EXTRA-CONTRACTUAL CLAIMS IN TEXAS WORKERS’ …

EXTRA-CONTRACTUAL CLAIMS IN TEXAS WORKERS’ COMPENSATION

2011 “BAD FAITH” UPDATE

W. EDWARD CARLTON Quilling, Selander, Lownds, Winslett & Moser

2001 Bryan Street, Suite 1800 Dallas, Texas 75201

214-880-1873 [email protected]

DAVID B. JOECKEL, JR. The Joeckel Law Office

1117 W. Magnolia Avenue Fort Worth, Texas76104

817-924-8600 [email protected]

State Bar of Texas 8th ANNUAL

ADVANCED WORKERS’ COMPENSATION COURSE August 11-12, 2011

Austin

CHAPTER 19

mailto:[email protected]

mailto:[email protected]

ED CARLTON is a shareholder in the Dallas, Tx law firm of Quilling, Selander, Lownds, Winslett & Moser, PC. He received his undergraduate degree from the University of North Carolina and his law degree from Cumberland School of Law. He primarily defends business clients; and over the last 10 years has focused on defending insurers, third-party administrators and adjusters against claims of insurance bad faith. In that regard, over the last several years, Mr. Carlton has successfully defended to conclusion over 40 insurance bad faith suits.

DAVE JOECKEL is a trial lawyer. He handles disputes in insurance, personal injury and employment litigation. He attended Texas Tech University, where he was a 3-year starter and 4-year football letterman for the Red Raiders. After earning his BBA in Lubbock, he also pursued his JD from Texas Tech Law School, where he was appointed to Law Review and graduated with honors in 1986. For the last 15 plus years, Dave has been a sole practitioner in Dallas-Fort Worth and has handled hundreds of cases for injured and wronged individuals. Previously, he had honed his skills as a partner at the 300-laywer firm Hopkins & Sutter. Dave has presented at four different seminars on bad faith insurance practices subject. Dave is equally comfortable in practicing before state or federal courts. His license allows him to practice in all of the state courts in Texas and he is also licensed to practice before the Northern, Southern, Eastern and Western Divisions of Texas of the United States District Courts, The Federal Fifth Circuit Court of Appeals and the United States Supreme Court. Dave has tried more than twenty trials to a jury, and has handled appeals before at least ten appellate courts. He has served on the board at Arlington Museum of Art, Dental Health for Arlington, Girls, Inc. of Tarrant County, Arlington Philharmonic, Arlington Colt Football Booster Club and Arlington Colt Volleyball Boaster Club. Dave also founded the Weekly Legal Clinic at Lutheran Inter-City Network Coalition in North Fort Worth, and was also founder of both the Spirit and Sports Camp at Grace Lutheran Church in Arlington and the Dad’s Club at Hill Elementary in Arlington, Texas. Finally, Dave has helped kids by coaching 23 different teams while his kids were growing up, including nine years of youth football, three years of youth volleyball, four years of youth soccer, two years of youth baseball, and five years of high school football seven-on-seven. Dave has been married to Reecanne Joeckel for 28 years. They were high school sweethearts, and attended Texas Tech together. Reecanne and a partner own Brandera, an advertising agency in Fort Worth, Texas. Dave’s oldest son, David, 23, is now a math teacher and football coach at North Mesquite High School High School. David was an All-Conference and All-Region offensive lineman at DePauw University, where he earned an Economics degree. Sarah, 21, is a junior at Texas Christian University. She is pursuing a Motion Science degree with the plan of attending Physician Assistant School after college. She is a two year letterman on TCU’s volleyball team with two more years of eligibility. Twins Matt and Luke, 19, are both freshman business majors at Texas A&M University. They play football at A&M. Matt, a quarterback, was redshirted for the 2010 season, and Luke, an offensive left tackle, started every game last season for the Aggies.

