News

February 03, 2007

In our April, 2005 Newsletter, we reported on the appellate court case of Borrowman v. Prastein, wherein Borrowman settled his workers’ compensation claim for $200,000, but where the terms failed to acknowledge that his employer was entitled to subrogation in the medical malpractice civil action.  Borrowman relied on the terms of the settlement agreement which made no reference to the subrogation claim.  The terms included the following:

The above constitutes a full, final[,] and complete settlement of any and all claims for temporary total disability, permanent partial and/or permanent total disability incurred or to be incurred by said [p]etitioner by reason of an industrial injury occurring on or about April 7, 1995, or by reasons of any claim or cause of action by [p]etitioner against [r]espondent of any nature whatsoever.  Rights under [s]ections 8(a) and 19(h) of the *** Act are hereby waived by both parties.

At the time of the settlement, Watertower, the employer, was aware of the pending malpractice claim which knowledge the court felt to be important while failing to notice that Section 5(b) of the Act requires the employer’s consent except where the employer has been fully indemnified or protected by court order.  In denying the subrogation claim, the Fourth District Appellate Court stated:

For this court to hold that Watertower was entitled to a lien against Borrowman’s malpractice settlement proceeds when Watertower (a) failed to reserve its right in its workers’ compensation settlement with Borrowman and (2) knew of the pending malpractice action at the time would completely nullify both parties’ good-faith dealings.  Such a holding would have Borrowman return to Watertower the money that Watertower previously agreed to give Borrowman without a change in circumstances.  It would not only belie Illinois’s public policy of encouraging settlements but would effectively serve as a repudiation of the agreement.  We hold that Watertower should be bound by the terms of its agreement and is not entitled to a section 5(b) lien on the malpractice case.

In our Editor’s Note on the Borrowman case, we pointed out that the decision was binding only on the Fourth District (Springfield area), but that the decision would be an incentive for claimants to try to expand the Borrowman decision to the other four districts since most settlement contracts contained no reference to subrogation.  As expected, soon after the Borrowman decision the Gallagher case arose in the First District.  The Gallagher court rejected the Borrowman opinion noting that Borrowmanwas unsupported by case law.

Examining the policy considerations behind the Act, the court stated that “[a]n employer’s reimbursement of workers’ compensation payments from an employee’s third-party recovery is crucial to the workers’ compensation scheme.  The court observed that reimbursing an employer (who is subject to no-fault liability under the Act) “accords with’ “the moral idea that the ultimate loss from wrongdoing should fall upon the wrongdoer.”  The court also pointed out that section 5(b) advances the Act’s policy of preventing an injured worker from receiving a double recovery and that our supreme court has emphasized that” ’ “[i]t is of the utmost importance that the trial court protect an employer’s [workers’ compensation] lien.”  Thus, the court concluded that “Borrowman’s holding that an employer waives or forfeits its workers’ compensation lien by not specifically reserving it in a settlement of the employee’s workers’ compensation claim when the employer knew of a pending claim against a thirty-party tortfeasor contravenes the Act’s purposes.”

As a result, the law continued to be uncertain with the Fourth District in Borrowmanand the First District in Gallagher submitting opinions which contradicted each other.  We have just now received the Second District opinion in the Harder case.  As in the other two cases, the terms of the settlement contract made no reference to subrogation but merely concluded all claims for compensation, medical, hospital and other expenses arising out of the Workers’ Compensation Act.  The Harder case agreed with the Gallagher case, thereby concluding that the workers’ compensation claim remained open.  In a rather scathing contradiction of Borrowman, the Harder case states:

The settlement agreement in Borrowman, like the agreement in the present case, does not contain any reference to the employer’s workers’ compensation lien and, specifically, does not include a waiver of that lien.  Based on the general contract principles cited above, the court should presume that if the employer meant to waive its statutorily created lien as part of the settlement of the employee’s workers’ compensation claim, it would have specifically included such a waiver in the settlement agreement.  Borrowman’s holding instead rewrites the contract, which was negotiated by lawyers representing both parties, and adds a provision which the parties did not include.  The plain language of the settlement agreement indicates that the parties did not intend to resolve the issue of the employer’s workers’ compensation lien within that settlement.  The Borrowman court assumed, without any basis, that the agreement’s silence on the issue of the workers’ compensation lien meant that the employer chose to waive that lien and its right to recover hundreds of thousands of dollars from any future third-party recovery by the employee.  Such an assumption contravenes well-established contract law in Illinois.

Further, waiver is the voluntary and intentional relinquishment of a known right by conduct inconsistent with an intent to enforce that right. [Citation] The absence of any reference to an employer’s lien in a settlement agreement, without more, cannot constitute such a voluntary and intentional relinquishment of that right.

Editor’s Note:

It would appear that except for cases in the Fourth District, courts would generally conclude that the workers’ compensation subrogation claim was not surrendered by the employer in the terms of the settlement contract.  After the Borrowman decision was rendered, numerous attempts were made by claimants to avoid reimbursement of the employer for its subrogation lien.  Since a settlement contract rarely made reference to the subrogation claim it would only be natural for the claimants to utilizeBorrowman to avoid the subrogation requirements of Section 5.  Perhaps, one of these cases could be appealed to the Illinois Supreme Court but it would appear to be most unlikely that the Borrowman theory would be sustained.

Harder v. Timothy Kelly, et al, No. 1-06-0404, decided January 11, 2007

Frank J. Wiedner, Editor Wiedner & McAuliffe, Ltd One North Franklin, #1900 Chicago, IL 60606 (312) 855-1105