New Jersey Worker’s Compensation Subrogation Is (For the Most Part) Not Limited by New Jersey’s No-Fault/Verbal Threshold System

In N.J. Transit Corp. v. Sanchez, 242 N.J. 78 (May 12, 2020) an equally-divided (3-3) Supreme Court allowed the Appellate Division's ruling in N.J. Transit Corp. v. Sanchez, 457 N.J. Super. 98 (App. Div. 2018) (discussed further below) to stand, thus confirming that a worker's compensation carrier's subrogation rights are generally not affected by New Jersey's no-fault and verbal threshold statutes.

At issue was the balance between no-fault laws designed to reduce the cost of automobile insurance by reducing subrogation between vehicles and the worker's compensation statute designed to reduce the cost of worker's compensation by allowing worker's compensation carriers to subrogate.

Under New Jersey's no-fault scheme, the Automobile Insurance Cost Reduction Act (AICRA) and its predecessors, certain vehicles in New Jersey require no-fault personal injury protection (PIP) coverage (this requirement is discussed further here). When an individual is entitled to PIP benefits, that individual cannot sue a tortfeasor for any costs that should be covered by PIP, as evidence of such costs are inadmissible. N.J.S.A. 39:6A-12. The insurer of a party receiving PIP can recover PIP only from a tortfeasor who is not required to carry PIP or who failed to carry PIP. N.J.S.A. 39:6A-9.1 (See our Guide to Recovery of PIP in New Jersey for further discussion). In effect, this means that each person entitled to PIP receives those benefits from his/her insurer and neither the injured party nor his/her insurer can seek recovery from an at-fault party. In theory, this reduces the cost of insurance by eliminating the cost of law suits going back and forth over the course of numerous accidents in which each insurer's insured is likely to be at fault some of the time.

On the other side of the equation is the worker's compensation statute. N.J.S.A. 34:15-40 affords a worker's compensation carrier a right of recovery against any tortfeasor who causes an injury to an employee. The worker's compensation carrier may recover those benefits either as a lien against its insured’s bodily injury claim or by direct suit if the employee doesn’t file suit.

The two sides of the equation converge when an individual entitled to PIP benefits is working at the time of the accident. If a person is entitled to both PIP and worker's compensation, worker's compensation benefits are primary (the PIP carrier may end up paying benefits, but can seek reimbursement of those costs from the worker's compensation carrier. N.J.S.A. 39:6A-6. See our discussion here).

If worker's compensation is paid to an injured party who would otherwise be entitled to PIP benefits, is the worker's compensation carrier subject to the same restrictions on reimbursement claims as the PIP carrier would be? On the one hand, under N.J.S.A. 39:6A-12 "evidence of the amounts collectible or paid under" PIP are inadmissible. On the other hand, arguably, since worker's compensation is primary, the benefits aren't "collectible" under PIP, and perhaps the broad subrogation rights enjoyed by a worker's compensation carrier under N.J.S.A. 34:15-40 should override the restrictions of the no-fault scheme.

In NJM v. Sanchez, the Appellate Division decided that the worker's compensation carrier's subrogation rights applied even though the injured employee was theoretically eligible for PIP in the accident. Three New Jersey Supreme Court Justices agreed, reasoning that the New Jersey Legislature had not specified that the worker's compensation carrier's broad subrogation rights would be limited by the no-fault scheme and that since worker's compensation is primary over PIP, benefits are not "collectible" under PIP when worker's compensation applies.

Three Justices disagreed, reasoning that benefits are still "collectible" under PIP even if they are paid by a worker's compensation carrier and that the fact that the Legislature made worker's compensation coverage primary over PIP suggests that the Legislature's interest in reducing PIP premiums was more significant than its interests in reducing worker's compensation costs.

