SUPREME COURT OF ARIZONA
Petitioner Employee, )
THE INDUSTRIAL COMMISSION OF
Respondent Employer, )
TRAVELERS INSURANCE COMPANY,
Respondent Insurer. )
Arizona Supreme Court
Court of Appeals
No. 2 CA-IC 98-0042
Insurer No. 48846-11076
O P I N I O N
Industrial Commission of Arizona
Gary M. Israel, Administrative Law Judge
AWARD VACATED; REMANDED
Court of Appeals, Division Two
No. 2 CA-IC 98-0042
Tretschok & McNamara, P.C.
Patrick R. McNamara
Attorney for Sherry Hendrickson
The Industrial Commission of Arizona
Anita R. Valainis, Chief Counsel
Long, Lundmark & Poppe P.A.
R. Todd Lundmark
Attorney for Continental Airlines
and Travelers Insurance Company
M c G R E G O R, Vice Chief Justice
We granted review to consider again the effect of a
workers’ compensation claimant’s failure to obtain written approval
for settlement of an action against a third party.
We hold that,
under the facts of this case, the forfeiture rule of Hornback v.
Industrial Commission, 106 Ariz. 216, 474 P.2d 807 (1970), does not
Industrial Commission, 196 Ariz. 424, 999 P.2d 180 (2000).
Continental Airlines, Sherry Hendrickson sustained an injury to both
of her temporomandibular joints.
She filed a workers’ compensation
Airlines’ carrier, the predecessor of Travelers Insurance. In 1984,
John Wenaas, D.D.S., treated Hendrickson by implanting Proplast
joints that Vitek, Inc. had manufactured from materials made by E.I.
DuPont de Nemours & Co.
Within four years, the implants failed.
In 1988, Hendrickson filed a civil action against Dr.
consolidated with approximately one hundred other Arizona lawsuits
litigation, Vitek sought bankruptcy relief.
Hendrickson received a
dismissed Vitek from the Proplast action.
In 1992, the court
dismissed Dr. Wenaas from the action, pursuant to a stipulation
between Hendrickson and Dr. Wenaas.
Hendrickson did not seek
Travelers’ approval to settle the claim against Dr. Wenaas, a
failure that Travelers argues violated Arizona Revised Statutes
(A.R.S.) section 23-1023.C.1
Proplast lawsuits in other states, received summary judgment in its
favor in 1995. In exchange for a promise not to pursue a $78,000
costs judgment in its favor, DuPont offered Hendrickson and the
other plaintiffs a settlement of $750 each.
permanent impairment or the need for supportive care.
Section 23-1023.C provides, in pertinent part, that
“[c]ompromise of any claim by the employee or his dependents at an
amount less than the compensation and medical, surgical and
hospital benefits provided for shall be made only with written
approval of the compensation fund, or of the person liable to pay
opposed the closure, and a hearing before the Industrial Commission
(the Commission) followed.
The administrative law judge, relying
on Hornback, held that Hendrickson’s failure to comply with section
23-1023.C resulted in her forfeiture of any additional workers’
The judge affirmed this award on review,
and Hendrickson filed a statutory special action in the Court of
The Court of Appeals held that because Hendrickson’s
compromise of her claim within the purview of section 23-1023.C,
Hornback required the forfeiture of future benefits.
v. Indus. Comm’n, No. CA-IC 98-0042, slip op. at 5 ¶ 9 (Sept. 28,
We granted review to determine the effect of Hendrickson’s
settlement with DuPont and her agreement to dismiss Dr. Wenaas.
exercise jurisdiction pursuant to Arizona Constitution Article VI,
Section 5.3 and Rule 23 of the Arizona Rules of Civil Appellate
An employee injured in the course of his employment by a
third party may pursue a civil remedy against that third party,
even if the employee also seeks benefits through the workers’
A.R.S. § 23-1023.A (1995).
If the employee
recovers against a third party, the carrier or other party liable
recovery equal to the compensation award, thereby preventing double
recovery for the claimant.
A.R.S. § 23-1023.C.
If the employee
compromises his claim against the third party, he can substantially
affect the carrier’s rights.
