Eckhardt v. Village Inn (Vicorp)

826 P.2d 855, 16 Brief Times Rptr. 356, 1992 Colo. LEXIS 244, 1992 WL 44570

• Court: Supreme Court of Colorado
• Decided: March 10, 1992
• Docket: 90SC701
• Status: Published

Opinions

Justice MULLARKEY

delivered the Opinion of the Court.

We granted certiorari to consider whether the court of appeals erred in affirming the decision by the Industrial Claim Appeals Office (Panel) to terminate future worker’s compensation benefits payable to the claimant, Richard K. Eckhardt. In an unpublished opinion, the court of appeals held that the Colorado Workmen’s Compensation Act, now called the Workers’ Compensation Act (Act), does not require an employer and/or its insurance carrier to act reasonably in withholding consent to a compromise or settlement of a suit by an injured employee against the alleged third-party tortfeasors. Eckhardt v. Village Inn, No. 90CA0060 (Colo.App. Oct. 11, 1990). We reverse.

I.

On April 24, 1985, Eckhardt was injured in a highway accident in Missouri.¹ When the accident occurred, Eckhardt was working within the scope of his employment with Village Inn, Inc. (Vicorp). Eckhardt slowed for a truck which turned onto the highway and another truck hit the rear of Eckhardt’s vehicle. Because of the injuries sustained in the accident, Eckhardt claimed and received worker’s compensation benefits from Vicorp and its insurance carrier, Great American Insurance Company (carrier), respondents. Both the employer and the carrier filed a general admission of liability and paid Eckhardt temporary disability benefits and costs of medical care.

Eckhardt commenced an action in the United States District Court for the Western District of Missouri against the owner and operator of the truck which struck his vehicle. Eckhardt notified the respondents, including the carrier’s adjuster, Gallagher Bassett Insurance Services (adjuster), of the suit. The carrier then notified counsel for the alleged third-party tort-feasors of its subrogated interest in the suit. Neither Vicorp nor the carrier participated directly in Eckhardt’s suit.

Several weeks before the date when the suit was scheduled for trial, Eckhardt’s attorney concluded that a successful suit was unlikely because it appeared that the defendants were not clearly at fault or at least were not primarily at fault for the accident, because Eckhardt’s medical witnesses were less than certain as to the causes of his injuries, and because questions arose as to the applicability of the defendants’ insurance coverage. In addition, defense counsel argued that Eckhardt himself caused the accident by slowing too early for the truck entering the highway. As a result, settlement negotiations began between Eckhardt and the defendants. The defendants offered settlement in the amount of $12,500.

Eckhardt’s attorney, pursuant to section 8-52-108(2), 3B C.R.S. (1986),² sought the carrier’s approval of the settlement amount. During the course of negotiations, the carrier, via its adjuster, offered to approve a settlement in which the carrier would receive $7,000 and a complete release from its obligation to pay Eckhardt any future benefits related to his claim under the Act. Because those terms were not acceptable to Eckhardt, the negotiations reached an impasse, and the adjuster refused to consent to any settlement not sufficient to indemnify fully the carrier for its subrogated interest, which at the time was over $11,000.

Denied the carrier’s approval, Eckhardt nevertheless settled with the defendants for $12,500. The defendants issued an initial check for that amount, payable to the adjuster, to Eckhardt and to Eckhardt’s attorney. The adjuster, however, refused to endorse the check. Eckhardt’s attorney informed the federal district court by letter of this impediment to the distribution of the proceeds. A copy of this letter was sent to the adjuster. The court, after a hearing, ordered the defendants to make the payment to the registry of the court, and the court then distributed the proceeds according to Missouri law. Of the $12,500, the carrier received $5,960.20 for its subro-gated interest, Eckhardt’s attorneys received $6,089.63 for expenses and fees, and Eckhardt received the remainder, $450.17.

Thereafter, the carrier petitioned the Colorado Division of Labor to suspend Eckhardt’s benefits, which he continued to receive for medical treatment for the injuries sustained in the accident. The administrative law judge found that Eckhardt had forfeited any future benefits by settling the suit without the carrier’s consent. The Panel affirmed. The court of appeals also affirmed, rejecting Eckhardt’s argument that there should be certain exceptions to the harsh rule of forfeiture established in our decision in Matter of Death of Peterkin, 729 P.2d 977 (Colo.1986).