The dissent noted the irony that had the same damages been paid for by the injured party or by a PIP carrier, neither the injured party nor the PIP carrier would likely have any subrogation rights. The controlling opinion declined to address these hypothetical situations. A more interesting question would be what would happen if a PIP carrier sought reimbursement from the worker's compensation carrier under N.J.S.A. 39:6A-6. Would the compensation carrier then be ineligible to subrogate (or have a lien for) those amounts since they were clearly "collectible" under PIP? One imagines that the court would find that once the worker's compensation carrier reimbursed the PIP carrier, the benefits ceased to be "collectible" under PIP and therefore could be the subject of a subrogation claim.

Since the Supreme Court deadlocked, the Appellate Division's ruling stands and presumably remains good law, subject only to the possibility of an amendment to the statutes.

In case the Legislature does act to restrict a worker's compensation carrier's recovery rights based on the no-fault law, note that even if the no-fault statute overrode worker's compensation subrogation rights, that would only be relevant where the injured employee is occupying a vehicle to which PIP coverage applies (basically, the vehicles described here). If the injured worker is occupying a non-PIP vehicle, then N.J.S.A. 39:6A-12 would not restrict subrogation of worker's compensation benefits, since that provision only restricts recovery of benefits that might be covered by PIP. For further discussion of this point, see the April 30, 2018 article below.

Finally, if the Legislature does act so as to limit worker's compensation subrogation by the PIP statute, it should also amend N.J.S.A. 39:6A-9.1 to clarify that worker's compensation carriers paying benefits that would otherwise have been paid by PIP enjoy the same reimbursement rights as PIP carriers under N.J.S.A. 39:6A-9.1.

Update (posted 11/27/20):

A propsed New Jersey Assembly Bill, AB 4472, considers overturning the major holding of Sanchez. You can track the bill's progress and access text of the bill here.

The bill adds the following language to the worker's compensation subrogation/lien statute, N.J.S.A. 34:15-40: "Notwithstanding any provision of law to the contrary, including but not limited to subsection (f) this section, an employer or insurance carrier shall be prohibited from filing a claim against a third party where an employee receives a workers' compensation award as a result of an injury sustained by the employee in a work-related automobile accident."

Since the Appellate Division's decision in Continental Ins. Co. v. McClelland, 288 N.J. Super. 185 (App.Div. 1996), many people have argued that a worker's compensation carrier could not subrogate if the injured employee was subject to and did not meet the verbal threshold. While I have long argued that this was never the intent of the Continental decision (see my 2012 article below), the Appellate Division in Sanchez clearly indicated that worker's compensation subrogation claims could not be subject to a verbal threshold defense since worker's compensation claims generally cover economic damages such as medical bills and lost wages rather than noneconomic damages such as pain and suffering (“NJ Transit seeks to recover benefits … for economic loss …The verbal threshold does not apply to economic loss.”). The controlling Supreme Court decision in Sanchez agreed with this analysis (the dissent does not address this issue), although it seemed to contemplate the possibility that some parts of "partial permanent disability" benefits could represent pain and suffering and therefore stated that the trial court would have "the discretion to expand the record on remand" to "resolve any factual disputes about the partial permanent disability payments made in this case." Based on the nature of disability benefits awarded in worker’s compensation (see https://www.nj.gov/labor/wc/workers/benefits/benefit_index.html), it is difficult to understand how any of those benefits could be noneconomic in nature. However, it is worth noting that worker's compensation permanent disability benefits do not necessarily track the injured party's actual future economic losses (rather, they apply formulas to reflect the presumed loss of future income based on the "State Wide Average Weekly Wage for all Workers in New Jersey"), and, therefore, a tortfeasor's liability for the injured party's economic losses may not always be as large as the worker's compensation permanent disability benefits.[1] In any event, it seems now to be settled New Jersey law that worker's compensation subrogation is not subject to the verbal threshold, except in the unlikely event that a court were to find that some portion of those benefits reflect pain and suffering.

