Compromise & Release(s)
Crawford & Company Lecture-04/24/06
David H. Parker
A compromise and release agreement is not valid unless the Appeals Board or a WCJ approves it. The purpose of this requirement is to afford protection to an injured worker, unfamiliar with the nature or extent of his or her rights under the compensation law, and unable to deal on equal terms with the employer or insurance carrier. Without this protection, settlement might be a means of disposing of a claim for less than the legal liability involved, and thus of defeating the purposes of the compensation law. Accordingly, the legislature has not only provided that compromises shall not be binding without approval, but also has prohibited any curtailment of compensation benefits through contract or otherwise, as between the employer and the employee. To further protect an injured employee's rights, the Board has held that a settlement agreement in a civil action between employee and employer cannot serve as a bar to the employee's workers' compensation claims unless it is filed with the Board, as required by Labor Code Section 5002 , is approved by the Board, as required by Labor Code Section 5001 , and comports with the requirements of Labor Code Section 5003 .
However, neither the WCJ nor the Board may rewrite the parties' agreement, but may only approve or disapprove the agreement. For example, the Board or a WCJ may not rewrite the parties' agreement by striking a proposed settlement of rehabilitation benefits and approving the balance of the agreement.
--Basis for Approval
The Appeals Board or WCJ must inquire into the adequacy of a compromise and release agreement and stipulations with request for award. The Board or WCJ may set the matter for hearing to take evidence when necessary to determine whether the agreement should be approved or disapproved or may issue findings and awards. This inquiry should carry out the legislative objective of protecting workers who might agree to unfortunate compromises because of economic pressure or lack of competent advice. Furthermore, once a compromise and release agreement has been filed with the Board, the Board has the power to determine the adequacy of the agreement even if the parties decide to proceed to trial on the merits of the case.
If a WCJ has concerns about the adequacy of a proposed settlement, he or she is required to communicate those concerns in writing or by telephone before setting the issue for hearing. If no response is received within 15 days, the matter will be added to the WCJ's regular calendar; if an inadequate response is received, an order setting forth the missing evidence and suspending action will issue and be served on all parties and their representatives, and a conference will be set within 30 days if the missing evidence is not received.
The Board will approve an agreement that provides for the payment of less than the full amount of compensation due or to become due and that undertakes to release the employer from all future liability, only when it appears that a reasonable doubt exists as to the rights of the parties or that approval is in the parties' best interest. It will not approve an agreement that relieves an employer of liability for vocational rehabilitation benefits unless it finds that there is a good faith issue that, if resolved against the injured employee, would defeat the employee's right to all workers' compensation benefits.
[b]--Exercise of Discretion by WCJ
The Board or the WCJ has a wide discretion in passing on compromise and release agreements submitted for approval. This discretion is exercised in accordance with the sociological purposes of the workers' compensation law, for the protection of the injured employee and his or her dependents. In the exercise of this discretion, the WCJ will take whatever steps appear to be necessary, including holding a hearing, in order that the employee will not receive less by way of compromise than that to which he or she is justly entitled under the compensation law.
No action will be taken on a submitted agreement until sufficient facts are presented to the WCJ to enable the WCJ to exercise his or her discretion properly. Thus, in any case in which the employee is offered less than full compensation, the parties should, at the time of filing the agreement, supply the WCJ with sufficient facts so that he or she may determine whether there is a reasonable doubt as to the rights of the parties or whether approval is in the parties' best interest.
[c]--Effect of Employee's Death
Approval or disapproval of a compromise and release agreement after an employee's death is left to the discretion of the Appeals Board. The execution of a compromise and release creates a legally binding agreement that is effective from the date of its execution unless disapproved by the Board, since the Board's approval is a condition subsequent, not a condition precedent, to the creation of a valid compromise and release.
--Procedure for Approval
When a settlement is submitted while proceedings are pending before the Appeals Board, the settlement is handled by the WCJ who is already in charge of the case. When no proceedings are pending, the settlement will be assigned to a WCJ for review and processing. Parties may also obtain approval of settlements by following a ''walk-through'' procedure established by each local office of the Board. If a compromise and release or stipulations with request for award have not been approved, disapproved, or noticed for trial on the issue of adequacy and other disputed issues within 45 days after filing, the file is to be transferred to the presiding judge for review. Following such a transfer, the presiding judge may return the file to the workers' compensation judge previously assigned when the presiding judge determines that the judge is proceeding appropriately, reassign the file to another workers' compensation judge, reassign the file to himself or herself for disposition of the proposed settlement, or take any other appropriate action to assure prompt disposition of the proposed settlement.
