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Frazier v. New Jersey Mfrs. Ins. Co.

December 1, 1995

CHRISTOPHER FRAZIER, PLAINTIFF-APPELLANT,
v.
NEW JERSEY MANUFACTURERS INSURANCE COMPANY, AN INSURANCE COMPANY LICENSED IN THE STATE OF NEW JERSEY, DEFENDANT-RESPONDENT.



On an appeal from the Superior Court, Appellate Division, whose opinion is reported at 276 N.J. Super. 84 (1994).

The opinion of the Court was delivered by Garibaldi, J. Chief Justice Wilentz and Justices Handler, Pollock, and Coleman join in Justice Garibaldi's opinion. Justices O'hern and Stein filed separate Concurring opinions.

The opinion of the court was delivered by: Garibaldi

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

CHRISTOPHER FRAZIER V. NEW JERSEY MANUFACTURERS INSURANCE COMPANY (A-3-95)

(NOTE: This is a companion case to Utica Mutual Insurance Company v. Maran, et als. also decided today.)

Argued September 11, 1995--Decided December 4, 1995

GARIBALDI,J., writing for the Court.

The issue on appeal is whether, pursuant to N.J.S.A.34: 15-40(section 40), a workers' compensation lien attaches to the proceeds of a malpractice suit brought to recover damages from an attorney who failed to institute an action against a third-party tortfeasor responsible for the worker's injury.

In March 1987, Christopher Frazier, an electrician employed by Autotron Electric, Inc., was injured in a work-related accident. Frazier fell down an open stairwell that lacked guardrails. In June 1987, Frazier's then attorney filed a workers' compensation complaint on Frazier's behalf against Autotron's workers' compensation insurance carrier, New Jersey Manufacturers Insurance Company (NJM). NJM accepted the claim and eventually paid Frazier $150,000.

Frazier also made a formal complaint with the Occupational Safety and Health Administration (OSHA) against the general contractor in respect of safety hazards on the job site. The general contractor did not employ Frazier. OSHA eventually cited the general contractor but Frazier's former attorney failed to sue the contractor. After the statute of limitations had run against this third-party tortfeasor, Frazier retained new counsel to sue his former attorney for legal malpractice. The matter was settled in September 1992 for $675,000. Frazier claimed that this amount was inadequate to fully compensate him for his injuries.

During the pendency of the legal malpractice action, NJM asserted its entitlement to a lien against any recovery. Frazier's attorney, relying on Wausau Insurance Cos. v. Fuentes, claimed that because any recovery would be against the former attorney and not the actual tortfeasor, NJM was not entitled to a lien against the recovery.

In February 1993, Frazier filed a declaratory judgment action with the Chancery Division, contending that NJM's lien did not attach to the legal malpractice settlement. In April 1993, NJM filed an answer and counterclaim for a declaratory judgment establishing its right to deduct the lien from future payments of workers' compensation benefits payable to Frazier. In December 1993, both parties moved for summary judgment. Frazier also moved to amend his complaint to add claims that NJM had mishandled or was otherwise negligent in handling his workers' compensation claim. In January 1994, the Chancery Division granted Frazier's motion for summary judgment on the lien issue, relying on Wausau. The court also granted Frazier's motion to amend the complaint.

In March 1994, the Appellate Division granted NJM's motion for leave to appeal. In that same month, the Division of Workers' Compensation declared Frazier totally and permanently disabled, and found that NJM was not entitled to a lien on the malpractice recovery. NJM appealed that order and the two matters were consolidated. In September 1994, the Appellate Division reversed both the trial court and the compensation court on the lien issue, holding that NJM's workers' compensation lien did attach to Frazier's legal malpractice settlement proceeds. The Appellate Division denied Frazier's motion for reconsideration.

The Supreme Court granted Frazier's motions for leave to appeal and for a stay of the release of the malpractice proceeds to NJM on the posting of a supersedeas bond.

