(Article from Insurance Law Alert, May 2017)
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The Iowa Supreme Court ruled that a workers’ compensation insurer was liable for bad faith even though it did not breach the insurance policy. Thornton v. American Interstate Ins. Co., 2017 WL 2200461 (Iowa May 19, 2017).
The dispute arose out of a work-related injury that left Toby Thornton partially paralyzed. His workers’ compensation insurer paid weekly benefits, but contested whether he was permanently and totally disabled (“PTD”). Additionally, the insurer resisted Thornton’s petition for a partial commutation award, which would have allowed him to obtain a lump sum payment in addition to reduced weekly payments. The Iowa Workers’ Compensation Commissioner later determined that Thornton was PTD and granted his petition for partial commutation. Thereafter, Thornton sued the insurer for common law first-party bad faith. Ruling on cross-motions for summary judgment, a trial court held that the insurer acted in bad faith as a matter of law by contesting PTD and commutation. A jury awarded Thornton $25 million in punitive damages and $284,000 in compensatory damages.
On appeal, the insurer argued that it could not be liable for bad faith because it voluntarily and continuously paid weekly benefits under its policy. The court rejected this argument, finding that bad faith may be established when an insurer lacks a reasonable basis for denying benefits under the policy. The court reasoned that “the requisite ‘denial’ may occur when an insurer unreasonably contests a claimant’s PTD status or delays delivery of necessary medical equipment,” even in the absence of a breach of a specific policy term. Because the record clearly established Thornton’s PTD shortly after the accident, the court affirmed that the insurer lacked any reasonable basis to dispute that status.
However, the Iowa Supreme Court reversed the trial court’s finding of bad faith as a matter of law based on the insurer’s resistance to commutation. The court explained that unlike mandated weekly payments, commutation is a discretionary issue, based on the Commissioner of Insurance’s consideration of various factors. As such, the court concluded that Thornton’s petition for commutation was “fairly debatable” on its facts. Notably, the court declined to foreclose the possibility that a bad faith claim may arise for resisting commutation under different facts, but held that the present record did not establish bad faith and that the insurer was entitled to summary judgment on that issue.
Finally, the court ruled that Thornton was not entitled to fees incurred in prosecuting his bad faith action, noting the lack of statutory or common law support for such damages under Iowa law. The court distinguished such fees from costs incurred by Thornton in the workers’ compensation proceedings to establish coverage, which are allowable as compensatory damages. The court reversed the trial court judgments for actual and punitive damages and remanded the case for a new trial on the remaining bad faith claims.