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February 26, 2015

Should Bad Faith Matter in Work Comp?

Summary:

States are evenly split on whether to allow "bad faith" lawsuits against insurers and third-party administrators. Who's right?

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Here’s a sensitive question for the workers’ compensation community: Should workers’ compensation insurance companies and third-party administrators be subject to civil “bad faith” lawsuits?

Or should a state’s workers’ compensation system remain an exclusive remedy, even if a claims payer intentionally commits egregious acts such as denying benefits that it knows are due?

WorkCompCentral Legal Editor Sherri Okamoto reports that about half of the states have done away with any civil bad faith remedy either through legislative or judicial actions, and that the other half retain that remedy.

The contrasts are stark.

Okamoto cites an Iowa jury award an earlier this month of $25 million in punitive damages, along with $284,000 in damages, payable by the former employer’s workers’ compensation carrier for its bad-faith handling of his claim. The offense was failure to pay permanent total disability benefits after a 2009 accident left the worker with catastrophic injuries.

Other states where there is no civil remedy rely on administrative penalties and administrative judicial enforcement, but those policies, in states such as California, have been criticized for not sufficiently deterring bad behavior such as wrongfully denying medical care to the critically injured.

Okamoto notes that the states that do allow for civil remedies vary widely in the standards and definitions for reprehensible conduct.

Alaska and Arizona, for example, define “bad faith” as a refusal to pay a claim without any arguably reasonable basis. In contrast, Arkansas requires a showing of “affirmative misconduct” or “dishonest purpose” to avoid liability.

Colorado, Maine and Michigan make a carrier’s failure to act in good faith a breach-of-contract claim. Hawaii and Mississippi make carrier misconduct redressable in tort.

Texas used to permit bad faith actions until the Supreme Court’s decision in Texas Mutual Insurance Co. v. Ruttiger, which held there was no common-law bad-faith action in the Lone Star State for workers’ compensation claims handling.

Likewise, two months after Ruttiger came out, the New Jersey Supreme Court held that the state’s injured workers do not have a common-law right of action for pain and suffering caused by an insurer’s administration of a workers’ compensation claim in Stancil v. Ace USA.

The North Carolina Court of Appeals ruled recently that an injured worker cannot bring a tort action to recover damages from an insurance carrier for its alleged bad-faith claims handling.

The split surely raises the passions in people: Civil remedies fly in the face of the concept of administrative expediency that underlies workers’ compensation; yet, administrative enforcement needs sufficient “teeth” to encourage compliance and deter bad behavior.

What do you think?

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About the Author

David DePaolo is the president and CEO of WorkCompCentral, a workers’ compensation industry specialty news and education publication he founded in 1999. DePaolo directs a staff of 30 in the daily publication of industry news across the country, including politics, legal decisions, medical information and business news.

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