[b]--When Unemployment Compensation Disability Lien Is Involved
Any lien filed by the Employment Development Department in the compensation proceeding for unemployment compensation disability benefits paid to the injured employee must be taken into consideration in approving any settlement of the workers' compensation claim. The injured employee and the employer may propose to the Board, as part of the compromise and release agreement, an amount out of the settlement to be paid to the lien claimant. If the lien claimant objects to the amount proposed for payment of its lien, the Board must determine the extent of the lien claimant's entitlement to reimbursement on the lien, and must make and file findings on all facts involved in the controversy over this issue. The Board may approve a compromise and release agreement that proposes the disallowance of a lien, in whole or in part, only when there is proof of service on the lien claimant by the defendant, not less than 15 days prior to the Board's action, of all medical and rehabilitation documents and a copy of the proposed compromise and release agreement.
The Board's determination as to the amount of the lien is binding on the lien claimant and the parties, subject to a petition for reconsideration and to the right of judicial review. The Board may order the amount of the lien claim, as determined and allowed by it, to be paid directly to the lien claimant either in a lump sum or in installments. The Board may also approve a compromise and release agreement on all other issues, while deferring to subsequent proceedings the determination of a lien claimant's entitlement to reimbursement, if the employer agrees to pay the amount subsequently determined to be due under the lien claim.
The Board's jurisdiction over issues involving unemployment compensation disability, conferred by the filing of a lien by the Employment Development Department, is limited to the subject matter of the lien. Thus, when the lien mentions only some, and not all, of the unemployment compensation disability payments made to a worker, and the payments not mentioned in the lien are also not mentioned in the compromise and release agreement or in the order approving the agreement, the Board has no jurisdiction to determine the worker's liability for repayment to the Employment Development Department of the unmentioned payments.
When it appears that unemployment compensation disability benefits may have been paid subsequent to the filing of the lien claim, the WCJ must notify the lien claimant when the case is ready for order approving the compromise and release. The lien claimant has five days thereafter in which to file and serve an amended lien reflecting all payments made to and including the date of filing the amended lien.
In cases in which a compromise and release is filed and continuing unemployment compensation disability benefits are being paid, the WCJ will ascertain the full amount of the lien claim as of the time of approval of the compromise and release.
[c]--When Lien for Medical Services or Benefits Is Involved
When a compromise of claim is submitted to the Appeals Board for approval, the parties must file with the Board any liens that have been served on the parties. Before approving the compromise, the Board must determine, on the basis of the liens filed with it by the parties or lien claimants, whether any benefits have been paid or services provided by a health care provider, a health care service plan, a group disability policy, including a loss of income policy, a self-insured employee welfare benefit plan, or a hospital service contract. The Board's approval of the settlement must provide for reimbursement for benefits paid or services provided under these plans. Thus the Board will rescind an order of a WCJ approving a compromise and release agreement that makes no provision for the payment of a lien for medical services previously filed in the matter.
However, a WCJ may properly dismiss a medical care provider's lien claim that is filed after approval of a compromise and release when there is no evidence that the employer or its insurer was aware of the provider's claim and acted in good faith and made all reasonable inquiries before settling the matter. Similarly, when no fraud was shown concerning a compromise and release agreement that provided the employee would be responsible for the cost of disputed future medical treatment, a medical insurer's lien to recover the cost of this treatment filed after approval of the agreement and payment of the agreed settlement was properly dismissed. On the other hand, a lien claimant will not be barred from recovering a medical treatment lien solely on the ground of failure to file the lien until after the agreement was approved, when the employer or its insurer had sufficient knowledge of a potential lien claim. Thus, when there was no evidence that the lien claimants knew, prior to the submission of the compromise and release agreement, that a workers' compensation case was pending, and when the employer could be charged with a sufficient degree of knowledge of an unresolved lien interest because the medical treatment provided by the lien claimants was discussed at length in the agreed medical examiner's report in the case, the lien would not be dismissed. In this situation, the Appeals Board held that the employer was placed on notice and had a duty to investigate whether medical treatment providers possessed potential lien rights.
