(Article from Insurance Law Alert, May 2019)
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Answering a certified question, the Iowa Supreme Court held that a common law cause of action for bad faith failure to pay workers’ compensation benefits is not actionable against a third-party claims administrator. De Dios v. Indem. Ins. Co. of N. Am., 2019 WL 2063289 (Iowa May 10, 2019).
A worker who was injured during the course of employment sued his workers’ compensation insurer and its third-party claims administrator, alleging bad faith failure to pay benefits. The Iowa Supreme Court ruled that the claim was not actionable against the third-party administrator. The court explained that the primary justification for recognizing bad faith claims against workers’ compensation carriers is “the existence of certain ‘affirmative obligations’ placed upon them by our statutory and regulatory scheme.” However, those same duties do not apply to third-party administrators under Iowa law, and administrators are therefore not the equivalent of insurers for purposes of bad faith liability.
As the court noted, courts in the majority of jurisdictions that have addressed this issue have concluded that bad faith is not actionable against third-party administrators in the workers’ compensation context. Colorado courts, as an exception to this general trend, have allowed such bad faith claims to proceed based on a specific statutory and regulatory scheme governing workers’ compensation. Courts in other jurisdictions, including Arizona, Oklahoma and Washington, have allowed claimants to pursue claims against third parties where those entities (1) engaged in tasks that created a quasi insurer-insured relationship; (2) were subject to the same statutory duties as insurers; or (3) bore some of the financial risk of loss for the workers’ compensation claims.