Opinion
W.C. No. 4-540-553.
September 15, 2004.
FINAL ORDER
The claimant seeks review of an order of Administrative Law Judge Mattoon (ALJ Mattoon) which granted the respondent's (City) motion to strike an application for hearing on the issue of penalties. We affirm.
On April 23, 2002, the claimant was bitten by a dog while performing duties arising out of and in the course of her employment with the City. The claimant elected to take workers' compensation benefits, and also filed a lawsuit against the party allegedly responsible for the dog. The remainder of the information contained in this statement of facts is gleaned from pleadings filed by the parties.
In October 2003, while the third-party lawsuit was pending, the claimant's compensation attorney and counsel for the City reached an oral agreement to settle the workers' compensation claim. The proposed settlement required the City to surrender its subrogation interest in the third-party lawsuit, in exchange for the claimant's agreement to surrender all rights to further workers' compensation benefits. The City's attorney prepared the settlement documents, and inserted a clause under which the claimant agreed to surrender any rights based on "bad faith" adjustment of the claim. Claimant's counsel objected to this clause, stating that he did not represent the claimant on any potential bad faith claim, and that the clause is meaningless since the City is immune from such suits.
The claimant attempted to enforce the oral settlement agreement. However, in an order dated December 22, 2003, ALJ Stuber granted the City's motion to strike the hearing on this issue.
In February 2004, the claimant applied for a hearing on the issue of penalties under § 8-43-304(1), C.R.S. 2003. In a "specific statement of penalty claim," the claimant alleged that the City's conduct in "refusing to have consummated the agreement reached between the parties" in the workers' compensation case wrongfully interfered with the "settlement negotiations in the third-party cause of action." According to the claimant, the City's action violated § 8-41-203(2), C.R.S. 2003, because it demonstrated an "unreasonable withholding of consent to a third-party settlement."
The City moved to dismiss the application for hearing. The City argued, in pertinent part, that the duty to act reasonably in withholding consent arises only if the proposed settlement is for an amount less than the carrier's subrogation interest. According to the City, the claimant's counsel in the third-party suit (Rosenbaum) settled for an amount exceeding the City's subrogation interest. However, the City failed to attach a letter from Rosenbaum dated January 7, 2004, which purportedly supports this assertion.
The claimant filed a reply to the City's motion. The reply asserted the City's refusal to execute the workers' compensation settlement caused a "significant and substantial delay in the ultimate resolution of Claimant's third-party claim." In support, the claimant attached Rosenbaum's affidavit stating that in his opinion, the proposed workers' compensation settlement was reasonable. Rosenbaum further stated that the City's unreasonable refusal to execute settlement forced him to keep settlement proceeds in his trust account "to satisfy the City's potential subrogated lien."
In an order dated May 17, 2004, ALJ Mattoon granted the City's motion to strike the hearing. The order contains no specific findings of fact or conclusions of law.
On review, the claimant contends ALJ Mattoon erred in dismissing the application for hearing to adjudicate the claim for penalties based on the alleged violation of § 8-41-203(2). The claimant reasons that in Eckhardt v. Village Inn, 826 P.2d 855 (Colo. 1992), the Supreme Court interpreted § 8-41-203(2) as imposing a duty on the employer or workers' compensation carrier to act reasonably when determining whether to refuse written approval of a proposed third-party settlement. The claimant argues that the City's refusal to execute the workers' compensation settlement amounted to an unreasonable refusal to approve the third-party settlement and penalties should be imposed under § 8-43-304(1). The claimant also asserts that the ALJ erred in failing to conduct a hearing to resolve disputed issues of fact. We find no error.
Section 8-43-304(1) provides for the imposition of penalties of up to five hundred dollars per day if an employer:
"violates any provision of articles 40 to 47 of this title, or does any act prohibited thereby, or fails or refuses to perform any duty lawfully enjoined within the time prescribed by the director or panel, for which no penalty has specifically been provided, or fails, neglects, or refuses to obey any lawful order made by the director or panel. . . ." (Emphasis added).
In Holliday v. Bestop, Inc., 23 P.3d 700 (Colo. 2001), the court held that the italicized language (limiting phrase) does not apply to violations of orders, but does apply to failure or refusal to perform a duty lawfully enjoined. Hence, where the employer's conduct is subject to a specific penalty under the Act, and also involves violation of an order, the conduct may be penalized under § 8-43-304(1). See Kennedy v. Industrial Claim Appeals Office, ___ P.3d ___ (Colo.App. No. 03CA1891, September 9, 2004). However, the Holliday court declined to address the question of whether the limiting phrase applies to violations of articles 40 to 47, or the performance of any act prohibited thereby. 23 P.3d at 707, n. 6.
