(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
(NOTE: This is a companion case to Utica Mutual Insurance Company v. Maran, et als. also decided
today.)
Argued September 11, 1995 -- Decided December 4, 1995
GARIBALDI, J., writing for the Court.
The issue on appeal is whether, pursuant to N.J.S.A. 34:15-40 (section 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 a third-party tortfeasor responsible for the worker's injury.
In March 1987, Christopher Frazier, an electrician employed by Autotron Electric, Inc., was injured
in a work-related accident. Frazier fell down an open stairwell that lacked guardrails. In June 1987,
Frazier's then attorney filed a workers' compensation complaint on Frazier's behalf against Autotron's
workers' compensation insurance carrier, New Jersey Manufacturers Insurance Company (NJM). NJM
accepted the claim and eventually paid Frazier $150,000.
Frazier also made a formal complaint with the Occupational Safety and Health Administration
(OSHA) against the general contractor in respect of safety hazards on the job site. The general contractor
did not employ Frazier. OSHA eventually cited the general contractor but Frazier's former attorney failed to
sue the contractor. After the statute of limitations had run against this third-party tortfeasor, Frazier
retained new counsel to sue his former attorney for legal malpractice. The matter was settled in September
1992 for $675,000. Frazier claimed that this amount was inadequate to fully compensate him for his injuries.
During the pendency of the legal malpractice action, NJM asserted its entitlement to a lien against
any recovery. Frazier's attorney, relying on Wausau Insurance Cos. v. Fuentes, claimed that because any
recovery would be against the former attorney and not the actual tortfeasor, NJM was not entitled to a lien
against the recovery.
In February 1993, Frazier filed a declaratory judgment action with the 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"s motion for summary judgment on the lien issue, relying on Wausau. The court also
granted Frazier's motion to amend the complaint.
In March 1994, the Appellate Division granted NJM's motion for leave to appeal. In that same
month, the Division of Workers' Compensation declared Frazier totally and permanently disabled, and found
that NJM was not entitled to a lien on the malpractice recovery. NJM appealed that order and the two
matters were consolidated. In September 1994, the Appellate Division reversed both the trial court and the
compensation court on the lien issue, holding that NJM's workers' compensation lien did attach to Frazier's
legal malpractice settlement proceeds. The Appellate Division denied Frazier's motion for reconsideration.
The Supreme Court granted Frazier's motions for leave to appeal and for a stay of the release of the
malpractice proceeds to NJM on the posting of a supersedeas bond.
HELD: A workers' compensation lien, pursuant to N.J.S.A. 34:15-40, attaches to the proceeds of a legal
malpractice action brought to recover damages from an attorney who failed to institute an action
against a third-party tortfeasor. N.J.S.A. 34:15-40 imposes a lien on third-party recoveries that are
the functional equivalent of a recovery against the direct tortfeasor, regardless of whether the worker
has been fully compensated for his or her injuries. Furthermore, the workers' compensation
insurance carrier need not institute a suit under section 40(f) against the third-party tortfeasor to
secure a section 40 lien.
1. Section 40 was enacted to overcome the inequity of double recovery. Section 40 provides that an injured
employee can recover for his or her damages either against a contributing third-party tortfeasor or through a
workers' compensation award, whichever is greater, but these recoveries cannot be duplicated. Therefore,
for every dollar of an employee's recovery from the third-party, the workers' compensation insurance
carrier's section 40 lien entitles it to reimbursement of one dollar (less legal cost) of workers' compensation
benefits. (pp. 5-7)
2. In Midland Ins. Co. v. Colatrella, this Court held that section 40 applies to recoveries that are the
functional equivalent of a recovery from the actual third-party tortfeasor. The Court based its holding in that
case on its belief that the primary concern of the Legislature was to integrate the sources of recovery. (pp.
