Actionable Strategies: Navigating Workers' Compensation Liens in Third-Party Personal Injury Claims

For personal injury (PI) attorneys managing third-party claims where an industrial accident is involved, skillfully navigating the corresponding workers’ compensation (WC) lien is crucial for maximizing the client’s net recovery. The legal mechanisms governing these liens are complex, originating from the foundational principle that the injured employee should be prevented from achieving a double recovery for the same injury.

Here are actionable tips for effectively handling Arizona WC liens under A.R.S. § 23-1023:

1. Audit the Lien: Challenging Non-Compensable Expenses

The statutory WC lien applies specifically to the "amount actually collectable" from the third party, and this amount is calculated after deducting the claimant's reasonable and necessary expenses, which explicitly include attorney fees incurred in securing the recovery.

A frequent mistake is accepting the gross lien amount asserted by the carrier without scrutiny. The lien should include only compensation and medical, surgical, and hospital benefits paid. You must diligently scrutinize the carrier's ledger to ensure unauthorized litigation or administrative expenses have been removed.

Immediately challenge and exclude costs that are not properly lienable, such as:

• Independent Medical Examination (IME) costs.

• Fees paid for defense medical exams (DME).

• Legal fees paid to the carrier’s workers’ compensation defense attorneys.

• Fees for nurse consultants or vendors.

2. Strategic Negotiation: Leveraging Future Credits

The carrier’s statutory reimbursement rights include both a lien on the current settlement and a future credit against any subsequent compensation liability (both medical and indemnity). This future credit acts as a deductible that the claimant must meet before the carrier pays future benefits for the industrial injury.

Carrier Motivation is Key The primary motivation for the workers' compensation carrier is often the desire to completely close the file and eliminate future financial exposure. A successful negotiation may involve a reduction of the current lien in exchange for retaining a high, comprehensive future credit, effectively eliminating the client's ability to successfully reopen the WC claim for future benefits. Memorialize any agreement concerning the reduction of the lien and the application or waiver of future credits in writing.

The Aitken/Leija Equitable Apportionment Principle The carrier’s lien must be reduced by the degree of fault attributable to the employer in the third-party claim. Although historically this equitable apportionment (or Aitken math) was typically applied only when damages were finalized through a jury verdict, recent case law suggests that in good faith, a carrier might agree to a lien reduction in a settlement context, especially when evidence of employer fault is clear, undisputed, and substantial. Use this potential reduction to negotiate early lien compromises.

3. Procedural Pitfall: The Risk of Forfeiture

Compliance with A.R.S. § 23-1023(D) is mandatory. If the settlement amount in the third-party case is for less than the amount of the workers’ compensation lien, obtaining the written approval of the compensation carrier (or the Special Fund, if uninsured) is required.

Failure to secure this prior written approval when settling for a lesser amount may result in the forfeiture of all future workers’ compensation benefits for that injury.

• Mitigation/Exception: An exception to strict forfeiture applies if the workers’ compensation claim was initially denied by the carrier. In such a case, the burden shifts to the claimant to prove the third-party settlement amount was reasonable.

• Mandatory Notice: The claimant or their attorney must provide the carrier with written notice of the intent to file suit, along with timely and periodic notice of all pleadings and rulings concerning the status of the pending action.

4. Identifying Exempt Recoveries (No Lien Attachment)

Not all components of a recovery are subject to the workers' compensation lien, presenting opportunities to maximize the net funds available to the client.

• UM/UIM Benefits: The statutory lien generally applies to recoveries from third-party tortfeasors, but does not attach to proceeds recovered from either the employee's or the employer's Uninsured or Underinsured Motorist (UM/UIM) coverage.

• Legal Malpractice Proceeds: The lien also typically does not attach to damages recovered in a legal malpractice action if the attorney missed the deadline for filing the third-party claim.

As personal injury lawyers navigate third-party negotiations, it’s essential to address workers’ compensation considerations and lien-related issues proactively. If you have questions or need clarity on lien resolution strategies, please reach out to me directly. I’m available to provide guidance and ensure we approach these matters with confidence and precision.