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decided: May 22, 1989.




Benjamin Paul, Philadelphia, for petitioner.

Thomas A. Kuzmick, Lawrence H. Haas, Philadelphia, for respondents.

Thomas S. Brown, Heckler, Brown, Sherry and Johnson, for respondents, Aeronca, Inc. and Continental Insurance Company.

Craig and Palladino, JJ., and Barbieri, Senior Judge.

Author: Craig

[ 126 Pa. Commw. Page 208]

Claimant Peter Dasconio appeals from an order of the Workmen's Compensation Appeal Board that affirmed a decision of a referee establishing a credit due an employer's insurer from the money the claimant and his wife recovered in settlement of a tort action, which they had instituted against a third party alleged to be partly responsible for the claimant's injuries.

The issues are:

(1) Whether any agreement by a compensation payer to compromise its accrued subrogation lien against money paid to the claimant by a defendant in the claimant's third-party tort action is invalid under the statutory rule that an agreement that varies the amount of compensation or the time during which it is paid or payable is wholly null and void;

[ 126 Pa. Commw. Page 209]

(2) Whether the entire net amount received jointly by a claimant and his spouse in settlement of a third-party action is subject to subrogation with respect to the accrued compensation lien and subsequent compensation obligation;

(3) How the recovery from a third party should be applied to the satisfaction of the accrued compensation lien and to the subsequent compensation obligation, considering the expenses attributable to obtaining that recovery; and

(4) How medical expenses newly incurred after the settlement of the accrued lien, in connection with a third-party recovery, should be handled in relation to the subsequent compensation obligation.

History of the Case

The material facts, as found by the referee, are not in dispute. On July 13, 1981, while the claimant was working for Aeronca, Inc., his head got caught in a punch press. He suffered a fractured skull and other injuries, leaving him blind in one eye, nearly blind in the other, hard of hearing, and suffering from various other physical problems. He received workers' compensation beginning a week after the accident.

The claimant and his wife filed a suit against three third-party defendants based on the same incident. They recovered a gross amount of $700,000 in settlement of the issue of the liability of one of those defendants. Although, as of the date of the third-party settlement, the employer's insurer had paid a total of $120,203.00 in compensation benefits, the insurer agreed in writing to accept $32,186.67 in full payment of its accrued subrogation interest, with the insurer to be free of any responsibility for legal fees attributable to obtaining that $32,186.87, provided that the claimant and his wife recovered no more than the $700,000 as a result of the suit.*fn1 Ultimately, the claimant and his wife did not recover anything more as a result of the suit.

[ 126 Pa. Commw. Page 210]

As established by a statement to the claimant from his tort attorney, the expenses attributable to the third-party recovery were as follows:

Gross Amount of Settlement $700,000.00

Cost Per Itemized Statement 7,582.92

Due Worker Comp. Insurer 32,186.67

Balance 660,230.22

Attorney's Fee -- 50% of balance 330,115.11

NET TO CLAIMANT $330,115.11

The expenses therefore consisted of costs, $7,582.92, plus counsel fee, $330,115.11, or a total of $337,698.03, which was the obligation incurred by the claimant to obtain the gross recovery of $700,000.00.

The employer then filed a termination petition alleging that its liability for payments should cease because the claimant had full recovery through the third-party settlement. The claimant filed a petition seeking payment of medical bills incurred in treating his work-related injury.

The referee decided that, under the Supreme Court's decision in Rollins Outdoor Advertising v. Workmen's Compensation Appeal Board (Maas), 506 Pa. 592, 487 A.2d 794 (1985), the agreement between the claimant and the employer's insurer relating to the accrued subrogation interest was null and void. Therefore, the referee directed the claimant to pay back the full amount of the compensation the insurer had paid to him as of the date of the settlement with the third party, the accrued lien amount of $120,203.

In addition, the referee determined that the net recovery from the gross amount of $700,000, after deducting the $337,698 total of legal expenses and the $120,203 accrued lien, was $242,099. The referee, following the Rollins approach, applied that net remainder to the employer's future compensation obligation, dividing it by the claimant's weekly compensation rate of $210.59 to determine a grace period of 1149 weeks.

[ 126 Pa. Commw. Page 211]

The referee recognized that the insurer should be required to reimburse the claimant for the legal expenses he expended to obtain the gross amount of $120,203, to be paid by the claimant to the insurer for the accrued compensation lien. The referee calculated that the insurer should reimburse to the claimant legal expenses, related to the accrued lien, in the amount of $57,746. (Accrued compensation amount of $120,203 divided by gross recovery of $700,000 yielded 17.1% which, applied to total expenses of $337,698, gave the result of $57,746.) The referee directed that the insurer reimburse those legal expenses to the claimant during the grace period at a rate of $105.30 per week, an amount which is 50% of the weekly $210.59 payment. (Arithmetic indicates that such an approach would mean that the claimant would not be reimbursed fully for the legal expenses of recovering the $120,203, which the claimant was to pay to the insurer immediately, until 548 weeks of the grace period had passed. Moreover, the board does not explain why the reimbursement rate was related to 50% of the weekly compensation amount.)