Extra-Contractual Claims in Texas Workers’ Compensation Chapter 19

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TABLE OF CONTENTS I. INTRODUCTION ................................................................................................................................................... 1

II. THE LIFE OF TEXAS INSURANCE “BAD FAITH” .......................................................................................... 1 A. Common law duty recognized and applied to workers’ compensation ........................................................... 1 B. Statutory Claims Added .................................................................................................................................. 2 C. Developments in the Standard for Liability (What is Considered Bad Faith?) ............................................... 2

III. PRELIMINARY/PROCEDURAL ISSUES............................................................................................................ 5 A. Statute of Limitations (When can a Plaintiff Sue?) ......................................................................................... 5 B. Standing (Who can Sue?) ................................................................................................................................ 5 C. Potential Liability (Who can be Sued?) ........................................................................................................... 5 D. Jurisdictional Issues ......................................................................................................................................... 5 E. Removing a Bad Faith Case to Federal Court – Tough To Do If The Adjuster is Sued ................................. 6

IV. SIGNIFICANT CURRENT/ PENDING ISSUES ................................................................................................. 6 A. Damages (Are Aggravation Injuries Separate and Independent?) .................................................................. 6 B. Dueling Doctors (Can There Be Bad Faith If The Sides Have Doctors That Disagree?) ............................... 7 C. Aggravation of a Pre-existing Condition—Does the Carrier Have to Show “Sole Cause”? ........................... 7 D. Summary Judgment for Insurer— Recently Upheld in El Paso ..................................................................... 8 E. Exhaustion of Remedies – What has Recently Been Done With Fodge ......................................................... 8

V. SO MUCH IS NOT KNOWN (WHAT ISSUES ARE TO BE DECIDED?) ....................................................... 10 A. Jurisdictional Issues ....................................................................................................................................... 10 B. Bad Faith Liability Issues .............................................................................................................................. 10

VI. WHERE WILL THIS END UP— OUR GUESS ................................................................................................ 11


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TABLE OF AUTHORITIES

CASES

Aleman v. Zenith Ins. Co. No. 08-09-00168,--- S.W.3d----, 2011 WL 1663152 (Tex. App.—El Paso May 4, 2011, no pet. h.) ........................ 8

Allstate Ins. Co. v. Watson 876 S.W.2d 145 (Tex. 1993) ....................................................................................................................................... 2

Am. Motorists Ins. Co. v. Fodge 63 S.W.3d 801 (Tex. 2001) ................................................................................................................................... 5, 10

Aranda v. Ins. Co. of N. Am. 748 S.W.2d 210 (Tex. 1988) ................................................................................................................................ 1, 10

Arnold v. Nat’l County Mut. Fire Ins. Co. 725 S.W.2d 165 (Tex. 1987) ................................................................................................................................... 1, 5

Burkhart v. Sedgwick Claims Mgmt. Servs., Inc. 2009 WL 2712414 (Tex. App.–Corpus Christi, No. 13-08-00351-CV, August 31, 2009, no pet.) ............................ 7

Campbell v. Tex. Employer’s Ins. Ass’n. 920 S.W.2d 323 (Tex.App.—Houston [1st Dist.] 1996, no writ) ................................................................................ 5

Childers v. Gallagher Bassett Servs., Inc. 2008 Tex. App. Lexis 2474, (Tex.App.—Fort Worth April 3, 2008, pet. denied) ..................................................... 5

Cooper v. St. Paul Fire and Marine Ins. Co. No. 07-05-0373-CV, 2006 WL 2135674 (Tex. App.—Amarillo, August 1, 2006, pet. denied) ............................... 5

Cunningham Lindsey Claims Mgmt., Inc. v. Snyder 291 S.W.3d 472 (Tex. App.–Houston [14th Dist.] 2009, pet. filed) ...................................................................... 9, 10

Durst v. Tex. Mut. Ins. Co. No. 04-09-00430-CV, 2010 WL 3332198, unpublished opinion, (Tex. App.–San Antonio, August 25, 2010, pet. denied) ........................................................................................................................................ 7, 8, 11

Gasch v. Hartford Acc. & Indem. Ins. Co. 491 F.3d 278 (5th Cir 2007) ........................................................................................................................................ 6

Hornbuckle v. State Farm Lloyds 385 F.3d 538 (5th Cir. 2004) ....................................................................................................................................... 5

Hulshouser v. Texas Workers’ Compensation Ins. Fund 139 S.W.3d 789 (Tex. App.–Dallas 2004, no pet.) ........................................................................................... 6, 7, 11

In re Liberty Ins. Corp. and Michelle Yaklin 321 S.W.3d 360 (Tex. App.—Houston [14th Dist.] 2010) (orig. proceeding); mand. filed 11/15/10, styled In re Sheila Kennedy, No. 10-0934 ............................................................................................................ 9, 10

In Re Liberty Mut. Fire Ins. Co. 295 S.W.3d 344 (Tex. App.–Corpus Christi 2008) (orig. proceeding), mand. granted, 295 S.W.3d 327 (Tex. 2009) (per curiam) ...................................................................................................................................... 8


