Supreme Court Concludes that Carrier Broadly Waived its Subrogation Interest

The Texas Supreme Court has held that a workers’ compensation carrier that executed a waiver of subrogation endorsement is precluded not only from recovering its subrogation interest from the third party defendant, but also from the injured worker.

The case, Wausau Underwriters Insurance Co. v. James Wedel and Michelle Wedel (No. 17-0462), was decided June 8, 2018.

Wausau, the workers’ comp carrier, sought to recoup from an injured workers’ settlement with a liable third party. Wausau intervened in the third party action after Wedel, a trucking company employee that had been injured at an asphalt company’s loading site, sued the asphalt company for negligence and gross negligence. The company that owned the asphalt loading-site, Western Refining, had contractually required Wedel’s employer to have workers-comp insurance with a subrogation waiver in Western’s favor.

The issue was whether a standard TDI waiver of subrogation endorsement precluded Wausau from subrogating directly against the employee – as opposed to subrogating against the third party defendant. On that point, the trial court granted summary judgment for Wedel, ruling that Wausau could not recoup from Wedel what the insurer paid him. The court of appeals affirmed, holding that Wausau’s subrogation waiver covering Western included Wausau’s statutory reimbursement right against Wedel.

The Supreme Court held Wausau could not be reimbursed from Wedel’s settlement with the third-party loading facility, citing more than 20 years of unanimous case law as well as Texas Department of Insurance rulings consistent with that case law. The court wrote that Wausau had signed away its right to recover benefits it paid to the employee and received a higher premium in exchange for assuming that risk and could not now seek to indirectly recover the same money it agreed not to pursue directly.

Justice Johnson dissented, in an opinion joined by Justice Boyd. The dissent argued that there was a decided and recognized difference between an insurer’s subrogation right and its right of reimbursement. It reasoned that the endorsement in this case had only waived the statutory subrogation right afforded Wausau by Workers’ Compensation Act. But, the dissenting justices wrote, the endorsement did not waive the separate statutory right to reimbursement afforded by the act.

The case has prompted some national commentary. Thomas A. Robinson gives the case a straight up analysis, while blogger Bob Wilson thinks the court missed the mark.

The case was argued before the Supreme Court on March 1, 2018. The argument is available for viewing here. The briefs of the parties can be accessed here. The arguments of the parties have been summarized below.

Wausau’s Argument
To protect lien interests crucial to the Texas workers’ compensation system, Labor Code Sections 417.001 and 417.002 grant workers’ compensation insurers two distinct rights to recover benefits paid or owing to injured workers: the right to recover directly from the third party that injured the worker, and the right to recover from damages or settlements the injured worker secures from third parties. Those rights can be contractually waived. The Waiver Endorsement in the Wausau Policy, however, states it waives only the first right of recovery: the “right to recover [Wausau’s] payments from anyone liable for an injury covered by this Petition for Review Page 6 policy.” (emphasis added). Thus, the endorsement unambiguously waives only Wausau’s right, under Section 417.001, to sue and recover directly from Western, the party liable for James Wedel’s injury. Because Wedel is not a person liable for his injury, the endorsement cannot reasonably be construed to waive Wausau’s right to recover from him under Section 417.002. The endorsement also plainly states the waiver applies only to parties named in the “Schedule,” which refers only to parties who have a contract with the insured, Cactus, to obtain such a waiver. Only Western has such a contract with Cactus, and the Schedule cannot reasonably be interpreted to apply to Wedel. Without interpreting a word of the endorsement, however, the Court of Appeals held it does just that.

This case addresses plain language in unambiguous contracts and Texas statutes. The contract in question, the Waiver Endorsement, cannot be reasonably construed to apply to Wausau’s right to reimbursement from Wedel under Section 417.002. Nevertheless, the courts below and other published opinions have not construed the endorsement’s unambiguous wording, much less applied it as written. They have simply cited prior cases that also glossed over or ignored the endorsement’s language to reach preferred results. The question presented is whether that house of cards will stand despite an unambiguous contract and statutes that this Court has repeatedly held must be applied as written.

The Wedels’ Argument
The Texas state and federal courts that have considered the arguments Wausau advances in this appeal have unanimously ruled against the interpretation of the waiver of subrogation promoted by Wausau in this case. In the context of a waiver of subrogation, an insurer’s right to reimbursement under Texas Labor Code section 417.002 is not separate from the right to assert a claim as subrogee under section 417.001. Thus, Wausau’s waiver of its subrogation rights against the liable third party Western Refining constitutes a waiver of any claim of reimbursement against amounts paid or payable by Western Refining to the Wedels. Given this sound, governing precedent, the Court should deny petition for review.

The liable third party (Western Refining) demanding under contract that the employer (Cactus Transport) pay a premium for its workers compensation insurer (Wausau) to waive its subrogation rights will benefit from the liable third party’s settlement proceeds not being subject to reduction by a reimbursement claim against the employee (Wedel). Absent a waiver of reimbursement rights, the employee’s cause of action against the liable third party would necessarily remain burdened by the subrogation rights of the carrier. This is because if the standard subrogation endorsement is interpreted the way Wausau seeks to have it interpreted, the liable third party will need to pay a larger settlement amount due to 8 the insurer’s “first-money right” to those funds. Thus, when the liable third party insists on a waiver of subrogation, it does so both to be free from a subrogation claim asserted by the insurer against the liable third party and to negotiate a settlement with the injured employee without having to pay additional amounts to cover a claim for reimbursement asserted by the insurer.

Under Wausau’s proposed interpretation, the waiver of subrogation is no waiver at all. The employer gets nothing for its additional premium, and the potentially liable third party is still subject to the insurer’s reimbursement claims. Under Wausau’s proposed interpretation, injured plaintiffs will not be able to settle with third parties—who bought and believe they have a waiver of subrogation— without taking into account the insurer’s reimbursement claim that has not, in fact, been waived. Wausau’s desired interpretation would render the standard waiver of subrogation in Texas pointless and valueless.