Because the referee used a net figure for computation of the future grace period, after deduction of all expenses, there was no need to order that the insurer make reimbursement payments to the claimant with respect to the legal expense of acquiring the portion of the recovery applied to future compensation.

Finally, with respect to future medical expenses submitted by the claimant, the referee ordered the defendant to pay 50% of those medical expenses.

On appeal, the Workmen's Compensation Appeal Board affirmed the referee's order. This appeal followed.

1. Accrued Subrogation and the Validity of the Agreement Pertaining to It.

An employer who pays workers' compensation is subrogated to the right of the employee against a third-party tortfeasor under section 319 of The Pennsylvania Workmen's

[ 126 Pa. Commw. Page 212]

Compensation Act, Act of June 2, 1915, P.L. 736, as amended (Act), 77 P.S. § 671.*fn2

In Rollins the Supreme Court considered the validity of an agreement by an insurer to accept less than the actual amount it had paid in compensation benefits to a claimant, as of the date of his settlement with a third party, in full satisfaction of the insurer's accrued subrogation lien in exchange for the claimant's agreeing to waive any future compensation payable under the Act.

The Court held that the agreement was unenforceable as to all of its provisions and as to all parties under section 407 of the Act, 77 P.S. § 731, which declares that any agreement varying the amount to be paid or the period during which compensation shall be payable is wholly null and void.*fn3

The Court first identified the claimant's waiver of his right to future compensation as the illegal element of the agreement. Then, after noting that the Court had previously

[ 126 Pa. Commw. Page 213]

    refused to enforce a contract containing a variance from the amount of compensation prescribed under the Act even though that contract benefited the employee, the Court declared that the intent of section 407 was clear: "[A]greements which vary the amount or time for payment of compensation benefits are 'wholly null and void' and, thus, unenforceable as to all the provisions of the agreement and as to all parties." Rollins, 506 Pa. at 598, 487 A.2d at 797.

Because the agreement then before the Court varied the amount or time for payment of benefits by virtue of the waiver of future rights to compensation, the entire agreement was of no effect, and the parties had to return to their positions before the agreement existed.

Here the claimant's employer and its insurer, by their counter-statement of questions, argue that Rollins means that any agreement which varies compensation benefits and compromises the insurer's subrogation rights is null and void.

This court already has analyzed such agreements otherwise. In Bayush v. Workmen's Compensation Appeal Board (Conemaugh Township), 111 Pa. Commonwealth Ct. 617, 534 A.2d 853 (1987), the court affirmed a decision of the Workmen's Compensation Appeal Board granting to an employer's insurer full credit toward future compensation payable from the excess of a claimant's third-party tort settlement, despite an allegation by the claimant that the insurer had agreed to compromise the amount of that credit.

Although this court ultimately affirmed the decision of the board in that case, we did so only after stating that the ground upon which the board had based its decision -- similar to the argument advanced by the employer and insurer here -- was an erroneous interpretation of Rollins :

Rollins Outdoor Advertising does not stand for the proposition, however, that an employer's right to credit against future compensation may never be released, waived or relinquished by an employer. In Rollins Outdoor Advertising, the agreement was void under the

[ 126 Pa. Commw. Page 214]

    provisions of the Act. This brought into effect by operation of law the provisions of Section 319. By contrast, in the present case, neither of the parties contend, nor do we find, that a release or waiver by an insurance carrier of its right to a credit against compensation payable to a claimant after the date of settlement of an action against a third-party tortfeasor would violate the provisions of the Act or the public policy or laws of this Commonwealth. The real question in this case is whether Employer ever agreed to release or waive its right to credit. If it is shown that Employer did indeed agree to release its rights, then Section 319 would be inapplicable.

Bayush, 111 Pa. Commonwealth Ct. at 622 n. 4, 534 A.2d at 856 n. 4 (emphasis added).

Although the statement from Bayush, emphasized above, relates to the future credit aspect of the subrogation rights, while the present case involves the accrued lien aspect of the subrogation rights, the applicable principle does not differ. A compromise relating solely to subrogation rights is distinct from, and does not involve, a commutation or variance as to the amount of compensation to be paid.

     a. Length of the Grace Period

The employer and insurer argue that any such reduction in the accrued subrogation lien will alter "the period during which compensation shall be payable" because it will extend the grace period (the time during which the employer does not pay future compensation because of the credit deemed to exist from the tort recovery) which Rollins calculated by subtracting from the claimant's net tort recovery (after deduction of attorney's fees and costs) the ...

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