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In re Tex. Mut. Ins. Co. 321 S.W.3d 655 (Tex. App.—Houston [14th Dist.] 2010) (orig. proceeding), mand. filed 12/31/10 styled In re Adrian Harding, No. 10-1050 .................................................................................................................. 9

In Re Tex. Mut. Ins. Co. 333 S.W.3d 925 (Tex.App.—Waco 2011, no pet.) ................................................................................................... 10

In re Tex. Mut. Ins. Co. and Evie Villareal 329 S.W.3d 1 (Tex. App.—San Antonio 2009) (orig. proceeding) mand. pending, No. 09-0508 ....................... 8, 10

In re Tex. Mut. Ins. Co. and Gloria Williams No. 05-09-00214-CV, 2009 WL 909725 (Tex.App.—Dallas 2009), application for mand. filed. ....................... 9, 10

Jimenez v. Travelers Indem. Co. Civ. Act. No. H-09-1308, 2010 WL 1257802 (S. D. Tex., March 25, 2010) ............................................................. 5

Johnson v. Zurich Am. Ins. Co. No. 05-09-0087-CV, 2009 WL 3337663 (Tex. App.—Dallas 2009, no pet.)............................................................. 8

Kelly v. Am. Interstate Ins. Co., ___, S.W.3d ___ No. 14-0-0083, (Tex. App.—Houston [14th Dist.] November 25, 2008, pet. filed) (not designated for publication) ............................................................................................................................................................ 8

Liberty Mutual Ins. Co. v. Garrison Contractors 966 S.W.2d 482 (Tex. 1998) ....................................................................................................................................... 5

Liberty Mutual v. Crane 898 S.W.2d 944 (Tex.App.—Beaumont, 1995, no writ) ............................................................................................ 7

Lyons v. Millers Cas. Ins. Co. of Tex. 866 S.W.2d 597 (Tex. 1993) ................................................................................................................................... 2, 7

Murray v. San Jacinto Agency, Inc. 800 S.W.2d 826 (Tex. 1990) ....................................................................................................................................... 5

Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Dominguez 873 S.W.2d 373 (Tex. 1994) ....................................................................................................................................... 3

Nationwide Ins. Co. v. Crowe 857 S.W.2d 644 (Tex.App.—Houston [14th Dist.] 1993, writ granted), judgm’t vacated w.r.m., 863 S.W.2d 462 (Tex. 1993) .............................................................................................................................................. 5

Natividad v. Alexisis, Inc. 875 S.W.2d 695 (Tex. 1994) ....................................................................................................................................... 5

Republic Ins. Co. v. Stoker 903 S.W.2d 338 (Tex. 1995) ....................................................................................................................................... 3

Rodriguez v. Tex. Employer’s Ins. Ass’n 598 S.W.2d 677 (Tex.App.—Ft. Worth 1980, writ ref’d n.r.e.) ................................................................................. 2

Saenz v. Fidelity & Guaranty Ins. Underwriters 925 S.W.2d 607 (Tex. 1996) ....................................................................................................................................... 6

State Farm Fire & Cas. Co. v. Simmons 963 S.W.2d 42 (Tex. 1998) ......................................................................................................................................... 4


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State Farm Lloyd’s v. Nicolau 951 S.W.2d 444 (Tex. 1997) ................................................................................................................................... 4, 7

Stinson v. Ins. Co. of the State Pa 286 S.W.3d 77 (Tex. App.–Houston [14th Dist.] 2009, pet. denied) ........................................................................... 9

Tex. Mut. Ins. Co. v. Morris 287 S.W.3d 401 (Tex.App.—Houston [14th Dist.] 2009, pet. filed) ..................................................................... 7, 11

Tex. Mut. Ins. Co. v. Ruttiger 265 S.W.3d 651 (Tex. App.–Houston [1st Dist.] 2008, pet. granted) ................................................. 2, 6, 8, 9, 10, 11

Transp. Ins. Co. v. Moriel 879 S.W.2d 10 (Tex. 1994) ......................................................................................................................................... 3

Transportation Ins. Co. v. Archer 832 S.W.2d 403 (Tex. App.—Ft. Worth 1992, writ denied) ...................................................................................... 5

United States Fire Ins. Co. v. Williams 955 S.W.2d 267 (Tex. 1997) ....................................................................................................................................... 4

Universe Life Ins. Co. v. Giles 950 S.W.2d 48 (Tex. 1997) ......................................................................................................................................... 4

Vail v. Tex. Farm Bureau Mut. Ins. Co. 754 S.W.2d 129 (Tex. 1988) ....................................................................................................................................... 2


