Pennsylvania Supreme Court Decision Nullifies Subrogation Right in Actions Involving Negligent Governmental Actor
The Supreme Court of Pennsylvania changed the law in worker’s compensation subrogation rights with its September 28, 2012 decision in Frazier v. WCAB (Bayada Nurses, Inc.). The opinion overturned Fox v. WCAB (PECO Energy Co.), which had previously held that the subrogation right in Section 319 of the Workers’ Compensation Act was absolute and unaffected by language in the Act 44 Amendment of 1993.
The Supreme Court begged to differ, revisiting the Fox decision and the portion of Act 44 Amendment of the Workers’ Compensation Act that provides for sovereign and official immunity from claims of subrogation or reimbursement from a claimant’s tort recovery in the context of workers’ compensation benefits. The result is that a workers’ compensation carrier now has no subrogation right to sums paid to a Claimant where a Commonwealth actor was negligent or otherwise at fault in causing injury or wage loss compensable as work-related.
The Claimant in Frazier sustained an ankle fracture when the SEPTA-operated bus on which she was a passenger was involved in a motor vehicle accident. At the time of the accident, Claimant was employed by Bayada Nurses and the accident occurred while she was in the course and scope of employment. Accordingly, Claimant filed a workers’ compensation claim which was ultimately granted by a workers’ compensation judge. Thereafter, Claimant filed a third-party lawsuit against SEPTA, and the workers’ compensation carrier of Bayada Nurses filed notice that it would enforce its subrogation right against any award to Claimant. The settlement between Claimant and SEPTA expressly protected Claimant from “any claim, suit, petition or other action brought against Claimant . . . for payment of the workers’ compensation lien.” Following the subrogation language in Section 319 and following Fox, Bayada Nurses filed a claim petition for $47,351.93, the amount it paid to Claimant in workers’ compensation benefits up to the time of the settlement.
In Fox, the Commonwealth Court determined that PECO was seeking subrogation from the employee and not the governmental entity, the City of Philadelphia. Because PECO sought recovery from the claimant and not from the City itself, the Court opined that “Section 23 of Act 44 does not foreclose [PECO] from enforcing its Section 319 . . . reimbursement rights.” The Claimant in Frazier, however, argued that if she were required to reimburse her employer from the settlement proceeds, then she would be “merely a conduit” for money passing between SEPTA and Bayada Nurses. The passage of money from SEPTA to the employer in this way would violate the sovereign immunity provision of Section 23 of Act 44, so argued the Claimant.
The workers’ compensation judge (WCJ) agreed, finding that the immunity clause would be rendered useless if an employer/insurer could recover from the Claimant the amount it would have otherwise sought from the government actor. The WCJ found that the immunity provided by Section 23 applies both to subrogation claims asserted against the government entity and to reimbursement claims from settlement proceeds paid to an injured employee. Bayada Nurses appealed the WCJ’s decision, and the Workers’ Compensation Appeal Board (WCAB) reversed, holding that Section 23, like sovereign, political subdivision and official immunity provisions elsewhere in the Judicial Code, only extended to direct actions for recovery against the Commonwealth or governmental entity. The WCAB therefore found that Section 23 did not come into play. Claimant appealed and a panel of the Commonwealth Court affirmed, declining to revisit the recently-decided Fox decision. Claimant filed for allowance of appeal to the Supreme Court, which was granted and led to the reversal of Fox.
Prior to the decision in Frazier, Section 23 of Act 44 was largely ignored, and insurers were free to pursue their subrogation rights under Section 319 of the Workers’ Compensation Act. Recovery of subrogation liens was limited by provisions under tort law on sovereign and governmental liability. Where exceptions to absolute immunity exist, the cap on recovery against a sovereign party is $250,000 for any one plaintiff, and $1M in the aggregate for any one accident, and against local government entities or political subdivisions the limit is $500,000.
The Supreme Court recognized that the scenario presented in Frazier was conflicting, noting that Section 23 provided expressly for sovereign and governmental immunity, and yet if Section 23 did not apply then it was a wholly meaningless piece of legislation. Bayada Nurses argued that Claimant was attempting to benefit from sovereign immunity, while Claimant argued that sovereign immunity would be negated if the governmental entity, when negotiating settlement, would have to consider the employer lying in wait to recover its subrogation lien.
