An employer is entitled to subrogation from a recovery made by a claimant from a bad faith action against a manufacturer’s insurance carrier.

The claimant sustained a crush injury to his right hand while using a conveyor belt at work. The employer paid the claimant total disability benefits and paid his medical bills. Later, the claimant filed a product liability action against the manufacturer of the conveyor belt, and the employer asserted a subrogation lien. The manufacturer’s insurance carrier refused to defend the action, claiming it fell within the “product hazard” exclusion in its liability insurance policy.

The trial court approved a consent judgment against the third party. The claimant agreed not to pursue the third party for the judgment. Instead, the claimant pursued the manufacturer’s insurance carrier for collection of the judgment and filed a complaint against them for breach of contract and bad faith. The trial court ruled in the claimant’s favor. When the claimant failed to pay the employer the amount of their subrogation lien, the employer filed a review offset petition. In his answer, the claimant asserted that the employer was not entitled to subrogation because the money the claimant received was for a breach of contract, not negligence. The employer’s petition was granted by the Workers’ Compensation Judge and affirmed by the Workers’ Compensation Appeal Board.

On appeal to the Commonwealth Court, the claimant argued that, by law, the employer is subrogated only where the recovery comes from the third party that caused the injury for which the employer paid compensation benefits. In this case, the third party tortfeasor that caused the injury, the manufacturer, paid nothing to the claimant due to its insolvency. The court, however, rejected this argument, pointing out that the only reason the manufacturer’s insurance carrier was not involved in the case was because it wrongfully refused to defend and indemnify the tortfeasor. The claimant’s lawsuit against the insurance carrier depended on the malfeasance of the original tortfeasor, that is, the manufacturer’s negligence. Thus, the court concluded that the employer was entitled to subrogation under §319 of the Act and affirmed the decisions of the Workers’ Compensation Judge and the Appeal Board.

Case Law Alerts, 4th Quarter 2013