The Most Significant Workers’ Compensation Legislative Change in a Decade Took Effect January 1, 2026
Senate Bill 487 represents the most financially devastating change to California workers’ compensation law in recent history, fundamentally rewriting subrogation and reimbursement rights when peace officers and firefighters pursue third-party civil litigation. Effective for injuries occurring on or after January 1, 2026, this legislation caps employer recovery at one-third of third-party liability insurance policy limits, eliminates employer consent requirements for settlements, and prohibits crediting employee third-party recoveries against future workers’ compensation benefits.
Defense counsel, claims adjusters, and public agency risk managers must immediately understand SB 487’s mechanics, recognize its practical implications, and adapt subrogation procedures to this fundamentally altered landscape.
Prior Law Framework
Under prior law, Labor Code Sections 3852, 3858, 3859, 3860, 3861, and 3862 established a comprehensive framework:
- Employer Lien Rights: Employers or carriers that paid workers’ compensation benefits acquired automatic lien rights against any third-party recovery—encompassing medical treatment, temporary disability, permanent disability, vocational rehabilitation, and death benefits.
- Employer Consent Requirement: Employees could not settle third-party claims without employer consent, providing meaningful negotiating leverage.
- Future Benefit Credits: Employers could apply the employee’s net recovery as a credit against future workers’ compensation benefits.
- Full Reimbursement Priority: Employers generally recovered full reimbursement before employees retained any net recovery.
This framework facilitated robust cost recovery, with employers in public safety cases routinely recovering 60%-85% of benefits paid.
SB 487’s Three Key Provisions
1. The One-Third Cap
SB 487 caps employer recovery at one-third of the third-party defendant’s liability insurance policy limits when: (1) the employee’s total damages exceed the net recovery available after satisfaction of the employer’s lien; and (2) available insurance limits are insufficient to fully compensate both employer and employee.
Critical: The one-third limitation is calculated based on the defendant’s total liability insurance policy limits, not the actual settlement or judgment amount.
2. Elimination of Employer Consent
SB 487 eliminates the requirement for employer consent to third-party settlements. Peace officers and firefighters may now settle claims directly with defendants, specifying that employer reimbursement shall not exceed one-third of policy limits, without employer approval or input. Employers often discover settlements only after execution.
3. Prohibition on Future Credits
The statute prohibits employers from using any portion of an employee’s third-party recovery as a credit or offset against future workers’ compensation benefits—creating systematic double recovery for injured employees at employer expense.
Fiscal Impact
California employs approximately 32,000 firefighters and 80,000 peace officers. Projected statewide impact: $42-56 million annually in lost recoveries, with a ten-year impact of $420-560 million. This excludes compounding effects of premium increases as carriers adjust rates.
Practical Guidance for Claims Adjusters
Early Third-Party Investigation
Within 30 days of claim receipt, identify potential third-party liability and document: tortfeasor identity, incident circumstances, witnesses, defendant’s insurance carrier, and estimated policy limits.
Policy Limits Discovery
Invest resources in discovering actual policy limits through formal discovery, informal investigation, and early communication with defendant insurers. Accuracy matters—a variance in assumed versus actual policy limits directly affect maximum recovery amounts.
Maintain Communication
Although SB 487 eliminates consent requirements, maintain regular communication with injured employees and plaintiffs’ counsel. Position employer representatives as resources rather than adversaries and document all communications.
Reserve Adjustments
Reduce recovery projections dramatically. Do not adjust future medical or permanent disability reserves based on projected employee third-party recoveries—SB 487 prohibits crediting.
Lien Perfection
Despite limitations, perfect all statutory lien requirements including Labor Code Section 3852 notices and court lien filings.
Employer Recommendations
Financial Planning: Adjust budgets, reserves, and projections to reflect 50%-70% reductions in subrogation recoveries. Self-insured agencies should conduct actuarial reviews.
Insurance Coordination: Notify carriers immediately regarding SB 487’s impact. Renegotiate premium rates and amend TPA agreements.
Loss Control: With cost recovery curtailed, prevention becomes critical—invest in defensive driving training, equipment maintenance, and robust incident investigation protocols.
Legislative Advocacy: Public agency associations should coordinate efforts seeking SB 487 repeal or modification, including amendments to restore consent requirements, increase recovery caps, or permit partial credits.
Conclusion
SB 487 eliminates decades of established law premised on the principle that negligent third parties should bear financial responsibility for injuries they cause. Immediate imperatives include revising claims handling procedures, implementing aggressive policy limits discovery, adjusting reserve methodologies, and engaging in legislative advocacy.
Yrulegui & Roberts has defended California employers and public agencies in workers’ compensation matters for over 30 years. For guidance on SB 487’s application, contact us at www.rjylaw.com.
Legal Disclaimer: This post is for informational purposes only and does not constitute legal advice.
