Tough nut: Resolving a workers compensation lien
Victor Leija was a window washer. He plunged three stories to his death when a scaffold he was trying to erect atop a three-story building collapsed and fell to the ground. His employer’s workers compensation carrier, Twin City Fire Insurance Company, accepted the claim and paid monthly benefits of $1,857 to Leija’s widow and children. Over time those payments will total some $575,000.
Leija’s family sued several third parties, including the City of Glendale, which owned the building from which Leija fell; the building’s property manager and maintenance company; the company that furnished the scaffold; and the company that fabricated it. The Leijas alleged that negligence by each of the defendants caused the scaffold to fall; in the case of the city, they alleged breach of a duty to provide anchors to secure the scaffold to the roof of the building. The city and the other defendants identified Leija’s employer as a nonparty at fault. As evidence, they pointed to citations the state Division of Occupational Safety and Health issued the employer for failing to repair a defect in the scaffold, failing to properly secure the scaffold to the building, and failing to make sure Leija wore a safety harness.
The Leijas eventually settled with all the defendants and recovered a total of $1,600,000. All but one paid the limits of their insurance coverage. The exception was the City of Glendale, which was an additional insured on two of the other defendants’ policies. The city settled the Leijas’ claim without having to draw on its own coverage, which was ample. Twin City did not object to any of the settlements but asserted a right to fully enforce its lien against the settlement proceeds. It sought reimbursement for what it had paid the Leijas already and full credit against future payments. The Leijas rejected Twin City’s demand, arguing that the carrier’s lien should be reduced because of the employer’s comparative fault in the accident.
After negotiations failed, Twin City filed a complaint for enforcement of lien. The Leijas counterclaimed, alleging that Twin City breached its duty of good faith and fair dealing by refusing to reduce its lien to account for employer fault. They also alleged that Twin City breached a promise to reevaluate the lien amount after all the settlements were finalized. In the alternative, the Leijas asked the superior court to set a trial to establish the amount of the lien.
Both sides eventually moved for summary judgment. The court rejected the Leijas’ contention that a workers compensation carrier owes a duty of good faith to compromise its lien to account for the employer’s comparative fault but found there was a genuine issue of material fact about whether Twin City breached a promise to consider compromising its lien. The court also ruled that “a separate action after compromise of the third-party claim is not the appropriate vehicle to allocate fault to the workers compensation carrier’s insured.”
After further discovery, Twin City once again moved for summary judgment. This time the superior court granted the motion, finding no proof that Twin City promised to compromise its lien. The court also denied the Leijas’ motion for leave to add claims against Twin City’s parent company, The Hartford Financial Services Group, Inc. The Leijas appealed.
On appeal, the court noted that the Leijas did not settle their claims over the carrier’s objection, nor did they seek to reduce the lien based on the outcome of a sham proceeding contrived to increase the employer’s comparative fault. Moreover, the settlements the Leijas negotiated did not exhaust the applicable insurance (several layers of the City of Glendale’s policies were left untouched). Given the safety citations issued to the employer after the scaffold’s collapse, the court said, estimates of the employer’s comparative fault undoubtedly affected the amount the Leijas were able to recover in settlement.
In these circumstances, the court said, the fact that the Leijas settled their claims rather than trying them to a verdict did not preclude equitable apportionment as prescribed in case law. “The worker is entitled to the fullest available recovery without double recovery.”
Implicitly acknowledging the case of authorities barring use of a sham proceeding to determine the amount by which a carrier’s lien should be reduced, the Leijas urged the court to direct the superior court to set a trial “for the purpose of establishing damages and employer fault” so that Twin City’s lien could be equitably apportioned. Twin City argued that such a trial necessarily would be a sham because the Leijas, who sought to minimize the employer’s comparative fault in their case against the third parties, would take the opposite position in an apportionment proceeding.
The court saw no logic in Twin City’s contention that the change in the Leijas’ litigation position concerning employer fault would render the trial an impermissible “artful contrivance.” On remand, the court said, Twin City would be free to offer otherwise admissible evidence aimed at minimizing the employer’s comparative fault, presumably including evidence disclosed in the Leijas’ litigation with the third parties. So long as properly motivated parties are accorded a fair adversarial proceeding conducted in accordance with due process, the concerns of a sham proceeding are avoided.
For these reasons, the court said, the superior court erred by denying the Leijas’ request for a trial to equitably apportion Twin City’s lien. The court reversed the superior court’s denial of the Leijas’ request for a trial on their damages and the employer’s comparative fault and remanded for determination of Twin City’s workers compensation lien. The court affirmed the superior court’s entry of summary judgment in favor of Twin City on the Leijas’ claims for breach of the covenant of good faith and fair dealing and breach of contract, and the court’s denial of the Leijas’ motion to amend their counterclaim.
Twin City Fire Insurance Company vs. Leija-Court of Appeals of Arizona, Division 1-November 8, 2017-No. CA-CV 16-0174.