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10/24/97 P&R WELDING & FABRICATING AND DONEGAL

October 24, 1997

P&R WELDING & FABRICATING AND THE DONEGAL MUTUAL INSURANCE COMPANY, APPELLEES
v.
WORKMEN'S COMPENSATION APPEAL BOARD (LARRY J. PERGOLA), APPEAL OF LARRY J. PERGOLA



Appeal from the Order of the Commonwealth Court Entered August 24, 1995 at No. 69 C.D. 1995, Reversing the Order of the Workmen's Compensation Appeal Board Dated December 9, 1994 at Appeal No. A94-0429. Before: Flaherty, C.j., Zappala, Cappy, Castille, Nigro, JJ. Madame Justice Newman did not participate in the consideration or decision of this case.

The opinion of the court was delivered by: Castille

OPINION OF THE COURT

JUSTICE CASTILLE

DECIDED: OCTOBER 24, 1997

The sole issue on appeal is whether the "gross method" or the "net method" should be utilized in calculating an employers'/workers' compensation insurers' subrogation rights and liabilities pursuant to Section 319 of the Workers' Compensation Act, 77 P.S. § 671, with respect to an employee's recovery in a third-party tort action. Because we hold that the gross method should be utilized in this situation, we affirm the order of the Commonwealth Court.

The relevant facts to this appeal are not in dispute. On July 28, 1985, appellant suffered a work-related back injury. As a result of this injury, appellant began receiving total disability benefits in the amount of $336 per week pursuant to a Notice of Compensation Payable dated December 20, 1985.

Appellant subsequently instituted a third-party tort action in relation to his injuries for which he was receiving disability benefits. On September 25, 1989, appellant settled the third-party tort action for $165,000. Appellant expended $55,000 in counsel fees and $2,610.95 in costs ($57,610.95 in total) in order to obtain this settlement.

At the time of the settlement, P&R Welding & Fabricating and the Donegal Mutual Insurance Company (collectively, "Employer") had an accrued lien of $117,167.24, which represented the amount of workers' compensation benefits Employer had paid appellant up to the date of settlement. On November 7, 1989, Employer accepted a lump sum payment of $35,000 as settlement of its $117,167.24 accrued lien. *fn1 Thereafter, Employer paid appellant a reduced workers' compensation rate that varied between $112 and $235.30 per week. *fn2 Consequently, on August 3, 1990, appellant filed a Petition for Review claiming that Employer unilaterally altered appellant's weekly compensation rate without a judicial order. *fn3

Based on this undisputed evidence, the Workers' Compensation Judge ("WCJ") determined that Employer owed appellant $40,903.77 as its share of the legal fees appellant expended in obtaining the settlement in the third-party tort action. *fn4 The WCJ then determined that appellant's net recovery from the third-party tort action was $31,125.57. *fn5 The WCJ then held that since appellant's net recovery of $31,125.57 was less that Employer's accrued lien of $117,167.25, Employer was not entitled to any credits for future workers' compensation payments. On December 9, 1994, the Workers' Compensation Appeal Board ("Board") affirmed the WCJ's decision.

Employer then timely appealed to the Commonwealth Court. The Commonwealth Court, in a published opinion and order, reversed the Board and WCJ's determination that Employer was not entitled to any credits for future workers' compensation benefits. In doing so, the Commonwealth Court determined that the Board and WCJ did not utilize the correct method in calculating whether Employer was entitled to any credits for future workers' compensation benefits. Instead, the Commonwealth Court held that the correct method for calculating Employer's subrogation rights and liabilities was the "gross method." *fn6 Thus, the Commonwealth Court remanded the matter to the Board for a calculation using the gross method. Appellant then filed a timely petition for allowance of appeal. This Court granted allocatur in order to determine whether the gross or net methodology is to be utilized in determining employers'/insurers' subrogation rights and liabilities pursuant to Section 319 of the Workers' Compensation Act where an employee recovers in a third-party tort action. *fn7

An employer who pays compensation is subrogated to the right of the employee against a third-party tortfeasor. Rollins Outdoor Advertising v. Workmen's Compensation Appeal Board (Mass), 506 Pa. 592, 596, 487 A.2d 794, 796 (1985). Section 319 of the Workers' Compensation Act provides:

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 the employe, his personal representative, his estate or his dependents. The employer shall pay that proportion of attorney's fees and 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 against such third person in excess of the compensation theretofore paid by the employer shall be paid forthwith to the employe, his personal representative, his estate or his dependents, and shall be treated as an advance payment by the employer on account of any future installments of compensation.

77 P.S. § 671.

Appellant argues that Section 319 requires the use of the net method when calculating an employer's subrogation rights and liabilities in relation to a third-party settlement. Under the net method, the employer's accrued lien and all legal costs of obtaining the settlement are deducted from the total recovery for purposes of determining the amount of the employer's credit for future installments. The amount available for future credits is referred to as the "balance of recovery." The balance of recovery is then divided by the weekly compensation rate being paid to the workers' compensation claimant in order to arrive at what is known ...


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