An injured worker with a good third-party case runs the numbers under Minn. Stat. § 176.061, subd. 6 and finds that after fees, costs, and the compensation carrier’s reimbursement, very little reaches the worker. That formula is the reason Minnesota lawyers use the phrase “Naig settlement.”
A Naig settlement is a settlement of only those damages the compensation carrier has no subrogation interest in. The carrier gets nothing out of it and cannot credit it against benefits. The employee keeps it.
What is usually left out of the shorthand is that the Minnesota Supreme Court set a price in the same paragraph in which it created the doctrine. After stating the rule, the court added: “By pursuing this course, however, the employee waives his statutory right to one-third of the employer’s net recovery from the third-party.” The Naig settlement is a trade, not a windfall.
What is the statutory formula a Naig settlement is designed to avoid?
Minn. Stat. § 176.061, subd. 6 divides the proceeds of a third-party action or settlement in a fixed order. Stated as a sequence rather than a table:
- First, deduct “the reasonable cost of collection, including but not limited to attorney fees and burial expense in excess of the statutory liability” — subd. 6(a)(1).
- Then “one-third of the remainder shall in any event be paid to the injured employee or the employee’s dependents, without being subject to any right of subrogation” — subd. 6(a)(2).
- Out of the balance, the employer or the special compensation fund is reimbursed for all benefits paid, less a proportionate share of the collection costs computed under the formula in subd. 6(b).
- Any balance goes to the employee and “shall be a credit to the employer or the special compensation fund” against benefits it is obligated to pay but has not paid, and against future benefits — subd. 6(c).
- There is “no reimbursement or credit to the employer or to the special compensation fund for interest or penalties” — subd. 6(d).
The Naig opinion itself shows the arithmetic on real numbers. The employee settled for $18,000. Collection costs were $6,691.80. One-third of the $11,308.20 remainder — $3,769.40 — went to the employee free of subrogation. That left $7,538.80, which the compensation judge ordered credited against the employer’s obligations.
What did the supreme court actually decide in Naig?
That the $7,538.80 credit was wrong, and that no part of the settlement could be credited.
Naig v. Bloomington Sanitation, 258 N.W.2d 891 (Minn. 1977), reached the supreme court by writ of certiorari from the Workers’ Compensation Court of Appeals. Melvin Naig was injured on January 8, 1970 in the course of his employment and received compensation benefits. He and his wife brought a tort action against several third parties, and the compensation insurer initially allowed Naig’s attorney to represent its subrogation interest. Two days before the September 1975 trial date, that attorney withdrew from representing the insurer because a conflict had arisen in settlement negotiations, and the insurer was put on notice that Naig intended to negotiate a settlement that would not include any item subject to the insurer’s subrogation claim.
On September 11, 1975 the parties read a settlement into the record in Hennepin County District Court. Naig and his wife received $18,000. Neither the employer nor the insurer was present or a party. The parties agreed that the settlement “encompasse[d] everything other than the subrogated interest of the compensation carrier.”
The employer and insurer then petitioned to have the proceeds allocated. A compensation judge ordered $7,538.80 credited against Naig’s claims for compensation and medical expenses. The Workers’ Compensation Court of Appeals sustained that order except as to medical expenses. The supreme court affirmed in part and reversed in part, holding “that no part of the settlement proceeds can be credited against the employer’s obligations under the act.”
The rule the court stated, in the sentence practitioners have cited ever since:
So long as the employer is notified of negotiations leading to such a settlement so that it can appear or intervene to protect its interest and so long as the employee demonstrates that the settlement concerns only damages not recoverable under worker’s compensation, or allocates the settlement into recoverable and nonrecoverable claims, the employer cannot credit the nonrecoverable portion of the settlement against compensation payments. By pursuing this course, however, the employee waives his statutory right to one-third of the employer’s net recovery from the third-party.
Note what protects the employer instead of a credit. The court reasoned that where the employee settles only non-subrogated claims, “the employer in no way is prejudiced by the settlement,” because it keeps the right to intervene and the right to maintain actions in its own name under subdivisions 5 and 7. And the court added that the third-party tortfeasor’s admission that the settlement encompassed nothing subject to subrogation “should estop that party from contending the contrary in a suit brought by the employer.”
