September 01, 2007

Supreme Court Upholds Employer’s Right of Subrogation – An Employer’s Lien Not Waved by Settlement Contract Terms

September 01, 2007

Gallagher v. Jaroslaw, et al No. 103522

In previous newsletters, your Editor has commented on the contradictory decisions by several appellate courts which addressed the contention that settlement contract terms deprived the employers of the subrogation rights for compensation payments.  The two most significant cases were Borrowman v. Prastein, where the court held that the employer had waived its lien, and Gallagher v. Lenart, where the court said the lien had not been waived.  Your editor noted that the final decision would eventually be made by the supreme court, and now it has.  The Supreme Court has affirmed theGallagher case and held that the subrogation lien had not been waived.

In the Gallagher case, the plaintiff, James Gallagher, an employee of Rail Terminal Services, was struck by a truck driven by an employee of Pacella Trucking Express.  Rail Terminal paid TTD and medical expenses in the sum of $78,295.72.  Thereafter, Rail Terminal and Gallagher settled the workers’ compensation claim for $150,000, with the terms making no reference to the pending civil claim.

The parties executed two documents as part of the settlement, that being a settlement contract and a resignation agreement.  The settlement contract provided in relevant parts:

Respondent denies these injuries are compensable and this settlement is made to settle those issues as a purchase of peace against any and all claims of temporary total compensation, permanent partial disability and medical, surgical or hospital expenses, past, present or future.

The second document which was entitled “Resignation Agreement” was contingent upon the workers’ compensation settlement contract approval by the Industrial Commission.  It further acknowledged that, as part of the settlement, Gallagher would voluntarily resign from his position with Rail Terminal.  It also provided that the Resignation Agreement was contingent upon the settlement of the workers’ compensation claim.

On September 16, 2005, Gallagher settled his civil case against Pacella, for a total of $350,000, with $125,000 to James Gallagher for his personal injury claim and $225,000 to Michelle Gallagher for her loss of consortium claim.  Understandably, Rail Terminal alleged that Gallagher had allocated the larger amount to the consortium claim to further circumvent Rail Terminal’s workers’ compensation lien.  During the trial court hearing, Rail Terminal produced testimony that Rail Terminal never agreed or intended to waive its workers’ compensation lien and that it was not customary to waive an employer’s right to recover its lien as part of negotiations for settlement of a workers’ compensation claim and if such a waiver was contemplated, it would be clearly included in the terms of the contract.  The trial court found for the plaintiff.  The appellate court disagreed and, in its finding for the employer against Gallagher, conducted an excellent review of the law favoring the employer’s right to recover.

Supreme Court Decision

The issue the Supreme Court considered was whether, based on the language of the settlement contract and the resignation agreement, Rail Terminal waived its workers’ compensation lien.  The court held that it had not, stating:

Turning to the settlement contract, plaintiffs argue that the following language constitutes a waiver of Rail Terminal’s section 5(b) workers’ compensation lien:

Respondent [Rail Terminal] to pay the petitioner [Gallagher] $150,000 in full and final settlement of all claims under the Workers’ Compensation Act for injuries allegedly incurred on or about August 10, 2001 and any and all results, developments or sequale [sic], past, present or future resulting from this accident.  (Emphasis added.)

Plaintiffs emphasize that the settlement contract disposes of “all claims” without restriction, in that it constitutes a “full and final settlement.”  Furthermore, according to plaintiffs, Rail Terminal’s lien is a “claim under the Workers’ Compensation Act.’ and it resulted from Gallagher’s “accident.”

The court stated:

We further hold that, even if the language of the settlement contract did constitute a general release, it would not be sufficiently explicit to waive Rail Terminal’s workers’ compensation lien.  Considering the integral role the workers’ compensation lien plays in the workers’ compensation scheme, we do not believe general language is sufficient to effect such a waiver.  On the contrary, the waiver of a workers’ compensation lien must be explicitly stated.  Accord 367 Ill.App.3d at 302-02 (concluding “waiver of a workers’ compensation lien must be more explicitly and affirmatively stated in a settlement agreement and cannot simply be implied by a lack of any reference to that lien”).  Here, the language of the settlement contract contains no mention of Rail Terminal’s workers’ compensation lien and therefore is not sufficiently explicit to waive the lien.

The court then reviewed the resignation agreement to determine whether or not the following paragraph effectuated a waiver of Rail Terminal’s workers’ compensation lien:

This Agreement does not constitute an admission by Employer of any liability or wrongdoing but it is intended to resolve in good faith any existing or potential disputes or claims arising out of Employee’s relationship and separation with employer.  (Emphasis added.)

On the basis of the above, the court concluded:

As discussed, the settlement contract, by its own terms, waives only Gallagher’s claims against Rail Terminal, and neither the settlement contract nor the resignation agreement explicitly refers to Rail Terminal’s workers’ compensation lien, as would be required to waive the lien.

Finally, the court addressed the question of the plaintiff’s contention that Rail Terminal was in effect receiving a double recovery, stating:

Plaintiffs first contend that they settled their personal injury action for less than they otherwise would have in reliance on Rail Terminal’s waiver of its lien, so a finding that Rail Terminal waived its lien will not result in a double recovery for Gallagher.  This argument rests on a factual assertion regarding plaintiffs’ basis for settling the personal injury action that is not borne out by the record.  Plaintiffs’ second argument regarding double recovery is that finding, as we have, that Rail Terminal did not waive its lien will result in a double recovery for Rail Terminal by allowing it both to recover its workers’ compensation payments and retain the benefit of Gallagher’s resignation. … In reality, plaintiffs are merely asking us to conduct a generalized inquiry into the fairness of Gallagher’s bargain with Real Terminal, which we decline to do.  Courts generally will not inquire into the adequacy of consideration for a contract.  Moreover, Gallagher specifically acknowledged in the resignation agreement that a $1 payment and the approval of the settlement contract, which unambiguously did not waive Rail Terminal’s workers’ compensation lien, would constitute sufficient consideration for his resignation

Editor’s Note:

Since the impact of the Borrowman case, the terms of settlement contracts, when prepared by respondents, have generally included a provision that the subrogation claim is not being waived.  The Borrowman case has now been reversed and theGallagher case is the law.  Even in the absence of any reference to the waiver, theGallagher decision protected the employer’s subrogation lien.  The Supreme Court went even further in noting that the resignation agreement had no effect on the subrogation claim.

Gallagher v. Jaroslaw, et al No. 103522, decided August 9, 2007

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