California: Does an Employer Have a Right to Remain as a Party Defendant?

When a worker sustains an industrial injury, the normal procedure is for that employee to file a claim. Next, the employer conducts proper administrative tasks and promptly alerts their insurer. The insurance company then takes the necessary steps to insert themselves into the litigation process in place of the employer and proceeds to defend the claim. Pursuant to Labor Code § 3755, this “action” by the insurer releases the employer from any further liability for that worker’s compensation claim.

I. Definition of Action that Triggers Release of Liability

What is the necessary “action” that triggers this release of liability? Ramifications of this “action” are nuanced in cases when the claim is denied by the insurer. If the insurance company is allowed to conduct discovery in a denied case, but the employer is prohibited from doing so, might that adversely affect the employer’s ability to control how the case is handled?

The WCAB explored this question in depth in the recent Noteworthy Panel Decision (NPD) of Saavedra v. Michael Sullivan Associates, LLP, 2023 Cal. Wrk. Comp. P.D. LEXIS 12.

In this case, the applicant, Virginia Saavedra, began working for the law firm of Michael Sullivan & Associates in 2008. Eventually, Ms. Saavedra filed a workers’ compensation claim for an alleged cumulative trauma ending 10/23/2019 to her low back, right hand and psyche.

The employer’s insurer, Employers Assurance Group (EAG), was properly joined as a party defendant and they hired the Law Offices of Nguyen & Gribble to defend the claim. EAG denied the claim on 1/28/2020.

II. Issue for Trial – When Is an Employer Allowed to Schedule Applicant’s Deposition When the Insured Is Handling the Case?

After concerns were raised as to how the litigation in this matter was progressing, the employer stepped into the mix and attempted to depose applicant on its own. Applicant strenuously objected to this action by employer, and the issue was set for trial. Applicant argued that her employer had no legal authority to take her deposition since the employer’s insurance company was handling the claim and conducting discovery. Accordingly, applicant requested that the court dismiss her employer as a party defendant per Labor Code § 3755.

The employer argued that Labor Code § 3755 did not apply, because the insurance company, EAG, never filed a “notice of assumption of liability” with the applicant, the employer or with the WCAB.

A strict constructionist might agree with the employer. Based on the highlighted  words of the statute below, an argument could be made that Labor Code § 3755 requires an insurance company to serve a “notice of assumption of liability” on the insured employer in order for Labor Code § 3755 to apply.

“If the employer is insured against liability for compensation, and if after the suffering of any injury the insurer causes to be served  upon any compensation claimant a notice that it has assumed and agreed to pay  any compensation to the claimant for which the employer is liable, such employer shall be relieved from liability for compensation to such claimant upon the filing of a copy of such notice with the appeals board. The insurer shall, without further notice, be substituted in place of the employer in any proceeding theretofore or thereafter instituted by such claimant to recover such compensation, and the employer shall  be dismissed therefrom.” (Emphasis added.)

In plain English, the words of Labor Code § 3755 might translate as follows:

If an employee files a workers’ compensation claim with their employer;

AND,

If the employer’s workers’ compensation insurance coverage is applicable to the claim filed,

Then as soon as the employer’s insurance company serves notice on the employer that the insurer accepts coverage, the insurance company shall be substituted in place of the employer;

AND,

The employer will then be relieved of liability for that claim, as soon as the employer files “a copy of such notice with the appeals board;”

AND,

The employer shall then be dismissed as a party defendant to the case.

III. Does Labor Code § 3755 Mandate Dismissal of Employer as Party Defendant?

The glitch in this case is that EAG never served a formal “notice of assumption of liability” on the employer, applicant or the WCAB. The employer argued that proper notice was a necessary condition precedent for the employer to be forcibly dismissed from the case by the court. In addition, employer argued, EAG had refused to assume liability for the claim by denying it. Therefore, Labor Code § 3755 did not apply, and the employer should be allowed to remain as a party defendant and to conduct its own discovery.

The WCJ disagreed with employer’s position and was affirmed by the WCAB. Essentially the WCAB explained that the parties must look to substance over form in situations like this. The controlling issue is NOT whether the claim is formally accepted or denied. The real question is whether EAG is liable for any compensation that may eventually be awarded to applicant. The facts indicate the answer to that question would be a resounding “yes.”

The WCAB reviewed the record, and noted the following three facts:

• EAG was permissibly joined in the case as a party defendant;
• EAG retained counsel to conduct their compensation defense; and
• EAG stipulated at the time of injury that it served as the appropriate workers’ compensation carrier for the employer.