When a lien claimant that is a health care provider does not agree to the amount allocated to it pursuant to the parties' compromise and release agreement, the WCJ must determine the potential recovery and reduce the amount of the lien in the ratio of the applicant's actual recovery to the potential recovery in full satisfaction of the lien. In other words, the formula for reduction of a health care provider's lien is as follows:
| x lien = lien recovery
In such a case, the parties must serve the lien claimant with all medical reports and other evidence submitted to the Board in connection with the proposed settlement, and must set forth in detail the evidence supporting their computation of the potential value of the employee's case. The percentage of disability, the adjustments, the dates of temporary disability, the medical expenses to be reimbursed, and the value and duration of future medical care should be included in the computation. These items should be set forth in sufficient detail to assist the lien claimant and the WCJ in determining whether the assumed potential value of the claim has been exaggerated. If the parties fail to provide this analysis, and the lien claimant objects to the lien reduction suggested by the parties, the WCJ must make a similar computation.
The parties should prepare and attach to the compromise and release agreement documents that compute the lien reduction in accordance with the formula described above. Such a practice saves needless delays, since, if the settlement papers set forth an arbitrary figure without any explanation, a medical lien claimant will undoubtedly always object to the amount of the proposed lien reduction. By supplying the suggested formula to the WCJ, the lien claimant can determine if it is correct. If the lien claimant objects to the suggested reduction, the WCJ can compare the lien claimant's suggested reduction with that proposed by the settling parties. In issuing a decision on the lien reduction, the WCJ may simply incorporate by reference the formula suggested by the lien claimant or by the settling parties if he or she is satisfied that the formula computations prepared by the parties are correct.
For purposes of the formula, the term ''potential recovery'' means the amount of recovery that is reasonably probable in a contested proceeding, not the highest possible amount of recovery that the employee could obtain in a contested proceeding. Thus, a WCJ must make a determination of the reasonable value of the employee's case, taking into consideration the validity of the various contentions and the likelihood of prevailing on these contentions in a contested proceeding.
A Medi-Cal lien is not subject to reduction, as described above, without the consent of the Department of Health Services.
Likewise, when a lien claimant, other than a health care provider, does not agree to the amount allocated to it pursuant to the parties' compromise and release agreement, the WCJ must determine the potential recovery and reduce the amount of the lien in the ratio of the applicant's actual recovery under the agreement to the potential recovery in full satisfaction of the lien. For example, in determining what portion of a compensation award arrived at under a compromise and release agreement should be paid to an unemployment compensation disability insurer lien claimant, a WCJ should compute the total amount of the respective claims for temporary and permanent disability as if they prevailed, and then reduce them proportionately according to the actual amount of the settlement. In applying this formula, a WCJ may allow liens in full for attorney's fees and/or for incurred and anticipated medical costs, while proportionately reducing a lien claimant's lien.
A lien claim is properly reduced if there is a bona fide issue as to whether the employee's injury was industrially caused. However, when there is no legitimate dispute as to industrial causation the formula will not be applied to reduce the lien.
A lien claim may not be reduced by use of the formulas, described above, when the formula is not submitted with the compromise and release agreement for approval, but the issue of the lien claim is instead deferred to negotiation and eventual hearing; in such a case, the lien claimant is entitled to pursue the full amount of its lien. However, when the formula for reducing the lien is not submitted with the compromise and release agreement, the lien may, nevertheless, be reduced if the WCJ finds that submission of the formula would not have made any difference in that the lien claimant would have objected to the formula and the matter would have proceeded to a hearing on the lien claim in any event.