II.

We granted certiorari to determine whether, under the Act, an insurance carrier’s refusal to approve a settlement of a suit by the injured employee against the third-party tortfeasor must be reasonable. We hold that an insurance carrier, which has been properly notified about a suit brought in good faith by the injured employee, has an obligation to act reasonably when an injured employee requests approval of a settlement in such a suit. This obligation to act reasonably means that an insurance carrier must itself make a good faith appraisal of the suit and any proposed settlement and must act accordingly. This rule of reasonable refusal is supported by our precedents and is required to further the intent and purposes of the Act.

A.

Recently, in Scott Wetzel Services, Inc. v. Johnson, 821 P.2d 804, 811 (Colo.1991), we held that the “duty of good faith and fair dealing owed by insurers and self-insurers to workers’ compensation claimants is rooted in the Act.” We decided the issues there “with an eye towards serving the purposes behind the workers’ compensation system.” Id. at 812. Again, in County Worker Comp. Pool v. Davis, we applied a rule of equitable apportionment although the Act “is totally silent on the issue of apportioning attorney fees and court costs incurred by the injured employee in the tort litigation against the tort-feasor responsible.” 817 P.2d 521, 525 (Colo.1991). Similarly, in Peterkin, 729 P.2d 977 (1986), we fostered the purposes of the Act by construing section 8-52-108(2), 3B C.R.S. (1986), as standing for a rule of forfeiture in the circumstances of that case.

In Peterkin, the claimant was a widow who received death benefits under the Act. She brought an action for wrongful death in the federal district court for Kansas against the alleged third-party tortfeasors. The federal “court approved a $100,000 settlement between Peterkin and the third party tortfeasors, compromising [a] $500,-000 judgment.” Peterkin, 729 P.2d at 978. We were required to construe section 8-52-108(2), 3B C.R.S. (1986), the same provision which is applicable in the present case. The statute states in relevant part:

A compromise of any [third-party] action by the employee or his dependents at an amount less than the compensation provided [under the Act] shall be made only with the written approval of the ... insurance carrier liable to pay the same.

We construed this section to stand for a rule of forfeiture, acknowledging that the rule is only “ ‘sometimes explicitly laid down in statute,....’” Peterkin, 729 P.2d at 981 (quoting 2A A. Larson, Larson’s Workmen’s Compensation Law, § 74.17 (1982)). We supported that construction with cases from other jurisdictions and with sound policy considerations and held that if “an employee fails to procure the insurer’s consent in accordance with section 8-52-108(2), the employee forfeits his or her right to receive future benefits.” Id. at 981. Because the rule of forfeiture is not explicitly laid down in section 8-52-108(2), the protection afforded to the employer or insurance carrier by the rule of forfeiture was the result of our effort to further the intent and purpose of the law.

We qualified our holding in Peterkin, however, by noting that the “harsh rule of forfeiture” may not apply when “the insurer unreasonably refuses to consent to the employee’s settlement.” In that event, a different rule may be required for the protection of the employee. Peterkin, 729 P.2d at 981, n. 2. By virtue of this qualification, we clearly acknowledged the likelihood of a case where the insurance carrier’s refusal to consent to a settlement would be unreasonable. Whether the carrier’s refusal to consent is reasonable or unreasonable depends on the circumstances, which include the adequacy of notice of the suit given by the injured employee to the carrier and the carrier’s own actions to protect its rights under the relevant statutes once notice is received.

We noted in Peterkin that the “record contained] no evidence that Peterkin either notified Great West [the insurance carrier] of the pending suit, informed it of the outcome, or procured its consent to the $100,000 settlement.” 729 P.2d at 979. In contrast to the complete lack of notice in Peterkin, it appears that the insurance carrier here was fully informed by counsel for the injured employee of the commencement of the suit and the suit’s venue in the United States District Court for the Western District of Missouri. The record also indicates that the carrier notified counsel for the alleged tortfeasor of its subrogation interest in the case. Eckhardt also claims that he informed the carrier of the suit’s changing fortunes. In addition, after the insurance carrier refused to endorse the initial settlement check, the carrier apparently was informed, by receipt of a copy of a letter from the employee’s counsel to the federal district court, that another attempt would be made to distribute the proceeds of the settlement by other means. This letter may constitute sufficient notice that the distribution might occur by order of the court, as it did. Whether the injured employee provided adequate notice to trigger the application of the rule of reasonable refusal must be determined by the administrative law judge.

