Arizona Worker’s Comp. Carriers: Enforce Your Lien, But Offer to Reduce it, Too

The Arizona Supreme Court, in Twin City Fire Ins. Co. v. Leija, —  P.3d — , 2018 WL 3651026 (Ariz. Aug. 2, 2018), affirmed worker’s compensation insurance carriers’ ability to enforce a statutory lien against beneficiary recovery in third party tort settlements, and avoid bath faith claims by beneficiary-insureds.  This case arose out of the Leija family’s tort suit against third party defendants who contributed to Mr. Leija’s death which befell him while on the job.  During settlement negotiations with the third-party defendants, Twin City asserted its statutory right to enforce a lien against all settlement proceeds recovered by the Leijas, to the extent of worker’s compensation benefits both paid and owed in the future.  Id. at *1.  However, Twin City also offered to reduce its lien by five percent if the Leijas settled all third party claims, which the Leijas rejected.  In the instant suit, Twin City sought to enforce its lien against the Leijas, pursuant to A.R.S. § 23-1023(D), and the Leijas filed a counterclaim in return, arguing that Twin City breached its duty of good faith by refusing to reduce its statutory lien against their settlement recovery to account for Mr. Leijas’ employer’s comparative fault.  The Leijas’ reasoned that, because their settlement recovery was hampered by the employer’s comparative fault, Twin City’s lien ought to be further reduced to cure any inequity resulting from the lien consuming the Leijas’ settlement recovery, and Twin City’s failure to do so was in bad faith.  

The trial court had granted Twin City’s motion for summary judgment enforcing its lien and rejecting the bad faith claim by the Leijas’.  In doing so, the trial court held that: “a workers’ compensation insurance carrier does not owe a duty of good faith and fair dealing to reduce its lien against a claimant’s settlement proceeds to account for a non-party employer’s alleged comparative fault.”  Id. at *2.  The court of appeals reversed in part, holding that “when a worker settles a claim against a third party for less than the limits of the third party’s insurance, the worker may obtain a judicial determination of whether the carrier’s lien should be reduced to account for the employer’s comparative fault.”  Id. However, the court of appeals did not reach the trial court’s ruling regarding lien enforcement and the duty of good faith by an insurance carrier, as it remanded to the trial court for a hearing on comparative fault and corresponding lien reduction.

The Arizona Supreme Court vacated a majority of the court of appeals’ decision granting a subsequent trial on comparative fault, and affirmed the trial court’s judgment in favor of Twin City.  Most notably, the court held that “even in a settlement context, an insurance carrier has an obligation to act in good faith toward a claimant by giving equal consideration to the claimant’s interests” as well as its own in enforcing a statutory lien.  Id. at *5.  The court pointed out, however, that Twin City demonstrated such good faith in offering to reduce its lien, which “might entail” the kind of good faith appropriate when, as here, a third party suit indicates “clear, undisputed and substantial” employer fault.  Id.