Ironically, however, the full extent of a worker’s compensation carrier’s ability to recover its payments may depend on whether the injured party meets verbal threshold. Under N.J.S.A. 34:15-40, a worker’s compensation carrier is entitled to a lien on the injured party’s bodily injury claim. This lien attaches to the first dollar of any third party recovery whether or not the injured person is made whole. If the injured party cannot prove economic damages equal to or greater than the disability benefits the injured party received, the compensation carrier would still have a lien for all of the benefits paid, even if its lien were effectively paid by taking a portion of its worker’s overall bodily injury claim (this would be fair, since otherwise the excess compensation benefits would be a windfall to the injured party). On the other hand, if the injured party cannot meet verbal threshold, then in all likelihood the worker’s compensation carrier would be left to subrogate the claim on its own, and the tortfeasor would only be liable for the injured party’s actual economic loss, since the compensation carrier’s subrogation rights apply “only for such right of action that the injured employee … would have had against the third person.“ N.J.S.A. 34:15-40(f).

An interesting procedural issue is likely to arise in cases where the employee may or may not meet the verbal threshold. Under N.J.S.A. 34:15-40, a worker's compensation carrier can only independently file suit to recover its claim if its employee did not file a bodily injury suit. If the employee sues, then the worker's compensation recovery is to be made as a lien on that suit. However, what if eventually the employee turns out not to meet the verbal threshold, which would mean that the employee's case should be dismissed? There should, in theory, be a mechanism to allow the worker's compensation carrier to continue the pending litigation in order to recover its claims which survive despite the fact that the injuries did not meet verbal threshold.

[1]The three elements of the workers compensation lien are the medical payments, temporary disability payments and permanent disability payments. The amounts of the medical payments and temporary disability payments reflect actual damages sustained by the injured worker and can be introduced as evidence in the injured employee's bodily injury case. Those payments are both lienable and "boardable." The third element, permanent disability payments, represents payments for 70% of the presumed loss of future income for a typical worker who has sustained an injury similar to that of the injured employee. The future income calculation is itself limited based on the State Wide Average Weekly Wage for all Workers for the year in which the injury occurred rather than the injured workers actual wages. Since the amount of permanent disability payments does not reflect the injured workers actual future loss of income, that amount cannot be introduced as evidence in the injury employee's bodily injury case. Those payments are lienable but not "boardable."

New Jersey Worker’s Compensation Subrogation Is Not Limited by New Jersey’s No-Fault/Verbal Threshold System

In N.J. Transit Corp. v. Sanchez, 457 N.J. Super. 98 (App. Div. 2018) the New Jersey Appellate Division clarified that a worker's compensation carrier's subrogation rights are not affected by New Jersey's no-fault and verbal threshold statutes. This case clears up an apparent conflict between a number of Appellate Division precedents and Continental Ins. Co. v. McClelland, 288 N.J. Super. 185 (App.Div. 1996).

At issue, ultimately, is the balance between no-fault laws designed to reduce the cost of automobile insurance by reducing subrogation between vehicles and the worker's compensation statute designed to reduce the cost of worker's compensation by allowing worker's compensation carriers to subrogate.

Under New Jersey's no-fault scheme, the Automobile Insurance Cost Reduction Act (AICRA) and its predecessors, certain vehicles in New Jersey require no-fault personal injury protection (PIP) coverage (this requirement is discussed further here). When an individual is entitled to PIP benefits, that individual cannot sue a tortfeasor for any costs that should be covered by PIP, as evidence of such costs are inadmissible. N.J.S.A. 39:6A-12. The insurer of a party receiving PIP can recover PIP from a tortfeasor who is not required to carry PIP or who failed to carry PIP. N.J.S.A. 39:6A-9.1. See our Guide to Recovery of PIP in New Jersey for further discussion. In effect, this means that each person entitled to PIP receives those benefits from his/her insurer and neither the injured party nor his/her insurer can seek recovery from an at-fault party. In theory, this reduces the cost of insurance by eliminating the cost of law suits going back and forth over the course of numerous accidents in which each insurer's insured is likely to be at fault some of the time.