The WCAB held that the facts stated above “constitutes sufficient evidence that Employers Assurance Group assumed liability under sections 3757 and 3759, such that we may dismiss Michael Sullivan & Associates from the proceeding, and applicant may continue her compensation case solely against Employers Assurance Group.”

In support of their finding, the WCAB referred to a quote from the case of SCIF v. Super. Ct. of Siskiyou County (Breceda) (1965) 237 Cal.App.2d 416, 421-422 [30 Cal.Comp.Cases 379], citing Labor Code §§ 3755, 3757, 3758 as follows:

“[W]henever the insurer has acknowledged the existence of its policy and has assumed liability it is substituted for the employer in all subsequent proceedings. The employer is thereafter relieved from liability.” Lab. Code, § 3759; Ins. Code, §§ 11651, 11662 [each compensation policy shall contain a clause under which the insurer assumes all rights and liabilities of the employer.]”

The issue in the Breceda case dealt primarily with the exclusive jurisdiction of the workers’ compensation system, rather than whether an employer was entitled to remain as a party defendant in a denied workers’ compensation case. However, the WCAB deemed the principle stated above applicable to the set of facts in the instant case.

IV. Employer May Participate in Discovery, But CANNOT Initiate It

In somewhat of a side notation, the WCAB clarified that “…by dismissing Michael Sullivan & Associates from this case, it is not being precluded from attending and participating in discovery, including any depositions, conducted by Employers Assurance Group and its legal counsel, the Law Offices of Nguyen & Gribble. (Report, p. 4.) It is simply that Michael Sullivan & Associates is not entitled to conduct discovery that is separate and apart from that discovery. (Lab. Code, §§ 3757, 3759.)”

V. Exceptions to the Labor Code § 3755 Mandate to Dismiss the Employer

These facts and finding by the WCAB beg the question as to whether situations may arise when the employer might well want to remain as a party defendant in a particular workers’ compensation case to “defend their own interests.” The WCAB acknowledged possible exceptions may arise when a “conflict of interest” exists between an employer and its insurer. In the instant case, if the employer had met their burden of proving that a “conflict of interest” existed between themselves and their insurer, that might have been a basis for an exception to the Labor Code § 3755 mandate to dismiss the employer, and perhaps allow the employer to remain as a party defendant. However, the WCAB found no “conflict of interest” in the facts of this case. That argument by the employer was dismissed. The WCAB explained,

“However, as the WCJ explained in his Report, there is nothing in the record showing that these parties’ interests diverge on the compensation issue in any way. Specifically, citing Giacalone v. Industrial Accident Commission (1953) 120 Cal.App.2d 727 (Giacalone), the WCJ explained the benefits of substituting the insurer for the employer in cases such as this, stating:

“[I]n removing the employer from the proceeding, it deprives the employee of the right to a judgment against both the employer and the insurer....

“While the Giacalone court noted that dismissal of the employer is not mandatory for claims not subject to insurance such as willful misconduct or where there is a conflict of interest between the employer and the insurer (Giacalone, supra [overruled on other grounds, Scott v. Industrial Acc. Com. (1956) 46 Cal.2d 76, 87]), there is no indication in case at hand that applicant Virginia Saavedra is pursuing any claim for willful misconduct, a 132a violation and/or that there is any conflict of interest between the employer and the insurance carrier regarding the workers’ compensation claim.”

(Emphasis added by WCAB)

PRACTICE TIP: This case highlights the importance of compliance with the strict language of the Labor Code. The WCAB was able to craft an opinion in this case consistent with the legislative intent behind Labor Code § 3755. However, the prudent practitioner should make sure to comply with the exact terms of Labor Code § 3755 when taking over a workers’ compensation case from the employer. In addition to filing a “notice of assumption of liability” with the employer, the insured should also discuss with the employer what responsibilities they will undertake during litigation of the matter. This will provide the employer with notice of the insured’s intent and will allow the employer an opportunity to discuss with the insured’s legal counsel what, if any, involvement they may wish to have in the litigation process going forward

VI. Takeaway

It appears from the facts of this case that exceptions may exist to the Labor Code § 3755 mandate for filing a “notice of assumption of liability” when an insurance company steps into the shoes of the employer for workers’ compensation litigation purposes. However, counsel should never assume an exception may apply in their particular situation without documentation. It is always best to follow the requirements of any given statute and to ensure documentation has been prepared, executed and filed for all required legislative action. Adherence to this rule will serve to reduce unnecessary trial time and other conflicts that may arise and interfere with an expeditious resolution of workers’ compensation cases.

Reminder: Board panel decisions are not binding precedent. Always check the subsequent history of a case before citing it.

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