McKinnon v. Otis Elevator Company
(2007) ___ Cal.App.4th ___ 07 C.D.O.S. 4210

Settlement of Subrogation Lawsuit Does Not Preclude Injured Employee’s Action Against Third Party Tortfeasor Absent Compliance With Labor Code Notice and Consent Requirements

The Court of Appeal, Third District, reversed an order of the Sacramento Superior Court granting summary judgment in favor of an alleged third-party tortfeasor in an action brought by an injured employee. The Court held that the employee’s lawsuit for negligence against the third-party tortfeasor was not barred by her employer’s prior settlement with the third-party tortfeasor, as both the employer and the settling tortfeasor failed to adequately notify the employee of the employer’s subrogation complaint against the third-party tortfeasor, and also failed to obtain the employee’s consent to the settlement, as required by Labor Code sections 3853, 3859, and 3860.

Plaintiff Deborah McKinnon (“Employee”) suffered an injury at her workplace, Landmark Healthcare, on May 24, 2002, when she fell while exiting an elevator. Landmark Healthcare’s workers’ compensation insurer, Everest National Insurance Company, and its claims administrator, American Commercial Claims administrators (collectively, “Employer”) was obligated to pay Employee workers’ compensation benefits and paid those benefits. On May 23, 2003, Employer filed a negligence based subrogation complaint against third-party tortfeasor, Otis Elevator Company (“Otis”) to recover the benefits paid to Employee. On June 10, 2003, Employer sent Employee a letter stating it was pursuing “subrogation against Otis,” and asked Employee if she was pursuing “a third party action against the elevator Company” and if she had “filed a lawsuit.” Approximately one week later, Employee responded that “she was undecided at that time about pursuing a third part[y] action.” On January 27, 2004, Employer sent a letter to Employee stating it was settling its case against Otis to recover workers’ compensation benefits paid to Employee and requested her consent to the settlement. Employee never consented to the settlement. It was undisputed that at no time did Employer ever serve Employee with a copy of the Complaint filed in the subrogation action.

On April 2, 2004, Employer reached a settlement with Otis and dismissed its subrogation action. Thereafter, on May 21, 2004, Employee sued Otis for negligence as a result of her injury sustained on May 24, 2002. Otis moved for summary judgment, claiming Employee was required to bring her lawsuit with the Employer’s subrogation action under section 3850 et seq. Otis asserted Employee’s suit was time-barred under section 3853 since the subrogation action was dismissed. Otis’ motion was granted and Employee appealed.

In reversing the decision of the trial court, the Court of Appeal first reviewed the policy behind the workers’ compensation system, noting that it attempts to ensure that “…whether it is the employee or the employer who sues the third party, both the employee and employer recover their due, and second, that, as far as possible, the third party need defend only one lawsuit.” The Court further noted that Labor Code section 3850 et seq. contains notice requirements consistent with this policy, to encourage the consolidation of claims by an employer and employee against a third-party tortfeasor. The Court then reviewed section 3853, which provides:

If either the employee or the employer brings an action against such third person, he shall forthwith give to the other a copy of the complaint by personal service or certified mail. Proof of such service shall be filed in such action. If the action is brought by either the employer or employee, the other may, at any time before trial on the facts, join the party plaintiff or shall consolidate his action, if brought independently.”

The Court held that the Employer’s letter dated June 10, 2003, failed to satisfy the notice requirements of section 3853. The Court stated, “Since the right to intervene exists up to the time of trial on the facts, proper notice of the trial date is essential. Proper and orderly procedure dictates that notice be a formal one…” The Court noted that the Employer failed to serve Employee with a copy of its subrogation complaint against Otis, and failed to even mention that there was a subrogation complaint or lawsuit.

The Court then turned to a discussion of sections 3859 and 3860, and held that the settling parties failed to comply with the consent requirement set forth in those sections. Section 3859 provides:

(a) No release or settlement of any claim under this chapter as to either the employee or the employer is valid without the written consent of both. Proof of service filed with the court is sufficient in any action or proceeding where such approval is required by law.

(b) Notwithstanding anything to the contrary contained in this chapter, an employee may settle and release any claim he may have against a third party without the consent of the employer. Such settlement or release shall be subject to the employer’s right to proceed to recover compensation he has paid in accordance with Section 3852.”

Further, section 3860(a), provides:

No release or settlement under this chapter, with or without suit, is valid or binding as to any party thereto without notice to both the employer and the employee, with opportunity to the employer to recover the amount of [workers’] compensation he has paid or become obligated to pay and any special damages to which he may be entitled under section 3852, and opportunity to the employee to recover all damages he has suffered…”

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