Alexandria Kitchen & Bath etc v. Gary Hare

• Court: Court of Appeals of Virginia
• Decided: July 29, 1997
• Docket: 2259963
• Status: Unpublished

Opinion

COURT OF APPEALS OF VIRGINIA

Present: Chief Judge Moon, Judge Coleman and Senior Judge Cole Argued at Richmond, Virginia

ALEXANDRIA KITCHEN & BATH STUDIO, INC. AND HARTFORD UNDERWRITERS INSURANCE COMPANY MEMORANDUM OPINION * BY v. Record No. 2259-96-3 JUDGE MARVIN F. COLE JULY 29, 1997 GARY HARE

FROM THE VIRGINIA WORKERS' COMPENSATION COMMISSION

Benjamin J. Trichilo (Trichilo, Bancroft, McGavin, Horvath & Judkins, P.C., on briefs), for appellants. George L. Townsend (Chandler, Franklin & O'Bryan, on brief), for appellee.

Alexandria Kitchen & Bath Studio, Inc. (employer) and

Hartford Underwriters Insurance Company (Hartford) appeal a

decision of the Workers' Compensation Commission (commission)

denying their application to terminate Gary Hare's workers'

compensation benefits. Employer and Hartford contend that the

commission erred in finding that Hare's settlement of a

third-party tort claim without the consent or knowledge of

employer or Hartford did not necessitate a termination of Hare's

workers' compensation benefits, and that such settlement did not

prejudice their right of subrogation against the third-party

tortfeasor.

We find that the evidence proved that Hare effected a

* Pursuant to Code § 17-116.010 this opinion is not designated for publication. settlement of his third-party claim and released the third-party

tortfeasor without informing employer or Hartford of the terms of

the proposed settlement, thereby prejudicing their right of

subrogation against the third-party tortfeasor as a matter of

law. Accordingly, we find that the commission erred in not

terminating Hare's workers' compensation benefits, and we reverse

the commission's decision.

I. On January 20, 1995, Hare sustained injuries as the result

of an automobile accident which occurred in the course of Hare's

employment. On March 8, 1995, pursuant to a memorandum of

agreement between Hare and employer, the commission entered an

award providing Hare with temporary total disability benefits and

medical expenses. As of July 26, 1995, Hartford had paid Hare a

total of $86,438.54 in disability and medical benefits.

As a result of the automobile accident, Hare asserted a tort

claim against the driver of the other vehicle, Kristen Deal.

Omni Insurance Group (Omni) insured Deal for liability with a

policy limit of $25,000. Hare also had his own liability policy,

which provided underinsured motorist coverage through Allstate

Insurance Company (Allstate). 1

Anthony Smith, a claims specialist employed by Hartford,

1 The parties stipulated that employer and Hartford were not entitled to assert any subrogation lien against the uninsured motorist coverage because the accident occurred prior to the enactment of Code § 65.2-309.1.

2 testified that Hartford did not authorize any person associated

with employer to settle or compromise Hartford's lien. Smith

acknowledged that he had discussed Hartford's lien with James

Turner, Hare's counsel in the third-party claim. However, Smith

denied that Turner ever offered $16,667 to Hartford from the

underlying liability limits of the Omni policy. Rather, Smith

stated that Turner offered Hartford $5,000 to waive its lien, and

Turner told Smith that if Hartford did not take the $5,000, Hare

might declare bankruptcy. Hartford rejected the $5,000 offer.

Smith stated that Hartford never authorized Turner or Hare to

release Deal, nor did Turner or Hare ever request such

authorization prior to Hare signing the release on or about

August 8, 1995. Hartford turned over the protection of its lien

to William Korth, Hartford's house-counsel, in late July or early

August 1995. Korth testified that Hartford referred this case to him at

the end of July 1995. Korth stated that when he first spoke to

Turner, Turner reiterated the $5,000 offer and said that Hare

might declare bankruptcy if Hartford did not accept the offer.

