Iowa Bars Bad Faith Against TPAs, but Question Unsettled Elsewhere

A split decision by the Iowa Supreme Court last week resolves the issue in one state, but the question of whether third-party administrators can be held liable for the tort of bad faith remains unsettled in much of the country.

Iowa’s high court held May 10 that Broadspire Services could not be held liable for the tort of bad faith for failing to pay workers’ compensation benefits because it did not have a contractual relationship with the claimant. The question was put to the court by the federal district court in Sioux City to decide if a federal lawsuit against Broadspire by claimant Samuel De Dios could proceed.

The Supreme Court had held previously that Iowa workers’ compensation carriers can be held liable in bad faith actions because state statues place an “affirmative obligation” on insurance carriers to act reasonably. But those statutes do not place similar requirements on third-party administrators, the Supreme Court said.

“A third-party administrator is not in an insurer/insured relationship with anyone,” the court said in a 5-2 majority opinion written by Edward M. Mansfield. “And unlike a self-insured employer, a third-party administrator does not have to meet rigorous financial requirements and is not under the ongoing supervision of the workers’ compensation commissioner.”

De Dios claimed that Broadspire did not conduct even the most basic investigations the workers’ compensation claim he had filed against his employer, Brand Energy & Infrastructure Services, after his vehicle was rear-ended by a co-worker. He alleged that the claims adjuster never contacted the employee who manned the guard shack at his workplace, who would have confirmed that his vehicle was struck after he drove into the fenced job site and was on his way to a parking area designated by his employer.

The court’s opinion said that there is little case law in Iowa to guide it. The opinion notes that about half of U.S. bar even first-party bad-faith claims in the workers’ compensation context.

De Dios had urged the court to adopt the approach taken by The Colorado Supreme Court, which held in 1991 that an independent claims adjuster had a duty of good faith when processing a workers’ compensation claim. But the Iowa high court said that ruling was based on Colorado’s statutory and regulatory scheme, which is not the same as Iowa’s.

At least two other Western states — California and Washington — have reached conclusions similar to Colorado’s.

Merton E. Marks, an insurance defense attorney affiliated with the Gordon and Rees law firm in Phoenix, Arizona, said in 2017 the Washington Court of Appeals ruled in Merriman v. Am. Guar. & Liab. Ins. Co. that third-party administrators and claims adjusters can be held liable for bad faith.

Similarly, the California courts have also held TPAs liable in bad-faith claims under the theory that they act in a “joint venture” with insurance carriers.

In fact, at least one California law firm markets its services for bad-faith litigation against TPAs.

“Under joint venture liability theory, the policyholder alleges that, unlike agents or employees of the insurer, the TPA entered into the business of insurance as a joint venture with the insurer,” a January 2018 blog post by the McKennon Law Group in Newport Beach states. “As such, both the TPA and the insurer may be held legally accountable for their bad faith conduct.”

Attorney Robert McKennon said Monday the he was unable to comment on the Iowa Supreme Court decision because he had not read it and was busy preparing for litigation.

Marks said the question of whether a third-party administrator can be found liable for bad faith hasn’t been settled in his home state of Arizona, but he would advise claims officials to presume that they are vulnerable to such suits. He noted that in a 2015 decision, the U.S. District Court held that a claims administrator was liable for bad-faith as a matter of law after it delayed paying workers comp benefits owed to a claimant for 10 months after recognizing that it had miscalculated the amount due.

As it happens, that case was filed against the insurer, not the TPA directly, but Marks said he thinks Arizona courts would rule that a TPA can be held liable for bad faith.

However, Marks said that Arizona courts won’t award damages for bad-faith if mere negligence is involved. The insured must show that the claims administrator had some “evil” motive.

“These are fairly rare cases,” Marks said. “It has to be really egregious conduct.”