By compromising his claim, he “not
only releases the third party from further liability but he also
cuts off the insurance carrier’s subrogation rights against the
Hornback, 106 Ariz. at 219, 474 P.2d at 810.
protect the carrier from the effect of an employee’s decision to
compromise a third-party claim for less than its value, the statute
requires the claimant to obtain written approval from the person
liable to pay workers’ compensation benefits prior to compromising
a third-party claim “at an amount less than the compensation . . .
requires that a workers’ compensation claimant receive written
approval prior to settling a claim against a third party, the
statute does not specify the penalty that attaches to a failure to
comply with the approval requirement.
We have previously been asked to fashion an enforcement
mechanism to encourage compliance with section 23-1023.C.
Hornback, we concluded that an employee who failed to obtain
approval was not entitled to reopen his compensation claim, which
106 Ariz. at 218, 474 P.2d at 809.
After our decision in Hornback, other jurisdictions with
statutes similar to section 23-1023.C adopted varying approaches to
resolve the questions related to a claimant’s failure to obtain
approval of a third-party settlement.
Some states held, as we did
benefits if he settles a tort action without the knowledge or
approval of his employer or its insurer.
See, e.g., Peterkin v.
Curtis, Inc., 729 P.2d 977, 981 (Colo. 1986)(relying on Hornback);
Vincent v. Geneva Pizza Inc., 602 N.Y.S.2d 220, 221 (App. Div.
1993); Safety-Kleen Corp. v. Van Hoy, 300 S.E.2d 750, 753 (Va.
See, e.g., Cook v. A.H. Davis & Son, Inc., 567 A.2d 29,
31 (Del. Super. Ct. 1989); Ankney v. Franch, 652 A.2d 1138, 1150-51
(Md. Ct. Spec. App. 1995), rev’d on other grounds 670 A.2d 951 (Md.
Ct. App. 1996)(holding that when an employee settles a third-party
action after filing a workers’ compensation claim and receiving
compensation benefits, forfeiture is not the proper remedy unless
the employer can show that it suffered material prejudice as a
result of the settlement).
Still other states have held that
unauthorized settlement agreements result in invalidation of the
See Nelson v. Dep’t of Natural Res., 305 N.W.2d 317, 319
(Minn. 1981); Fogleman v. D & J Equip. Rental, Inc., 431 S.E.2d
849, 852 (N.C. Ct. App. 1993).
During the years since we decided Hornback, its holding
has determined the outcome of many actions before the Industrial
Commission and Court of Appeals, although the factual situations in
those actions may have been less extreme than that in Hornback.
recently considered, therefore, whether the Hornback result applies
to all cases in which a claimant fails to obtain the authorization
required by statute.
In Bohn, we held that the claimant, who had
been denied workers’ compensation benefits and who later settled
with a third party without approval, did not forfeit all future
196 Ariz. at 426 ¶¶ 13-14, 999 P.2d at 182 ¶¶ 13-14.
The facts underlying Bohn’s claim varied considerably
from those of Hornback’s claim.
Although we did not limit the
Hornback holding to situations in which the claimant acted in a
clearly unreasonable manner, we intimated that forfeiture was
warranted because Hornback purposefully waited to reopen his claim
until after he had settled the third-party action.
106 Ariz. at 221, 474 P.2d at 812.
Hornback had received benefits
and the Commission had closed his case without a finding of
Id. at 218, 474 P.2d at 809.
experienced additional injuries allegedly related to his claim.
Rather than immediately seek to reopen his claim, he pursued a
third-party action and obtained a sizeable settlement.
then did he seek to reopen his claim, basing his request on the
same injuries for which he had recovered in the third-party action.
Id. at 218-19, 474 P.2d at 809-10.
He thus cut off the carrier’s
subrogation rights before seeking additional workers’ compensation
Under those circumstances, we held that the Commission
justifiably refused to reopen his claim.
Id. at 221, 474 P.2d at
possible remedy for a violation of section 23-1023.C.
426 ¶ 9, 999 P.2d at 182 ¶ 9.
196 Ariz. at
Bohn, whose claim for benefits had
been denied, entered into an unapproved third-party settlement
Id. at 424-25 ¶ 2, 999 P.2d at 180-81 ¶ 2.
eventually received workers’ compensation benefits, at the time he
settled the third-party action he was unable to return to his
former job and desperate to obtain financial assistance.
426 ¶ 11, 999 P.2d at 182 ¶ 11.
forfeiture of his benefits, we applied an equitable solution that
allowed the injured employee to receive compensation while ensuring
that the carrier was not prejudiced by the unauthorized settlement.
Id. at 426-27 ¶¶ 14-16, 999 P.2d at 182-83 ¶¶ 14-16.
