delmarva Power & Light, 575 A2d 1103 (Del 1990)
  • Johnson v Fireman's Fund Ins., 425 S2d 224 (La 1982)
  • Travelers Ins. v Joseph, 649 S2d 53, 58 (La App 1st Cir 1994)
  • Southeast Furniture v Barrett, 24 Utah 2d 24, 465 P2d 346 (1970)
  • State Farm Mut. Auto. Ins. v Karasek, 22 Ariz App 87, 523 P2d 1324 (1974)
  • Travelers Ins. v National Farmers Union P&C, 252 Ark 624, 480 SW2d 585 (1972)
  • Commissioners of State Ins. Fund v Miller, 4 AD2d 481, 166 NYS2d 777 (1st Dept 1957)

See also Md. Rev. Stat. Ann. §62 and NH Rev. Stat. Ann. §281A:13.I. where Maryland and New Hampshire statutes prohibit subrogation or lien against UM/UIM benefits to the employee/insured.

The minority of jurisdictions have held that workers compensation subrogation is applicable to UM/UIM coverages on the basis that benefits payable to the insured employee are damages payable on a tort basis by legally responsible third parties. See

  • Harris v New Castle County, 513 A2d 1307 (Del 1986) (employer subrogated to employee's UM recovery where policy furnished by employer on concept that UM insurer is a substitute tortfeasor)
  • Midland Ins. Co. v Colatrella,102 NJ 612, 510 A2d 30, 33 (1986) (primary concern of legislature is to integrate the sources of recovery in work-related injuries)
  • Walkup v Wabash Natl., 691 NE2d 1282, 1285 (Ind App 1998), opinion vacated on other grounds, 702 NE2d 713 (Ind 1998) (court noted that Indiana Code § 22-3-2-13 allowed employer to place a lien on "any" settlement award, including UM benefits)
  • Silvera v Employers Ins. Co. of Nevada, 40 P3d 429 (Nev 2002) (Nevada Statutes § 616C.215(3)(b), permits a workers' compensation insurer to subrogate against a UM policy that covers the injured employee unless the policy was purchased and maintained by a party other than the employer or the employee)
  • Travelers Cos. v Liberty Mut. Ins., 164 Vt 368, 670 A2d 827 (1995) (workers compensation insurer is entitled to reimbursement of its payments out of the UIM recovery of employee on basis that UIM payments are tantamount to a tort recovery of the insured employee's damages)

Conclusion

In summary, the statutory right of a workers compensation insurer or employer to subrogate against a third party generally does not include rights to personal auto UM/UIM benefits. Such right is limited by strict interpretation of the workers compensation acts and, oftentimes, public policy against benefiting the workers compensation insurer or employer that did not actually pay the premium for the UM/UIM coverage. Those few states that recognize a subrogation right against the employee's personal auto UM/UIM coverage do so in an effort to prevent double recovery by the employee for a single injury as a means of reducing the burdens of work-related injuries on the business and industrial communities.


Footnotes

1For further listing of decisions hold that an employer or compensation insurer has no right to subrogation against UM benefits available to the employee-insured, see Berna-Mork v Jones, 174 Wis 2d 645, 498 NW2d 221 (1993).

2Note however that the Texas courts are more likely to allow subrogation rights against UM/UIM coverage where such coverage was actually purchased by the employer, not the employee. See Texas Workers' Compensation Ins. Fund v Knight, 61 SW3d 91 (Tex App—Amarillo, 2001); Texas Workers' Comp. Ins. Facility v Aetna Cas. & Suety., 994 SW2d 923 (Tex App—Houston [1st Dist] 1999, no pet.); Employers Cas. Co. v Dyess, 957 SW2d 884, 890-91 (Tex App—Amarillo 1997, pet. denied).


Dana Harbin is an attorney in the Dallas office of Cooper & Scully, P.C. where she specializes in insurance coverage and bad faith involving all types of insurance policies, both first and third party. Ms. Harbin earned her BA degree from the University of Texas in Arlington and her JD degree from the University of Texas at Austin. She can be reached at dana.harbin@cooperscully.com


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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