FRAZIER V. NEW JERSEY MANUFACTURERS INSURANCE COMPANY
Case Date: 12/04/1995
Court: Superior Court of New Jersey
Docket No: SYLLABUS
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(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
CHRISTOPHER FRAZIER,
Plaintiff-Appellant,
v.
NEW JERSEY MANUFACTURERS
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
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.
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.
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.
[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.
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
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
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.
[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.
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.
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).
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.
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).
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. 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. 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.
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.
CHRISTOPHER FRAZIER,
Plaintiff-Appellant,
v.
NEW JERSEY MANUFACTURERS
Defendant-Respondent.
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
CHRISTOPHER FRAZIER,
Plaintiff-Appellant,
v.
NEW JERSEY MANUFACTURERS
Defendant-Respondent.
STEIN, J., concurring.
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
CHRISTOPHER FRAZIER,
Plaintiff-Appellant,
v.
NEW JERSEY MANUFACTURERS
Defendant-Respondent.
DECIDED December 4, 1995
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