AICRA also seeks to reduce insurance costs through the "verbal threshold." Under N.J.S.A. 39:6A-8, when acquiring auto insurance in New Jersey, one elects whether or not to be subject to New Jersey's Verbal Threshold (an additional premium is charged for "non threshold" policies). If the verbal threshold applies to an accident, the injured party cannot recover for noneconomic damages (e.g. pain and suffering) from an owner or operator of an "automobile" (one of the categories of vehicles requiring PIP) unless the injured party has sustained certain significant injuries. See further discussion of verbal threshold here.

In Continental Ins. Co. v. McClelland, 288 N.J. Super. 185 (App.Div. 1996), the court held that a worker's compensation carrier could not recover any benefits it paid that would have been paid under PIP had worker's compensation not applied. The precise reasoning behind the Continental decision is unclear, however, it is clear that the Continental court felt that the restrictions of the subrogation restrictions of the no-fault law should override the subrogation provision of the worker's compensation law.

The McClelland court stated that " the sole issue is whether McLaughlin's election of the verbal threshold bars his employer's claim for reimbursement pursuant to N.J.S.A. 34:15-40." Id. at 188. Thus, McClelland is generally understood to stand for the principle that a worker's compensation subrogation claim is subject to the insured's verbal threshold. On the other hand, the verbal threshold statute only restricts recovery of noneconomic damages, as noted above, whereas the worker's compensation benefits are by definition economic damages, and in fact the court said that “[t]here is merit to” the worker's compensation carrier’s argument that its loss was entirely economic and therefore not subject to verbal threshold. Id. at 190. Further, the court held that the compensation carrier could recover for "uncompensated income loss," id. at 191, apparently meaning income loss benefits that would not be covered under PIP, which seems to indicate that the true issue in the case was the provisions of N.J.S.A. 39:6A-12 on recovery of "amounts collectible or paid under" PIP, rather than the verbal threshold. For more on this argument, see my 2012 article below.

Regardless of the exact reasoning of McClelland, the court clearly articulated its view that the restrictions of AICRA should apply to worker's compensation subrogation. The court reasoned that:

The Appellate Division came to a seemingly opposite conclusion in Lambert v. Travelers Indem. Co. of Am., 447 N.J. Super. 61 (App. Div. 2016). There, the court ruled that N.J.S.A. 39:6A-12 does not restrict a worker's compensation carrier from seeking recovery where the employee would have been eligible for PIP benefits (verbal threshold was not at issue, presumably because the injured parties met verbal threshold). The court reasoned that N.J.S.A. 39:6A-6 makes worker's compensation primarily responsible for benefits in work-related accidents and intends for the worker's compensation carrier's subrogation rights to be dictated by the worker's compensation statute and not the no-fault statute. The court wrote that:

Id. at 74-74. Unfortunately, the Lambert court did not address Continental's argument that a tortfeasor should not be more liable based on whether the injured party was working at the time of the accident nor the fact that Lambert did imply that a worker's compensation subrogation claim is limited by AICRA. Presumably, the court did not do so because Continental, at least purportedly, addressed the applicability of the verbal threshold portion of AICRA, whereas Lambert addressed evidentiary bar at N.J.S.A. 39:6A-12. N.J. Transit Corp. v. Sanchez, 457 N.J. Super. 98 (App. Div. 2018) provides more direct indication that, that Continental is not good law and that worker's compensation subrogation rights are entirely unencumbered by AICRA.

In New Jersey Transit (NJT), NJT sought to subrogate its WC benefits despite the fact that its employee did not meet verbal threshold. The Appellate Division referenced the Continental case but recognized that “[s]ubsequent published opinions have not adopted the reasoning of Continental.” Id. at 12. The court took some time to explain its adoption of the Lambert approach and then brushed away any arguments about verbal threshold by stating that “NJ Transit seeks to recover benefits … for economic loss …The verbal threshold does not apply to economic loss.” Id. at 17 (note that as discussed above the New Jersey Supreme Court clarified that certain parts of "partial permanent disability" benefits represent pain and suffering and therefore could be subject to a verbal threshold defense).