HELD: A workers' compensation lien, pursuant to N.J.S.A.34:15-40, attaches to the proceeds of a legal malpractice action brought to recover damages from an attorney who failed to institute an action against a third-party tortfeasor. N.J.S.A.34:15-40 imposes a lien on third-party recoveries that are the functional equivalent of a recovery against the direct tortfeasor, regardless of whether the worker has been fully compensated for his or her injuries. Furthermore, the workers' compensation insurance carrier need not institute a suit under section 40(f) against the third-party tortfeasor to secure a section 40 lien.

1. Section 40 was enacted to overcome the inequity of double recovery. Section 40 provides that an injured employee can recover for his or her damages either against a contributing third-party tortfeasor or through a workers' compensation award, whichever is greater, but these recoveries cannot be duplicated. Therefore, for every dollar of an employee's recovery from the third-party, the workers' compensation insurance carrier's section 40 lien entitles it to reimbursement of one dollar (less legal cost) of workers' compensation benefits. (pp. 5-7)

2. In Midland Ins. Co. v. Colatrella, this Court held that section 40 applies to recoveries that are the functional equivalent of a recovery from the actual third-party tortfeasor. The Court based its holding in that case on its belief that the primary concern of the Legislature was to integrate the sources of recovery. (pp. 7-10)

3. In Wausau, it was held that a workers' compensation lien cannot attach to legal malpractice recoveries. In reaching that Conclusion, the Wausau court strictly construed section 40, finding that the statutory language did not plainly extend the reimbursement right to recoveries against parties other than the tortfeasor. However, a literal reading of section 40 is inappropriate in light of the strong legislative determination that there be no double recovery. It was not the intention of the Legislature that an injured employee who receives a legal malpractice award be in a better position than an injured employee who recovers directly from the tortfeasor. Therefore, malpractice claims that are derivative of third-party claims are subject to a section 40 lien, and Wausau is overruled. (pp. 10-13)

4. Section 40 prevents double recovery. Thus, when a plaintiff recovers from a third party, a lien even if the two combined benefits would leave the employee less than fully compensated. There is no legislative history to indicate otherwise. Moreover, the "no double recovery" rule should be no different when the third-party recovery is against a party other than the tortfeasor. Therefore, the Court also overrules Charnecky v. American Reliance Ins. Co.. (pp. 13-17)

5. A workers' compensation carrier's right to reimbursement from the employee under section 40 is not contingent on the carrier's exercise of the section 40(f) remedy. (pp. 17-20)

6. The Court's decision in this matter will be applied retroactively. (p. 20)

Judgment of the Appellate Division is AFFIRMED and the matter is REMANDED to the trial court for a consideration of the issues raised in the amended complaint.

Justice O'HERN, Concurring, agrees with the judgment of the Court that a lien attaches to the proceeds of a malpractice suit premised on the failure of the worker's attorney to prosecute a viable third-party action against a tortfeasor responsible for the worker's injuries. However, Justice O'Hern disagrees with the opinion of the Court insofar as it overrules Charnecky. The "no double recovery" rule is and remains inappropriate and unjust when there is no double recovery.

JUSTICE STEIN, Concurring, agrees with the Court's Disposition of this appeal but not on its reliance on Midland. As he observed in Midland, if the lien authorized by section 40 is to apply to an employee's recovery of uninsured motorist benefits from his or her own policy, the Legislature should make that determination explicitly.

CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, POLLOCK, and COLEMAN join in JUSTICE GARIBALDI'S opinion. JUSTICES O'HERN and STEIN filed separate Concurring opinions.

The opinion of the Court was delivered by GARIBALDI, J.

In this appeal, as in Utica Mutual Ins. Co. v. Maran & Maran, N.J. (1995), also decided today, the issue is whether, pursuant to N.J.S.A. 34:15-40, a workers' compensation lien attaches to the proceeds of a malpractice suit brought to recover damages from an attorney who failed to institute an ...


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