Without notice, the carrier has no opportunity to assert its rights in a case which may result in an improvident settlement by the injured employee. Where notice is not given, there is no duty to act reasonably because the carrier is unaware that it should act at all. Thus, the carrier’s interest is jeopardized only when the carrier remains ignorant of the third-party suit. Those interests are not jeopardized when the carrier is fully aware of the commencement of the suit, its developing prospects as trial approaches, and the available opportunities for settlement. With notice, the carrier is in a position properly to assert its rights under the relevant statutes, including section 8-52-108(1), 3B C.R.S. (1986), which should be construed together with section 8-52-108(2).

B.

We must presume that the entire statutory scheme is intended to be effective and that the legislature intended a just and reasonable result. § 2-4-201(1)(b) and (c), 1B C.R.S. (1980). See County Workers, 817 P.2d 521, 526 (where we were “mindful that the legislature, in enacting the Workers’ Compensation Act, intended to achieve a just and reasonable result.”). Further, the legislature tells us that, in enacting a statute, the public interest is favored over any private interest. § 2-4-201(1)(e), 1B C.R.S. (1980). In construing statutes, we also may consider the object sought to be attained and the consequences of a particular construction. § 2-4-203(1)(a) and (e).

Section 8-52-108(1) creates a system of options for employers, insurance carriers and injured employees.³ Under the statute, once an injured employee receives workers’ compensation benefits, the “payment of compensation shall operate as and be an assignment of the cause of action” against the third-party tortfeasor to the insurance carrier liable for such compensation. In addition to the assignment of the cause of action to the carrier, section 8-52-108(1) provides that the insurance carrier “shall be subrogated to the rights of the injured employee” to the extent of its liability for compensation to the employee. See County Workers, 817 P.2d at 524.

The scope of the rights which the carrier enjoys by virtue of the statutory assignment and subrogation was addressed by the court of appeals in Kirkham v. Hickerson Bros. Truck Co., 29 Colo.App. 303, 485 P.2d 513 (1971). There, the court of appeals construed the corresponding section of the former Workmen’s Compensation Act, section 81-13-8 C.R.S. (1963). After noting that “[ajssignment and subrogation are not one and the same,” 485 P.2d at 516, the Kirkham court, relying on decisions from this court, held that rights which vest by the assignment are limited to the rights of subrogation. The Kirkham court thus concluded that the insurance carrier may settle as to its rights with the third party, “with or without the consent of the employee.” The carrier may not, however, “compel the employee to abandon or compromise his cause of action.” Kirkham, 485 P.2d at 517-18.

This view was strengthened by a subsequent amendment to section 81-13-8, C.R.S. (1963), which specifically provided for the right of the injured employee to proceed against the third-party tortfeasor even when compensation is received from the insurance carrier.⁴ The employee may “proceed against the third party causing the injury to recover any damages in excess of the subrogation rights” otherwise provided by the statute (emphasis added). This provision was retained in section 8-52-108(1) and is now codified in section 8-41-203(1), 3B C.R.S. (1991 Supp.). “The insurer, however, is not permitted to recover any sum in excess of the amount of workers’ compensation for which the insurer is liable to the injured employee.” County Workers, 817 P.2d at 524.

The purpose of this system of options is to “shift[ ] the ultimate liability to the tort-feasor, the party responsible for the employee’s injuries.” Tate v. Industrial Claim Appeals Office, 815 P.2d 15, 17-18 (Colo.1991); County Workers, 817 P.2d at 524-25. That is, section 8-52-108(1) does not merely allow the carrier (by assignment or subrogation) and/or the injured employee to recover from the third-party tort-feasor, but in effect provides an incentive to recover from the third party to the fullest extent allowed in a tort claim. Tate, 815 P.2d at 17. Kirkham, 485 P.2d at 517 (citing 2A Larson, Workmen’s Compensation Law § 74.16). When such recoveries are made by the injured employee, the burdens on the employer and its carrier are lessened since they are reimbursed for benefits already paid and given credit against future benefits. Tate, 815 P.2d at 17. Thus, because the system of options and incentives provided by section 8-52-108(1) is intended to serve the interests of employers (and their carriers) and injured employees, the consent requirement of section 8-52-108(2) must be construed to harmonize or to further, not to defeat, both parties' interests as recognized and structured by the Act.