7-10)
3. In Wausau, it was held that a workers' compensation lien cannot attach to legal malpractice recoveries.
In reaching that conclusion, the Wausau court strictly construed section 40, finding that the statutory
language did not plainly extend the reimbursement right to recoveries against parties other than the
tortfeasor. However, a literal reading of section 40 is inappropriate in light of the strong legislative
determination that there be no double recovery. It was not the intention of the Legislature that an injured
employee who receives a legal malpractice award be in a better position than an injured employee who
recovers directly from the tortfeasor. Therefore, malpractice claims that are derivative of third-party claims
are subject to a section 40 lien, and Wausau is overruled. (pp. 10-13)
4. Section 40 prevents double recovery. Thus, when a plaintiff recovers from a third party, a lien even if the
two combined benefits would leave the employee less than fully compensated. There is no legislative history
to indicate otherwise. Moreover, the " no double recovery" rule should be no different when the third-party
recovery is against a party other than the tortfeasor. Therefore, the Court also overrules Charnecky v.
American Reliance Ins. Co.. (pp. 13-17)
5. A workers' compensation carrier's right to reimbursement from the employee under section 40 is not
contingent on the carrier's exercise of the section 40(f) remedy. (pp. 17-20)
6. The Court's decision in this matter will be applied retroactively. (p. 20)
Judgment of the Appellate Division is AFFIRMED and the matter is REMANDED to the trial court
for a consideration of the issues raised in the amended complaint.
JUSTICE O'HERN, concurring, agrees with the judgment of the Court that a lien attaches to the
proceeds of a malpractice suit premised on the failure of the worker's attorney to prosecute a viable third-party action against a tortfeasor responsible for the worker's injuries. However, Justice O'Hern disagrees
with the opinion of the Court insofar as it overrules Charnecky. The "no double recovery" rule is and
remains inappropriate and unjust when there is no double recovery.
JUSTICE STEIN, concurring , agrees with the Court's disposition of this appeal but not on its
reliance on Midland. As he observed in Midland, if the lien authorized by section 40 is to apply to an
employee's recovery of uninsured motorist benefits from his or her own policy, the Legislature should make
that determination explicitly.
CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, POLLOCK, and COLEMAN join in
JUSTICE GARIBALDI'S opinion. JUSTICES O'HERN and STEIN filed separate concurring opinions.
SUPREME COURT OF NEW JERSEY
A-
3 September Term l995
CHRISTOPHER FRAZIER,
Plaintiff-Appellant,
v.
NEW JERSEY MANUFACTURERS
INSURANCE COMPANY, an
insurance company licensed
in the State of New Jersey,
Defendant-Respondent.
Argued September ll, l995 -- Decided December 4, 1995
On an appeal from the Superior Court,
Appellate Division, whose opinion is reported
at
276 N.J. Super. 84 (l994).
Hilton L. Stein argued the cause for
appellant (Mr. Stein, attorney; Mr. Stein,
David L. Doty, Arthur G. Schultzer, and
Leonard A. Giusti, on the briefs).
Moira E. O'Connell argued the cause 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, ___ N.J. ___ (l995), also decided today, the issue is
whether, pursuant to N.J.S.A. 34:l5-40, 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.
In March l987, 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 l987, 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 $l50,000.
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 l992 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 l992, 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,
2l
5 N.J. Super. 476 (App. Div. l986), certif. denied, l
05 N.J. 542 (l986). In June l992, 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 l993, 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 l993, 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 l993, 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 l994, 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 l994, 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 l994, 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 (l994).
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 (l994). 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.
To overcome the inequity of double recovery, the Legislature amended the Workers' Compensation Act in l9l3 by adding N.J.S.A. 34:l5-4O (section 40), (L. l9l3, c. l74, § 8). Newark Paving Co. v. Klotz, 85 N.J.L. 432 (Sup. Ct.), aff'd 86 N.J.L. 690 (E. & A. l9l4). With minor changes in l93l (L. l93l, c. 279, § 3), l936 (L. l936, c. l62, § l), l95l (L. l95l, c. l69, § l), and l956 (L. l956, c. l4l, § 6), the l9l3 amendment became codified in N.J.S.A. 34:l5-40, 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.
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 (l976). 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:l5-40,
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., l89
N.J. Super. l60, l65 (App. Div. l983),
certif. denied,
94 N.J. 544 (l983) (emphasis
added).]
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, l
02 N.J. 6l2 (l986), we recognized that Section 40
was not to be so rigidly confined and was to apply to recoveries
that were the functional equivalent of a recovery from the actual
third-party tortfeasor.
