In the case of Thornton vs. American Interstate Insurance Company, (May 19, 2017) the Iowa Supreme Court agreed that a workers compensation insurer had acted in bad faith as a matter of law in opposing an undisputed PTD claim at hearing, but disagreed that its opposition to a partial commutation was also in bad faith. The jury had awarded $25 million in punitive damages and $284,000 in compensatory damages.
The facts are complicated but important in order to understand the bad faith behavior claimed. In June 2009, the Employee was paralyzed below his chest, leaving him with no use of his left hand and limited use of his right hand, from a work related driving accident. The insurance carrier’s conduct in addressing the claim included the following: The adjuster went to the hospital within two days, met with the family, and advised that benefits would begin immediately. Two weeks after the accident the insurer received a medical opinion from Employee’s examining physician that Employee was permanently and totally disabled (PTD). The carrier internally acknowledged and reserved his claim as PTD and began benefits that week. These benefits continued through trial. The Employee’s attorney requested wage documentation multiple times over two months, which was eventually provided, and which resulted in a $7 per week increase based on the new agreed wage. When released from the hospital, the Employee moved into his in-laws’ home and the insurer arranged for modifications including installing a shower and hospital bed. The insurer provided a wheelchair and van which was specially modified to the Employee’s height and weight. In June of 2010, the carrier hired a home health care nurse so the Employee’s wife could return to work. Then, when the Employee separated from his wife and needed to move out, the carrier arranged for home health care and modifications to his new apartment. The carrier also arranged for the Employee to take a disabled driver’s test.
In March 2011 the treating doctor opined that the Employee was at MMI. The carrier continued paying weekly benefits, assuming this was a PTD case. The insurer made two structured settlement proposals to Employee at that point (with Medicare Set-Aside provisions), but the Employee did not wish to discuss settlement until his divorce was finalized. In May of 2012 , the Employee filed its Petition, alleging that he was PTD. The carrier denied the PTD claim in its Answer. In subsequent discovery, the Employee testified that he would like to get a job someday. Additionally, a vocational report was obtained by the Employer/Carrier in February of 2013 indicating that jobs may be available to the Employee. Discovery further revealed that in March of 2013, defense counsel had met with the treating doctor regarding his opinion the the Employee was permanently and totally disabled, and, following that, the attorney reported that the treater was not going to be changing his PTD opinion. He recommended that the carrier agree to settlement on a PTD basis, and warned that they may face sanctions if they failed to do so. Nevertheless, the Employer/Carrier proceeded to hearing and contested the claim of a PTD, with the adjuster explaining that they felt they had at least the right to go to hearing. On May 23, 2013 the Deputy found the Employee to be permanently and totally disabled.
Shortly after the PTD award, the Employee filed a petition seeking partial commutation of the PTD award in a lump sum of $761,957 in order to buy a home, pay attorney’s fees, and invest. The record demonstrated that the Defendants felt that although there was a good chance the Employee might be awarded the partial commutation, they also believed he was not entitled to it. As such, the Defendants resisted the petition. The Defendants offered evidence that the Employee had a history as a poor money manager. They also presented experts who opined that commutation was not in his financial best interests and he did not have a sound game plan to protect or justify the lump sum commutation. The Employee presented his own experts who opined that the commutation was in his best interests if did not invade the principal. In May of 2014, the Deputy granted partial commutation in a decision sharply critical of Defendants, and also awarded the costs of the Employee’s two experts.
Thereafter, the Employee filed a civil action for bad faith claims handling against the insurance carrier, alleging bad faith in disputing whether the Employee was PTD, and in contesting his petition for a partial commutation (lump-sum) award.
The district court instructed the jury that the insurer, by contesting the PTD claim and commutation, had acted in bad faith as a matter of law by March 11, 2013 (nearly four years after the accident), and that the jury was to determine to what extent the carrier had acted in bad faith prior to that time. The jury then found the insurer had committed bad faith as of September 1, 2009, coinciding with its refusals to give wage information and its internal recognition of a PTD claim. The jury awarded $284,000 in compensatory damages and $25 million in punitive damages.
On appeal of that decision, the Supreme Court first agreed that the insurer knew or should have known it lacked any reasonable basis to dispute that the Employee was permanently and totally disabled, and, therefore, held that portion of the jury instruction was not in error.
The Supreme Court then analyzed the issue of whether a workers’ compensation insurer that pays weekly benefits can still be found in bad faith. It rejected the insurer’s argument that since the insurance contract was not introduced into evidence, and since all PTD benefits were paid, bad faith could not be found due to no showing of a denial of a right guaranteed in the contract. The Court explained that insurance contracts contain an implied covenant of good faith that neither party will do anything to injure the rights of the other in receiving the benefits of the agreement. The Court further stressed that the reason the tort of bad faith claims handling is recognized in Iowa is because traditional damages for breach of contract will not always adequately compensate an insured for an insurer’s bad faith conduct. The Court also noted that insurance policies are contracts of adhesion, with unequal bargaining power between the insurer and insured. The Court explained that to establish a first-party bad-faith claim against a workers’ compensation insurer, the plaintiff must show: (1) that the insurer had no reasonable basis for denying benefits under the policy and, (2) the insurer knew, or had reason to know, that its denial was without basis.
The Court concluded that the workers’ compensation insurer unreasonably contested the Employee’s PTD status at hearing despite early opinions from a medical professional and its own claims adjuster that the Employee, a quadriplegic, was permanently and totally disabled.
However, the Court did find that the lower court erred by instructing that the insurer was in bad faith as a matter of law for resisting the partial commutation. The Court disagreed that settlement negotiations rather than immediate stipulation to PTD was bad-faith conduct, explaining that negotiations can be mutually beneficial to both employees and insurers, and that all parties are entitled to engage in settlement negotiations. Regarding resisting commutation, the Court explained that commutation is different than the payment of weekly benefits, which are commanded by statute. Commutation is only appropriate if the Employee demonstrates that commutation is in his best interests and therefore involves a weighing by the Commissioner of the worker’s preference and the benefits to the worker of receiving a lump sum payment against the potential detriments that would result if the worker invested unwisely, spent foolishly, or otherwise wasted the funds. The Court concluded the insurer was not in bad faith for resisting commutation because the Employee’s petition for commutation was fairly debatable on its facts due to omissions in his proposed budget, his past spending habits, and his lack of experience with investments.
The Court held that the district court erred by instructing the jury that the insurer acted in bad faith by opposing the Employee’s commutation. Therefore, the Court concluded that the trial was fatally tainted by the erroneous instruction. As such, the Court remanded the matter for a new trial on liability and damages, although the separate instruction that the insurer acted in bad faith in opposing the PTD claim was upheld.
This case illustrates the many pitfalls potentially facing an insurance carrier when handling a catastrophic claim of this nature, and the painstaking care which must be taken with every claims handling decision in order to demonstrate reasonableness and compliance with Iowa workers compensation law. Thanks to I&F Partner Terry Donohue for thus summary of this case. Terry handles Iowa claims for the firm and works out of the Chicago and Des Moines offices of Inman and Fitzgibbons. Please feel free contact Terry with any Iowa workers’ compensation questions.