The incentive to bring an action against the third-party tortfeasor, however, is not necessarily of the same dimension for the insurance carrier and the injured employee. The carrier in any suit against the third-party tortfeasor is limited to recovering the compensation it has paid or is liable to pay to the injured employee, County Workers, 817 P.2d at 524, Kirkham, 485 P.2d at 516, while the injured employee is not so limited but can recover greater damages under a common law tort action. Thus, an injured employee often has a greater incentive than the carrier to sue the third party who may be liable for the injuries. This is especially true in those cases where the carrier believes that the costs of litigation and attorneys’ fees may exceed its liability to the injured employee. See Tate, 815 P.2d at 17.

A consequence of this system of options and incentives is that, among the many suits brought by injured employees against third-party tortfeasors, there inevitably will be a suit like the one here. That is, an injured employee will commence suit in good faith to recover an amount exceeding the amount subrogated to the carrier.⁵ The suit, however, will develop in such a way that the best de facto alternative is to accept a settlement offer which is less than the subrogated amount but is still reasonable in light of the evidence. Upon discovery and investigation, the evidence may indicate that the alleged third-party tort-feasor was in fact not a tortfeasor, or was only minimally at fault. The statute does not, and should not be read to, create a lottery at which an injured employee risks all future compensation from the insurance carrier by exercising his option to file a good faith action against the alleged third-party tortfeasor for the excess of the carrier’s subrogated rights.

We cannot ignore the fact that without the lawsuit filed by the injured employee, in those cases where the carrier itself does not proceed against the third-party tort-feasor by its right of subrogation, the carrier remains liable for the entire compensation award to the employee. In fact, imposing no duty on the carrier to act reasonably when refusing to consent to a settlement offer would only work to diminish the number of actions initiated by employees against third-party tortfeasors. The result would be contrary to the intent and purposes of the Act and to employers’ best interests because their carriers will not receive any reimbursement from the third parties responsible. Some measure of reasonableness on the part of the carrier in a case such as this therefore is required.

A carrier must fairly and reasonably evaluate the suit before refusing approval of the settlement. Once it has been apprised that a good faith suit by the injured employee has deteriorated, the carrier cannot simply seize that opportunity to relieve itself of the obligation to pay future compensation by withholding consent. Without the suit by the injured employee here, the carrier not only would have had to continue paying future workers’ compensation benefits, but it would not have been indemnified with approximately half of the total $12,500 paid by the alleged tortfeasor to settle the suit. Likewise, had the injured employee voluntarily dismissed his suit because of the carrier’s refusal to consent, assuming that dismissal was a possible option, the carrier would have had to continue paying future benefits without half of the settlement amount.

C.

Because adequate notice to the carrier of the suit and its developing fortunes triggers the duty of a good faith refusal, the issue becomes how to determine when a refusal to consent to a settlement is unreasonable given such notice of the suit and its plunging prospects. The rule cannot be that the carrier must consent simply because the employee has given notice. Rather, after adequate notice is given, it is the carrier’s actions taken in light of all the circumstances which determine whether its refusal to consent was reasonable or unreasonable. Absent a rule of reasonable refusal, in certain cases a carrier will be motivated to withhold consent to a settlement, not because the settlement would be inimical to its subrogated interests, but because withholding consent would redound to its self-interest in that the carrier thereby would be relieved of its obligation to pay future benefits under an unqualified rule of forfeiture.

The fact that the carrier had a reasonable opportunity to timely intervene in the underlying suit and failed to do so is evidence particularly relevant in adjudicating a claim that the carrier acted unreasonably. That is, a timely intervention, after adequate notice, is evidence which shows that the carrier’s subrogated interests in fact may be jeopardized and which therefore is entitled to great weight. As indicated, because the election of compensation under the statutes operates as an assignment of the cause of action to the carrier, the carrier had its own power to act. Although the rights vesting by the assignment and the subrogation provided by the statute are not absolute, neither are they inert attributes of the carrier’s self-interest. Thus, the carrier’s subrogated right is not a right just waiting to be violated by the employee. Rather, the rights accruing to the carrier by assignment and subrogation are rights which can be, and should have been, exercised by the carrier. Thus, in County Workers, we held that an “insurer has the right to intervene and participate in the employee’s tort action against a third party or may elect to file a separate claim against the tortfeasor.” 817 P.2d 521, 526, n. 5.