The employee in Midland sustained work-related injuries in
an auto accident caused by the negligence of an unidentified hit-and-run driver. The employee received workers' compensation
benefits from his employer's workers' compensation carrier as
well as an uninsured motorist's award under his own insurance
policy. The employee claimed that a section 40 lien attached
only to recoveries directly from the third person. Holding that
the workers' compensation carrier's section 40 lien did attach to
the uninsured motorist's benefits, this Court observed:
[I]n effect, an uninsured motorist provision
is a contractual substitute for a tort action
against an uninsured motorist. By
comparison, the acts of the third-party
tortfeasor produce the recovery to which the
compensation lien attaches. N.J.S.A. 34:l5-40. Thus, the tortious act of a third party
is the predicate for both recovery of
uninsured motorist proceeds and the assertion
of a [section 40] workers' compensation lien.
Because recovery under uninsured motorist
insurance is premised on the tortious conduct
of another, the proceeds of that recovery,
like the proceeds of an injured employee's
third-party action, should be subject to a
compensation lien.
In holding that a section 40 lien attaches to proceeds from the
employee's own uninsured motorist's policy, the Court relied on
Montedoro v. City of Asbury Park, l
74 N.J. Super. 305 (App. Div.
l980). In Montedoro, the Appellate Division had held that a
section 40 lien attaches to the proceeds of an uninsured
motorist's policy purchased by the employer. That court properly
recognized that
[a]n employee injured in a worker-related
automobile accident by an insured tortfeasor
cannot, under N.J.S.A. 34:l5-40, retain both
workers' compensation benefits and the fruits
of the common law damage action against a
third-party tortfeasor. We have been unable
to conceive of any reason why the Legislature
would have intended an employee-accident
victim of an uninsured driver to fare better
than an employee-accident victim of an
insured driver, when the legislative effort
has been in the other direction.
The Montedoro court concluded that, with respect to an uninsured-motorist-insurance recovery, "its essence is as compensation for
the uninsured driver's common law liability." Ibid.
In Midland we based our holding on the fact that "in
N.J.S.A. 34:l5-40 the Legislature has expressed its intent that a
compensation lien should attach to the recovery from a third-party tortfeasor." Midland, supra, 102 N.J. at 6l8. This Court
in Midland acknowledged the narrow statutory definition of "third
person." We noted that section 40
does not define "third person" to include an
uninsured motorist or its carrier.
Consequently, we base our decision on the
belief that the primary concern of the
Legislature here, as in other work-related
injuries caused by third-party tortfeasors,
is to integrate the sources of recovery.
[Midland, supra, l02 N.J. at 6l8.]
Frazier, however, relies on Wausau, supra, 2l 5 N.J. Super. 476, on which the Chancery Division relied in granting Frazier summary judgment. Because this Court decided Midland only two days before the Appellate Division decided Wausau, the Appellate Division in this case assumed that the Wausau court did not have
the benefit of this Court's Midland opinion. 276 N.J. Super. at
87 n.l. We note, however, in the case also decided today, Utica
Mutual Ins. Co. v. Maran & Maran, ___ N.J. ___ (l995), the
Appellate Division relied on Wausau in declining to find that a
section 40 lien attached to malpractice proceeds.
In Wausau, the Appellate Division held that a workers'
compensation lien cannot attach to legal malpractice recoveries.
The court held that a workers' compensation carrier's
right of recovery goes no further than to
payments actually made by the "third person"
whose tortious conduct contributed to the
happening of the industrial accident. The
lawyer whose delinquency deprived the
employee of a possible recovery from the
[third person-tortfeasor] does not take on
the identity of the statutory "third person."
The Wausau court based its holding on the plain language of the statute (how it defines "third person") and on the rule that "statutes in derogation of common-law must be strictly construed." Ibid. In other words, section 40's requirement that the employee reimburse the workers' compensation carrier out of the third party recovery derogates from the employee's common-law right of recovery against the tortfeasor. Because section 40 does not plainly extend the reimbursement right to recoveries against third parties other than the tortfeasor, the Wausau panel determined that courts must construe section 40 strictly and not extend the right. In response to the workers' compensation carrier's contention that disallowing the lien on the malpractice
recovery would result in double recovery for the employee, the
court "conclude[d] that the remedy for this must be found with
the legislature and not the judiciary." Ibid. As Frazier notes,
although Wausau was decided almost l0 years ago, the Legislature
has not amended the statute to show that Wausau incorrectly
interpreted section 40.