We held that
a claimant who compromises a third-party claim without prior
authorization bears the burden of showing that the settlement was
If the claimant cannot prove he settled for a
reasonable amount, the carrier’s credit increases to the amount of
a reasonable settlement.
Id. at 427 ¶ 16, 999 P.2d at 183 ¶ 16.
That approach does not impair the carrier’s subrogation rights
because the carrier receives the full benefit of a reasonable
At the same time, the claimant retains access
to those workers’ compensation benefits to which he is entitled,
but does not receive a double recovery.
We turn now to the proper penalty for Hendrickson’s
failure to obtain Travelers’ approval prior to accepting DuPont’s
settlement offer and stipulating to Dr. Wenaas’s dismissal from the
We conclude that forfeiture is inappropriate
and apply the approach we approved in Bohn.
The facts underlying Hendrickson’s compensation claim and
Hendrickson, unlike Bohn, had not been denied benefits when she
compromised her third-party claim.
But, unlike Hornback, she did
not first resolve her third-party claim and then attempt to reopen
her compensation claim.
Rather, when she settled with DuPont, she
was receiving benefits for the same injuries that were the subject
of the third-party action.
In addition, she recovered a minimal
amount from her third-party action, particularly when compared to
the substantial amount of compensation benefits to which she may be
Under these circumstances, we conclude that requiring
Hendrickson to forfeit her compensation benefits would be contrary
Moreover, Travelers does not face any loss of the value of its
If Hendrickson accepted an unreasonably low
amount to settle her third-party action, Travelers’ credit will be
increased to the reasonable settlement amount.
judge’s conclusion that section 23-1023.C required her to obtain
approval before agreeing to dismiss her claim against Dr. Wenaas,
arguing that dismissal of a claim is not a “compromise” under the
terms of the statute.
We find no reason to exempt the agreement
with Dr. Wenaas from the statutory approval requirement.
Dr. Wenaas was dismissed from the Proplast action not
because Hendrickson had failed to state a claim against him,2 but
rather pursuant to a stipulation with Hendrickson. We have defined
a compromise as an “agreement between two or more persons who, for
the purpose of preventing or putting an end to a lawsuit, adjust
their differences by mutual consent in the manner which they agree
Brecht v. Hammons, 35 Ariz. 383, 389, 278 P. 381, 383 (1929),
disapproved on other grounds by Ariz. Pub. Serv. Co. v. S. Union
Gas Co., 76 Ariz. 373, 382, 265 P.2d. 435 (1954).
stipulation to dismiss an action embodies an agreement for purposes
See Arizona Rules of Civil Procedure 12(b)(6).
of putting an end to a legal action.
According to testimony during
the administrative proceedings, Hendrickson agreed to dismiss the
action against Wenaas in exchange for his agreement to provide
favorable testimony in the action against DuPont and Vitek.
agreement thus involved a detriment to Hendickson and a benefit to
Moreover, Hendickson’s stipulation to dismiss Dr.
Wenaas ended Travelers’ subrogation rights against him.
stipulation to dismiss Dr. Wenaas thus worked a “compromise” of a
The administrative law judge did not consider whether
Hendrickson reached a reasonable compromise of her claims against
DuPont and Dr. Wenaas.
On rehearing, the judge should consider
whether, in light of the circumstances involved, an agreement to
accept $750 from DuPont and to dismiss Dr. Wenaas without payment
of any amount constituted reasonable settlements of the third-party
If the amounts are less than reasonable, Travelers will
receive additional credit.
Our holding today emphatically does not alter the duty of
a workers’ compensation claimant or his attorney to comply with
section 23-1023.C and seek written approval prior to compromising
a third-party claim.
The fact that a claimant may suffer no
financial impact from disregarding the direction of the statute
does not lessen his lawyer’s obligation to follow the law as set
out in section 23-1023.C.
In addition, although many, perhaps
most, factual circumstances will require that the effect of an
unauthorized compromise of a third-party claim will be determined
by the Bohn approach, egregious situations like that considered in
Hornback may result in the forfeiture of workers’ compensation
For the foregoing reasons, we vacate the decisions of the
Industrial Commision and of the Court of Appeals.
We remand to the
Industrial Commission for further proceedings consistent with this
Ruth V. McGregor, Vice Chief Justice
Charles E. Jones, Chief Justice
Stanley G. Feldman, Justice
Thomas A. Zlaket, Justice (Retired)