Appellate Court Rejects Argument that Workers’ Compensation Lien Should be Extinguished Based on Improper Conduct of Insurer

June 2018

The Illinois Appellate Court, Fifth District, recently addressed whether a workers’ compensation lien, under 820 ILCS 305/5(b) of the Illinois Workers’ Compensation Act, could be subject to reduction or elimination on equitable grounds due to the conduct of the insurer. In Estate of Rexroad v. Mid-West Truckers Risk Management Association, 2018 IL App(5th) 170342, the Appellate Court rejected an “equitable extinguishment” argument, reaffirming the absolute right of employers and insurers to recover a Section 5(b) lien from the proceeds of any settlement recovered from a third-party tortfeasor.

Mid-West Truckers Risk Management Association (MTRMA) intervened in a probate proceeding which was opened to administer the proceeds of a wrongful death settlement. MTRMA paid workers’ compensation benefits following the death of an insured truck driver who died in the course of his employment. After a portion of the underlying wrongful death case was settled, MTRMA received partial reimbursement of its workers’ compensation lien. The decedent’s estate then filed a motion seeking to extinguish the remaining amount of MTRMA’s workers’ compensation lien due to MTRMA’s alleged misconduct with respect to its handling of the workers’ compensation claim and investigation of the underlying accident.

The decedent’s estate alleged, inter alia, MTRMA failed to pay the decedent’s widow the full amount of benefits owed, obstructed the investigation of the underlying wrongful death action by refusing to produce the truck the decedent was driving for inspection, and improperly communicated directly with the decedent’s family despite knowing the family was represented by counsel. As a result, the decedent’s estate argued the lien should be extinguished on equitable grounds with no right to recover any portion of the remaining $1.38 million settlement amount. In response, MTRMA argued none of the issues raised by the decedent’s estate – even if true – should be considered in determining MTRMA’s right to recover the Section 5(b) lien, which statute provides for recovery of 75% of the lien, less a pro rata share of costs and expenses.

The Circuit Court granted the motion filed by the decedent’s estate, extinguishing the remainder of the workers’ compensation lien. The Appellate Court reversed; noting the right to lien reimbursement is “absolute” and is a crucial foundation of workers’ compensation law in Illinois. The Appellate Court concluded there was no basis under Illinois law to hold that the alleged conduct of MTRMA, even assuming such conduct occurred, outweighed the absolute right to lien recovery under Section 5(b).

The “equitable extinguishment” argument rejected in Estate of Rexroad makes clear that, even if an insurer or employer is accused of some improper conduct in connection with a workers’ compensation claim or a related third-party civil lawsuit, such conduct has no bearing on the absolute right to recover a Section 5(b) lien under Illinois law.