In Johns-Manville, supra, 2ll N.J. Super. 520, decided two
months before Wausau, the Law Division came to the opposite
conclusion and held that a section 40 lien does attach to a legal
malpractice recovery. The Law Division acknowledged that section
40 involves "recovery against a third person liable for `injury
or death,'" and that "an attorney liable for malpractice cannot
be considered such a person liable for injury or death." Johns-Manville, supra, 2ll N.J. Super. at 525-26. Nonetheless, the
court found that such a literal reading was inappropriate because
section 40 "reflects a very strong legislative determination that
injured workers are not entitled to double recovery. . . .
[S]ensible legislators would wish to bar double recovery in the
present circumstances," in which the employee recovered not
against the third-party tortfeasor but against the attorney who
failed to sue the tortfeasor within the statute of limitations.
Id. at 526.
We agree. In order to recover against an attorney for
missing the time-bar, a client must establish "the recovery which
the client would have obtained if malpractice had not occurred."
Osborne v. O'Reilly,
267 N.J. Super. 329, 33l (Law Div. l993).
"[T]he measure of damages is ordinarily the amount that the
client would have received but for his attorney's negligence.
Such damages are generally shown by introducing evidence
establishing the viability and worth of the claim that was
irredeemably lost. This procedure has been termed a `suit within
a suit.'" Gautam v. De Luca, 2l
5 N.J. Super. 388, 397 (App.
Div.) certif. denied
109 N.J. 39 (1987) (citations omitted)
(noting also that New Jersey has eschewed rigid application of
"suit within suit" approach in favor of greater flexibility).
It was the tortious act of the third party (the general
contractor) that was the predicate for Frazier's malpractice
action against his former attorney. But for the third-party
tortfeasor's tortious conduct, Frazier would not have recovered
against his attorney. The Legislature did not intend such
disparate treatment between a worker who recovers directly from
the third-party tortfeasor and a worker who recovers from his
attorney because of the third-party tortfeasor's same tortious
conduct. No apparent justification exists for allowing an
injured employee who receives a legal malpractice recovery to be
in a better position than an injured employee who recovers
directly from the tortfeasor. Malpractice claims that are
derivative of third-party claims are therefore subject to the
workers' compensation lien under N.J.S.A. 34:l5-40. We therefore
overrule Wausau.
Frazier argues that even if we hold that the section 40 workers' compensation lien attaches to the proceeds of a legal malpractice recovery it only attaches if a worker is fully compensated for his injuries by way of the recovery from workers' compensation and his attorney in the malpractice action.
Frazier asserts that his legal malpractice recovery, together with his workers' compensation benefits, did not fully compensate him for his injuries. Therefore, he argues, the section 40 lien does not attach to the proceeds of his legal malpractice recovery.
There is no full compensation rule in the statute. When a plaintiff recovers from a third party, a lien attaches regardless of whether the cumulative awards are sufficient to fully compensate for all injuries. Indeed, N.J.S.A. 34:l5-40(c) specifically provides for the situation where a third-party recovery is less than the compensated liability.
Section 40 prevents "double recovery," which, as the Appellate Division explained in Montedoro, occurs when the employee keeps any workers' compensation benefits that have been matched by recovery against the liable third person, even if the two combined would leave the employee less than fully compensated. Montedoro, supra, l74 N.J. Super. at 308. That view accords with the plain language of section 40 and is the procedure mandated when the employee recovers directly against
the third person. Pursuant to subsection 40(c), the employee
must reimburse the workers' compensation carrier for any amount
received from the third person, and without regard to whether or
not the employee is fully compensated for the injuries. The
legislative history of section 40 does not indicate that an
employee had to be fully compensated for injury before the
workers' compensation carrier was entitled to reimbursement out
of the recovery against a liable third person. Statement to
Assembly Bill No. l78 (P.L. l93l, Chap. 279). The "double
recovery" that the Legislature intended to prevent under section
40 is payment from two different sources for the same injury, and
not payment in excess of the worker's "actual damages." As the
Appellate Division found in Laureano v. N.J. Transit Bus.
Operations, Inc.,
220 N.J. Super. 295, 299 (App. Div. l987),
certif. denied, ll0 N.J. l76 (l988), the workers' compensation
carrier may attach a lien to "any payment" the employee recovers
from the tortfeasor, whether or not the recovery fully
compensates the employee for the injuries.
The Legislature did not intend for
reimbursement to be in direct ratio to the
amount of common-law damages recovered or
collected from the third party tortfeasor.
On the contrary, the Legislature provided
that if the employee is paid "any sum" by the
third-party tortfeasor or his or her carrier,
the reimbursement lien attaches to that sum
and the employer is to be reimbursed under
N.J.S.A. 34:l5-40(c) cases to the full extent
of the payment less N.J.S.A. 34:l5-40(e)
deductions of up to one-third for attorneys
fees and up to $200 in litigation expenses.
In Midland, supra, l02 N.J. at 6l9, "we [did] not reach the
more difficult question whether the workers' compensation lien
should attach when the uninsured motorist coverage is less than
the full amount of plaintiff's damages." In Charnecky v.
American Reliance Ins. Co.,
249 N.J. Super. 9l (App. Div. l99l),
aff'd o.b. l27 N.J. l88 (l992), the Appellate Division faced the
question that Midland had left unanswered. The plaintiff in
Charnecky was injured in a work-related auto accident with a hit-and-run driver. He received $l60,000 in workers' compensation
from his employer's workers' compensation carrier and also made a
claim under his own uninsured motorist policy. His uninsured
motorist carrier tendered the policy limit of $l00,000. The
workers' compensation carrier asserted a section 40 lien against
the uninsured motorist benefits. Relying on Midland, the Law
Division held that the lien attached. The Appellate Division
reversed, finding that "[w]here an injured party's combined
compensation and [uninsured motorist] recoveries do not indemnity
him in full for his loss, the remedy fashioned in Midland to
forestall a double recovery is inappropriate and unjust."
Charnecky, supra, 249 N.J. Super. at 94. Accord, Stabile v. N.J.
Mfrs. Ins. Co.,
263 N.J. Super. 434 (App. Div. l993) (citing
Charnecky, section 40 lien attaches to underinsured motorist
proceeds, but only if the employee would still be fully
compensated); Schaser v. State Farm Ins. Co., 255 N.J. Super. l69
(Law Div. l992), aff'd,
267 N.J. Super. 5l0 (App. Div. l993),
(citing Charnecky, section 40 lien attaches to uninsured motorist
proceeds only if employee fully compensated).
The Appellate Division in Charnecky offered several
justifications for its holding. Primarily the Charnecky court
relied on 2A Larson, Workmen's Compensation Law § 7l.23(h) l4-37
(l990). Charnecky, supra, 249 N.J. Super. at 95. Larson
explains that the assumption underlying compensation liens in
most states is that the third-party recovery typically covers all
of the plaintiff's loss, so that the employee's retention of the
workers' compensation benefit would result in "double recovery"
in the sense of "exceeding actual loss"; Larson contends that
because of low policy limits, this assumption should not apply in
the uninsured motorist context and no lien should attach. That
predicate assumption, however, does not underlie New Jersey
section 40 liens, because -- at least when the recovery comes
directly from the third person-tortfeasor -- section 40 clearly
affords the workers' compensation carrier a right of
reimbursement even if the result is that the employee is not
fully compensated.
We perceive no reason why the "no double recovery" rule
should be different when the third-party recovery is against a
party other than the tortfeasor. The Montedoro court, addressing
facts in which the employee had received uninsured motorist
benefits rather than a recovery directly against the tortfeasor,
found "[n]othing in the situation . . . [to] suggest[] why the
same relationship between employer and injured employee should
not obtain here." Montedoro, supra, l74 N.J. Super. at 3l0. In
other words, it found no basis for concluding that the "no double
recovery" rule should operate differently when the recovery is
against a party other than the tortfeasor. The workers'
compensation carrier is entitled to reimbursement whether or not
the employee is fully compensated, and the application of that
rule does not depend on whether the third-party recovery was
directly against the tortfeasor.
We hold that any proceeds, whether recovered from the direct
third-person tortfeasor or from a functionally equivalent source
-- uninsured motorist insurance proceeds or legal malpractice
proceeds -- are subject to section 40 liens, and the same "no
double recovery" rule applies for both recoveries. Recoveries
that are not directly from the tortfeasor are subject to a lien
even when the employee is not fully compensated. We therefore
overrule Charnecky.
