Recently, the Amarillo Court of Appeals addressed the split of authority as to the fate of a workers’ compensation insurance carrier when the lawsuit of an employee against a third party is dismissed.  In City of Lubbock v. Payne, 2011 WL 2463125 (Tex.App. – Amarillo June 17, 2011), Jarred Pierson, a Lubbock police officer, was injured on the job while chasing a suspect at an apartment complex, when he fell over a cable that had been placed there by the Ponderosa Apartments (“Ponderosa”) to prevent cars from entering into a particular area. Pierson filed suit against Ponderosa to recover for his injuries.  At the same time, he received workers’ compensation benefits from the City of Lubbock, which intervened in his lawsuit  against  Ponderosa.   One  day  before  trial,  Pierson  non-suited  his  lawsuit  with  prejudice. Ponderosa then also obtained a dismissal with prejudice of the City’s claims.

On appeal, the City contended it was entitled to continue to pursue the lawsuit against Ponderosa to the extent it made compensation benefits to Pierson.  The court of appeals recognized a split of authority on the issue.  Some courts of appeals hold that when an employee’s cause of action is defeated, that of the carrier is defeated as well, while others hold that once compensation benefits have been paid, the right of the insurance carrier overrides that of the employee.

In agreeing with the City, the court of appeals stated that to hold otherwise would be to ignore several long established rules of subrogation.  In particular, payment from a subrogee effectuates a transfer of interest in the cause of action to the subrogee.  When that occurs, the subrogee assumes the status as the “real party in interest” while the subrogor’s interest becomes nominal.  If the subrogor enters into a settlement with and gives a release to the wrongdoer after such payment while the tortfeasor knows of the subrogee’s rights of subrogation and the subrogee is not party to the settlement, then settlement does not bar the subrogee from enforcing its subrogation right.  So, it does not matter that Pierson may have compromised whatever remaining claim he had against Ponderosa and dismissed his portion of the suit with prejudice. The City had compensated Pierson to some extent before then and, therefore, owned at least a part of the cause of action.  Pierson also knew of the City’s status as a subrogee before the non- suit.  Consequently, the actions of Pierson, did not bar the City from continuing its recovery efforts against the purported tortfeasor. Accordingly, the court of appeals reversed the trial court’s order dismissing the City’s claims and remanded for further proceedings.

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