On August 2, 1995, Korth sent a letter to Omni's registered

agent, notifying Omni of Hartford's subrogation lien. At that

time, Turner had increased his offer to compromise Hartford's

lien to $7,500. In an August 2, 1995 letter, Korth rejected the

$7,500 offer made by Turner. On August 8, 1995, Korth received a

letter from Turner via fax indicating that Hare had settled his

3 third-party claim against Deal for the liability policy limit of

$25,000, plus $75,000 from Allstate. The letter indicated that

$16,667.67 would be paid to Hartford in satisfaction of its lien.

Hare stipulated that he signed a release of all claims releasing

Deal from any further liability on or about August 8, 1995.

On August 8, 1995, Korth wrote to Turner, stating that the

settlement occurred without Hartford's knowledge, consent, or

approval. On August 15, 1995, employer/insurer filed an

application to terminate Hare's workers' compensation benefits

based upon his settlement of the third-party claim without

Hartford's consent or approval. Korth testified that Hartford

never authorized Hare to sign the release of all claims against

Deal, nor did Turner or Hare ever request such authorization.

Korth contended that he did not try to determine if Deal had

additional assets because he did not have sufficient time to do

so between receiving the file on July 26, 1995 and the settlement

on August 8, 1995. An August 15, 1995 letter from Omni to Korth

indicated that Omni settled the third-party claim on July 24,

1995 without any knowledge of Hartford's lien. Turner testified that he knew Hartford was asserting its

$86,438.54 lien before he settled the third-party claim. Turner

contended that Korth verbally acknowledged to him that Hartford

was only entitled to the $16,667. Turner admitted that Hartford

did not authorize Hare to sign the release of all claims against

Deal. Turner stated that he requested authorization from Korth

4 for Hare to sign the release, but Hartford refused to give such

authorization. Korth denied that Turner ever made such a

request. Turner's disbursement sheet reflected that the

settlement was completed on August 8, 1995. On August 10, 1995,

Turner tendered a $16,667 check to Hartford through Korth.

Turner stated that he had informed Korth of the availability of

the $16,667 before the settlement. Smith and Korth denied that

Turner or Hare had ever offered the $16,667 prior to the

settlement. Turner stated that prior to the settlement, he had

also informed Korth that his investigation had revealed that Deal

had no assets other than the $25,000 liability policy. Korth

testified that prior to August 8, 1995, he and Turner never

discussed any information concerning an investigation of Deal's

assets, other than her liability insurance policy. Turner

testified that Deal committed suicide. 2

Hare testified that he did not personally obtain written

consent from employer to settle his third-party claim before

August 8, 1995, nor did he obtain Hartford's permission to settle

his third-party claim.

II.

The deputy commissioner found that Hartford knew about

Hare's third-party claim against Deal prior to the settlement.

2 The deputy commissioner allowed Turner's hearsay testimony concerning his investigation of Deal's assets and her death not for the truth of the matters asserted but to complete the record and to show Turner's understanding of Deal's assets.

5 The deputy commissioner found that the settlement occurred on or

about July 24, 1995 based upon Omni's letter, and that Hare

executed a full release of Deal on August 8, 1995. Relying upon

Korth's testimony, the deputy commissioner found that the

settlement was made without Hartford's consent or knowledge,

which consent Hartford did not unreasonably withhold. Moreover,

the deputy commissioner found no evidence that employer consented

to the settlement prior to its occurrence. The deputy

commissioner also found that Hare's settlement impaired

Hartford's right of subrogation as a matter of law, finding that

Hartford did not have to prove as a matter of fact that its

ability to recover from Deal had been diminished. Accordingly,

the deputy commissioner terminated Hare's workers' compensation

benefits. The full commission reversed the deputy commissioner's

decision. Relying upon Wood v. Caudle-Hyatt, Inc., 18 Va. App.

391, 444 S.E.2d 3 (1994), the commission concluded that

Hartford's subrogation rights were not prejudiced by the

settlement between Hare and Deal. The commission found that

Hartford did not object to the terms of the settlement, of which

it was made aware, did not attempt to intervene in the

third-party proceedings, did not refer the matter to Korth until

late July 1995, and did not make any investigation into Deal's

assets. Based upon these findings, the commission denied the

application seeking to terminate Hare's compensation benefits.

6 In addition, the commission found that Hartford had effectively

communicated to Hare that the terms of the settlement were

appropriate to protect its subrogation rights, because Hartford

received the $16,667 and converted that money to its own use.

