An employer’s insurer may collect from the supersedeas fund for “unreimbursed pre-settlement” and “grace period” payments made to a workers’ compensation claimant who settles with a third-party tortfeasor following a work-related injury, the state Supreme Court has ruled.

Leading the 5-2 court was Justice Max Baer, who analyzed the payments as “compensation,” subject to subrogation and employer reimbursement from the supersedeas fund, which applies to situations in which an employer’s insurance company successfully litigates a modification or suspension of benefits.

The unreimbursed pre-settlement money consisted of $2,016 that Excelsior Insurance doled out in a three-month period — between November 2005, when it first filed a petition for modification of benefits, and February 2006, when the third-party settlement took place. Before the settlement, the claimant had been collecting $410 a week following an injury he sustained in 2003. The third party is not named in the court’s opinion.

But a workers’ compensation judge eventually decided to suspend benefits, rendering compensation paid after August 12, 2005 — the date on which the employer had argued suitable work became available to the claimant — as “not payable.”

The WCJ’s decision, which came in November 2006, applied back to the employer’s proposition that medically appropriate work was, in fact, available to the claimant as of August 2005. In other words, it took the facts and timeline of Department of Labor and Industry v. Workers’ Compensation Appeal Board (Excelsior Insurance) and twisted them up like a pretzel, untangled officially in the form of Baer’s 24-page opinion last month.

“We find no language in either Section 443 or Section 319 [of the Workers' Compensation Act] that would transform the unreimbursed portion of these weekly compensation benefit payments into something other than compensation merely because that portion was deducted in order to compensate the claimant for the costs of recovering the third-party settlement agreement,” Baer said.

Section 443 relates to cases in which supersedeas is requested and denied; Section 319 covers subrogration.

Turning to the grace period, Baer reached a similar conclusion. A grace period is granted to an insurer if settlement proceeds exceed benefits paid by the employer. In such a case, the balance goes to the claimant but is calculated as a grace period during which the employer does not have to pay benefits.

However, if an insurer remains liable for the claimant’s expenses of recovery, then the calculation of payments guided is by the “gross method” that the high court crafted in P & R Welding & Fabrication v. WCAB (Pergola) and to which the parties to the current matter adhered. So in the instant case, the $164 in weekly grace period payments were calculated to compensate the claimant for his legal costs in his case against the third-party tortfeasor.

But following the grant of supersedeas, rendering any payments after August 12, 2005, nonpayable, the high court concluded the employer’s insurer should not be held liable for recovery costs related to the settlement, when a WCJ had subsequently cleared them of paying compensation during that grace period.

“Given that the statute credits the employer with paying future weekly installments of compensation via the excess recovery, we conclude that the weekly amount actually paid by the employer during the grace period may also be considered reimbursable “compensation” for purposes of Section 443,” Baer said. “Such a conclusion complies with Section 443′s intent to ensure that the employer is reimbursed for payments later determined not to be the employer’s responsibility and Section 319′s absolute right to subrogation when the responsibility for the injury lies at the feet of a third-party tortfeasor rather than the employer.”

The Department of Labor and Industry’s Workers’ Compensation Bureau, the administrator of the fund, had a different take.

The bureau argued that the final two of five requirements an employer must meet to obtain reimbursement from the supersedeas fund barred the sought-after recovery in Excelsior, i.e., the insurance company had not met them.

Those two hurdles, as described by Baer, are (1) that benefit payments were continued because of an order denying supersedeas, and (2) if, in the final outcome of the workers’ compensation proceedings, it was determined that compensation was not payable.

Reflecting an issue that has been heavily litigated, the bureau’s argument (and the court’s decision) came down to the definition of the word “compensation.”

The bureau claimed Excelsior was going after money for its pro rata share of attorney fees and costs related to the third-party settlement, which the bureau argued were not “compensation” under Section 443.

Citing Universal Am-Can v. Workers’ Compensation Appeal Board, the bureau noted a workers’ compensation carrier cannot recover litigation costs or interest from the supersedeas fund when a court rules a claimant should not have received benefits.

In support of its claim that such payments were not compensation, the bureau pointed to language in Pergola: “The grace period is that number of weeks in the future for which the employer does not have to pay claimant’s workers’ compensation benefits.”

And even if the high court were to determine the contested payments were, in fact, compensation, the bureau argued the insurer would nonetheless have been required, regardless of the supersedeas request, to reimburse the claimant for the costs of his third-party recovery.

The Workers’ Compensation Appeal Board pointed to the language of Sections 443 and 319 as indicative of the payments being compensation subject to reimbursement.

After a statutory construction analysis, Baer sided with the appeal board, affirming the decision of a divided Commonwealth Court and the board itself.

Indeed, the case turned on whether payments were continued because of an order denying supersedeas and if it was determined that compensation was not payable for the relevant time period.

Baer noted the insurer had to continue making payments because of an order denying supersedeas, a portion of which was both the unreimbursed settlement proceeds and the grace period payments. So the denial of supersedeas prong was met.

The other prong, whether compensation was “payable,” implicates Section 319.

Baer said an employer’s absolute right to subrogation and the principles behind the law were instructive, before concluding that nothing would transform the payments into something other than compensation, simply because the portion was deducted to cover the claimant’s litigation costs.

“We have not minced words regarding the significance of the employer’s right to subrogation,” Baer said, referring to the court’s body of jurisprudence on the matter.

Justice J. Michael Eakin reasoned the employer’s insurer may not recover the payments from the fund because the case at bar dealt with an insurer’s attempt to recover from a third-party settlement, rather than a traditional benefit suspension or modification case in which supersedeas is denied. Chief Justice Ronald D. Castille joined Eakin in dissent.

Janet L. Palese of the Department of Labor and Industry represented the bureau and could not be reached for comment.

John T. Huskin Jr. of Thomas, Thomas & Hafer in Harrisburg represented Excelsior and was not available.

Ben Present can be contacted at 215-557-2315 or bpresent@alm.com. Follow him on Twitter @BPresentTLI.

(Copies of the 24-page opinion in Department of Labor and Industry v. Workers’ Compensation Appeal Board (Excelsior Insurance), PICS No. 12-2252, are available from Pennsylvania Law Weekly. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •