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Defense Digest

Don’t Waive Goodbye to Your Section 40 Lien Rights

Defense Digest, Vol. 32, No. 2, June 2026

June 30, 2026

by William J. Murphy

Key Points:

  • Under NJ workers’ compensation law, employers can assert a lien upon third-party actions for any medical and indemnity benefits paid.
  • The employers are free to compromise or waive this lien.
  • The Appellate Division found that a carrier cashing a check for less than the full lien amount, but accompanied by a letter stating this payment was full and final payment of the lien, constituted an agreement to waive the remainder of the lien. 

A chief concern of the workers’ compensation system in New Jersey has always been prevention of double recovery, in which an injured worker would obtain a “windfall” by receiving compensation from both a workers’ compensation claim and a third-party suit. In order to avoid this, the Workers’ Compensation Act provides the respondent with a lien against third-party proceeds. Known as the “Section 40 lien,” the respondent can assert a lien based on the medical and indemnity benefits it has issued for the workers’ compensation claim. The lien can be collected upon two-thirds of the third-party recovery, minus $750.00 for the costs of suit. 

As with most liens, a Section 40 lien can be negotiated. Employers will sometimes agree to compromise or, in some cases, even waive the lien. 

In the recent unpublished case of Tomaselli v. Petco, 2026 WL 585448 (N.J. Super. App. Div. April 3, 2026), the Appellate Division addressed a dispute as to whether an employer’s Section 40 lien had been compromised.

In the case, the petitioner was employed as a store manager at Petco (insured by Sedgwick).  On December 23, 2017, he was collecting shopping carts in the store’s parking lot when a car backed into him, causing injuries to his lower back. Since the petitioner was injured by a third-party tortfeasor in the course of his employment, he filed both a workers’ compensation claim against Petco and a suit against the driver.

The third-party suit ended with a settlement of $85,000 in underinsured motorist (UIM) benefits and $15,000 in third-party settlement.

At the time of resolution of the civil claim, Sedgwick had paid a total of $177,084.30 in benefits ($90,351.50 in medical and $86,732.80 in indemnity). This amount was not exhaustive, as the  petitioner was still undergoing treatment and the costs would continue to increase. At that point, Sedgwick was entitled to recoup over $65,000.00 from the third-party settlement.  However, in the spirit of compromise, they sent the petitioner a letter indicating that they would accept $33,333.33 from the UIM award and $15,000.00 from the third-party settlement. 

The petitioner’s lawyer sent a check to Sedgwick for $33,333.33 with a letter stating the check “represents full and final payment of any outstanding worker's compensation lien, in connection with the above-referenced claim." The check was cashed by the carrier.  

The workers’ compensation matter subsequently went to trial and ended with a judgment from the judge of compensation finding a percentage of permanent disability and further concluding that Sedgwick’s acceptance of the check for $33,333.33 with the aforementioned letter constituted an agreement to resolve the lien for only that amount. On appeal, Sedgwick argued that the mere act of cashing a check did not constitute a waiver of its Section 40 lien rights.

The Appellate Division ruled that it did. They stated that Sedgwick was clearly aware of its rights to recover the full amount allowable under their Section 40 lien, and that “[b]y accepting and endorsing the check, Sedgwick clearly and unequivocally conveyed its intent to accept $33,333.33 as full and final payment of any outstanding workers' compensation lien.”

While this is an unpublished opinion and therefore not binding, it will likely have persuasive authority for judges of compensation going forward. 

The impact of this case is significant. At most corporations, the high volume of checks received in the mail are sorted, endorsed, and deposited by an accounts receivable department or comparable business unit. However, in this opinion, the Appellate Division is ascribing significant decision-making authority to the action of one who is likely not a corporate officer, but a clerk. 

What are some actions that carriers can take to safeguard their Section 40 liens and prevent an unintentional waiver of same?

The first is to enact policies requiring supervisory approval before any check pertaining to a Section 40 lien repayment is deposited. Systems should be enacted which will lead to any check pertaining to Section 40 lien repayment being flagged, and requiring a supervisor to review and approve before it is deposited. 

  • If there is no language on the check or accompanying paperwork indicating anything about “full and final” or “resolution” or “waiver” or any other terms to that effect, the check can be deposited without issue.
  • If there is such language, consultation should be made with the workers’ compensation adjuster, defense counsel, or another designated party that can verify the full amount of the carrier’s Section 40 lien and determine whether any negotiated amounts have been agreed to by the carrier.
    • If the check with such language is in the full amount (or the negotiated amount, if applicable), the check can then be deposited.
    • If the check is for a lesser amount, it should be immediately sent back with a letter copying all pertinent parties, stating that the carrier is entitled to (state the full dollar amount of entitlement) and does not agree to accept a lesser amount.  The carrier should then ask the addressee to advise whether they will be re-sending the proper amount or whether further legal action will be required.

A second suggestion would be to designate that such checks need to be sent to defense counsel. This would task the carrier’s legal team with the job of verifying that endorsement of the checks does not unintentionally cause a waiver of lien rights. After review, the defense counsel can then pass the check on to the carrier or send back to the addressee, as the situation requires. 

A third cautionary step would be to issue a notice to petitioner’s attorney, indicating that the carrier is asserting its full lien rights under N.J.S.A. 35:15-40 and that going forward, the carrier does not consent to any compromise of its full entitlement unless noted in a formal agreement signed by both parties. While the service of this document by itself would be helpful, it would be optimal for it to be signed by petitioner’s attorney. Since the carrier is normally asked to produce a ledger showing the amount of its Section 40 lien, petitioner’s attorney should be told that production of the requested ledger will only be made upon receipt of the notice with their (the attorney’s) signature.   

The Tomaselli opinion has exposed a vulnerability in respondent’s rights to assert their full Section 40 liens they are entitled to under law. The carriers are entitled to recoup monies spent on medical and indemnity benefits. They should act with great care to ensure that entitlement isn’t lost through error.

William J. Murphy is in our Roseland office.  He can be reached at (973) 618-4129 or at wjmurphy@mdwcg.com.

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