Essentials: To Sue or Not To Sue

Courts and state legislatures have variously resolved the question of whether state-specific workers’ compensation legislation precludes common-law tort actions for insurer bad faith conduct in mishandling a claim for benefits. The threshold question is whether the exclusive remedy provisions that are uniformly part of state workers’ compensation acts preclude a private right of action for bad faith claims arising out of the administration of workers’ compensation benefits. The courts are almost equally divided on this issue.

In the following states, the courts have held that the workers’ compensation insurer is entitled to immunity under the exclusive remedy provisions of the relevant state workers’ compensation act: Alabama, Arkansas, California, Connecticut, District of Columbia, Georgia, Idaho, Illinois, Indiana, Kentucky, Louisiana, Massachusetts, Minnesota, Missouri, Nebraska, New Mexico, New York, Pennsylvania, Rhode Island, South Carolina and Washington.

The states whose courts have allowed a common-law bad faith cause of action against workers’ compensation insurers are: Arizona, Colorado, Delaware, Hawaii, Iowa, Minnesota, Mississippi, Montana, Nevada, North Carolina, Ohio, Oklahoma, South Dakota, Texas and Wisconsin.

Barring Bad Faith Lawsuits

Many of the courts that have imposed the exclusive remedy bar have done so without significant analysis. These courts find that the workers’ compensation statutory exclusive remedy bar is to be broadly interpreted foreclosing common-law bad faith lawsuits.

These courts generally find that the existence of a penalty for late payment of claims indicates generally that the state legislature had intended to expand the state’s statutory exclusive remedy provision to bar bad faith claims arising from the delayed payment.

While some courts note that statutory penalties do not adequately compensate the employee for damages caused by late payments, the courts nevertheless find that the imposition of a penalty, irrespective of its adequacy, reveal a legislative intent to preempt common-law causes of action. Some of these courts have held that a common-law bad faith cause of action does not arise from delayed payment of a workers’ compensation claim unless the insurer or self-insured employer has committed offenses greater than mere delay of payment.

Joel E. Fenton, in his book, “The Tort of Bad Faith in Iowa Workers’ Compensation Law,” observed:

“The exclusivity principle is the great fence that seeks to enclose all work-related tort-like injuries. The overriding fear is that the exclusivity principle will begin to disintegrate, with each new application of judicial gloss forcing the law to ‘become honeycombed with independent and conflicting rulings of the courts.'” (45 Drake L. Rev. at 848 (citing Noe v. Travelers Ins. Co., 342 P.2d 976, 979 (Cal. Dist. Ct. App. 1959))).

An example of this approach can be seen in the Connecticut Supreme Court’s decision in DeOliveira v. Liberty Mut. Ins. Co., 273 Conn. 487, 870 A.2d 1066 (2005). In DeOliveira, the court held that Connecticut would not recognize a common-law cause of action for bad faith handling of a workers’ compensation claim. Central to the court’s ruling was the conclusion that the statutory penalties within Connecticut’s Workers’ Compensation Act demonstrated a legislative intent to confine the available remedies to those provided by the relevant penalty statutes. The court bolstered its legislative intent analysis by examining the legislative history of the Workers’ Compensation Act.

Focusing on legislative testimony, the court noted there was legislative testimony at a time when the act underwent major revisions that described “horrific circumstances” that resulted from bad faith claims handling in the workers’ compensation context. From this legislative history, the court concluded that “the legislature clearly was aware of the scope and nature of this problem and presumably crafted the remedies that it deemed fit.” <Id. at 1073-74.

Based on the legislative history, the court in DeOliveira found that bad faith claims handling was a “risk contemplated by the compensation bargain,” and therefore fell within the Act’s exclusive remedy provisions. Id. at 1076. The court found that the various statutory penalties for undue or unreasonable delay were “broad enough to encompass the bad faith processing of a workers’ compensation claim,” thus preempting a judicially created common-law cause of action. Id. at 1077.

Where Lawsuits Have Been Allowed

A central viewpoint of courts that have allowed a common-law tort of bad faith in the workers’ compensation context finds that a cause of action that reaches the status of an intentional tort is not within the purview of the exclusive remedy provisions of their respective state workers’ compensation act. These courts find that the exclusive remedy provisions are only designed to insulate the employer against common-law liability for the ordinary hazards of employment.

Central to this analysis is the observation that a common-law “bad faith” tort requires the insurer to indulge in intentional misconduct, which places it outside the framework of a state’s workers’ compensation system. Therefore, the insurance company, by its own conduct, abandons the protection of exclusive remedies when the insurer commits bad faith. See, e.g., Spearman v. Exxon Coal USA, Inc., 16 F.3d 722 (7th Cir. 1994), finding that a bad faith cause of action is a fault-based tort and does not arise under workers’ compensation laws.

An example of this approach can be found in the Iowa Supreme Court’s decision in Boylan v. American Motorists Ins. Co., 489 N.W.2d 742 (Iowa 1992). The court in Boylan disregarded the penalty provisions of the Iowa statute applicable to an insurer’s wrongful conduct in the administration of benefits. See Iowa Code § 86.13 (1991).

The court in Boylan concluded that it was unlikely that the legislature intended the penalty provisions to be the sole remedy for all types of wrongful conduct by insurers, with respect to the administration of workers’ compensation benefits.

The court gave the following reasons for reaching this conclusion:

Partial Immunity

A few courts have used a hybrid approach, finding that their state’s workers’ compensation statutes grant immunity to insurers for routine bad faith delay claims but allow a common-law tort action where extreme misconduct is involved. See, e.g., McCutchen v. Liberty Mut. Ins. Co., 699 F.Supp. 701, 710 (D. Ind. 1988) and Continental Cas. Ins. Co. v. McDonald, 567 So.2d 1208, 1219 (Ala. 1990).

An example of this approach can be seen in the Alaska Supreme Court’s decision in Stafford v. Westchester Fire Ins. Co. of New York Inc., 526 P.2d 37 (Alaska 1974). In Stafford, the court found that Alaska Stat. § 23.30.155, Alaska’s penalty statute, was enacted by the Alaska Legislature to cover situations where the employer or insurer negligently, or willfully, failed to make timely compensation payments to claimants. Id. at 43.

However, the court held that the penalty statute was not intended to operate as the exclusive remedy for all intentional wrongdoings. In those circumstances where there had been tortious conduct that went beyond the bounds of untimely payments, the court in Stafford held that exclusive immunity from suit provided by the Workers’ Compensation Act was lost. Id.

Legislative Intervention

In a few instances, state legislatures have reacted to their state’s judicial adoption of a common-law bad faith tort in the workers’ compensation context by passing legislation strengthening the exclusivity provision of their workers’ compensation act to include bad faith misconduct. These corrective legislative attempts have experienced mixed success.

As an example, the Wisconsin and Indiana Legislatures were successful in reestablishing exclusivity after their courts had permitted a common-law tort of bad faith (see Wis. Stat. Ann. § 102.18(3)(bp) (West. Supp. 1984) and Ind. Code § 22-3-4-12.1(a)), while the Arizona Legislature was unsuccessful (see, e.g., Hayes v. Continental Ins. Co., 178 Ariz. 264, 872 P.2d 668 (1994)).