Frazier also contends that NJM relinquished any claim it might have to any third-party recovery by failing to pursue its own suit against the contractor-tortfeasor under section 40(f). That section permits an employer or carrier to file a third-party claim but does not mandate such a suit. Frazier cites the Appellate Division's notation of the fact that the workers'
compensation carrier in Wausau did not avail itself of its
section 40(f) remedy. Wausau, supra, 2l5 N.J. Super. at 478
(disallowing workers' compensation carrier's lien against legal
malpractice recovery). Aside from Wausau, there is no case law
to support this argument.
NJM properly counters that "[n]othing in the Act makes the
validity of a lien contingent upon filing a claim pursuant to
§40(f)." The opinion below found "no foundation for the premise
that the . . . [WC carrier] is obligated to timely pursue an
action under 34:l5-40(f) or lose its lien." 276 N.J. Super. at
90. That interpretation is consonant with the plain language of
section 40: the workers' compensation carrier's right to
reimbursement from the employee under subsections 40(b) and 40(c)
is not contingent on the workers' compensation carrier's exercise
of the subsection 40(f) remedy.
Finally, Frazier claims that if this Court holds that a section 40 lien does attach to legal malpractice recoveries, that would constitute a change in the law significant enough to warrant applying the holding only prospectively, and not to the parties in the present case. We disagree.
Generally, judicial decisions are applied retroactively to all civil matters that have not reached final judgment. Chase Manhattan Bank v. Josephson, l 35 N.J. 209, 235 (l994); County of Essex v. Waldman, 244 N.J. Super. 647, 662 (App. Div. l990),
certif. denied, l
26 N.J. 332 (l99l). Nonetheless, this Court
"accord[s] . . . rulings prospective effect in cases where the
interests of justice mandate such an approach." N.J. Election
Law Enf. Comm'n v. Citizens to Make Mayor-Council Gov't Work, l
07 N.J. 380, 387 (l987). In deciding retroactivity issues arising
in civil proceedings, a court must consider three questions.
First, as a threshold question, does the decision constitute a
new principle of law? If not, the decision will have full
retroactive effect. State v. Burstein,
85 N.J. 394, 403 (l98l).
Second, what is the purpose of the new rule, and would
retroactive application further that purpose? Third, would
retroactive application be unfair to those who reasonably relied
on the old rule? Montells v. Haynes, l
33 N.J. 282, 295 (l993);
N.J. Election Law Enf. Comm'n, supra, l07 N.J. at 389.
Frazier claims that it was settled law that section 40 liens
do not attach to legal malpractice recoveries and that he relied
on that settled law. He has not, however, suggested any factual
support for the assertion that he relied on the "old rule."
Moreover, although Wausau has remained good law for almost ten
years, the Midland ruling, as well as the conflicting decisions
of Appellate Division on this issue, render any reliance
unjustified and therefore insufficient to overcome the
presumption of retroactive application. See N.J. Election Law
Enf. Comm'n, supra, l07 N.J. at 390-91; Mirza v. Filmore Corp.,
92 N.J. 390, 399 (l983).
In conclusion, we find that a workers' compensation lien pursuant to N.J.S.A. 34:l5-40 attaches to the proceeds of a legal malpractice action brought to recover damages from an attorney who failed to institute an action against a third-party tortfeasor. We therefore overrule Wausau, 2l 5 N.J. Super. 476. We further hold that Section 40 imposes a lien on third-party recoveries that are the functional equivalent of a recovery against the direct tortfeasor, regardless of whether the worker has been fully compensated for his injuries. We therefore overrule Charnecky, supra, l27 N.J. l88.
We also determine that an insurance carrier need not institute a suit against the third-party tortfeasor to secure a section 40 lien. Finally, we apply these holdings retroactively.
We affirm the judgment of the Appellate Division and remand the matter to the trial court for a consideration of the issues raised in the amended complaint.
CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, POLLOCK, and
COLEMAN join in JUSTICE GARIBALDI'S opinion. JUSTICES O'HERN and
STEIN filed separate concurring opinions.