Analyzing the passage of Section 23 of Act 44, and the specific language utilized in Section 23, the Supreme Court determined that the words “subrogation or reimbursement” used together were determinative, and in contemplation of the precise scenario presented in Frazier. While under a subrogation claim the insurer “steps into the shoes” of the insured in order to recover what is rightfully owed to it by a third-party tortfeasor, the reimbursement proceeding occurs only after settlement. In the latter case, the insurer must bring the action against the insured—the employee—directly. Because reimbursement pertains to the employer-employee relationship, the court found that the use of “reimbursement” in Section 23 was included to protect the Commonwealth and political subdivisions and ensure their immunity. This would be achieved where, as here and also in Fox, the government defendant structured a settlement that indemnified the claimant from any claims of subrogation or reimbursement.
This result raises the question, however, of how the insurer’s interest is represented in such a case. As Bayada Nurses pointed out in the litigation, the courts long ago identified three underlying purposes for subrogation in workers’ compensation:
(1) to prevent double recovery for the same injury by the claimant;
(2) to ensure that the employer is not compelled to make compensation payments made necessary by the negligence of a third party; and
(3) to prevent a third party from escaping liability for his negligence.
The Court placed in a footnote its suggestion that if the Commonwealth wished in the future to construct settlements such as the one in Frazier, it should include all interested parties in the settlement discussions. It elaborated that the participation of all parties would ensure the dual goals of preventing double recovery by claimants and protecting the public fisc. The Court also mentioned that the negligent actor did not escape liability in this case because it paid the Claimant $75,000. But it failed to address the second purpose.
The Supreme Court seemed satisfied in shifting responsibility from the negligent Commonwealth actor to the employer/insurer, which was not at fault. It concluded that the legislature selected sovereign and governmental immunity and protection of the public fisc over the private right of the employer/insurer to avoid compulsion to make compensation payments rendered necessary by the negligence of a third party. The decision could therefore be vulnerable to attack by employers/insurers seeking to protect their unrepresented interest. Another question that remains unanswered is whether the same result will occur if the settlement agreement between the claimant and government defendant does not include an express indemnity clause with respect to a workers’ compensation lien. Frazier may be the law today, but because of these uncertainties, it may not be the end of the analysis.
BOTTOM LINE: The workers’ compensation insurer has no subrogation right against a negligent governmental actor, and no reimbursement right against recovery by its workers’ compensation claimant in a third-party action versus that governmental actor.
 6 A.3d 1288 (Pa. 2012).
 969 A.2d 11 (Pa. Cmwlth. 2009).
 Section 23 of Act 44 states: “The Commonwealth, its political subdivisions, their officials and employees acting within the scope of their duties shall enjoy and benefit from sovereign and official immunity from claims of subrogation or reimbursement from a claimant’s tort recovery with respect to workers' compensation benefits.”
The definition for “political subdivision” is found under the Pennsylvania Rules of Civil Procedure: “any county, city, borough, incorporated town, township, school district, vocational school district, county institution district or municipal or other local authority.” Pa. R.C.P. No. 76.
 The Southeastern Pennsylvania Transportation Authority, or SEPTA, is a Commonwealth party. See Feingold v.
Southeastern Pennsylvania Transp. Authority, 517 A.2d 1270 (Pa. 1968).
 Settlement Agreement between Claimant and SEPTA, Jul. 26, 2007 at 1, found at Reproduced Record 13a.
 The City of Philadelphia is included under Section 23 of Act 44 as a “political subdivision” of the Commonwealth.
 969 A.2d at 14.
 See 42 Pa C.S. § 8522(b) for exceptions to sovereign immunity and 42 Pa. C.S. § 8542 (b) for exceptions to governmental immunity.
 42 Pa. C.S. § 8528 and 42 Pa. C.S. § 8553, respectively.
 6 A.3d at 1296 (citing Dale Mfg. Co. v. WCAB (Bressi), 421 A.2d 653, 654 (Pa. 1980)).
For more information regarding this alert Anthony Salvino (610.782.4949; email@example.com).