Id. at 17. Again, the court did not address Continental's observation that it seems unfair for a tortfeasor to be more or less liable based on whether the injured party happened to be at work. One could argue, however, that in other contexts a tortfeasor is more or less liable based on whether the injured party is at work at the time of the accident. For instance, in the average slip-and-fall accident, a health insurer who pays medical benefits does not have subrogation rights in New Jersey under the collateral source statute (see discussion of this issue here).

Clearly, the Legislature's interest in reducing worker's compensation costs led the Legislature to allow worker's compensation carriers to subrogate where other insurers could not. Ultimately, the question is whether the Legislature's interest in reducing worker's compensation costs was greater or less than the Legislature's interest in reducing automobile insurance costs. For now, the interest in reducing worker's compensation costs is more important, and hence the subrogation rights held by worker's compensation carriers overrides the New Jersey no-fault statute.

Perhaps an additional hint as to the Legislature's intent might be garnered from N.J.S.A. 39:6A-9.1. That statute allows "[a]n insurer, health maintenance organization or governmental agency paying" PIP benefits to recover those benefits from certain tortfeasors. It stands to reason that if the Legislature intended for worker's compensation carriers to be treated like PIP carriers where the injured party was eligible for PIP, the Legislature would have wanted worker's compensation to have the same rights of recovery that a PIP carrier has. If that was the case, then the Legislature should have included the word "employer" in the list of parties enjoying recovery rights under N.J.S.A. 39:6A-9.1 since, technically, it is the employer who pays worker's compensation benefits.

As a final note, note that even if the no-fault statute overrode worker's compensation subrogation rights (which for now would probably only be the case if the New Jersey Supreme Court reversed NJT), that would only be relevant where the injured employee is occupying a vehicle to which PIP coverage applies (basically, the vehicles described here). If the injured worker is occupying a non-PIP vehicle, then N.J.S.A. 39:6A-12 would not restrict subrogation of worker's compensation benefits, since that provision only restricts recovery of benefits that might be covered by PIP. For further discussion of this point, see the April 30, 2018 article below. Additionally, if the injured employee were in a PIP vehicle but the tortfeasor was not, then if N.J.S.A. 39:6A-12 were found to override worker's compensation subrogation rights, the carrier might be able to rely upon the reimbursement rights in N.J.S.A. 39:6A-9.1.

Worker's Compensation Subrogation Claim Not Subject to Verbal Threshold Defense:

Legal Victory for Law Offices of Jan Meyer

In certain situations, New Jersey's Verbal Threshold, N.J.S.A. 39:6A-8 et. seq. limits recovery of noneconomic damages (i.e. pain and suffering) unless the injured party demonstrates that the injured party has sustained certain injuries. See our discussion of the verbal threshold here.

In Cont'l Ins. Co. v. McClelland, 288 N.J. Super. 185, (App. Div. 1996), the New Jersey Appellate Division issued a decision that seemed to imply that a worker’s compensation subrogation claim can be subject to verbal threshold (and indeed, the court at one point says that its decision turns on whether or not the subrogation claim is subject to verbal threshold). Law Offices of Jan Meyer and Associates, P.C. has long argued that this understanding of McClelland is difficult, since worker's compensation benefits by definition cover economic, rather than noneconomic damages, and McClelland never explains why verbal threshold should apply to such damages. In 2012, we published an article in Subrogator Magazine on this topic (the text of which appears below) titled "Subrogating New Jersey Workers' Compensatin in Motor Vehicle Accidents: The Interplay of the PIP and Verbal Threshold Schemes." In that article, we argued that McClelland stood for the proposition that where an injured worker would have been eligible for PIP benefits (but for the fact that worker's compensation is primary over PIP), N.J.S.A. 39:6A-12, which prevents admission into evidence of amounts paid or payable under PIP, prevents subrogation of worker's compensation claims.

However, the more recent case of Lambert v. Travelers Indem. Co. of Am., 447 N.J. Super. 61 (App. Div. 2016) clearly held that worker's compensation claims were not limited by N.J.S.A. 39:6A-12 and furthermore was emphatic that:

In addition, Cynthia M. Craig & Daniel J. Pomeroy, New Jersey Auto Insurance Law, §12:3 at 244-245 and §15:3-2 at 290-291 (2018) notes that the McClelland decision is at odds with Lambert and other cases.

