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Department of Labor and Industry, Bureau of Workers' Compensation v. Workers' Compensation Appeal Board (Excelsior Insurance

November 21, 2012

DEPARTMENT OF LABOR AND INDUSTRY, BUREAU OF WORKERS' COMPENSATION, APPELLANT
v.
WORKERS' COMPENSATION APPEAL BOARD (EXCELSIOR INSURANCE), APPELLEES



Appeal from the Order of Commonwealth Court entered January 11, 2010 at No. 2012 CD 2008 Affirming the Order of the Workers' Compensation Appeal Board dated September 22, 2008 at No. A07-: 2304

The opinion of the court was delivered by: Mr. Justice Baer

CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, ORIE MELVIN, JJ.

ARGUED: March 6, 2012

OPINION

We granted review to consider whether a Workers' Compensation employer's insurance carrier should be reimbursed from the Supersedeas Fund for specific payments made to a claimant prior to the ultimate grant of supersedeas. The question turns on whether the relevant payments constituted payments of "compensation" within the meaning of Section 443 of the Workers' Compensation Act ("WCA"), 77 P.S. § 999(a), or, as argued by Appellant Bureau of Workers' Compensation ("Bureau"), whether the payments are not reimbursable because they constitute payment of legal costs associated with obtaining a claimant's third-party tort settlement under Section 319 of the WCA, 77 P.S. § 671. After review, we find no language in either Section 443 or Section 319 that would transform the relevant payments into something other than compensation merely because the amounts of the payments were calculated to compensate the claimant for the costs of recovering the third-party settlement. Accordingly, we affirm the decision of the Commonwealth Court.

Claimant Mark Oestereich ("Claimant") worked as a service technician for Filter Tech, Inc., changing filters and performing inspections on commercial heating and air conditioning units. In November 2003, he suffered work-related bilateral ankle fractures when he fell from a ladder at a Wendy's restaurant in Carlisle, Pennsylvania. As a result, Claimant had surgeries on both legs, was in a wheelchair for three months, used crutches for an additional six months, and had continuing lifting restrictions.

Following the 2003 injury, Appellee Excelsior Insurance ("Employer's Insurer"), Filter Tech's Workers' Compensation insurance carrier, paid Claimant Workers' Compensation benefits of $410.00 per week ("Weekly Compensation Rate").*fn1 On November 22, 2005, Employer's Insurer filed a petition to modify benefits, alleging that medically appropriate work was available to Claimant as of August 12, 2005, and requested supersedeas. A Workers' Compensation Judge ("WCJ") denied Employer's Insurer's request for supersedeas in January 2006. Later, Employer's Insurer orally amended the petition to modify, requesting a suspension of benefits as of August 12, 2005.

Subsequently, Claimant settled his claim against a third-party tortfeasor for $310,000.00 ("Settlement Total"). In February 2006, Employer's Insurer and Claimant entered into an agreement ("Third-Party Settlement Agreement") providing for the distribution of the settlement in compliance with Section 319, as interpreted by this

Court in P &R Welding & Fabrication v. WCAB (Pergola), 701 A.2d 560 (Pa. 1997).*fn2 As discussed in detail below, Section 319 provides specific direction for the distribution of a claimant's settlement from a third-party tortfeasor between the claimant and the employer. At its most basic, Section 319 provides that the employer shall recover from the settlement the amount it previously paid to the claimant, minus the claimant's legal costs of recovering that amount. If the settlement exceeds the amount previously paid by the employer, then the balance is paid to the claimant but treated as advance payment of future compensation by the employer, such that the employer is granted a grace period during which it does not have to make compensation payments for a certain number of weeks. The employer, however, is responsible for the remaining legal costs of recovering the amount attributable to the grace period. While simple in concept, the application of Section 319 presents various complications, including how to treat the division of the attorney fees, which Section 319 directs to be prorated between the employer and the claimant.

In Pergola, we determined that the proper method of apportioning the legal fees required the use of the gross method, rather than the net method, of calculation. The main difference between the two methods is that under the net method the legal costs are deducted initially from the total recovery to determine the amount available for future credit during the grace period, whereas the gross method prorates the legal fees as the employer receives the benefit during the grace period. Under the gross method, the employer receives a longer grace period and has the payment of the legal costs spread over the grace period.*fn3

Applying Section 319 and Pergola to the case at bar, the parties agreed that $120,698.48 of the $310,000 Settlement Total was subject to subrogation under Section 319 as the amount Employer's Insurer had previously paid in benefits to Claimant ("Employer Accrued Lien"). 77 P.S. § 671 ("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[e] . . . against such third party to the extent of the compensation payable under this article by the employer . . . . ") (internal footnote omitted).

The Third-Party Settlement Agreement additionally recognized that Section 319 provides for the proration of the claimant's expenses of recovery between the employer and claimant. Id. ("[R]easonable 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[e] . . . . "). Accordingly, the parties first determined that Claimant expended $124,314.23 ("Total Expenses of Recovery") to recover the settlement. In order to prorate this amount, the parties recognized that the Employer's Accrued Lien amounted to thirty-nine percent of the Settlement Total.*fn4

Therefore, they prorated to Employer's Insurer thirty-nine percent of the Total Expenses of Recovery, specifically $48,401.73 ("Employer's Initial Share of Expenses of Recovery").*fn5 Thus, Employer's Insurer, as reimbursement of the amount it had previously paid in Workers' Compensation benefits, received the amount left after subtracting the Employer's Initial Share of Expenses of Recovery from the Employer's Accrued Lien, for an Employer Net Lien of $72,296.75.*fn6 Id.