One structural detail matters for reading the opinion today. The 1977 court cited the one-third provision as subdivision 6(b), quoting a version of subdivision 6 lettered (a) through (d). The current statute renumbers that formula: the one-third provision now appears at subdivision 6(a)(2).
What does a Naig settlement cover, and what does it not?
Naig did not draw the line. Sixteen years later, in Tyroll v. Private Label Chemicals, Inc., 505 N.W.2d 54 (Minn. 1993), the supreme court did, and it said plainly that the line had been unclear:
We conclude that common law tort damages for past and future wage loss and loss of earning capacity are the kind of damages that should be deemed recoverable under workers’ compensation. Common law damages of the kind not recoverable under workers’ compensation should, we think, be deemed to include pain and suffering, general disability, embarrassment, disfigurement, and mental anguish. We believe this division for allocation purposes should govern, at least ordinarily.
Read the qualifier at the end. “At least ordinarily” is the court’s own signal that this is an allocation convention, not a jurisdictional boundary.
Loss of earning capacity is the item most likely to surprise a plaintiff. It sounds like a general-damages element, and it is on the recoverable side of the Tyroll line — meaning it belongs to the compensation carrier’s subrogation claim, not to the employee’s Naig settlement. The court explained that loss of earning capacity “sufficiently overlaps the kind of loss contemplated by workers’ compensation benefits” to belong on that side of the line. A settlement drafted as though earning capacity were the employee’s to sell is not a Naig settlement of that item.
What notice makes a Naig settlement stick?
Two things: the statutory notice, and the proof the Naig rule conditions the result on.
The statute. Minn. Stat. § 176.061, subd. 8a:
In every case arising under subdivision 5, a settlement between the third party and the employee is not valid unless prior notice of the intention to settle is given to the employer within a reasonable time.
The same subdivision continues: where the employer or insurer has paid compensation and become subrogated or acquired a right of indemnity, “any settlement between the employee or the employee’s dependents and the third party is void as against the employer’s right of subrogation or indemnity.” And when an action at law is started against a third party, “a copy of the complaint and notice of trial or note of issue in the action shall be served on the employer or insurer.”
The proof. Naig conditions the no-credit result on the employee demonstrating “that the settlement concerns only damages not recoverable under worker’s compensation,” or allocating the settlement between recoverable and nonrecoverable claims. In Naig itself the court found the settlement language as recited by counsel ambiguous — it referred to loss of earning ability, scars, general disability, and pain and suffering, all of which “might be related to claims for worker’s compensation” — and the result turned on the third-party defendant’s admission that no subrogated interest was included.
That is the practical drafting lesson, and it is 48 years old: an ambiguous release is the risk, and the counterparty’s written agreement about what the money is for is what closes it.
What happens to the compensation carrier’s case afterward?
It proceeds, and Tyroll describes how. After a pretrial Naig settlement, the supreme court held that “the employer’s subrogation action should be limited to recovery of common law damages for past and future wage loss, loss of earning capacity, and similar items of damages, if any.” Three consequences follow directly from that holding, in the court’s words: “This recovery is not subject to the subdivision 6 formula,” “there is no additional recovery for attorney fees,” and there is “no credit remaining outstanding.”
Tyroll also held that the defendant tortfeasor is entitled to a jury trial on that claim, because the “nature and character of the controversy” remains a common law negligence action, and that the amount of benefits paid and payable is determined separately by the court at a pretrial hearing, at which “[i]t shall be presumed that benefits paid by the employer were reasonable and proper expenditures under the Workers’ Compensation Act.”
And the tortfeasor keeps its causation defenses. Tyroll held that the tortfeasor “is free to argue to the jury that it is not liable for loss of wages and earning capacity caused by an injury unrelated to the accident involved in the subrogation suit.”