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EXTRA-CONTRACTUAL CLAIMS IN TEXAS WORKERS’ COMPENSATION – 2011 “BAD FAITH” UPDATE

I. INTRODUCTION

Texas courts have recognized a duty on the part of insurers to deal fairly and in good faith in the handling of first party insurance claims; and have applied that duty to workers’ compensation insurers. The duty, currently placed on insurers both by common law and by statute, applies to all aspects of a claim, including investigation, adjusting and payment/settlement. Texas courts have also recognized a private cause of action in tort against insurers, including workers' compensation insurers, for breach of the duty. While the standard for liability has ostensibly always been one of reasonableness, how courts have determined what constitutes a breach of the duty, i.e. what acts or omissions are evidence of “bad faith”, either under the common law or statute, has been a moving target. This article will discuss the birth and various stages of development in the life of this Texas tort as well as reviewing some of key issues which are currently in dispute. II. THE LIFE OF TEXAS INSURANCE “BAD

FAITH” A. Common law duty recognized and applied to

workers’ compensation In Arnold v. Nat’l County Mut. Fire Ins. Co., 725

S.W.2d 165 (Tex. 1987) the Texas Supreme Court first recognized that insurers had a common law duty of good faith and fair dealing with respect to their insureds. Arnold arose in the underinsured motorist context. After successfully pursuing his contractual uninsured motorist claim, a motorcyclist brought various extra-contractual claims against his insurer, including a common law cause of action for breach of the duty of good faith and fair dealing. The District Court granted summary judgment for the insurer. The Houston Court of Appeals affirmed. Id. at 166.

The Supreme Court, among other things, held “a cause of action for breach of the duty of good faith and fair dealing is stated when it is alleged that there is no reasonable basis for denial of a claim or delay in payment or a failure on the part of the insurer to determine whether there is any reasonable basis for the denial or delay. Id. at 167. As for why the tort was needed, the Court noted the “parties’ unequal bargaining power and the nature of insurance contracts which would allow unscrupulous insurers to take advantage of their insureds’ misfortunes in bargaining for settlement or resolution of claims.” The Court also

noted that “an insurance company has exclusive control over the evaluation, processing and denial of claims.” Finally, as to damages, the Court pointed out that “exemplary damages and mental anguish damages are recoverable for a breach of the duty of good faith and fair dealing under the same principles allowing recovery of those damages in other tort actions.” Id. at 168.

A year later, in Aranda v. Ins. Co. of N. Am., 748 S.W.2d 210 (Tex. 1988), the Supreme Court confirmed that the duty of good faith and fair dealing applied to worker’s compensation insurers. The injured worker filed a claim naming two employers and their respective worker’s compensation carriers. The carriers were unable to agree amongst themselves as to who bore primary responsibility. Thus, both refused to initiate benefits. After Aranda brought suit in District Court, alleging that they had breached their duty of good faith and fair dealing, the carriers filed special exceptions. The District Court sustained the special exceptions and dismissed the suit. The Court of Appeals affirmed, holding that Aranda’s allegations did not state a cause of action. Id. at 211.

Citing Arnold, the Supreme Court held, “there is a duty on the part of a worker’s compensation carrier to deal fairly and in good faith with injured employees in the processing of compensation claims.” Id. at 212-13. As to the standard of care, the Court held that a plaintiff “must establish (1) the absence of a reasonable basis for denying or delaying payment of the benefits of the policy, and (2) that the carrier knew or should have known that there was not a reasonable basis for denying the claim or delaying payment of the claim.” Id. at 213. In explaining this standard, the Court noted: “The first element of this test requires an objective determination of whether a reasonable insurer under similar circumstances would have delayed or denied the claimant’s benefits. The second element balances the right of an insurer to reject an invalid claim and the duty of the carrier to investigate and pay compensable claims. This element will be met by establishing that the carrier actually knew there was no reasonable basis to deny the claim or delay payment, or by establishing that the carrier, based on its duty to investigate, should have known that there was no reasonable basis for denial or delay. Under the test, carriers will maintain the right to deny invalid or questionable claims and will not be subject to liability for an erroneous denial of a claim.” Id.

Finally, in a statement that would eventually become extremely important in evaluating the scope of damages in these cases, the Court noted, “[a] claimant is permitted to recover when he shows that the carrier’s breach of the duty of good faith and fair dealing or the carrier’s intentional act is separate from the


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compensable claim and produced an independent injury.” In this regard, the Court noted that Aranda had alleged damages from the carrier’s failure to pay compensation benefits, such as losses to credit, reputation and the ability to maintain a job when his credit was a matter of consideration for this employer. Id. at 214.

