How are litigation expenses allocated in workers' compensation third-party recoveries? Auto Owners Insurance v. Labor Commission Explained

In Auto Owners Insurance v. Labor Commission, the Utah Supreme Court clarified how litigation expenses must be allocated when injured workers obtain third-party settlements that will offset workers’ compensation benefits.

Background and Facts

Eduardo Narciso suffered permanent disability in a 2013 workplace accident. He settled a third-party tort action for $5 million, from which $2.15 million was paid for attorney fees and expenses. His employer and insurance carrier had already paid over $1.5 million in benefits and sought to offset the recovery against future compensation obligations estimated at over $7 million. The dispute centered on how to calculate the employer’s proportionate share of attorney fees under Utah Code § 34A-2-106(5).

Key Legal Issues

The case presented two critical questions: First, whether an employer’s proportionate share of litigation expenses should include only past paid benefits or also anticipated future benefits when calculating the parties’ interests in the recovery. Second, whether the employer must reimburse the employee for unpaid attorney fees before claiming offset rights against the settlement proceeds.

Court’s Analysis and Holding

The Supreme Court affirmed the Labor Commission’s decision, holding that when an employer seeks both reimbursement for past benefits and offset against future benefits, the statute’s reference to parties’ interests “as their interests may appear” requires consideration of both past and future compensation obligations. The court explained that the phrase “may appear” contemplates uncertainty rather than requiring absolute certainty. The court relied on its precedent in Esquivel v. Labor Commission, which established that third-party recoveries must account for both past payments and future liability when determining proportionate shares of litigation expenses.

Practice Implications

This decision provides important guidance for workers’ compensation practitioners handling third-party recoveries. When employers seek offset rights against settlement proceeds, they must account for their full interest in the recovery—including anticipated future benefits—when calculating their share of litigation costs. The ruling also confirms that employers cannot claim offset rights until they have satisfied their proportionate responsibility for the expenses incurred to obtain the recovery, even when those expenses were initially paid by the injured worker.