7 III.

A claim for workers' compensation benefits operates as an

assignment to the employer of any right to recover damages which

the injured employee may have against any other party for such

injury. See Code § 65.2-309(A). "[T]he employee may not pursue

his common law remedy in such a manner or settle his claim to the

prejudice of the employer's subrogation right and thereafter

continue to receive workers' compensation benefits." Wood, 18

Va. App. at 397, 444 S.E.2d at 7. The employee necessarily prejudices his employer's subrogation rights and, thus, is barred from obtaining or continuing to receive benefits under a workers' compensation award when an employee settles a third-party tort claim without notice, or without making a claim for workers' compensation benefits, or without obtaining the consent of the employer.

Id. "This is especially true when an employee settles a

third-party claim for less than the potential amount of workers'

compensation coverage. In such situations, the employer's rights

are significantly impaired." Id. at 398, 444 S.E.2d at 7.

In Wood, the employee promptly notified the employer by

certified mail of the terms of the proposed third-party

settlement, which was in excess of the workers' compensation

benefits that the employee could receive, and the employee

requested the employer's consent or objection within ten days.

Id. at 398, 444 S.E.2d at 7. Based upon this evidence, we found

that the employer was afforded every opportunity to protect its

8 subrogation rights, and, therefore, it failed to prove that it

was prejudiced by the settlement.

The facts in Wood are distinguishable from those in this

case. Here, no credible evidence proved that Hare notified

employer or Hartford of the specific terms of the proposed

settlement prior to July 24, 1995, the uncontradicted date upon

which Hare effected the settlement with Omni, or even prior to

August 8, 1995, the date upon which settlement proceeds were

disbursed and Hare released Deal. In Wood, unlike this case, the evidence showed that the employer was given the opportunity to

object or participate in the settlement and was informed of the

terms of the settlement. Therefore, unlike the situation in

Wood, Hare's unauthorized settlement of his third-party claim

necessarily prejudiced employer and Hartford by depriving them of

the opportunity to protect and assert their subrogation right

against Deal.

The commission erred in taking into account the fact that

Hartford and employer did not intervene in the third-party claim.

We have previously held that an employer who knows of a

third-party action and does not file a pleading to intervene is

not estopped from seeking termination of the employee's workers'

compensation benefits. See Ball v. C.D.W. Enterprises, Inc., 13

Va. App. 470, 474, 413 S.E.2d 66, 69 (1992). See also

Safety-Kleen Corp. v. Van Hoy, 225 Va. 64, 71, 300 S.E.2d 750,

754 (1983). The fact that an employer knows about a pending

9 third-party claim is not the relevant inquiry. See Barnes v.

Wise Fashions, 16 Va. App. 108, 111, 428 S.E.2d 301, 302 (1993).

Rather, the issue is whether the employer had knowledge of the

terms of the proposed third-party settlement prior to its

completion, such that the employer had the opportunity to assert

and protect its subrogation right. Moreover, contrary to the

commission's finding, no credible evidence showed that Hare ever

instituted a third-party lawsuit against Deal or that any suit

was pending in which employer could have intervened. As in Barnes, the uncontroverted evidence in this case proved that Hare

first notified employer and Hartford of the third party

settlement after it had been effected on July 24, 1995. In

addition, Hare's argument that employer was not prejudiced

because Deal did not have any assets other than the liability

insurance policy is without merit. Hare extinguished his claim

against Deal before its value could be tested either by himself

or his subrogees. See Ball, 13 Va. App. at 474, 413 S.E.2d at

69. Any evidence that a claim against Deal was valueless was

speculative at best. See id. Thus, the commission erred in

considering such evidence as a factor in finding that employer

failed to prove it suffered prejudice as a result of the

unauthorized settlement. "The rule is well-settled and plain.

[Hare] forfeited his right to further compensation by

unilaterally depriving the employer and the insurer of their

right to seek reimbursement from the third [party]." Id. at

10 474-75, 413 S.E.2d at 69.

For these reasons, we reverse the commission's decision and

direct the commission to enter an order consistent with this

opinion.

Reversed.