Alexandria Kitchen & Bath etc v. Gary Hare ( 1997 )

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.
11