Here, for example, it appears that the carrier had an adequate opportunity to intervene in the suit by the injured employee against the tortfeasor under principles of conflict of laws which govern federal practice.⁶ Without the carrier’s participation, the federal court distributed the proceeds of the settlement according to Missouri law. Had the carrier intervened to protect its own interests it might have argued successfully that Colorado law applied. Brown v. Globe Union, a Div. of Johnson Controls, 694 F.Supp. 795, 798 (D.Colo. 1988) (“When resolving a dispute over sub-rogation rights, there are strong reasons for applying the law of the state whose workers’ compensation law was invoked by the employee-claimant to recover workers’ compensation benefits.”). In Brown, the carrier intervened “ ‘for the limited purpose of preserving [its] right to recover pursuant to C.R.S. § 8-52-108.’ ” 694 F.Supp. at 796.

Thus, by intervening in the Missouri suit, the carrier could have pleaded relevant Colorado law, including Peterkin and County Workers, if its subrogated interests had been jeopardized by the potential settlement. As it was, the federal court proceeded entirely under Missouri law. Had the carrier reasonably and timely intervened, assuming there was no bar to the intervention, some other disposition of the Missouri case might have occurred, possibly including a court-ordered settlement which preserved the subrogated rights of the carrier as against the third-party tortfeasor.⁷ Despite the foregoing comments, because the record here was not developed according to the rule of reasonable refusal, this case must be remanded to the administrative law judge for a determination of the facts and issues based on the evidence presented by the parties.

III.

We summarize the requirements of an adjudication of a petition by a carrier to suspend benefits under the rule of reasonable refusal. Once the petition is filed, an injured employee who claims the carrier unreasonably withheld its consent to settlement must show the following. First, the employee gave adequate notice of the suit and its changing fortunes, and notice of the proposed settlement to the carrier. Second, the proposed settlement was reasonable under all the circumstances. Third, the employer or carrier unreasonably failed to intervene in the underlying suit. If notice of the suit or the proposed settlement was inadequate, or if the settlement was unreasonable, or if the carrier timely intervened in the suit, then the petition to suspend benefits should be granted under the rule of forfeiture.

We reverse and remand to the court of appeals with directions to return the case to the administrative law judge for further proceedings consistent with the views expressed in this opinion.

ROVIRA, C.J., dissents. ERICKSON, J., dissents, and VOLLACK, J., joins in the dissent.

1 . No findings of fact were made in the administrative proceeding below and the record of the Missouri federal court case is not before us. For purposes of this opinion, the facts are taken from the pleadings and evidence in the record but because the facts must be determined on remand, our recitation of the facts is not dispos-itive.

2 . Recodified in section 8-41-203(2), 3B C.R.S. (1991 Supp.).

3 . We reject the suggestion that the employer is solely dependent on the enlightened self-interest of the carrier. That argument is not consistent with the legislative scheme and also now has been firmly rejected by later statutory enactment. See § 8-40-102, 3B C.R.S. (1991 Supp.) (the General Assembly recognizes "that the workers’ compensation system in Colorado is based on a mutual renunciation of common law rights and defenses by employers and employees alike").

4 . See Ch. 271, sec. 15, § 81-13-8, 1973 Colo. Sess.Laws 948-49.

5 . According to the preserved deposition testimony, Eckhardt’s attorney initially valued the suit between $20,000 and $50,000, the lower range of which exceeded the carrier's subrogated interests at that point.

6 . See 3B Moore’s Federal Practice ¶24.13: A timely application to intervene under the federal rules of civil procedure is "not measured merely from the time the action was commenced, or even from the time that the applicant was aware of the action, but from the time that the applicant was aware that its interests might be adversely affected by the litigation.”

7 . See, e.g., 2A Larson, Workmen’s Compensation Law § 74.17(e) (“Ordinarily a third party who settles with the employee-plaintiff without carrier consent (or court approval where relevant) remains liable to the subrogee carrier ... since he must be held to know that he cannot evade his liability to the carrier as subrogee by a settlement with the employee.’’).