In Star Insurance v. Magee, BER-L-7185-17 (Sup. Ct. Law Div. April 27, 2018), the Defendant moved for summary judgment dismissing Star's worker's compensation subrogation claim on the basis that Star could not prove that its insured's injuries met verbal threshold. Law Offices of Jan Meyer, representing Star, responded with several arguments:

Judge Charles E. Powers, Jr., J.S.C., denied Defendant's summary judgment motion and indicated that he agreed with all three of LOJM's arguments, writing that:

The opinion is an unpublished and therefore non-precedential opinion. However, it indicates that worker's compensation carriers should be more aggressive in subrogation efforts even where verbal threshold may not be met, and in particular in the many cases where the injured employee is occupying a vehicle that is not part of the PIP scheme.

Subrogating New Jersey Worker’s Compensation In Motor Vehicle Accidents:

The Interplay of the PIP and Verbal Threshold Schemes

New Jersey’s verbal threshold statute, N.J.S.A. 39:6A-8 states that those who elect to be subject to the verbal threshold (VT) (and thus qualify for lower automobile insurance rates) must meet the VT before recovering for “noneconomic loss” from a motor vehicle that is subject to the NJ PIP requirement. “Noneconomic loss” is defined as “pain, suffering and inconvenience.” N.J.S.A. 39:6A-2.

At first blush, VT should have nothing to do with worker’s compensation subrogation, since worker’s compensation covers economic losses, and excludes pain and suffering. However, many carriers involved in asserting or defending against WC subrogation have been lead astray by a misunderstanding of Continental Ins. Co. v. McClelland, 288 N.J. Super. 185 (App.Div. 1996) and conclude that where VT applies, WC subrogation will only be possible where VT is met.

Continental says nothing of the sort. The court indeed spends a good deal of time establishing that VT applies to a work-related MVA, and states that despite the WC statute’s broad authority for subrogation, MVA tortfeasors should be no more liable for their torts by the happenstance that the injured party was in the course of work at the time of the accident. However, the court notes that “[t]here is merit to” the WC carrier’s argument that its loss was entirely economic and therefore not subject to VT.

In fact, Continental turns on a second statute, N.J.S.A. 39:6A-12, which prohibits recovery of amounts covered by NJ PIP. The court noted that if this were not a work-related accident, the injured party (who was occupying a private passenger vehicle) would have been entitled to PIP benefits (WC is primary over PIP per N.J.S.A. 39:6A-6, and therefore the WC carrier paid in this accident), and the cost of those benefits could not have been recovered from the tortfeasor. As noted previously in the case, the court believed the happenstance that WC was applicable should not increase the tortfeasor’s liability. Finally, the court noted that any losses not covered by PIP would be recoverable by the injured party pursuant to N.J.S.A. 39:6A-12, and that the compensation carrier would be subrogated to those recovery rights.

Thus, the true holding in Continental is not that VT applies to WC subrogation, but that the WC carrier may not recover for claims that could otherwise have been paid by PIP. In this regard it is worth noting that the majority of WC claims arising out of MVAs in NJ will not be subject to PIP, because commercial vehicles (other than private passenger vehicles not used as taxis and charter/route buses) do not require PIP. Second, although not explicitly provided by the statute, a WC carrier would likely have recovery rights for claims that would have been covered under PIP if a PIP carrier would have recovery rights under N.J.S.A. 39:6A-9.1 (i.e. where the tortfeasor was not required to, or did not, carry PIP).

Please visit our Guide to Recovery of PIP in New Jersey for the text of the key New Jersey statutes regarding PIP recovery, together with an outline of those statutes, hyperlinks to definitions of key terms, discussions of key provisions of each statute, relevant case law, and other selected issues of New Jersey subrogation.

Please note that the information included herein is solely the product of Law Offices of Jan Meyer and Associates, P.C., and does not constitute legal advice. For legal advice kindly contact our office.