Ky. Supreme Court Rejects Fee-First Rule in Employer Subrogation Case

Case File

In Kentucky, an employer is entitled to immediate reimbursement of duplicative workers' compensation benefits, but its recoverable subrogation interest must be reduced by its pro rata share of the employee's attorney's fees and litigation expenses.

Case

K-VA-T Food Stores Inc. v. Blackburn, No. 2025-SC-0335-WC (Ky. 08/20/26)

What Happened?

A grocery store worker was injured while working and received workers' compensation benefits from the store. The worker also pursued a third-party claim against a store vendor whose actions played a role in causing her injury. The worker recovered $295,000 via settlement with the vendor. The store then sought reimbursement via subrogation. An administrative law judge, the Workers' Compensation Board, and the Court of Appeals reached differing conclusions regarding the applicability and timing of the store's obligation to pay a pro rata share of the worker's legal fees, bringing the case before the Kentucky Supreme Court.

Rule of Law

Under Kentucky Revised Statute 342.700(1), employers and workers' compensation insurers are permitted to recover workers' compensation benefits paid to an injured employee from a third party who is deemed liable for the injury. A 2018 amendment imposed responsibility on the employer or insurer for a pro rata share of the employee's legal fees and expenses incurred by pursuing the third-party action.

What the Kentucky Supreme Court Said

The Kentucky Supreme Court agreed with the ALJ and Board that the store was entitled to immediate reimbursement for the benefits it paid to the worker that were duplicated by the settlement she received, but only after reducing the settlement proceeds that the store could reach in subrogation by the amount of the store's pro rata share of the worker's legal fees and expenses.

The court noted that Mastin v. Liberal Markets, 674 S.W.2d 7 (Ky. 1984) held that an employer is entitled to immediate restitution as to the amount of a settlement that duplicated the employee's workers' compensation benefits. However, Selective Self-Ins. Fund v. Bush, 74 S.W.3d 251 (Ky. 2002) and AIK Selective Self-Ins. Fund v. Minton, 192 S.W.3d 415 (Ky. 2006), proceeded on the assumption that the claimant's legal expenses were deducted from the subrogation credit, not from the settlement.

After the 2018 amendments, the Kentucky Supreme Court rendered both Bush and Minton to include language explaining that the employer was entitled to a subrogation credit not to exceed the indemnity and medical expenses paid less a pro rata share of the employee's legal fees and expense.

The court explained that the implementation of a pro rata share in the 2018 amendments was intended to reflect only that portion of the fees that were used to obtain damages that were duplicative of the workers' compensation award.

"With the 2018 amendment, the employer's lien is reduced only by its pro-rata share of the legal fees and expenses," the court wrote. "If an employer was only responsible for one-third of the $100,000 in legal fees ($33,333), then they have a recoverable subrogation amount of $66,667."

The court reasoned that the statute allows an injured worker to claim workers’ compensation or proceed against a third party, so long as the worker does not recover from both.

"Tracking through the language further, if workers’ compensation is awarded, (1) the employer, who has paid compensation or becomes liable for compensation; (2) may recover from the liable third party; (3) not to exceed the indemnity and medical expenses paid and payable to the injury employee – 'paid' clearly contemplating amounts already received from the employer and 'payable' indicating the amounts an employer is liable to pay in the future; (4) less a pro rata share of the employee’s legal fees and expenses," the court wrote. "The statute explicitly entitles the employer to recovery for amounts it has paid and amounts it is liable to pay in the future."

The court further explained that the statute did not state that subrogation was barred unless benefits paid exceed fees incurred, meaning that there was no "fee-first" threshold. Instead, it mandated proportional reduction whereby “less” meant subtraction, and “pro rata” meant allocation.

Ask AI: To get a handle on how the worker's proposed math and the court's formulation differed, we asked AI for its explanation. Here's what we got:

The entire case really comes down to where the employer's share of attorney fees gets applied in the subrogation calculation.

The employee (Blackburn) and the court were both trying to apply the same statutory language, but they had fundamentally different views of the sequence.

The Employee's Formulation

Blackburn argued that the employer's pro rata share of attorney fees should effectively be treated as a threshold that must be exhausted before the employer recovers anything.

