In Thornton v. American Interstate Insurance Company, No. 15-1032 (Iowa May 19, 2017), plaintiff was awarded $284,000 in compensatory damages and $25 million in punitive damages by the jury in a case involving the payment of workers' compensation benefits in a permanent total disability case. The Supreme Court concludes that the insurer lacked any reasonable basis to dispute PTD status and affirmed summary judgment for the claimant. The Court also held, however, the district court erred in holding that the insurer acted in bad faith as a matter of law for resisting claimant's partial commutation petition. The judgments for compensatory and punitive damages were reversed and remanded.
Plaintiff had a serious injury while working as an over the road truck driver. As a result of this injury, the insurance carrier began paying benefits and set its reserves in an amount based on a PTD finding. The evidence at trial indicated that the insurance carrier and its attorney believed that Mr. Thornton's claim was a PTD claim. Defendants presented settlement proposals to plaintiff based on payment of a PTD claim on a structure with a Medicare Set Aside and closure of the file. Plaintiff filed a workers' compensation claim and defendants denied PTD in answer to the petition. A mediation failed and the case proceeded to hearing. Defendants' witness indicated that although there may not have been a reasonable defense, he felt that they still had a right to go to hearing. Claimant was found PTD after hearing.
Plaintiff subsequently filed a partial commutation claim. Defendants resisted the partial commutation claim. Defendants hired an expert to dispute that a partial commutation was in claimant's best interests. A partial commutation was granted following hearing and indicated it would be hard to imagine a clearer scenario where a partial commutation should be granted.
The Supreme Court found that to establish a first party bad faith claim against a workers' compensation insurer, plaintiff must show that there was no reasonable basis for denying benefits and the insurer knew or had reason to know that its denial was without basis. The Court discusses earlier workers compensation bad faith claims and concludes that bad faith depended on the carrier's conduct in light of its statutory obligations and not the specific wording of the insurance contract. Therefore, the failure to introduce the contract at trial did not defeat claimant's claim.
The district court had ruled, as a matter of law, that defendants had acted in bad faith. The concluded that this decision was appropriate with respect to claimant's PTD status. The Court did not believe there was bad faith in the mediation phase of the case. The Court also concluded that there was not bad faith in resisting partial commutation. The Court notes that commutation is not like the payment of weekly benefits, which commands action from the insurer. The resistance to commutation was found to be fairly debatable on its facts.
Because of the ruling on the resistance to commutation, the Court concludes that a new trial on liability and damages is necessary. Much of the $284,000 compensatory damage award was attributable to the delay in commutation portion of the claim. Because of the incorrect ruling on the commutation portion of the bad faith claim, the trial was said to be tainted and the other bad faith claims did not cure the taint from the bad instruction.
Plaintiff had also requested attorney's fees for litigating the bad faith action. The Court, citing the American rule, concludes that the loser does not normally pay attorney's fees and that the bad faith exception to this rule did not apply.
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