Court of Appeals Concludes that District Court Has Jurisdiction to Hear Claims for Fraud and Unjust Enrichment Against Claimant

In The Cincinnati Insurance Companies v. Kirk, No. 0-950 (Iowa App. May 25, 2011), the Court of Appeals concluded that the district court had jurisdiction to hear claims made against the claimant for unjust enrichment and fraud after claimant allegedly fraudulently received medical and indemnity benefits from the workers' compensation carrier.  The facts of the case are unusual, and the decision of the Court of Appeals should be seen in that light.

Claimant suffered an injury to his left arm, and was provided with medical treatment and indemnity benefits.  The insurance carrier decided to conduct surveillance when the healing process did not go as smoothly as expected.  That surveillance allegedly revealed that claimant, prior to an appointment with his workers' compensation physician, was seen striking his injured left arm repeatedly while sitting in his car.  Following this surveillance, the carrier filed claims for fraudulent representation, unjust enrichment, money had an received, and restitution.  The carrier sought recovery of $29,000 in medical expenses, indemnity benefits, and administrative expenses.

Claimant filed a motion to dismiss the claims, arguing that the claims were within the exclusive jurisdiction of the workers' compensation commissioner.  The district court granted the motion to dismiss, finding that the rights concerning workers' compensation benefits are to be first considered by the commissioner.

On review, the Court of Appeals reversed.  The court noted that Iowa has adopted a bad faith tort as an exception to the normal rule of exclusivity.  This was premised, in part, on the fact that there was no adequate remedy provided by the workers' compensation act.  The court concluded that there was no adequate remedy under the Act to recover the expenses and costs incurred by the carrier in this case.  The court noted that sections 85.34(4) and (5) only provide a credit against future benefits, and stated that "if the worker does not want to repay the benefits, neither the commissioner nor the insurance carrier can force the worker to pay."  In the case of fraudulent conduct, according to the court, this remedy is inadequate. The court noted this was even more true where an employee no longer worked for the company at which the injury was incurred, as there would be no future claims against which a credit could be applied.

The court also concluded that the inadequacy for the recovery of indemnity benefits was similar to the inadequacy of penalty benefits under section 86.13 to address bad faith claims.  The court cited to Boylan v. Am. Motorists Ins. Co., 489 N.W.2d 742, 744 (Iowa 1992), which established bad faith claims in workers' compensation actions, and noted that "just like in Boylan, we find it unlikely the legislature intended the credit provision in section 85.34 to be the sole remedy for insurance carriers where a claimant fraudulently obtains benefits."  According to the court, if there were no remedy in court, this would allow workers to commit fraud and the carrier would have no recourse.  The court concluded that this remedy encompassed both indemnity and medical benefits.

In terms of the claim for fraud, the court concluded that if fraudulent conduct occurred independent of an subsequent to the work injury (here there was no question that the original injury was work related), the district court and not the commissioner had jurisdiction to hear the case.  If the fraud is extrinsic and collateral to the matter decided by the commissioner, the district court properly had jurisdiction.

The court also concluded that the district court had interpreted Zomer v. West River Farms, Inc., 666 N.W.2d 130, 135 (Iowa 2003) in too broad a fashion.  Zomer involved the reformation of an insurance policy, and the Supreme Court concluded that the commissioner had jurisdiction to decided this issue because this was necessary to a determination of liability under the workers' compensation statute.  The Court of Appeals concluded that Zomer did not apply, because the issue of whether claimant fraudulently received workers' compensation benefits was not an essential prerequisite to a determination of compensability.

Finally, the court found that both the commissioner and the district court would need to hear evidence and reach factual findings to determine whether fraudulent misconduct had occurred.  The court found that the fact that there was the possibility of inconsistent or contradictory findings does not mean that the district court did not have jurisdiction.  Instead, the issue should be addressed using preclusion principles and stays of proceedings. In this case, the court indicated that the district court proceedings could be stayed pending conclusion of the workers' compensation claim, and issue preclusion could be applied to prevent inconsistent results.

Although the facts of the Kirk case may be unusual, the decision could potentially have broad application to any situation where an insurance carrier wished to allege fraud against the claimant.  The case creates a new cause of action in favor of the workers' compensation carrier, and although partially analogous to a bad faith claim, the fact that the workers' compensation law is to be interpreted liberally in favor of the claimant and not the insurer creates a distinction between Kirk and Boylan.  In light of the potentially broad reach of the decision, it would not be surprising if the Supreme Court were to grant further review.

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