Notably, in one of the dissenting opinions, Chief Justice Phillips criticized the majority’s determination that the statutory relationships created by the Texas Workers’ Compensation Act could give rise to an implied duty of good faith and fair dealing on the part of the insurer. Id. at 215. Because he felt that the legislative scheme for worker’s compensation obviated the need found in Arnold for a common law remedy, he argued that the exclusivity provisions of the Workers’ Compensation Act should bar this cause of action. Id. at 216-17. This is one of the issues being argued with respect to Tex. Mut. Ins. Co. v. Ruttiger, 265 S.W.3d 651 (Tex. App.–Houston [1st Dist.] 2008, pet. granted), currently pending before the Supreme Court.

B. Statutory Claims Added

In Rodriguez v. Tex. Employer’s Ins. Ass’n, 598 S.W.2d 677, 679 (Tex.App.—Ft. Worth 1980, writ ref’d n.r.e.), the Fort Worth Court of Appeals had held a deceased injured worker could not pursue a claims under the Texas Deceptive Trade Practices Act as he was not a “consumer” under the Act because he had not “purchased” goods or services from the insurer. Furthermore, even if he had been a “consumer” under the Act, the requisite nexus between the “purchase” and the deceptive or misleading act or acts alleged was “wholly absent.”

However, less than two months after issuing Aranda, the Supreme Court, in Vail v. Tex. Farm Bureau Mut. Ins. Co., 754 S.W.2d 129 (Tex. 1988), a fire insurance case, recognized a private statutory based cause of action by insureds against their insurers for unfair claims settlement practices under the Deceptive Trade Practices Act and the Texas Insurance Code. After an analysis criticized by the dissenting opinions as “tortured” and “confusing”, the majority of the Court concluded that the Vails had a cause of action against their insurer for unfair claims settlement practices under the Texas Deceptive Trade Practices Act and the Texas Insurance Code. Id. at 136.

In his dissent, Justice Gonzales, among other things, noted that there was nothing in the legislative history of section 17.50(a)(4) of the DTPA or Article 21.21 of the Texas Insurance Code to suggest that the legislature intended to provide a private cause of action for unfair claims settlement practices. Id. at 138.

In a more recent opinion, Allstate Ins. Co. v. Watson, 876 S.W.2d 145 (Tex. 1993), the Supreme Court held that a third party claimant has no direct cause of action against an insurer for unfair claims settlement practices under Section 16 of Article 21.21 of the Texas Insurance Code. In so doing, the Court appeared to reevaluate many of the arguments made in Vail upon which it recognized the statutory claim for unfair claims settlement practices. Interestingly, while the Allstate Court’s analysis of issues raised in Vail appear to many to have completely reversed the holdings in Vail, in the latter part of the Allstate opinion, the Court states: “In reaching our decision today, we are particularly mindful of the duties imposed on insurers as to their insureds. ... Vail remains the law as to claims for alleged unfair claims settlement practices brought by insureds against their insurers.” Id. at 149.

C. Developments in the Standard for Liability

(What is Considered Bad Faith?) Although the Supreme Court had expressly laid

out the requirements for a finding of liability under a cause of action for breach of the duty of good faith and fair dealing in Aranda, in cases that followed, courts appeared to have a difficult time applying the standard on a consistent basis.

In a case involving a homeowner’s policy, the Supreme Court found that the insurer had erroneously denied the claim, but was not liable for extra-contractual, bad faith damages. Lyons v. Millers Cas. Ins. Co. of Tex., 866 S.W.2d 597 (Tex. 1993). At the underlying trial, the jury had found the insurer had violated the DTPA and breached its duty of good faith and fair dealing. The court of appeals found no evidence of either. Id. at 599.

In affirming the court of appeals, the Supreme Court noted that “the issue of bad faith focuses not on whether the claim was valid, but on the reasonableness of the insurer’s conduct in rejecting the claim.” Because no evidence had been offered that the reports of the insurer’s experts were not objectively prepared, or that the insurer’s reliance on them was reasonable, the Court agreed with the court of appeals that there was “no evidence that [the insurer] had no reasonable basis to deny payment of Lyon’s claim.” Id. at 601.

