APPEAL from the Circuit Court of Cook County; the Hon. DAVID
A. CANEL, Judge, presiding.
MR. JUSTICE DEMPSEY DELIVERED THE OPINION OF THE COURT:
A truck driven by Dominic Villapiano collided with one driven by John Brandon. Villapiano was employed by Illini Reefer Transit, Inc., and Brandon by Better Brands of Illinois. Better Brands was delivering Miller High Life beer in a truck rented from the Hertz Corporation. Within a month after the accident, Villapiano, in return for $1,500, executed a full release to Brandon, Better Brands, Miller and Hertz for the injuries he received in the collision.
Reefer was not informed of the release. It had paid Villapiano workmen's compensation benefits and, upon learning of the release, sued to set the release aside. Villapiano and Reefer's compensation carrier, the Farmers Insurance Group, joined in the action. After the defendants (including National Illinois Claim Service which had been instrumental in securing the release while investigating the accident for the defendants) had answered, the chancery division of the circuit court ruled that the release bound Villapiano but not Reefer and Farmers. The case was then transferred to the law division.
Before the cause came to trial the property damage claims were settled. There remained only that portion of the complaint which pertained to Reefer's and Farmers' request that they be reimbursed for compensation payments made or payable to Villapiano. The defendants moved to dismiss this issue. Their motion stated that they were unaware at the time they obtained the release from Villapiano that he had been paid pursuant to the Workmen's Compensation Act and that they first received notice of this fact 2 weeks after the release was executed. The motion was granted, the complaint was dismissed and Farmers appealed.
The appeal raises the issue whether an employer who pays workmen's compensation to an employee for injuries caused by a third party loses his statutory right to indemnity if the employee, without the employer's knowledge or approval, releases his claim against the third party before the latter receives formal notification of the employer's interest. Before supplying this answer it is first necessary to understand both the nature and extent of an employer's rights to reimbursement from the third-party tort-feasors under the Workmen's Compensation Act (Ill. Rev. Stat. 1967, ch. 48, par. 138) and the relationship of those rights to the avenues of action open to injured employees.
• 1 The Workmen's Compensation Act was intended to supplant common-law rules of master-servant liability, by which employees injured in the course of their employment bore a disproportionate share of their losses. However, to mitigate the rigors of the substituted system of liability, which imposed liability without fault upon employers for the benefit of their employees, the Act in section 5(b) (Ill. Rev. Stat. 1967, ch. 48, par. 138.5(b)) provides a recourse for employers who are compelled to pay compensation to employees injured by third-party tort-feasors. See Grasse v. Dealer's Transport Co. (1952), 412 Ill. 179, 106 N.E.2d 124; Baker & Conrad, Inc. v. Chicago Heights Construction Co. (1936), 364 Ill. 386, 4 N.E.2d 953.
While intended to protect employers, section 5(b) also safeguards the rights of employees. An earlier section of the Act (section 29, Ill. Rev. Stat. 1947, ch. 48, par. 166), which limited the employee's common-law remedy against the tort-feasor, did not pass constitutional muster. (Grasse v. Dealer's Transport Co.) As presently drawn, it imposes no such restraint, reserving to an injured employee first choice in the manner of proceeding. When an injury compensable under the Act is caused by someone other than the employer the injured employee may elect either to proceed against the actual tort-feasor or to enter a compensation claim. But if, while claiming compensation, he also elects to file a negligence action, he must notify his employer. It then devolves upon the employer or his compensation carrier in his place to intervene and join the employee's action; if he does, all subsequent orders of the court "shall be made for his protection." Alternatively, the employer "may have or claim a lien" upon any judgment or settlement fund. In either case it is the employee who controls the litigation.
If, on the other hand, the employee forsakes his tort remedy and decides only to enter a claim for workmen's compensation, the innocent employer is empowered by section 5(b), during the 3 months immediately preceding expiration of the period of limitations, to file the negligence action in his own name or that of the employee, and in that way have questions of liability and damages adjudicated. Out of any recovery, the excess above the employer's indemnity for compensation payments and litigation costs must be paid over to the employee.
Because of the close association between the remedies of the injured employee and those of his employer, section 5(d) contains an important proviso:
"No release or settlement of claim for damages by reason of such injury * * * shall be valid without the written consent of both employer and employee * * * except * * * where said employer has been fully indemnified or protected by Court order." (Ill. Rev. Stat. 1967, ch. 48, par. 138.5(b).)
Relying on a similar proviso in an Oklahoma statute, the Supreme Court of that state held a settlement violating the requirement to be void and binding on no one. (Sinclair Oil & Gas Co. v. State Industrial Com. (1931), 151 Okla. 228, 3 P.2d 438.) The court reasoned that the requirement of an employer's consent was a restriction on the right of the employee to contract relative to his claim. The holding is also consistent with a statutory purpose, discerned by some courts, to "protect the employee against his own improvidence, weakness, ignorance, or shortsightedness in compromising his claim for injuries." Woodward v. E.W. Conklin & Son (1916), 171 App. Div. 736, 157 N.Y.S. 948.
• 2, 3 Courts are in general agreement that even where the workmen's compensation statute is silent as to the right of an employee to settle, his execution of a release or settlement cannot interfere with the right of an employer or its compensation carrier to proceed against the third-party tort-feasor the same as if such settlement had not been made. (See the cases collected in Lang v. William Bros Boiler & Manufacturing Co. (1957), 250 Minn. 521, 85 N.W.2d 412.) By signing a release, the employee surrenders at most his personal claim to a share in any recovery. But the negligence claim survives in his employer, subject to the limitation that his damages may not exceed his compensation liability. As stated in Hugh Murphy Construction Co. v. Serck (1920), 104 Neb. 398, 401, 177 N.W. 747, 748:
"The wrongdoer must take notice of the rights of all, and cannot by a settlement with the injured party increase the burden of the innocent employer. The parties concerned are equal in the eye of the law, and the courts will not suffer one to profit at the expense of either of the others."
The gist of the defendants' contention is that neither Illini Reefer nor the Farmers Insurance Group can ask indemnity of them, because they were not notified of Villapiano's compensation claim prior to entering their settlement with him. Some jurisdictions hold that an employer may forego his claim for indemnity by his laches of the third-party tort-feasor settles in good faith with the employee without notice or reason to know the employer's right. (Smith v. Yellow Cab Co. (1927), 288 Pa. 85, 135 A. 858.) Other authority is more strict, charging third-party tort-feasors who enter ...