Finally, the Board may approve a compromise and release agreement between an injured employee and the employer or insurer without first determining the rights of a medical lien claimant when the agreement includes a hold harmless provision with respect to the lien and when the lien claimant is given the right to fully litigate its claim. In this situation, recovery from an employer or insurer on a Medi-Cal lien filed by the Department of Human Services is not limited, as it is when such a lien is included in the settlement, to an amount equal to one-half of the employee's net recovery. Rather, the Medi-Cal lien, like any other successfully litigated lien in this situation, may be recovered in its full amount. However, the Appeals Board has held that a lien claimant previously partially reimbursed by Medi-Cal may recover the full amount of its lien only after making a full refund to Medi-Cal. The Board will set aside an order approving a compromise and release when it is unclear whether the employee is being held harmless from a medical lien claim or whether the case is being settled around the claim.
[d]--When Other Liens Are Involved
Liens other than unemployment compensation disability liens or liens for medical services or benefits may be determined and allowed by the Appeals Board as provided by statute. For example, as part of an order approving a compromise and release agreement, the WCJ may allocate to a county lien holder a portion of the amount of the county's lien for unpaid child support that represents a percentage of the award that equals the percentage of the employee's earnings previously payable as child support.
[e]--Allowance of Attorney's Fees
The Appeals Board or a WCJ has the authority to review and reduce an attorney's fee agreed to by the parties in a compromise and release agreement. In determining the reasonableness of the fee requested by an applicant's attorney in the agreement, the WCJ will refer to the guidelines contained in the Appeals Board's Policy and Procedural Manual. In general, in establishing the amount of that fee, the WCJ will consider the complexity of the case, the time incurred by the attorney, and the results obtained.
When the WCJ proposes to reduce the amount of the requested fee, he or she must give the attorney notice and an opportunity to offer evidence of the value of the services rendered. However, a formal hearing is not required in every case. The matter may be determined based on the attorney's submitted written opposition to the WCJ's proposed order.
The Appeals Board may award an attorney's fee to the injured employee's attorney out of a lien claimant's recovery under certain conditions, but not if the case is disposed of by compromise and release.
[f]--Subsequent Injuries Benefits Trust Fund Cases
The Attorney General or the Department of Industrial Relations has the right to release by compromise any claims for Subsequent Injuries Benefits Trust Fund benefits. The compromise and release agreement must be approved by the Board, but the provisions of Labor Code Sections 5000 through 5004 governing regular compromise and release agreements do not apply.
--Effect of Approval
Approval of a compromise and release agreement terminates the liability of the employer and its insurer on account of the injury involved, including any liability for increased disability, to the extent indicated by the agreement. The employer's liability to the employee's dependents for death benefits may also be terminated by approval of the agreement when the agreement so provides in clear and non-technical language.
Once the Board approves the agreement, it may, without notice, of its own motion or on the application of either party, enter its award based on the agreement. An approved compromise and release agreement is a judgment with the same force and effect as an award made after a full hearing, but this does not apply to apportionment pursuant to Labor Code sections 4663 and 4664, applicable after 4/19/04 (currently as of the date of this writing, 4/24/06).
The Board's approval of a compromise and release bars an employee's right of action against the employer with respect to the same injuries. For example, the Board's approval of a compromise and release necessarily includes the determination that the injuries covered by the release are compensable under the compensation law. Thus, when an employee settled his claims against the employer for physical and emotional injury due to job stress by way of a compromise and release, the issue of the compensability of these injuries was res judicata, and the employee could not thereafter bring an action against the employer for emotional distress based on the same events. Similarly a discharged employee's compromise and release of his compensable physical and emotional injury claims arising out of his termination barred his subsequent action under Labor Code Section 3602(b)(2) for aggravation of his injury by the employer's alleged active concealment of medical reports when the employee did not contend that he was unaware of the basic facts relating to this action when he signed the release. Likewise, when an employee filed a petition seeking a penalty for serious and willful misconduct prior to entering into a compromise and release, the employee's claim against his employer for serious and willful misconduct was barred by a compromise and release that was to resolve all issues between the parties.
--Procedure on Disapproval
When a compromise and release agreement is disapproved, the parties are left in the same position that they were in prior to its signing. When a WCJ does not intend to approve a compromise and release, he or she should set the matter for a hearing on the adequacy of the agreement and on all other litigable issues in the case without waiting for the parties to file a declaration of readiness to proceed. After a hearing, if the compromise and release agreement is to be disapproved, the WCJ should ordinarily issue a Findings and Award along with an Order Disapproving Compromise and Release. The Appeals Board has declared that an order disapproving a compromise and release should not, in the absence of unusual circumstances, be issued without a Findings and Award or other appropriate disposition of all pending litigable issues.