SUPREME COURT OF NEW JERSEY
A-
3 September Term l995
CHRISTOPHER FRAZIER,
Plaintiff-Appellant,
v.
NEW JERSEY MANUFACTURERS
INSURANCE COMPANY,
Defendant-Respondent.
O'HERN, J., concurring.
I concur in the judgment of the Court that an equitable lien
akin to the statutory workers' compensation lien attaches to the
proceeds of a malpractice suit premised on the failure of the
worker's attorney to prosecute a viable third-party action
against a tortfeasor responsible for the worker's injuries. I
find nothing in this record to warrant a suspension of
enforcement of the equitable remedy as in Charnecky v. American
Reliance Ins. Co.,
249 N.J. Super. 9l (App. Div. l99l), aff'd
o.b., l27 N.J. l88 (l992). In Charnecky the Court held that,
before enforcing the equitable lien fashioned in Midland Ins. Co.
v. Colatrella, l
02 N.J. 6l2 (l986) that attached to the proceeds
of an uninsured motorist claim, a court should consider whether
there was, in fact, a double recovery.
I disagree with the opinion of the Court in this case
insofar as it now overrules that aspect of Charnecky. The
judicial remedy fashioned in Midland to forestall a double
recovery is and remains inappropriate and unjust when there is no
double recovery. Ordinarily, in an attorney malpractice case
there is a suit within a suit and (if the malpractice is as plain
as here when the attorney misses a statute of limitations) the
worker recovers all that he or she would have recovered in the
first instance. Hence, it is fair to view such a case as a
double recovery. The worker recovers all sums due for the
injuries incurred -- injuries for which he or she had been
previously compensated. Not so in the circumstance of Charnecky
when the recovery was, by its very nature, limited. It is unfair
to deprive parties such as Charnecky, without so much as a
hearing, of the benefits of the self-insurance that they had
prudently obtained. Law should not penalize the prudent but,
rather, prevent an imprudent grab at a double recovery.
SUPREME COURT OF NEW JERSEY
A-
3 September Term l995
CHRISTOPHER FRAZIER,
Plaintiff-Appellant,
v.
NEW JERSEY MANUFACTURERS
INSURANCE COMPANY,
Defendant-Respondent.
STEIN, J., concurring.
I agree with the Court's disposition of this appeal but not
with its reliance on Midland Insurance Co. v. Colatrella,
102 N.J. 612 (1986). The Court correctly concludes that for purposes
of the workers' compensation lien authorized by N.J.S.A. 34:15-40, an employee's malpractice recovery from the lawyer that
negligently failed to prosecute the employee's third-party action
should be subjected to the lien to the same extent as the
employee's recovery from the third party would have been. As the
Court observes, "[n]o apparent justification exists for allowing
an injured employee who receives a legal malpractice recovery to
be in a better position than an injured employee who recovers
directly from the tortfeasor." Ante at ___ (slip op. at 12).
The same irrefutable logic cannot apply to enforcement of
the lien against the employee's recovery from his or her own
automobile policy, the source of that recovery being an insurance
policy paid for by the employee, and the amount of uninsured
motorist benefits--and hence the amount of the lien--depending
entirely on how much uninsured motorist coverage the employee
elected to buy. Recognition of the compensation lien in that
circumstance may prevent a so-called "double recovery," but in
the process it permits the compensation carrier to pick the
pocket of the employee who paid for the uninsured motorist
coverage. As I observed in Midland, supra, 102 N.J. at 622
(Stein, J., dissenting), if the lien authorized by N.J.S.A.
34:15-40 is to apply to an employee's recovery of uninsured
motorist benefits from his or her own policy, the Legislature
should make that determination explicitly.
NO. A-3 SEPTEMBER TERM 1995
ON APPEAL FROM Appellate Division, Superior Court
ON CERTIFICATION TO
CHRISTOPHER FRAZIER,
Plaintiff-Appellant,
v.
NEW JERSEY MANUFACTURERS
INSURANCE COMPANY, an
insurance company licensed
in the State of New Jersey,
Defendant-Respondent.
DECIDED December 4, 1995
Chief Justice Wilentz PRESIDING
OPINION BY Justice Garibaldi
CONCURRING OPINIONS BY Justice O'Hern and Justice Stein
DISSENTING OPINION BY