Virginia HB426 Will Change How Employers Apply Third-Party Recovery Credits

Third-party recoveries have long been one of the more consequential pressure points in Virginia workers’ compensation claims. When an injured worker obtained a recovery from a negligent third party arising out of the same accident, employers and carriers could rely on Code § 65.2-313 to obtain a meaningful offset against future workers’ compensation exposure. HB426 changes that framework in a significant way. Beginning July 1, 2026, the employer’s credit remains, but the practical benefit of that credit will be reduced because ongoing medical and indemnity benefits are no longer treated the same way during the offset period.

Under the current version of Code § 65.2-313, the employer pays the claimant a percentage of each further entitlement, as it is submitted, equal to the ratio of attorney’s fees and costs to the total third-party recovery, until the post-recovery entitlement equals the difference between the gross recovery and the employer’s compensation lien. The statute currently defines “entitlement” to include compensation and medical expenses related to the injury. On its face, that language already required proportional treatment of future entitlements, but the recent Court of Appeals decision in Goode v. Virginia Commonwealth University confirmed how that system operates in practice: the employer’s liability for further indemnity benefits is suspended while the credit is being exhausted, and the employer remains liable only for the claimant’s proportionate recovery costs on each medical expense submitted.

That is the key feature of the old model: the employer was entitled to a suspension of ongoing liability for indemnity benefits until the third-party recovery was exhausted. The Court of Appeals in Goode expressly held that Code § 65.2-313 did not contemplate automatic continued disability payments during the offset period and that continuing full benefits would undermine the statute’s purpose of preventing a double recovery. In practical terms, that meant the employer’s credit operated as a true offset mechanism, with the claimant submitting post-recovery medical entitlements and the employer paying only the proportional share tied to litigation costs until the credit was used up.

HB426 materially changes that structure. The bill summary states that lifetime medical award benefits and ongoing indemnity award benefits are to remain in full force and effect if the claimant is under such an award when the recovery is effected, subject to the employer offset provisions. The employer still receives credit for the third-party recovery, but that credit is now applied as a continuing pro rata reduction to benefits otherwise payable under the existing award until the employer’s required credit is exhausted. The bill also removes language limiting an employee’s entitlement to compensation and medical and funeral expenses during the offset period, and it provides that if the claimant pays medical expenses falling under the award during that period, the employer must reimburse the claimant’s proportionate share of attorney’s fees and costs on those payments until the credit is exhausted.

For employers and carriers, the practical consequence is straightforward: the credit remains, but the claim does not go quiet. Under the prior framework, the third-party recovery often created a period in which indemnity exposure was effectively suspended and medical exposure was addressed only through submitted entitlements and proportional recovery-cost reimbursement. Under HB426, the employer must continue administering the award and continue paying a reduced share of both indemnity and medical benefits while the credit burns down over time. That is a meaningful change in both workload and economics.

This will likely increase the administrative burden on adjusters and carriers. Files involving third-party recoveries will now require ongoing calculation of the pro rata reduction against indemnity benefits, ongoing processing of medical bills during the offset period, tracking of the declining balance of the credit, and closer auditing of when the offset has been fully exhausted. What was once closer to a suspension-based framework now becomes an active administration framework. Employers may still obtain the same nominal credit amount, but they will have to work much harder to realize it.

The financial effect may prove just as important as the administrative one. From the defense perspective, HB426 appears designed to move away from the strict anti-double-recovery mechanics recognized in Goode. Under the old system, the Court of Appeals emphasized that continuing automatic benefits during the offset period would create an improper double recovery. Under the new system, however, the claimant may retain the third-party proceeds while also continuing to receive reduced indemnity and medical payments under the workers’ compensation award. Whether one views that as fair cost-sharing or partial overlapping recovery will depend on perspective, but there is little question that the statute shifts more of the immediate payment burden back onto employers and carriers during the offset period.

It would not be surprising to see new litigation develop around the edges of this amendment. Disputes may arise regarding calculation of the pro rata percentage, application of the credit to various categories of benefits, documentation necessary to establish exhaustion of the credit, treatment of unpaid versus paid medical charges, and whether a claimant under a preexisting award receives the benefit of the amended structure in all post-July 1, 2026 recovery scenarios. As often happens with legislative changes to Title 65.2, the text answers the big policy question while leaving several operational questions for the Commission and appellate courts to resolve.

The immediate takeaway for employers, TPAs, and carriers is that third-party recovery files in Virginia should be reviewed with fresh eyes before July 1, 2026. Claim handling protocols, reserve practices, and offset calculations may all need to be revisited. Employers will still be entitled to credit. But after HB426, that credit will no longer function as the same kind of pause button it once did.

Should you have any questions about how HB426 may affect your current claims handling practices, third-party recovery strategy, or reserve evaluation, please contact one of the attorneys in Ford Richardson’s workers’ compensation practice group.

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