Folkestad v. Burlington Northern, Inc., s. 85-4280

• Decision Date: 01 April 1987
• Docket Number: 85-4305,Nos. 85-4280,s. 85-4280
• Parties: Alan R. FOLKESTAD, Plaintiff-Appellant and Cross-Appellee, v. BURLINGTON NORTHERN, INC., a Delaware corporation, Defendant-Appellee and Cross-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1377

813 F.2d 1377

Alan R. FOLKESTAD, Plaintiff-Appellant and Cross-Appellee, v. BURLINGTON NORTHERN, INC., a Delaware corporation Defendant-Appellee and Cross-Appellant.

Nos. 85-4280, 85-4305.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Oct. 3, 1986.

Decided April 1, 1987.

Siegfried Hesse, Berkeley, Cal., for plaintiff-appellant and cross-appellee.

Thomas W. Spence, St. Paul, Minn., and Betty Jo Christian, Washington, D.C., for defendant-appellee and cross-appellant.

Appeal from the United States District Court for the District of Montana.

Before SCHROEDER, NORRIS and BRUNETTI, Circuit Judges.

SCHROEDER, Circuit Judge:

This is an action by an injured employee against his employer, the Burlington Northern Railroad, for damages under the Federal Employers Liability Act, 45 U.S.C. Secs. 51 et seq. (1982). Judgment was entered in favor of the plaintiff in the amount of $490,000. Although both sides originally appealed, all of the issues raised in the employee's appeal have been withdrawn by virtue of the parties' settlement, and we decide only the issue raised in the railroad's cross-appeal.

That issue is whether the district court properly refused to permit an offset of approximately $57,000 that had already been paid to the employee through the railroad industry's health and welfare plan to which Burlington Northern was a party. The district court based its refusal upon its interpretation of section 5 of the FELA, 45 U.S.C. Sec. 55, a section which has spawned considerable litigation concerning setoff of benefits paid pursuant to this plan. ¹

Section 5 provides:

Any contract, rule, regulation, or device whatsoever, the purpose or intent of which shall be to enable any common carrier to exempt itself from any liability created by this chapter, shall to that extent be void: Provided, that in any action brought against any such common carrier under or by virtue of any of the provisions of this chapter, such common carrier may set off therein any sum it has contributed or paid to any insurance, relief benefit, or indemnity that may have been paid to the injured employee or the person entitled thereto on account of the injury or death for which said action was brought.

All of the employee's medical expenses incurred as a result of his industrial accident were paid through the health and welfare plan, administered by the Travelers Insurance Company, known as Group Policy GA-23000. The plan is financed wholly by premiums paid by the railroads. The plan has been in effect since the 1950s, and the present version, apparently without amendment material to this case, since 1972. Its history is described in Urbaniak v. Erie Lackawanna Railway Co., 424 F.Supp. 981, 983-84 (W.D.N.Y.1977).

The 1975 Health and Welfare Agreement between railroads represented by the National Carriers' Conference Committee and railroad employees represented by the Brotherhood of Maintenance of Way Employees contains a provision which expressly provides for the setoff the railroad seeks. The agreement states that payment of benefits under tbe plan "will satisfy any right of recovery against the employing railroad for such benefits to the extent of the benefits so provided." ² The railroads and the unions have thus agreed that benefits under the plan will satisfy FELA liability and that setoffs such as that sought by the employer in this case should be allowed. The plan is thus intended, at least in part, to serve as a device for indemnifying railroads for their liability under the FELA. For this reason, the railroad argues that the setoff is permissible under the proviso to section 5.

The district court nevertheless held that setoff should not be allowed because, in its view, section 5 prohibits setoff of any benefits received through insurance, even of benefits received from an insurance plan financed solely by the employer, rather than by the employee, and expressly earmarked by the union and employer to satisfy FELA liability. For the reasons set forth in the following discussion, we hold that the setoff should have been permitted in the light of the history of the statute and the weight of subsequent judicial authority interpreting section 5.