One further piece of the statute belongs in the same plan. Under Minn. Stat. § 176.061, subd. 11, a nonemployer third party that is liable has a right of contribution against a faulted employer, capped at the net amount the employer recovered under subdivision 6, paragraphs (b) and (c) — and the employer can avoid that exposure “by affirmatively waiving, before selection of the jury, the right to recover workers’ compensation benefits paid and payable, thus removing compensation benefits from the damages payable by any third party.” Whether the employer waives changes what is left for anyone to fight about.
How is this different from a health plan’s reimbursement claim?
Different statute, different rule, different leverage. A compensation carrier’s rights come from chapter 176 and are enforced through the subdivision 6 formula, the subdivision 8a notice, and a separate cause of action for medical expenses under subdivision 7. A health plan’s subrogation claim is governed by Minn. Stat. § 62A.095 — and whether that section reaches the plan at all depends on whether the employer bought insurance or funds its own benefits. We treat that fight separately in our article on Minnesota’s health plan subrogation limits.
The point of the comparison is that a single settlement can be exposed to both, on different terms, and neither analysis substitutes for the other.
What to do
- Give the subdivision 8a notice, in writing, before you negotiate. “[P]rior notice of the intention to settle” within a reasonable time is a validity condition, not a courtesy.
- Allocate in the release, and get the defendant’s agreement to the allocation. Naig rewarded a record in which the tortfeasor admitted no subrogated interest was included. Ambiguity is what put the employee at risk in the first place.
- Keep loss of earning capacity on the right side of the line. Under Tyroll it is a recoverable-type item belonging to the subrogation claim.
- Price the waiver before you sign. Naig says the employee gives up the statutory one-third of the employer’s net recovery. Run the subdivision 6 numbers on the whole case first, the way the opinion’s own arithmetic does.
- Ask whether the employer will waive under subdivision 11, and calendar the deadline — “before selection of the jury.”
- Serve the complaint and notice of trial on the employer or insurer, as subdivision 8a requires.
- Confirm the underlying claim is inside chapter 176 at all, and check whether the exclusive remedy rule or a § 176.82 retaliation claim is also in play.
The observation
The Naig court described its own subject as “the confusing and difficult relationships among employers, employees, and third-party tortfeasors under the Worker’s Compensation Act.” Almost fifty years and several supreme court opinions later, the description holds.
What makes the doctrine durable is that it solves a problem the statute created. Subdivision 6 is a distribution formula, and a formula applied to a whole settlement necessarily distributes money that was paid for things the carrier never covered — loss of consortium, disfigurement, pain and suffering. As the Naig court put it, crediting part of such a settlement to the employer “effectively precludes the employee from seeking a settlement of his own claims.”
The doctrine’s cost is equally structural. The one-third in subdivision 6(a)(2) exists because the legislature decided an injured worker should get something off the top of a third-party recovery regardless of how large the lien is. An employee who takes a Naig settlement is, per Naig, giving that protection up. Whether the trade is a good one is arithmetic, and it is arithmetic that has to be done before the release is signed rather than after.
Madgett Law, LLC handles Minnesota third-party injury claims arising out of work injuries, including the subrogation, allocation, and notice questions that decide what an injured worker actually keeps. If a compensation carrier is asserting a lien against your injury settlement, the allocation language in the release is the first thing to read. Send us a message or call 612-470-6529.
Sources: Minn. Stat. § 176.061 (subd. 5, paragraphs (a) and (b), cumulative remedies, the employer’s deduction from benefits payable “in accordance with subdivision 6,” and the reciprocal intervention rights; subd. 6, paragraph (a), clause (1), deduction of “the reasonable cost of collection, including but not limited to attorney fees and burial expense in excess of the statutory liability,” and clause (2), “one-third of the remainder shall in any event be paid to the injured employee or the employee’s dependents, without being subject to any right of subrogation”; subd. 6, paragraph (b), the employer’s reimbursement less the pro rata share of collection costs; paragraph (c), balance to the employee and credit to the employer for benefits obligated but unpaid and for future benefits; paragraph (d), “There shall be no reimbursement or credit to the employer or to the special compensation fund for interest or penalties.”; subd. 7, the employer’s separate additional cause of action for medical treatment and other compensation; subd. 8a, “In every case arising under subdivision 5, a settlement between the third party and the employee is not valid unless prior notice of the intention to settle is given to the employer within a reasonable time,” the voiding sentence as against the employer’s subrogation or indemnity right, and the requirement that “a copy of the complaint and notice of trial or note of issue in the action shall be served on the employer or insurer”; subd. 11, first paragraph, the third party’s right of contribution against a faulted employer capped at the net amount recovered under subd. 6, paragraphs (b) and (c), and the employer’s ability to avoid it “by affirmatively waiving, before selection of the jury, the right to recover workers’ compensation benefits paid and payable”). Minn. Stat. § 62A.095 is named only for the contrast and is treated in the linked article. All statutory text retrieved from the Minnesota Office of the Revisor of Statutes, revisor.mn.gov, on 2026-08-10.