Returning to consideration of the recovery received by Claimant, the parties subtracted the Employer Accrued Lien from the Settlement Total, which resulted in a balance of recovery of $189,301.52 (Balance of Recovery).*fn7 As noted, Section 319 provides that "[a]ny recovery against such third person in excess of the compensation theretofore paid by the employer shall be paid forthwith to the employe[e] . . . and shall be treated as an advance payment by the employer on account of any future instal[l]ments of compensation." Id. Accordingly, utilizing the gross method, the agreement divided Claimant's Balance of Recovery ($189,301.52) by his previous Weekly Compensation Rate to determine that Employer's Insurer would be entitled to a grace period of 461.7 weeks.*fn8 Recognizing that $75,912.50 of Expenses of Recovery remained uncompensated,*fn9 the parties also calculated the weekly prorated share of the remaining Expenses of Recovery to determine that Employer's Insurer would pay Claimant $164.42 each week during the grace period.*fn10

Following several months of grace period payments by Employer's Insurer to Claimant pursuant to the Third-Party Settlement Agreement, in November 2006, the WCJ granted the Employer's Insurer's petition to suspend Claimant's benefits as of August 12, 2005.*fn11 Following the WCJ's November 2006 decision suspending benefits, Employer's Insurer filed an application for Supersedeas Fund reimbursement seeking the unreimbursed portion of the amount it paid Claimant between November 22, 2005, and February 15, 2006 ("Unreimbursed Pre-Settlement Payments"),*fn12 and the $164.42 weekly payments it paid between February 16, 2006, and October 11, 2006 ("Grace Period Payments").*fn13 The Bureau, as conservator of the Supersedeas Fund, opposed the application arguing that Unreimbursed Pre-Settlement Payments and the Grace Period Payments were not compensation reimbursable under Section 443,*fn14 but instead constituted payments of counsel fees.

Rejecting the Bureau's argument, the WCJ granted Employer's Insurer's application and ordered the reimbursement of $2,016.08 for the Unreimbursed Pre-Settlement Payments for the period November 22, 2005, to February 15, 2006, in addition to $5,590.28, which represented the $164.42 weekly Grace Period Payments to Claimant from February 16, 2006 to October 11, 2006.*fn15 The total reimbursement ordered was $7,606.36. The Bureau appealed the decision of the WCJ to the Workers' Compensation Appeal Board ("WCAB"), which affirmed after noting the absence of case law on the question presented by this case involving the interaction of supersedeas reimbursement under Section 443(a) and third-party settlement distribution under Section 319.

On the Bureau's appeal to the Commonwealth Court, that court recognized that under Section 443(a) an employer must meet the following five criteria to obtain reimbursement from the Supersedeas Fund: (1) supersedeas was requested; (2) the request for supersedeas was denied; (3) the request was made in a proceeding under Section 413 or 430 of the WCA; (4) payments were continued because of the order denying supersedeas; and (5) in the final outcome of the proceedings, it was determined such compensation was not, in fact, payable. The court noted that the parties did not dispute that Employer's Insurer satisfied the first three factors. Instead, the dispute hinged on the final two factors: whether because of the "order denying supersedeas, [Employer's Insurer] continued making payments of 'compensation' that were ultimately determined to not, in fact, be payable." Dept. of Labor and Industry v. WCAB (Excelsior Insurance), 987 A.2d 855, 860 (Pa. Cmwlth. 2010) (internal footnote omitted).

The court acknowledged that the Bureau argued that the payments made by Employer's Insurer were not payments of "compensation" but were payments made for Employer's Insurer's share, attributable to each week of the grace period, of the costs of recovering the proceeds of the third-party settlement, which it claimed are not reimbursable under Section 319. The Bureau further argued that Employer's Insurer received a benefit from the third-party settlement through the reimbursement of its accrued lien and the benefit of the grace period.

The Commonwealth Court majority rejected the Bureau's argument. As did the WCJ and the WCAB, the Commonwealth Court concluded that Employer's Insurer was entitled to reimbursement from the Supersedeas Fund for the payments made. It noted that Employer's Insurer began paying Claimant $410.00 per week in wage loss benefits, as well as medical benefits, following Claimant's injury in November of 2003. However, the court opined that Employer's Insurer did not receive full reimbursement for that compensation from the third-party settlement because, pursuant to Section 319, Claimant's costs of recovering the third-party settlement were deducted prior to the distribution to Employer's Insurer. Additionally, the court observed that after the third-party settlement, Employer's Insurer paid $164.42 per week, rather than paying Claimant the full $410.00 per week compensation. The court explained in a footnote:

While the $164.42 per week that [Employer's Insurer] was required to pay Claimant during the grace period was calculated based on [Employer's Insurer's] share of the costs for recovering Claimant's balance of recovery from the Third-Party Settlement, this amount was, in effect, paid to Claimant to ensure that ...


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