The Board treats an order disapproving a compromise and release agreement as an interim decision by a WCJ, and not as a final order for purposes of reconsideration under Labor Code Section 5900 .
--Penalty for Unreasonable Delay in Payment of Benefits Pursuant to Approved Compromise and Release
An employee may be entitled to the penalty provided by Labor Code Section 5814 for an unreasonable delay in the payment of benefits pursuant to an approved compromise and release agreement. As of June 1, 2004, in any proceeding under Labor Code Section 5814 , the Appeals Board is required to use its discretion to accomplish a fair balance and substantial justice between the parties. Presumably, this mandate will affect the Board's interpretation of whether a given delay is unreasonable. In this regard, cases interpreting the pre-June 1, 2004, version of the statute may be instructive. For example, when an employer did not pay the benefits agreed to under a compromise and release until 26 days after the order approving the settlement, the delay was not unreasonable. Similarly, a 22-day delay in paying a portion of an award pursuant to a compromise and release was not considered unreasonable when the delay was due to a misunderstanding over the amount of the compromise and release and to normal administrative proceedings. Likewise an insurer's delay in paying interest on an award pursuant to a compromise and release was not unreasonable when it promptly paid the award and subsequently promptly paid the delayed interest after the employee brought the error to its attention.
In contrast, however, the Appeals Board assessed a penalty on the entire amount of a compromise and release agreement, when the employer failed to pay interest until four days after notification from the employee's attorney that interest was due. The Board did not excuse the employer's delay in payment, even though the employer claimed that it inadvertently used a compromise and release form which did not include a provision that interest would be waived if the proceeds of the settlement were paid within 20 days of approval.
A delay of 45 days in paying benefits pursuant to a compromise and release that was caused by the insurer's administrative error in mailing the check to the wrong address, despite notice of the employee's correct address, was held to be unreasonable and subjected the insurer to a penalty for unreasonable delay in payment. Similarly, a penalty was imposed against an insurer for paying benefits specified in a compromise and release with an instrument that was not immediately negotiable by the employee. Likewise, a penalty was imposed for an insurer's 30-day delay in paying the proceeds of a compromise and release, even though the compromise and release contained a clause stating that the settlement included interest for 30 days.
In an unpublished decision, the court of appeal held that where an employer unreasonably delayed payment of a compromise and release which had resolved a previous penalty owed for late payment of permanent disability, medical treatment and attorney's fees, the employer was liable for a further penalty computed not on the amount of the compromise and release, but on the value of the underlying benefits resolved by the compromise and release. The court reasoned that a penalty award increases the compensation for the underlying class of benefits to which it applies and does not constitute a separate class of benefits. Thus, any subsequent penalty award for having failed to pay an earlier penalty award must be computed on the underlying class of benefits plus the earlier penalty, whether such penalty arose out of trial or out of a compromise and release.
--Insurer's Duty to Notify Employer of Hearing
With respect to injuries occurring on or after January 1, 1994, if an employer has notified the insurer in writing that, in the employer's opinion, no compensation is payable to the employee, at the employer's written request to the Appeals Board the Board may approve a compromise and release agreement or stipulation that provides compensation to the employee only if there is proof of service on the employer by the insurer of notice of the time and place of the hearing at which the compromise and release agreement or stipulation is to be approved. The notice must be sent to the employer's last known address not less than 15 days prior to the Appeals Board action.
When the insurer has attached a declaration to the compromise and release agreement or stipulations with request for award that it has complied with the provisions of Labor Code Section 3761 , the Appeals Board may approve the compromise and release or stipulations with request for award without hearing or further proceedings.
The insurer's failure to provide the required notice does not prohibit the Board from approving a compromise and release agreement or stipulation. However, the Board must order the insurer to pay the employer's reasonable expenses, as provided in Labor Code Section 5813 , on request by the employer, and after giving the insurer notice and an opportunity to be heard.
Any request for relief under Labor Code Section 3761(b) or (d) must be made by filing a petition under Workers' Compensation Appeals Board Rule 10450 , together with a declaration of readiness to proceed.
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