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July 25, 1997


Appealed From No. A94-3122. State Agency Workmen's Compensation Appeal Board.

Before: Honorable Rochelle S. Friedman, Judge, Honorable Bonnie Brigance Leadbetter, Judge, Honorable Charles A. Lord, Senior Judge. Opinion BY Judge Leadbetter.

The opinion of the court was delivered by: Leadbetter


FILED: July 25, 1997

John Kochie (petitioner) appeals from an order of the Workmen's Compensation Appeal Board (Board) affirming the Workers' Compensation Judge's (WCJ's) (1) calculation of the credit due to Northbrook (Insurer) in its future compensation of petitioner; *fn1 (2) determination that Insurer is not contractually bound to contribute to the cost of the third party recovery on a one-third basis; and (3) denial of petitioner's request for the assessment of fees and penalties against Insurer. We affirm.

In August of 1986, petitioner was injured in a work-related airplane crash. As a result of these injuries, F.D.I.B. (Employer) issued a Notice of Compensation Payable, and petitioner began to receive compensation benefits from Insurer. Kochie is, and was at all relevant times, the principal stockholder in and officer of F.D.I.B. Although he returned to work in April of 1987, neither he nor Employer informed Insurer of this fact.

Meanwhile, petitioner instituted a lawsuit against Teledyne Continental Motors Aircraft Products (Teledyne) for the injuries he sustained in the August 1986 crash. The suit was brought on petitioner's behalf by the law firm of German, Gallagher & Murtagh for a one-third contingency fee. On October 20, 1988, Insurer wrote German, Gallagher & Murtagh to request that the law firm represent the Insurer's subrogation lien, "for a fee of 33 1/3%". In a letter dated October 28, 1988, the law firm responded:

This will acknowledge receipt of and thank you for your October 20, 1988 letter concerning our representation of your subrogation lien. It is agreeable to proceed on a 33 1/3% basis, which I believe would also apply to the costs portion of the case.

There was no further correspondence between Insurer and the law firm about the exact meaning of "33 1/3% basis" prior to the settlement of the Teledyne suit.

In May of 1990, petitioner's suit against Teledyne was settled for a lump sum of four million dollars and a one million dollar annuity. At the time of this settlement, petitioner had received $346,627.47 from Insurer in compensation benefits, as a result of which Insurer had absolute subrogation rights to this amount. Nonetheless, petitioner did not immediately release any portion of these settlement proceeds to Insurer. On June 2, 1990, Insurer unilaterally stopped paying petitioner's compensation benefits.

On September 17, 1990 petitioner provided Insurer with information that the Insurer required in order to calculate its subrogation lien. At the same time, petitioner gave to Insurer its first and only payment of $200,384.00. Petitioner, relying on the gross calculation method to determine Insurer's subrogation rights, contends that this $200,384.00 payment is in full satisfaction of Insurer's subrogation lien minus fees and costs. However, the Insurer, relying on the net method of calculation, contends that the Board correctly found that petitioner owes it an additional $45,755.20 on the lien. *fn2

Based upon the Teledyne settlement, Insurer filed a Petition for Review, Termination, Suspension, or Modification of compensation benefits on June 11, 1990. Petitioner counter-filed with a Petition for Penalties, alleging that Insurer had violated the Act by unilaterally terminating benefits. After conducting a series of hearings, the WCJ entered the order that is, with a few minor amendments, *fn3 the order now before us on appeal. Our scope of review is limited to a determination of whether constitutional rights were violated, an error of law was committed, or necessary findings of fact are supported by substantial evidence. Bethenergy Mines, Inc. v. Workmen's Compensation Appeal Board (Skirpan), 132 Pa. Commw. 277, 572 A.2d 838 (Pa. Commw. 1990), affirmed, 531 Pa. 287, 612 A.2d 434 (1992).

It is not disputed that Insurer is entitled to subrogation under Section 319 of the Pennsylvania Workmen's Compensation Act (Act), Act of June 2, 1915, P.L. 736, as amended, 77 P.S. § 671, nor that these subrogation rights are absolute. Winfree v. Philadelphia Elec. Co., 520 Pa. 392, 396, 554 A.2d 485, 487 (1989). Section 319 provides that:

Where the compensable injury is caused in whole or in part by the act or omission of a third party, the employer shall be subrogated to the right of the employe, his personal representative, his estate or his dependents, against such third party to the extent of the compensation payable under this article by the employer; reasonable attorney's fees and other proper disbursements incurred in obtaining a recovery or in effecting a compromise settlement shall be prorated between the employer and employe, his personal representative, his estate or his dependents. The employer shall pay that proportion of the attorney's fees and other proper disbursements that the amount of compensation paid or payable at the time of recovery or settlement bears to the total recovery or settlement. Any recovery of such person in excess of the compensation theretofore paid by the ...

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