Frazier v. New Jersey Mfrs. Ins. Co.

• Decision Date: 01 December 1995
• Citation: 667 A.2d 670,142 N.J. 590
• Parties: , 64 USLW 2397 Christopher FRAZIER, Plaintiff-Appellant, v. NEW JERSEY MANUFACTURERS INSURANCE COMPANY, an insurance company licensed in the State of New Jersey, Defendant-Respondent.
• Court: New Jersey Supreme Court

Page 590

142 N.J. 590

667 A.2d 670, 64 USLW 2397

Christopher FRAZIER, Plaintiff-Appellant, v. NEW JERSEY MANUFACTURERS INSURANCE COMPANY, an insurance company licensed in the State of New Jersey Defendant-Respondent.

Supreme Court of New Jersey.

Argued Sept. 11, 1995.

Decided Dec. 1, 1995.

Hilton L. Stein, Montville, for appellant (Mr. Stein, attorney; Mr. Stein, David L. Doty, Boonton, Arthur G. Schultzer, and Leonard A. Giusti, Newark, on the briefs).

Moira E. O'Connell, Morristown, for respondent (McElroy, Deutsch & Mulvaney, attorneys).

The opinion of the Court was delivered by GARIBALDI, J.

In this appeal, as in Utica Mutual Ins. Co. v. Maran & Maran, 142 N.J. 609, 667 A.2d 680 (1995), also decided today, the issue is whether, pursuant to N.J.S.A. 34:15-40, a workers' compensation lien attaches to the proceeds of a malpractice suit brought to recover damages from an attorney who failed to institute an action against the third-party tortfeasor responsible for the worker's injury.

I

In March 1987, plaintiff, Christopher Frazier, an electrician employed by Autotron Electric, Inc., was injured in a work-related accident. He fell down an open stairwell that lacked guardrails. In June 1987, Frazier's then attorney instituted a workers' compensation claim on his behalf against Autotron's workers' compensation carrier, defendant New Jersey Manufacturers Insurance Company (NJM). NJM accepted the claim and ultimately paid Frazier $150,000.

Sometime after his accident, Frazier made a formal complaint to the Occupational Safety and Health Administration (OSHA) against the general contractor (not his employer) concerning safety hazards at the job site. Subsequently, OSHA cited the general contractor for a lack of guardrails on the floor opening where Frazier had fallen and for other violations. Notwithstanding the OSHA citation, Frazier's former counsel failed to institute a third-party action on Frazier's behalf against the general contractor. After the statute of limitations had run against the third-party tortfeasor, Frazier retained new counsel to sue his former attorney for malpractice for having failed to file a timely complaint against the third-party tortfeasor. Frazier's malpractice claim was settled in September 1992 for $675,000, an amount less than the policy limit of the malpractice insurance. Frazier claims that the malpractice award was inadequate to fully compensate him for his injuries.

In April 1992, during the legal malpractice suit and negotiations, Frazier's new workers' compensation attorney wrote to NJM to ascertain the total amount of workers' compensation benefits that NJM had paid to Frazier as of that date. In responding to Frazier's attorney's letter, NJM stated that it would file a lien against any recovery for legal malpractice. Frazier's attorney wrote back to NJM, stating that because any recovery would be against the former attorney for malpractice and not against the tortfeasor, NJM was not entitled to a lien against the recovery, citing Wausau Insurance Cos. v. Fuentes, 215 N.J.Super. 476, 522 A.2d 440 (App.Div.1986), certif. denied, 105 N.J. 542, 523 A.2d 181 (1986). In June 1992, NJM informed both Frazier's malpractice attorney and Frazier's former attorney that NJM would file a lien against any recovery for malpractice that Frazier might receive from the former attorney.

In February 1993, Frazier filed a complaint for declaratory judgment with the Superior Court of New Jersey, Chancery Division, contending that NJM's lien did not attach to the legal malpractice settlement. In April 1993, NJM filed an answer and counterclaim for a declaratory judgment establishing its right to deduct the lien from future payments of workers' compensation benefits payable to Frazier. In December 1993, both parties moved for summary judgment. Frazier also moved to amend his complaint to add claims that NJM had mishandled or was otherwise negligent in handling his workers' compensation claim. In January 1994, the Chancery Division granted Frazier summary judgment on the lien issue, relying on Wausau, supra. The court also granted Frazier's motion to amend his complaint.

In March 1994, the Appellate Division granted NJM's motion for leave to appeal. In the same month, the Division of Workers' Compensation entered an order declaring that Frazier was totally and permanently disabled, and that NJM was not entitled to a lien on the malpractice recovery. NJM appealed that order, and the Appellate Division consolidated NJM's two appeals.

