Defense Digest, Vol. 31, No. 2, June 2025

Be Specific to Avoid Waiver of Subrogation Rights

By
Jessica W. Gordon

Key Points:

  • New Jersey Workers’ Compensation Statute includes provisions for employers to seek subrogation in claims involving third-party recoveries by employees.
  • The employer is entitled to reimbursement for up to two-thirds of medical expenses and compensation payments.
  • To fully maximize subrogation rights, it is important to perfect liens in order to prevent unintended waivers of future lien rights.

The New Jersey Workers’ Compensation Statute includes provisions for employers to seek subrogation in claims involving third-party recoveries by employees. Employers or carriers often fail to take full advantage of the subrogation rights and leave money behind. To fully maximize subrogation rights, it is important to perfect liens in order to prevent unintended waivers of future lien rights.

Section 40 of the Statute states that when a third person is liable for the injury or death of an employee and the employee obtains a third-party recovery, the employer is released from liability. This release, however, is limited to the extent of recovery, and the employer is entitled to reimbursement of medical expenses and compensation payments.

The amount of any lien recovery depends on benefits paid and the third-party recovery amount. The maximum lien that can be asserted is two-thirds of the total third-party recovery, minus costs. This calculation presumes that a one-third counsel fee is paid on a third-party litigation, leaving the two-thirds net as payment to the petitioner for injuries. An employer/carrier is entitled to obtain reimbursement for up to two-thirds of the medical expenses and compensation benefits, including permanent disability, paid on a claim. 

When the third-party recovery is minimal, liens will often be exhausted by medical expenses and temporary disability benefits paid. However, where large third-party recoveries are received, lien credits may apply to permanent disability benefits or future benefits on reopener applications. These future lien credits can easily be unintentionally waived.

An employee’s counsel will often request a compromise of a lien to effectuate settlement of the third-party claim. When the workers’ compensation claim remains open with only medical and temporary disability benefits paid at the time of the third-party recovery, a compromise of the lien could potentially waive any right to assert a lien on permanent disability benefits paid or future benefits. Unless specified as part of a compromise, that no waiver of future lien rights is agreed upon, the employee’s counsel will seek to deem the compromise as a “full satisfaction of the lien” and deny future reimbursement.

There is no obligation to agree to compromise any subrogation. If the chance of a third-party recovery is low, due to weak issues of liability or the amount of an anticipated recovery is small, a compromise may be practical. A compromise could assist to effectuate the third-party recovery and guarantee at least some reimbursement of benefits paid rather than risk no recovery should the third-party litigation be unsuccessful. In cases of anticipated large third-party recoveries, a compromise may have no benefit to a carrier. 

If the parties agree to a compromise, it is imperative to specify what is included in the compromise. For example, in a recent workers’ compensation opinion, lack of specificity led to a waiver of future subrogation rights. 

In that matter, the employee received workers’ compensation benefits and then initiated a third-party suit. The third-party resolution occurred before an award of permanent disability was entered. The third-party resolution included a compromise of workers’ compensation benefits paid to date. The carrier forwarded correspondence to the employee’s counsel confirming the agreement to compromise the lien to date; however, the letter was silent as to any future lien rights. The employee’s attorney issued payment of the lien to the carrier and attached correspondence stating that the check issued was in “full and final payment of the outstanding workers’ compensation lien.” The carrier cashed the check without dispute as to the notation that payment was “full and final.”
 
The judge of compensation opined that there is an established practice in cases where the total value of the workers’ compensation lien exceeds the third-party recovery to agree to an equal division of the third-party recovery among the employee, employee’s counsel, and employer/workers’ compensation carrier. Such an agreement is known as a “one-third, one-third, one-third” settlement. The judge held that the lack of specific reservation of future subrogation rights and the acceptance of “full and final” payment constituted a waiver of future lien rights. An appeal has been initiated by the employer.

While a “one-third, one-third, one-third” split is often the preferred compromise of employees’ counsel, there is no established practice to require agreement with same. There is no legal obligation to agree to any compromise, much less this proposal. Lien compromises should always be assessed on an individual basis to determine what makes the most practical decision for that claim. An agreement to the “one-third” compromise should only be done in cases where it is the most beneficial for that claim. 

When the parties agree to a compromise, correspondence to all counsel that the compromise only pertains to the lien amount to date is imperative. The correspondence should also expressly specify that the compromise is NOT a waiver of future subrogation rights. This will prevent any future dispute as to the reimbursement as the result of any additional benefits paid.

It is also important to ask for the third-party counsel fee agreement or the third-party disbursement documentation to ensure that proper calculation of future lien credits can be made at the necessary time. When the future subrogation rights are preserved, reimbursement of future benefits paid, including any permanent disability award or additional medical or temporary disability benefits, can be received. In cases where employees obtain a permanent disability award, a large future lien credit that has been properly preserved can act as a deterrent to reopen applications. If additional medical benefits are sought as part of the reopener, the petitioner will be responsible for payment of two-thirds of the benefits from the proceeds of their third-party recovery until the full lien is exhausted. This can be a powerful tool to mitigate future litigation costs. Special consideration should be taken in cases of large third-party recoveries to ensure the preservation of the future lien.

Any questions as to whether a compromise is beneficial should be addressed with counsel, who can assist in determining what is in the best interest of the employer/carrier. In addition, any agreement to compromise should be reviewed by counsel to confirm preservation of all rights to avoid missed opportunities for future reimbursement. Remember, specificity is best to prevent unanticipated waivers.
     
*Jessica is a member of our Workers’ Compensation Department and works in our Mount Laurel, NJ office. 

 

Defense Digest, Vol. 31, No. 2, June 2025, is prepared by Marshall Dennehey to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2025 Marshall Dennehey. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.