In a widely anticipated decision, the Court of Appeals has affirmed the 3rd Department's ruling in Burns v. Varriale (2007 NY Slip Op 07498). The ruling severely limits use of the so-called "Kelly calculation" to assess a carrier its share of litigation costs, including attorneys' fees, incurred by a workers' compensation claimant in a third-party action.

When a personal-injury plaintiff has received workers' comp benefits, Workers' Compensation Law § 29 provides the comp carrier a lien on the plaintiff's recovery equal to the amount of benefits paid. When the lien is enforced against a recovery, the carrier is required to contribute to the plaintiff's litigation costs by the same percentage paid by the plaintiff (usually a one-third share).

In a landmark 1983 decision, the Court of Appeals in Kelly v. State Insurance Fund (60 NY2d 131) mandated an additional assessment on the carrier based on calculating the present value of the future benefits the carrier would save while taking credit for the third-party recovery. Although Kelly dealt specifically with death benefits, it was subsequently interpreted as requiring a calculation of present value in all cases where continuing benefits were being paid.

This approach was challenged in August 2006 when the 3rd Department ruled in Burns (34 AD3d 59) that it was error to use the Kelly calculation where a claimant was classified as permanently partially disabled, even though continuing benefits were being paid. The court reasoned that since benefits to partially disabled claimants were subject to change, their future value was too speculative to form the basis for a present value calculation. This effectively restricted Kelly to cases of death, permanent total disability and schedule loss of use.

In light of this, it was not surprising that the Court of Appeals granted leave to appeal. On Oct. 11, the Court of Appeals affirmed the appellate ruling. In a unanimous decision, the court agreed that Kelly was restricted to the three specific types of cases mentioned above. It also found as a matter of law that in all other cases, the value of future benefits was too speculative and could not be readily quantified so as to warrant an upfront assessment on the carrier.

The impact of this decision may be illustrated by the following. Most comp claimants who obtain significant personal-injury recoveries have been classified with permanent disabilities. The state Insurance Fund, New York's largest comp carrier, reviewed its classification cases and determined that 94 percent of third-party actions with ongoing compensation benefits involve permanent partial disabilities, while just 6 percent are permanent total disabilities.

Previously, a Kelly calculation (and additional assessment) was performed in each of those cases. The Burns decision now means that this process is required in only six of every 100 of those cases. In all other cases the carrier will recover its entire lien, reduced only by the initial one-third share.

Ralph Visano, an associate attorney with the New York State Insurance Fund, can be reached at rvisa@nysif.com.