In a strongly worded dissent, Justice Doggett criticized the majority for overturning the jury, noting that, “[u]ntil today, reasonableness had been recognized as a question of fact to be decided by the fact-finder”. Id. at 603. He also criticized the majority for excusing the insurer for what, in his opinion, was an incomplete and inadequate investigation of the claim. Id. at 604-05.


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Following Lyons, the Supreme Court, in Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Dominguez, 873 S.W.2d 373 (Tex. 1994), held there was no evidence that the carrier breached its duty of good faith and fair dealing in its handling of a workers’ compensation claim. The employee had reported a sore back and received treatment from a chiropractor. He received benefits under the company’s disability policy until those benefits ran out and he was terminated. He then filed a claim for workers’ compensation benefits which resulted in an award in his favor; and then pursued a claim for bad faith that resulted in a jury award in his favor. Id. at 374.

In determining that there was no evidence of bad faith, the Supreme Court noted that the doctor who initially treated the worker diagnosed his pain as stemming from a degenerative condition, although a later physician opined that it was work related; that the employer advised the worker had never reported the injury as work related; and that the worker had signed forms expressly representing that the injury was not work related. Id. at 366-67.

The dissent (Doggett) criticized the majority’s method of review. He also criticized the failure of the insurer to conduct a proper investigation and pointed out a number of acts or omissions by the investigator which he concluded would constitute evidence of bad faith if an appropriate review had been conducted by the Court. Id. 377-78.

In 1994, the Supreme Court, in what was believed at the time to be the “death knell” for bad faith suits, clarified the standard governing the imposition of punitive damages in the context of bad faith cases. Transp. Ins. Co. v. Moriel, 879 S.W.2d 10 (Tex. 1994). Moriel’s bad faith claims had focused on the insurer’s alleged wrongful delay or denial of payment for medical bills submitted in connection with his workers’ compensation claim. The jury found the insurer had no reasonable basis for delaying payment; and awarded Moriel $1,000 in actual damages, excluding mental anguish, $100,000 in mental anguish damages, and $1 million in punitive damages. The court of appeals affirmed. Id. at 15.

The Supreme Court first noted that punitive damages are levied against a Defendant to punish the Defendant for outrageous, malicious, or otherwise morally culpable conduct. The Court compared the justification for punitive damages with that of criminal punishment. With respect to bad faith insurance disputes, the Court noted that an insurer’s nonpayment of a covered claim ordinarily is a breach of contract and does not alone entitle a Plaintiff to mental anguish; and that “[e]ven if the insurer has ‘no reasonable basis’ to deny or delay payment of the claim, the plaintiff may not recover punitive damages on that basis alone.”

Instead, punitive damages were justified only when the bad faith of the insurer was accompanied by “malicious, intentional, fraudulent or grossly negligent conduct.” Id. at 18.

The Moriel Court concluded that an insurance carrier’s refusal to pay a claim would generally not justify punishment “unless the insurer was actually aware that its action would probably result in extraordinary harm not ordinarily associated with breach of contract or bad faith denial of a claim—such as death, grievous physical injury, or financial ruin.” Id. at 24. Noting that the only harm that Transportation’s delay caused to Moriel was anxiety of knowing that his bills were not paid, the Court held that the injury did not rise to the level of serious harm sufficient to justify punitive damages. Id. at 26.

A year later, in connection with an uninsured motorist claim, the Supreme Court continued to limit the circumstances under which plaintiffs could pursue claims for breach of the duty of good faith and fair dealing. In Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995), the Court addressed the question of whether an insurer breaches its duty of good faith and fair dealing if it denies a claim for an invalid reason when there was at the time a valid reason for the denial. Republic had initially denied the claim on the basis that the insured driver was more than 50% at fault in causing the accident. After the bad faith suit was filed, however, the insurer filed a motion for summary judgment on the basis that there was no physical contact between the unidentified hit and run driver and the insured’s vehicle and therefore there was no coverage. The trial court granted summary judgment as to the contract claim, but submitted the remaining claims to a jury; which found liability against the insurer on both common law and statutory bad faith claims. The court of appeals affirmed. Id. at 339-40.

The Supreme Court, quoting Vail, held, “Whether there is a reasonable basis for denial [of a claim] must be judged by the facts before the insurer at the time the claim was denied.” The Court further noted, “The facts compelling denial of the Stokers’ claim were in existence at the time of the denial…. What is dispositive is whether, based upon the facts existing at the time of the denial, a reasonable insurer would have denied the claim.” The Court then found that “Republic did not fail to determine whether there was a reasonable basis for denying the Stokers’ claim; its decision was timely; it simply made the right decision for the wrong reason.” Thus, Stoker could not preclude Republic from relying on a valid reason for denying the claim that existed at the time of the denial, even if it was not the reason for the insurer’s original denial. Id. at 340-41.


