California’s New Limit on Workers’ Compensation Liens in Third-Party Claims

When an employee is injured through the fault of someone other than the employer, California law generally permits the employee to receive workers’ compensation benefits while also pursuing a personal-injury claim against the responsible third party. The employer or its workers’ compensation carrier may then seek reimbursement from the third-party recovery for benefits paid or payable. For most employees, there is no fixed percentage cap: the entire settlement may be subject to the employer’s reimbursement claim, although reasonable litigation expenses and attorney fees may receive priority under Labor Code section 3860.

Effective January 1, 2026, Senate Bill 487 created an important exception for certain public-safety employees. Under amended Labor Code section 3852, an employer’s recovery may be limited to no more than one-third of the third-party defendant’s applicable liability-insurance limits when the injured employee is a qualifying peace officer or a firefighter employed by a city, county, city and county, or fire protection district.

The one-third limitation is not automatic. The employee must establish both that the employee’s total damages exceed the net recovery available after satisfaction of the employer’s claim and that the available liability-insurance limits are insufficient to compensate both the employer and employee fully. When those requirements are satisfied, the employer’s reimbursement and subrogation rights are subordinate to the statutory allocation. For example, if the negligent third party has a $15,000 liability limit, the employer’s maximum recovery would ordinarily be $5,000 under the new provision.

The amendment can materially change the resolution of policy-limits claims. Insurers, employers, workers’ compensation carriers, and injured employees must determine early whether the employee qualifies for the protection, whether the claimant’s damages exceed the available recovery, and what insurance limits are actually available. Settlement documents should state the allocation clearly and address the workers’ compensation carrier’s lien, reimbursement, subrogation, and future-credit rights so that payment does not leave unresolved claims against the insured or settlement proceeds.

For employees outside the statute’s narrow public-safety categories, the traditional rules remain in place. A workers’ compensation carrier may still seek reimbursement up to the benefits paid or payable, subject to attorney-fee, litigation-cost, employer-negligence, and other applicable limitations. Because the governing rules depend on the employee’s occupation, the available insurance, the parties’ participation in obtaining the settlement, and the wording of the release, workers’ compensation liens should be evaluated before any third-party settlement is finalized.