Naig v. Bloomington Sanitation, 258 N.W.2d 891 (Minn. 1977) (No. 46983, decided October 7, 1977) — reporter citation, docket number, court, and date taken from the Caselaw Access Project structured case metadata at static.case.law/nw2d/258, and the opinion read in full from the CAP archival text at static.case.law/nw2d/258/cases/0891-01.json. Relied on for: the certiorari posture from the Workers’ Compensation Court of Appeals; the January 8, 1970 injury; the withdrawal of counsel and the notice to the compensation insurer; the September 11, 1975 settlement read into the record in Hennepin County District Court; the $18,000 settlement and the footnoted arithmetic ($6,691.80 collection costs, $3,769.40 one-third, $7,538.80 credit); the parties’ agreement that the settlement “encompasse[d] everything other than the subrogated interest of the compensation carrier”; the quoted rule conditioning the no-credit result on notice and on demonstration or allocation, and the waiver of “his statutory right to one-third of the employer’s net recovery from the third-party”; the statements that the employer “in no way is prejudiced,” that the tortfeasor’s admission “should estop that party from contending the contrary in a suit brought by the employer,” that crediting “effectively precludes the employee from seeking a settlement of his own claims,” the description of “the confusing and difficult relationships among employers, employees, and third-party tortfeasors under the Worker’s Compensation Act,” and the holding “that no part of the settlement proceeds can be credited against the employer’s obligations under the act.” The 1977 opinion cites the one-third provision as subd. 6(b) under the then-current lettering, quoted in its footnote 3; the current statute places it at subd. 6(a)(2).
Tyroll v. Private Label Chemicals, Inc., 505 N.W.2d 54 (Minn. 1993) (No. C1-92-479, decided August 27, 1993) — reporter citation, docket number, court, and date taken from the Caselaw Access Project structured case metadata at static.case.law/nw2d/505, and the opinion read in full from the CAP archival text at static.case.law/nw2d/505/cases/0054-01.json. Relied on for: the quoted division of recoverable and nonrecoverable damages including the qualifier “at least ordinarily”; the statement that loss of earning capacity “sufficiently overlaps the kind of loss contemplated by workers’ compensation benefits” (footnote 6); the holding limiting the employer’s post-Naig subrogation action to “recovery of common law damages for past and future wage loss, loss of earning capacity, and similar items of damages, if any,” that “[t]his recovery is not subject to the subdivision 6 formula,” that “there is no additional recovery for attorney fees and no credit remaining outstanding”; the holding that the defendant tortfeasor is entitled to a jury trial and the “nature and character of the controversy” standard; the pretrial determination of benefits paid and payable and the presumption that “benefits paid by the employer were reasonable and proper expenditures under the Workers’ Compensation Act”; and the statement that the tortfeasor “is free to argue to the jury that it is not liable for loss of wages and earning capacity caused by an injury unrelated to the accident involved in the subrogation suit.”
No citator was consulted; the Caselaw Access Project contains none. This article reports what these two opinions say and what § 176.061 says as of 2026-08-10; it does not assert the current precedential status of either decision, and it does not address later court of appeals decisions applying them. It also does not address post-verdict Naig-type settlements, which Tyroll distinguishes from the pretrial posture it decided. This is general legal information about Minnesota law, not legal advice, and reading it does not create an attorney–client relationship. Every case depends on its own facts. No outcome is promised or implied.