Supreme Court Concludes that Third-Party Administrator is Not a Proper Party in Bad Faith Action

Acting on a certified question of law from the federal district court, the Supreme Court in De Dios v. Indemnity Insurance Co. of North America and Broadspire Services, Inc., No. 18-1227 (Iowa May 10, 2019) concluded that a bad faith action was not proper against a third party administrator because the administrator did not possess the attributes that have led to the imposition of bad faith liability

The dispute arose out of a workers' compensation claim in which plaintiff  sued both the insurance carrier and 3d party administrator for bad faith.  The court found that the bad faith cause of action arises from: 1) the special contractual relationship between the insurer and insured, 2) the specific statutory duties imposed on insurers, or  3)some combination of the two.  Because a 3d party administrator did not possess these attributes, according to the court, bad faith liability against that entity was improper.

The court canvasses the law of bad faith, both generally and in the workers' compensation context.  The court stressed in these earlier cases that the bad faith tort was justified by the nature of the contractual relationship between the insurer and the insured.  The court noted the extension of bad faith to workers' compensation action in Boylan v. Am. Motorists, Ins., 489 N.W.2d 742 (Iowa 1992) and the further extension to self-insured employers in Reedy v. White Consolidated Industries, 503 N.W.2d 601 (Iowa 1993).  In Bremer v. Wallace, 728 N.W.2d 803 (Iowa 2007), the court refused to extend the doctrine to non-insured employers.  The court based this refusal on the fact that both insurance companies and self-insureds were governed by the Iowa Code and had affirmative obligations under the Iowa Code.  According to the court, it was "the nature of the workers' compensation insurer's relationship with the insured employees and corresponding statutory duties that give rise to bad-faith tort liability."

The court finds that a 3d party administrator is not in an insurer/insured relationship with anyone.  Furthermore, the 3d party does not have to meet rigorous financial requirements under the Iowa Code and is not under the ongoing supervision of the workers' compensation commissioner.  No affirmative obligations are imposed on 3d party administrators under the workers' compensation laws. The court also finds that although an insurer could delegate its duties, the insurer didn't have a free pass.  First, if the 3d party is an agent, then vicarious liability would apply.  Second, the nondelegable duties remain on the carrier regardless of any attempt to pass them to a third party.  In the court's conception,  an insurer could not delegate its duty of good faith and would continue to be liable for bad faith regardless of the delegation of duties. 

Ultimately, the court refuses to find that a 3d party administrator, even if it acts sufficiently like an insurer, is liable for bad faith and that the legislature has established under 87.1, 87.4 and 87.11 of the Code that parties that can be liable for bad faith. 

Justices Appel and Wiggins dissented and would apply bad faith liability to 3d party administrators because those administrators act in lieu of insurance companies and under a more modern conception of bad faith, should be held liable.