Using simple numbers:

• Workers' comp benefits paid: $25,000
• Employer's pro rata fee obligation: $40,000
• Subrogation recovery: $0 [Human note: Under the worker's math in the case, this would actually mean that the employer owed her $15,000 still]

Since fees exceeded benefits paid, the employer would recover nothing immediately. The employer would not begin recovering until future workers' compensation liability exceeded the $40,000 fee amount. In other words, the attorney-fee obligation comes first, and the employer cannot recoup benefits until that obligation has been fully absorbed.

That was essentially the rationale adopted by the Court of Appeals.

The Court's Formulation

The Kentucky Supreme Court rejected that approach. The court said the statute gives employers an immediate right to recover amounts already "paid" and amounts "payable" in the future, subject only to a proportional reduction for attorney fees.

Under the court's approach, you first determine:

1. How much of the third-party recovery is subject to subrogation.
2. The employer's percentage share of fees and expenses.
3. Reduce the subrogation fund by that share.
4. Allow immediate reimbursement of benefits already paid from the remaining amount.

Using a simplified example:

Subrogable recovery pool: $100,000

Employer fee share: -$33,333

Available for subrogation: $66,667

The employer can immediately recover from that $66,667 fund. The fee share reduces the employer's recovery, but it does not eliminate the right to recover.

The Conceptual Difference

The easiest way to think about it is:

Employee's View

Employer Lien
      ↓
Subtract Fees
      ↓
If result is negative,
no recovery yet

The fee obligation acts like a deductible that must be satisfied first.

Court's View

Third-Party Recovery
      ↓
Determine Subrogable Portion
      ↓
Reduce by Fee Share
      ↓
Employer Recovers Immediately

The fee obligation acts only as a reduction of recovery, not as a barrier to recovery.

Why the Court Rejected Blackburn's View

The court focused heavily on the statutory phrase "paid and payable."The court reasoned that the statute expressly grants recovery for:

• benefits already paid, and
• benefits payable in the future.

Nothing in the statute says "only after attorney fees have been exhausted."

The court viewed Blackburn's interpretation as creating a new condition that the Legislature never wrote into KRS 342.700(1). The words "less a pro rata share" mean to reduce or allocate the recovery, not to extinguish the employer's lien whenever fees exceed benefits paid.

One-Sentence Distinction

The employee's formulation treated attorney fees as a first-dollar offset that could postpone all employer recovery, while the Kentucky Supreme Court treated attorney fees as merely a proportional reduction of an otherwise immediately enforceable subrogation right.

That's really the crux of the case. Once you see that distinction, the rest of the opinion falls into place.

"Neither of these terms authorize the extinction of an employer’s statutory right to subrogate when the legal fees and expenses exceed benefits paid," the court wrote. "Further, 'not to exceed' establishes a cap and ensures the employer only benefits by way of the amounts it has paid or is liable to pay."

The Kentucky Supreme Court concluded that when applying KRS 342.700(1), an employer or insurer’s responsibility of attorney’s fees is initially subtracted from the amount available in subrogation from amounts an injured worker recovers from a third party. The employer or insurer is entitled to immediate recoupment of benefits already paid, and, if applicable, a credit for benefits payable in the future.

Verdict: The Kentucky Supreme Court reversed the Court of Appeals insofar as it concluded that the store could begin to recover only when the benefits it had paid exceeded the pro rata share of legal fees and expenses and reinstated the opinion of the Board, which remanded the claim to the ALJ for correction of a mathematical error.

Takeaway

When applying KRS 342.700(1), the ALJ must first determine which amounts are duplicative of workers’ compensation damages – the amount subject to subrogation. Then, the ALJ must reduce the amount subject to subrogation by the employer’s share of attorney’s fees and legal expenses – the amount the employee owes in attorney’s fees and expenses from obtaining the recovery amount that is duplicative of workers’ compensation benefits. After subtracting the employer’s pro rata share of legal fees and expenses, the remaining amount is what is ultimately available to the employer in subrogation. The employer may immediately recover duplicative benefits already paid from the reduced subrogation fund, with any remaining amount available as a credit against future liability

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