In a signficantly divided (5-2) decision, the Supreme Court of Iowa, answering a question certified to it from the U.S. District Court for the Northern District of Iowa, held that, under Iowa law, a common law cause of action for bad-faith failure to pay workers’ compensation benefits may not be maintained against a third-party claims administrator of a workers’ compensation carrier [De Dios v. Indem. Ins. Co. of N. Am. & Broadspire Servs., 2019 Iowa Sup. LEXIS 56 (May 10, 2019)]. Stressing that while such an action may be maintained against both a carrier and a self-insured employer, Justice Mansfield, writing for the majority, said third-party administrators are not charged with the requisite statutory and administrative duties to make them directly liable to a complaining injured worker.
De Dios (“the worker”) was employed by Brand Energy & Infrastructure Services (“the employer). The employer’s workers’ compensation insurance was underwritten by Indemnity Insurance Company of North America (“the carrier”) who, in turn, engaged Broadspire Services, Incorporated (“Broadspire”) as a third-party administrator.
The worker alleged that on April 8, 2016, he sustained work-related injuries to his lower back at one of the employer’s construction sites when his vehicle was rear-ended at the site’s security gate. The incident, which was almost immediately reported to the employer’s safety manager, was witnessed by the security guard.
The worker alleged that subsequently, the carrier or Broadspire made the decision to deny workers’ compensation benefits, that they did so without ever interviewing him or the security guard, that the various defendants denied the worker’s claim before the Iowa Workers’ Compensation Commissioner without conveying the basis for that denial, and that both the carrier and Broadspire had no reasonable basis for denying the claim, and that they knew, or should have known, that there was no reasonable basis to deny the worker’s claim.
The worker then filed a complaint against the various defendants, including Broadspire, alleging that they had acted in bad faith in refusing to pay workers’ compensation benefits. In due course, the district court certified the following question to the Iowa Supreme Court:
In what circumstances, if any, can an injured employee hold a third-party claims administrator liable for the tort of bad faith for failure to pay workers’ compensation benefits?
Majority’s Analysis: First-Party Insurer Bad Faith
Initially, the majority of the Court noted that it had earlier recognized the tort of first-party insurer bad faith [Dolan v. Aid Insurance Company, 431 N.W.2d (Iowa 1988)(en banc). There the court recognized the tort of bad faith conduct, noting that traditional breach of contract damages did not always compensate the insured adequately for an insurer’s bad faith.
Bad Faith Extended to Workers’ Compensation Setting
The majority noted that four years after Donan, the Court extended the holding to workers’ compensation in Boylan v. Am. Motorists Ins., 489 N.W.2d 742, 744 (Iowa 1992). While there was no actual contractual relationship between the insurer and the worker, as was the case in Dolan, the Court said Iowa statutes and administrative law placed obligations on insurers that required them to act reasonably with regard to payments owed under the policies.
Bad Faith Cause of Action Extended to Self-Insurers
The majority observed that in Reedy v. White Consolidated Industries, Incorporated, 503 N.W.2d 601 (Iowa 1993), the Court extended the theory of liability so as to include self-insured employers.
Cause of Action Not Extended, However, to Uninsured Employers
The majority continued that In yet another case, Bremer v. Wallace, 728 N.W.2d 803 (Iowa 2007), the Court had answered the following question in the negative: “Does Iowa recognize a common-law claim for bad-faith refusal to pay workers’ compensation benefits by an uninsured employer?”
Addressing Dolan, Boylan, and Reedy, the Bremer Court found:
The common thread in these decisions is the defendant’s status as an insurer, or in the case of a self- insured employer, the substantial equivalent of an insurer. This status reflects and is consistent with the rationale underlying our decision in Dolan.
In the uninsured employer setting, there was no “insurer” or equivalent. There could, therefore, be no recognized tort for wrongfully refusing to pay workers’ compensation benefits.
No Grounds for Extending Bad-Faith Liability to Third-Party Administrators
The majority said the Dolan/Boylan/Reedy rationale could not be extended to third-party adminstrators. The TPA was not an insurer. It had an insured relationship with no one. And unlike a self-insured employer, a TPA did not have to meet the rigorous financial requirements and was not not under the ongoing supervision of the workers’ compensation commissioner. In short, the workers’ compensation staututes did not impose “affirmative” obligations” on TPAs as they did on insurers [Opinion, p. 14]. With references to TPAs in the statutes, the Iowa legislature was certainly aware of their role.
The majority concluded that the exclusive remedy provision in Iowa Code § 85.20 logically would not bar a claim against a TPA, just as it did not bar a claim against a workers’ compensation carrier. Merely “clearing a potential obstacle to such a claim” did not provide the Court with “an affirmative reason for recognizing such a claim” when Iowa workers’ compensation law did not impose any relevant statutory duties on TPAs [Opinion, p. 14-15, emphasis by the Court].
Majority Declined to Be Bound by Law of Other States
The majority acknowledged that Colorado had apparently extended tort liability to TPAs, but indicated that state’s statutory and regulatory scheme was sufficiently different so as to make it distinguishable. The majority added that several other states had not extended the tort liability to TPAs.
Justice Appel, joined by Justice Wiggins, dissented. Citing several secondary sources, Justice Appel noted that the law on third-party liability of TPAs was evolving. Reviewing such evolution in several other states, the justice set up a bit of a “straw man,” indicating the lack of privity between the worker and the TPA should not be a barrier to suit. Indeed, the majority had said that much.
Functional Equivalent of Insurer
Justice Appel offered a stronger argument, essentially that it was the insurer who had made the decision to use the TPA, that the decision was economically-driven, that a TPA shielded the insurer—at least in part—from having to assume a negative “public relations posture” [Opinion, p. 39], and that there was nothing in the Iowa case law that precluded the recognition of a bad faith tort where the insurance intermediary–such as the TPA—was the functional equivalent of the insurer.
The justice acknowledged that the majority had stressed that that an insurance company cannot delegate its duty to act in good faith and that the insurance company remains liable for the bad-faith actions of its agent. Justice Appel said, however, the tort law functioned better if the person directly responsible for bad-faith acts was financially responsible for the resulting damage. The justice concluded:
I can think of no other area where it is more critical to have direct accountability than in insurance—where issues of extraordinary importance and urgency to the insured are increasingly handled by faceless and insulated third-party bureaucracies. To me, one of the essential functions of our tort system is to ensure that parties responsible for the foreseeable injuries that they cause through their misconduct, particularly those done in bad faith, are held directly accountable [Opinion, p. 43].