In Pena v. Family Dollar Stores, Inc., W.C. No. 4-412-966 (February 11, 2003), we held that the limiting phrase does apply to cases where the alleged penalty is based on a violation of articles 40 to 47, or the performance of any act prohibited thereby. Thus, if the penalty is based on an alleged violation of the act, no violation of an order is involved, and the Act imposes a specific penalty for the violation, penalties under § 8-43-304(1) are not available. We adhere to the reasoning in Pena and adopt it here as if fully set forth.
With this principle in mind, we turn to its application to the facts of this case. The claimant is alleging a violation of the employer's duty to act reasonably when deciding whether to approve a written settlement. This duty arises out of § 8-41-203(2) as it existed prior to the 1993 amendments. 2003 Colo. Sess Laws, ch. 406, pp. 2615-2616 (amendments apply to injuries occurring on or after July 1, 2003).
Prior to the 1993 amendments, the statute provided a "compromise of any [third-party] cause of action by the employee" shall be made only with the written approval of the "person, association, corporation, or insurance carrier liable to pay the same." In Peterkin v. Curtis, Inc., 729 P.2d 977 (Colo. 1986), the court held that this language creates an implied forfeiture of the right to future workers' compensation benefits if the claimant fails to procure the insurer's written approval of a proposed third-party settlement. The forfeiture rule was adopted to protect insurers against improvident settlements of third-party suits by claimants. Thus, the forfeiture rule is limited to cases in which the settlement is for an amount less than is necessary to discharge the existing compensation subrogation interest. Id. at 982, n. 3; Andrews v. Industrial Claim Appeals Office, 952 P.2d 853, 854 (Colo.App. 1997).
Subsequently, the court announced Eckhardt v. Village Inn, supra. In Eckhardt, the insurer sought an order suspending the claimant's workers' compensation medical benefits based on the claimant's alleged settlement of a third-party lawsuit for an amount less than the compensation insurer's subrogated interest. The court held that in cases where the claimant settles a third-party suit without obtaining the requisite written approval, the rule of forfeiture may be avoided if the claimant demonstrates that he gave adequate notice of the third-party suit and proposed settlement to the insurer, the proposed settlement was reasonable, and the carrier unreasonably failed to intervene in the underlying suit. The court explained that the rule of "reasonable refusal" exists as a counterbalance to the rule of forfeiture so that the carrier "cannot simply seize that opportunity to relieve itself of the obligation to pay future compensation by withholding consent." 826 P.2d at 861. Indeed, the court noted that if there were no duty of reasonable refusal, some claimants might be discouraged from pursuing third-party tortfeasors out of fear the case would go poorly and all compensation benefits would be forfeited.
Thus, the rule of reasonable refusal is not a specific right clearly delineated by the statute, but is instead an implied right derived from the rule of forfeiture announced in Peterkin. Moreover, the holding in Eckhardt is that if the employer or carrier violates the rule of reasonable refusal, the employer loses the right of forfeiture which would otherwise attach to the claimant's failure to procure written approval of a third-party settlement.
It follows that, insofar as violation of the rule of reasonable refusal may be considered a violation of § 8-41-203(2), and the evidence would establish the City unreasonably refused to approve the third-party settlement by failing to execute the workers' compensation settlement, the Act also imposes a specific penalty for that conduct. Violation of the rule of reasonable refusal results in the employer's loss of the right to claim forfeiture of all future compensation benefits. Because the Act imposes a specific penalty for violation of the rule of reasonable refusal, penalties under § 8-43-304(1) are not available. Pena v. Family Dollar Stores, Inc., supra.
ALJ Mattoon was therefore correct as a matter of law in dismissing the application for hearing and, in effect, dismissing the claim for penalties based on the alleged violation of § 8-41-203(2). Because we assume the correctness of the claimant's factual allegations, and conclude the issue is one of law, a hearing is not necessary. See Provo v. Industrial Claim Appeals Office, 66 P.3d 138 (Colo.App. 2002) (hearing not necessary if issue is one of law), aff'd. in part, rev'd. in part on other issues, Dworkin, Chambers Williams, P.C. v. Provo, 81 P.3d 1060 (Colo. 2004).
IT IS THEREFORE ORDERED that the order of ALJ Mattoon dated May 17, 2004, is affirmed.
INDUSTRIAL CLAIM APPEALS PANEL
_____________________________ David Cain
_____________________________ Dona Halsey
Corinne Gibson, Colorado Springs, CO, Lori Stillmunks, City of Colorado Springs, Colorado Springs, CO, Gina V. Reynolds, Colorado Springs, CO, and James A. May, Esq. and Steven U. Mullens, Esq., Colorado Springs, CO (For Claimant)
Joseph C. Irwin, Esq., Colorado Springs, CO, (For Respondent)