DISCUSSION

The legislative history of section 5 indicates that it was enacted to bar devices that railroads were using to exempt themselves from full liability for employee injuries. See 42 Cong.Rec. 4527 (1908) (statement of Sen. Dolliver); H.R.Rep. No. 1386, 60th Cong., 1st Sess. 6-9 (1908). Congress was responding also to employers' efforts to contract out of liabilities imposed under state acts. See id. at 30-75 (reprinting state laws). As this court has observed, "the practice of obtaining waivers prior to accidents and as an incident of employment was well-known to Congress and the object of Sec. 5." Bay v. Western Pacific Railroad Co., 595 F.2d 514, 516 (9th Cir.1979) (per curiam) (citing Philadelphia, Baltimore & Washington Railroad Co. v. Schubert, 224 U.S. 603, 612-13, 32 S.Ct. 589, 592, 56 L.Ed. 911 (1912)); see also Duncan v. Thompson, 315 U.S. 1, 62 S.Ct. 422, 86 L.Ed. 575 (1942) (applying Sec. 5 to invalidate a post-accident agreement whereby an employee was required, as a prerequisite to bringing a lawsuit, to return monies advanced to him by the railroad).

The history also shows that the proviso to section 5 was included in order to ensure that the employer was given credit for money it had already paid to the employee on account of the injury. As one court has summarized, the overall concern of the section is that "an employee be compensated to the full extent of his loss, not that an employer be precluded from indemnifying himself against potential FELA liability as, for instance, by carrying liability insurance coverage." Hall v. Minnesota Transfer Co., 322 F.Supp. 92, 95 (D.Minn.1971).

The statute in part codifies the common law collateral source rule which prevents a tortfeasor (the employer) from reducing its liability by payments that the injured party (the employee) has received from sources collateral to the tortfeasor. Restatement (Second) of Torts, Sec. 920A ("Payments made to or benefits conferred on the injured party from other sources are not credited against the tortfeasor's liability, although they cover all or a part of the harm for which the tortfeasor is liable."). Thus, early litigation under section 5 established that payments from insurance to which the employer had not contributed could not be used to reduce an employer's liability under the statute. See, e.g., Bangor and Aroostook R. Co. v. Jones, 36 F.2d 886 (1st Cir.1929). Payments under the Railroad Retirement Act, a social program funded by collections from the employer and employee and to a limited extent from the general public, and designed to facilitate the retirement of elderly railroad employees, were likewise deemed to come from a collateral source. See, e.g., Sinovich v. Erie Railroad Co., 230 F.2d 658, 661 (3d Cir.1956); New York, New Haven & Hartford R. Co. v. Leary, 204 F.2d 461, 467-68 (1st Cir.), cert. denied, 346 U.S. 856, 74 S.Ct. 71, 98 L.Ed. 370 (1953); Hetrick v. Reading Co., 39 F.Supp. 22, 25 (D.N.J.1941).

This circuit recognized the same principle when we construed section 5 in the context of a case arising under the Jones Act. ³ Gypsum Carrier, Inc. v. Handelsman, 307 F.2d 525 (9th Cir.1962). We there refused to permit an employer to set off benefits a seaman had received from a disability fund, supported primarily by employee contributions, against the employer's obligation for maintenance and cure. "The tortfeasor should not be required to compensate twice for the same injury, but he should not have the benefit of payments to the injured person which he did not make. The test is therefore whether the particular payments came from [the tortfeasor]...." Id. at 534 (footnote omitted). Thus if employee contributions pay for the insurance, benefits are regarded as collateral to the employer and setoff is prohibited.

This is fully in accord with the common law collateral source rule; the tortfeasor's liability generally may not be reduced by payments which the injured party received from insurance unless the insurance was procured by the tortfeasor. Where, however, the tortfeasor voluntarily procures the insurance, the collateral source rule does not apply and setoff is generally permitted. See 11 A.L.R.3d at 1116-17. The Restatement (Second) of Torts applies this principle to insurance purchased by the tortfeasor regardless of whether it is limited to liability indemnification. Section 920A comment a. The principle that payments made by a tort defendant have the effect of reducing its tort liability "is also true of payments made under an insurance policy that is maintained by the defendant, whether made under a liability provision or without regard to liability, as under a medical-payments clause." Id. That common law principle would appear to allow setoff, once it is established that premiums were paid by the employer.

We are here concerned, however, with section 5 of the FELA. The question of whether employer-purchased insurance benefits may offset liability is complicated by the statutory framework. The issue has arisen in an evolving historical context. It surfaced after employers subject to the FELA began to obtain insurance policies that, like the Travelers Insurance Group Policy GA-23000 involved in this case, made the employers responsible for all of the premium contributions. Under such policies, unlike the policies considered in earlier cases such as Gypsum and Bangor, benefits are financed by the employers and not by the employees.

The problem that has troubled the courts has been whether to treat the insurance as a fringe benefit in part compensation for the employee's work. If it is viewed as the product of the employee's labors, it is deemed to come from a source collateral to the employer/tortfeasor rather than from...