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CT Supreme Court Rules in Favor of Insurer’s Subrogation Rights

On September 27, 2016, in Pacific Insurance Company, Limited v. Champion Steel, LLC, et al. 323 Conn. 254 (2016), the Supreme Court of Connecticut ruled that workers’ compensation insurers are permitted to maintain equitable subrogation claims against third-party tortfeasors to recover benefits paid to injured employees on behalf of insured employers. 

This action arose out of a worker’s fall at a construction site due to the failure of his retractable lifeline. The worker, James Doughty, sustained injuries and was paid benefits through his employer’s workers’ compensation insurer, Pacific Insurance Company, Limited (“Pacific”). Pacific filed suit against Champion Steel, LLC, Shepard Steel Company, Inc., and Dimeo Construction Company to recover the benefits it paid, alleging negligence in failing to provide an adequate fall arrest system at the construction site. The defendants filed motions to dismiss Pacific’s complaint, arguing that Pacific lacked standing to bring the action under either Connecticut’s Workers’ Compensation Act (C.G.S. § 31-293) or the common law doctrine of equitable subrogation. 

The trial court granted the defendants’ motions to dismiss Pacific’s complaint, noting that there was no controlling authority recognizing a workers’ compensation insurer’s equitable subrogation rights. On direct appeal, the Supreme Court reversed, holding that an insurer’s right to be subrogated to an employer’s rights under § 31-293(a) is derived from the common law and not from legislative enactment. Equitable subrogation has long been available to insurers seeking reimbursement for benefits paid when third party tortfeasors are liable for the loss. Further, the court emphasized that the doctrine of subrogation, as an equitable remedy, is judicially favored, supported by public policy, intended to work justice, and should be generously applied.

The court drew a distinction between subrogation rights, which arise from the common law, and an employer’s right to bring an action against the third-party who caused injury to an employee, which does not exist at common law and must be derived from statute. In the case of Section 31-293, the court noted, the legislature specifically and expressly permitted employers to intervene in or bring an action against third-party tortfeasors. Notably, the legislature did not prohibit equitable subrogation. 

Although the court limited its holding to the question of whether such a subrogation claim could be maintained as a matter of law, the court did instruct the trial court to consider whether Mr. Doughty or the defendants would be unjustly enriched should subrogation be denied. The court also directed the trial court to weigh the public policies of containing the cost of the workers’ compensation system and disfavoring economic waste, and to consider the expectations of the parties. Because the insurer “steps into the shoes” of the insured with subrogation, the court noted that the insurer in this context would be subject to the same statutory privileges and obligations that would have applied to an employer plaintiff.

The court’s decision reaffirms the broad applicability of the doctrine of equitable subrogation, emphasizing that any limitation of that right must be by direct, express, and specific legislative enactment. With respect to workers’ compensation claims, the decision clarifies that an insurer that makes a payment to an employee injured by the negligence of a third party may pursue a subrogation action against the third party. The court stopped short of ordering subrogation in the case before it, but, with the instructions provided to the trial court on remand, the court appeared to suggest that the balance of equities may favor subrogation in light of the facts of the case.

If you have any questions about how this decision may affect you or your company, please do not hesitate to contact us.