In September 1994, the Appellate Division reversed the trial court and compensation court on the lien issue and held that NJM's workers' compensation lien did attach to Frazier's legal malpractice settlement proceeds. 276 N.J.Super. 84, 647 A.2d 472 (1994). Subsequently, the Appellate Division denied Frazier's motion for reconsideration. Pursuant to Rule 2:2-2, we granted Frazier's motion for leave to appeal to this Court. 139 N.J. 2, 651 A.2d 472 (1994). We also granted Frazier's motion for a stay of the release of the malpractice proceeds to NJM, provided that he post a supersedeas bond.

The Appellate Division also affirmed the order granting Frazier leave to amend his complaint, and remanded the case for disposition of the issues raised in the amended complaint. Those issues are not before us.

II

"The Workmen's Compensation Act, as enacted in 1911 [L.1911, c. 95], did not provide for the employer's recovery from the third person alleged to be responsible for the injuries sustained." Johns-Manville Prods. Corp. v. Dronebarger, 211 N.J.Super. 520, 524, 511 A.2d 1304 (Law Div.1986). Hence, an employee who recovered against a liable third party was entitled to keep 100% of the workers' compensation benefits, as well as 100% of any third-party recovery. "Thus, an injured employee was in some instances permitted a double recovery." Ibid.

To overcome the inequity of double recovery, the Legislature amended the Workers' Compensation Act in 1913 by adding N.J.S.A. 34:15-40 (section 40), (L.1913, c. 174, § 8). Newark Paving Co. v. Klotz, 85 N.J.L. 432, 91 A. 91 (Sup.Ct.), aff'd 86 N.J.L. 690, 92 A. 1086 (E. & A. 1914). With minor changes in 1931 (L.1931, c. 279, § 3), 1936 (L.1936, c. 162, § 1), 1951 (L.1951, c. 169, § 1), and 1956 (L.1956, c. 141, § 6), the 1913 amendment became codified in N.J.S.A. 34:15-40, which provides, in relevant part:

Where a third person is liable to the employee ... for an injury ... the existence of a right of compensation from the employer or insurance carrier under this statute shall not operate as a bar to the action of the employee ..., nor be regarded as establishing a measure of damages therein. In the event that the employee ... shall recover and be paid from the said third person or his insurance carrier, any sum in release or in judgment on account of his or its liability to the injured employee ... the liability of the employer under this statute thereupon shall be only such as is hereinafter in this section provided.

* * * * * *

(b) If the sum recovered by the employee or his dependents from the third person or his insurance carrier is equivalent to or greater than the liability of the employer or his insurance carrier under this statute, the employer or his insurance carrier shall be released from such liability and shall be entitled to be reimbursed, as hereinafter provided, for the medical expenses incurred and compensation payments theretofore paid to the injured employee or his dependents less employee's expenses of suit and attorney's fee as hereinafter defined.

(c) If the sum recovered by the employee or his dependents as aforesaid is less than the liability of the employer or his insurance carrier under this statute, the employer or his insurance carrier shall be liable for the difference, plus the employee's expenses of suit and attorney's fee as hereinafter defined, and shall be entitled to be reimbursed, as hereinafter provided for so much of the medical expenses incurred and compensation payments theretofore paid to the injured employee or his dependents as exceeds the amount of such difference plus such employee's expenses of suit and attorney's fee.

[emphasis added.]

Thus, section 40 provides that an employee will be "guaranteed recovery for his common-law damages against contributing third-party tortfeasors or for his [workers'] compensation award, whichever is greater, but he may not duplicate these recoveries." Schweizer v. Elox Div. of Colt Indus., 70 N.J. 280, 287, 359 A.2d 857 (1976). Hence, for every dollar of the employee's recovery from the third party, the carrier's lien under section 40 (section 40 lien) entitles it to reimbursement of one dollar (less legal cost) of workers' compensation benefits. Otherwise, the tort recovery would be duplicating the workers' compensation benefits.

By application of established principles of statutory construction to N.J.S.A. 34:15-40, the legislative scheme which emerges is a plan to permit an injured worker to collect worker's compensation benefits and pursue his common law remedy against the third-party tortfeasor. Subsection (b), however, obligates the employee or his dependents to reimburse the employer or its worker's compensation insurance carrier when the employee or his dependents recover from the third-party tortfeasor or his insurance carrier. The amount of the reimbursement is determined by reference to subsections (c), (d) and (e).

[Danesi v. American Mfrs. Mut. Ins. Co., 189 N.J.Super. 160, 165, 459 A.2d 686 (App.Div.1983), certif. denied, 94 N.J. 544, 468 A.2d 194 (1983) (emphasis added).]

III

Ordinarily, section 40 is invoked when an employee obtains a recovery from the third-party tortfeasor directly responsible for causing the injury for which the employee received workers' compensation benefits. However, in Midland Ins. Co. v. Colatrella, 102 N.J. 612, 510 A.2d 30 (1986), we recognized that Section 40 was not to be so rigidly...