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In 1997, however, the trend of Supreme Court decisions favorable to insurers in connection with the duty of good faith and fair dealing took a sudden turn in the opposite direction. In Universe Life Ins. Co. v. Giles, 950 S.W.2d 48 (Tex. 1997), the Supreme Court, addressing actions of a health insurer, adopted a new standard for the common law duty of good faith and fair dealing. Noting alleged problems with appellate review of the existing standard, and the legislature’s recent (1995) amendment of the Texas Insurance Code to define unfair settlement practices to include “failing to attempt in good faith to effectuate a settlement of a claim with respect to which the insurer’s liability has become reasonably clear,” the Court, under the guise of consistency, adopted this new “reasonably clear” standard as the basis for liability for a breach of the duty of good faith and fair dealing. Id. at 56. In a footnote, the Court also noted that the insurer would not escape liability merely by failing to investigate a claim so it could contend that liability was never reasonably clear. “An insurance company may also breach its duty of good faith and fair dealing by failing to reasonably investigate a claim.” Id.

The concurring opinion by Justice Hecht noted that replacing the “no reasonable basis” standard of common-law bad-faith insurance liability with the “reasonably clear” standard simplified the law “but does nothing to clarify what bad faith means or resolve the dilemma of evidentiary review.” Justice Hecht would have defined bad faith as “unscrupulous, arbitrary conduct” and would impose liability for “intentional or reckless conduct on the part of the insured, but not merely for negligence or mistakes.” Id. at 59. Both Justice Hecht and Justice Enoch reconfirmed that “an insurer retains ‘the right to deny invalid or questionable claims’ and will not be subject to [bad faith] liability for an erroneous denial of a claim,” citing Aranda. Id. at 80.

In a per curiam opinion issued on the same day as Giles, the Supreme Court held that a workers’ compensation insurer’s erroneous interpretation of a Workers’ Compensation Commission Rule could not form the basis of a claim for breach of the duty of good faith and fair dealing. United States Fire Ins. Co. v. Williams, 955 S.W.2d 267 (Tex. 1997) (per curiam). In Williams, the trial court had granted summary judgment in favor of U.S. Fire. The court of appeals had reversed with respect to Williams’ claim for breach of the duty of good faith and fair dealing. The Supreme Court held that an insurer cannot be liable for bad faith simply because it misinterprets a rule. Because U.S. Fire’s interpretation of the rule was at least arguable, they held that such interpretation did not form a basis for a bad faith judgment.

In another opinion issued on the same day as Giles, the Supreme Court, in a 5-4 decision, affirmed a jury finding of bad faith against a homeowner’s insurer. State Farm Lloyd’s v. Nicolau, 951 S.W.2d 444 (Tex. 1997). With Justice Spector authoring the majority opinion, the Court held that there was some evidence that supported the jury’s finding that the insurer violated its duty of good faith and fair dealing in connection with a foundation claim, but found that there was no evidence to support punitive damages. The Court remanded the case for the Court of Appeals to consider whether the evidence supported entitlement to additional damages on statutory grounds. Id. at 446.

According to the majority, the jury’s bad faith finding was supported by evidence which inferred that the insurer had obtained the reports from its engineering experts because of that company’s general view that plumbing leaks were unlikely to cause foundation damage; by evidence that the engineering report may not have been objectively prepared or that the insurer’s reliance on the report was unreasonable; and by evidence that the insurer, and the engineers on which it relied, did not conduct an adequate investigation. Id. at 449-50. In a portion of his lengthy dissent, Justice Hecht stated: “If ever there was a dispute about an insurance claim over which reasonable minds could differ, this [was] it.” He noted that the claims of inadequate investigation levied against the defense’s experts were things that Plaintiff’s experts had failed to do for over five years prior to bringing the insurance claim and that the disagreement over what caused the shifting of the foundation of the house was serious and substantive. After noting that one of the factors cited by the majority was testimony from Plaintiff’s counsel that the carrier had “acted unreasonably”, Justice Hecht noted: “If all it takes to support a claim for bad faith is for a witness professing expertise or the Plaintiff’s lawyer to opine that an insurer had no reasonable basis for acting as it did, then few will be the cases with no evidence to support the claim.”

