Subrogation actions can occur in almost any type of claim situation where an insured receives a claim payment for injuries caused by a third party.

But what about workers' compensation, when there typically are three parties involved in the loss–the injured employee, the insured employer and the insurance company? And what if the workers' comp coverage is written on a large (six-figure or more) deductible plan?

Let's look at a hypothetical situation in which an employer opts for a large-deductible workers' comp plan.

An employee is seriously injured while on the job, qualifying and receiving workers' comp benefits. The injured employee sues a third party and wins a large settlement, far in excess of the benefits already paid. But the employee still is disabled and workers' comp benefits are continuing.

The award is used to reimburse the employer's deductible payment and the amounts the insurer has paid out in benefits, with the rest allotted as an offset for future benefits payable. Any excess belongs to the employee.

So far, this seems logical, but now the insurance company says the employer–which already reimbursed the entire deductible–must pay future statutory benefits until the deductible once again is eroded.

It seems fair that if the employer reimbursed the insurer for the entire deductible before the award was handed down, the deductible obligations are fulfilled. After all, the policy states that there is one deductible per accident, and the insured employer fulfilled that obligation. Why would the employer be required to foot the deductible bill a second time?

In analyzing this question, we accept that workers' comp is regulated by the states, and deductible and subrogation statutes differ among them.

Some states permit direct subrogation by a workers' comp insurer against the negligent third party. Others permit the workers' comp insurer to place a lien on an employee's suit against the alleged negligent third party who caused the injury.

Some states (such as Pennsylvania) affirm that the employer is subrogated to the rights of the injured employee, while others (such as Texas) provide that the insurer is subrogated to the rights of the injured employee. The standard workers' comp policy provides that the insurer is subrogated to the rights of the insured.

In addition, most if not all state optional deductible plans specify that employers are not permitted to make their employees fund the deductible.

States also are generally averse to the injured claimant pocketing a double recovery–once from the insurer and duplicate payments by the responsible third party. Hence the provision for the employer or insurer to be subrogated to the rights of the employee against a negligent, injury-causing third party.

There has been little litigation on workers' comp deductible plans and subrogation. Most of the litigation has dealt with how legal fees are handled, with attorney fees and costs coming off the top of subrogation awards. Texas, however, has addressed a deductible situation.

In Argonaut Ins. Co. vs. Debbie Baker, et al, the Supreme Court of Texas held that the insurance company (Argonaut) was entitled to be reimbursed from Baker's third-party settlement for benefits paid to, and on behalf of the employee, “including those paid in connection with the employer's optional deductible plan.”

At the time of the litigation, settled in 2002, the Texas Labor Code specified that the net recovery in a third-party action instigated by the injured employee should be used to reimburse the carrier for benefits that had been paid. The court reasoned that benefits paid included those paid by virtue of the deductible.

This was the majority opinion despite the fact that the Texas statute authorizing deductible workers' comp plans specified that “an employee may not be required to pay any of the deductible amount.”

The court found no disparity between the Texas optional deductible statute (which provided that an employee could not be required to pay any of the deductible amount) and the Texas subrogation statute (which permitted carrier reimbursement for all benefits paid regardless of whether a deductible was involved).

In other words, the deductible did not matter.

So what happens when the subrogation proceeds are used to offset future workers' comp benefits?

The Texas court in Argonaut dealt with benefits already paid, and was very clear that the deductible was to be covered by the subrogation proceeds. The employer, essentially, did not have to pay the deductible–the negligent third party was to pay it.

If the court–at least in Texas–didn't require the employer to pay the deductible the first time around, why would a court penalize an employer with a second deductible for future benefits payable?

In asking that a second deductible be assumed by the employer, the insurer seems to be trying to escape its legal requirement to pay benefits. If the employer again has to erode a six-figure deductible, the carrier may never be tapped for any benefits.

Some might say the employer is getting what it bargained for, since it bought a deductible plan. It does not, however, appear that the Texas court agrees with this observation.

I'm sure there are insurance companies who would disagree with this logic. But until the matter of how subrogation proceeds for future benefits and deductible responsibilities is litigated, there will be no certified answer but much to discuss.