Lienholder Responsible for 100% of Costs When Lien Exceeds the Third-Party Recovery

August 2026

Jeffrey F. Clement

In Larsen v. Vaid, 2026 IL App (1st) 252100, the First District Appellate Court addressed how to calculate an employer’s pro-rata share of costs when the employer obtains reimbursement of its workers’ compensation lien under Section 5(b) of the Workers’ Compensation Act. Larsen is unique because the lien exceeded the third-party civil recovery and the lienholder did not agree to reduce its lien, essentially positioning the lienholder to recover the entirety of the civil recovery and the employee to receive nothing. The Appellate Court held that the lienholder was responsible for 100% of the litigation costs under the circumstances. The fact that the lienholder was also responsible for paying the employee’s attorney a statutory fee of 25% did not sway the Appellate Court.

When a workers’ compensation lienholder - usually the workers compensation insurer or a self-insured employer - receives any reimbursement of its lien from the employee’s third-party civil recovery, it is required to pay its pro-rata share of all costs reasonably incurred in connection with such third-party claim. It is also required to pay the employee’s attorney a fee of 25% of the gross amount of such reimbursement. 820 ILCS 305/5(b).

Pro-rata share of costs is not defined. Is the employer’s share of costs calculated before or after paying the 25% attorney’s fee?

Over 20 years ago, in Overlin v. Windmere Cove Partners, Inc., 325 Ill. App. 3d 75 (2d Dist. 2001), the Second District Appellate Court subtracted the amount of attorney’s fees from the total recovery and used the remainder to calculate the employer’s pro rata share of costs.

In Larsen, the employee Larsen was in an automobile accident in the course and scope of her employment. She filed a workers’ compensation claim against her employer and received $399,930.16 in workers’ compensation benefits.

She also filed a third-party civil lawsuit against the adverse driver, Vaid. She entered into a settlement agreement with Vaid for $325,000. She incurred $20,794.88 in costs to prosecute the civil case.

The lienholder did not make any reduction to its workers’ compensation lien and demanded that all proceeds of the settlement be used to reimburse its lien. It was undisputed that the lienholder owed an attorney’s fee of 25% of the gross amount of the reimbursement. Therefore, the lienholder owed $81,250 in attorney’s fees (25% of $325,000). This reduced the lienholder’s recovery to $243,750.

When adjudicating costs, the trial court held that the lienholder was responsible for 100% of the costs of $20,794.

On appeal, the lienholder argued that it should have only been assessed with 75% of the costs because it paid the 25% attorney’s fees, thus its “share” of the total proceeds was 75% and not 100%. The Appellate Court disagreed. The Court held that Section 5(b) contains no language indicating an intent to connect the calculation of the employer’s pro rata share of costs to the amount of attorney’s fees the employer must pay. The Court also declined to follow the Second District in Overlin. It held that the obligation to pay the 25% attorney’s fee and the obligation to pay pro-rata costs are separate obligations which cannot be intertwined.

In my opinion, the Larsen court could have reached its decision without contradicting Overlin. In Overlin, even after subtracting the 25% attorney’s fee, the employee was going to receive some portion of the remaining funds. The Overlin court then calculated share of costs based on how the employee and lienholder would share in the proceeds. This was a logical, fair, and reasonable interpretation of Section 5(b). In Larsen, however, because the employee would be receiving nothing from the civil proceeds, there was nothing to “share” between the employee and the lienholder.Under the circumstances in Larsen, the only logical result would be for the lienholder to pay 100% of costs. Regardless, because of the arguable conflict between the Second District ruling in Overlin and the First District ruling in Larsen, this issue has not definitively been resolved.