In 1998, in another opinion authored by Justice Spector, the Supreme Court, in a homeowners’ case, again found evidence sufficient to support a jury finding of breach of the duty of good faith and fair dealing; again reversed the punitive damages award; but this time rendered judgment for additional damages for a knowing violation of the DTPA. State Farm Fire & Cas. Co. v. Simmons, 963 S.W.2d 42 (Tex. 1998). The Court concluded that State Farm breached its duty of good faith and fair dealing “by denying the Simmonses’ claim based upon a biased investigation intended to construct a pretextual basis for denial.” Id. at 44.


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The dissenting opinions by Justices Hecht and Enoch criticized the majority for allowing the insureds to recover by proving only that the insurer’s investigation was “biased”, “pretextual” or “deficient” without addressing its affect on whether the claim was reasonably clear. Justice Hecht noted that “the insurer’s bias and intent become relevant only when it appears the insurer denied a claim when liability was reasonably clear.” Justice Enoch noted that “an insurer’s duty to investigate claims arises from, and must be construed in light of, its duty to pay claims when liability is reasonably clear.” Id. at 48-52.

III. PRELIMINARY/PROCEDURAL ISSUES A. Statute of Limitations (When can a Plaintiff

Sue?) In Arnold, the Supreme Court had held that the

statute of limitations on a good faith and fair dealing claim did not begin to run until the underlying insurance contract claim had been finally resolved. However, in Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826 (Tex. 1990), the Supreme Court found that the limitations holding in Arnold was not consistent with the rule that limitations commence at the time when facts come into existence which authorize a claim to seek a judicial remedy. “A first party claim, such as Arnold and [Murray] accrues when an insurer unreasonably fails to pay an insured under the policy. The injury-producing event is the denial of coverage.” Id. at 829.

In Campbell v. Tex. Employer’s Ins. Ass’n., 920 S.W.2d 323 (Tex.App.—Houston [1st Dist.] 1996, no writ), the Houston Court of Appeals confirmed that a breach of duty of good faith and fair dealing claim accrues on the date that the claim was denied; and that likewise statutory causes of action accrue on the date coverage is denied. In doing so, the Court noted that under the DTPA and the Texas Insurance Code, a party must file a cause of action within two years after the party discovered or should have discovered the occurrence. Id. at 329. See also, Cooper v. St. Paul Fire and Marine Ins. Co., No. 07-05-0373-CV, 2006 WL 2135674 (Tex. App.—Amarillo, August 1, 2006, pet. denied) (cause of action accrued when insurer notified insured it was disputing the claim).

Having to exhaust the administrative remedies does not extend the administrative remedies. Accrual of the cause of action is not when the claimant has success in the administrative process, but instead is when coverage is denied. Childers v. Gallagher Bassett Servs., Inc., 2008 Tex. App. Lexis 2474, (Tex.App.—Fort Worth April 3, 2008, pet. denied). The Court in Childers also held that later denials, after the initial denial was resolved starts the running of the statute of limitations on the new denial. Id.

B. Standing (Who can Sue?) As indicated in Allstate, the Supreme Court has

not recognized a cause of action by third parties against insurers for breach of a duty of good faith and fair dealing. In Transp. Ins. Co. v. Archer, 832 S.W.2d 403 (Tex. App.—Ft. Worth 1992, writ denied), the Fort Worth Court of Appeals held, consistent with Allstate, that a workers’ compensation insurer does not owe a duty of good faith and fair dealing to the injured worker’s spouse. Id. at 405-06. But see, Nationwide Ins. Co. v. Crowe, 857 S.W.2d 644 (Tex.App.—Houston [14th Dist.] 1993, writ granted), judgm’t vacated w.r.m., 863 S.W.2d 462 (Tex. 1993)) (workers’ compensation death beneficiary has standing to pursue extra-contractual claims). C. Potential Liability (Who can be Sued?)

In Natividad v. Alexisis, Inc., 875 S.W.2d 695 (Tex. 1994), the Texas Supreme Court refused to extend the common law duty of good faith and fair dealing, recognized in Arnold against insurance carriers, to also include third party insurance adjusting firms and their employee claims adjusters. Noting that the non-delegable duty of good faith and fair dealing is owed by an insurance carrier to its insured due to the nature of the contract between them giving rise to a “special relationship,” the Court declined to extend that duty to agents of the insurance carrier, which had no special contractual relationship with the injured Plaintiff.

On the other hand, the Supreme Court has held that an insurance company employee who, in the course and scope of his employment, engages in the business of insurance is subject to liability under former Art. 21.21 (currently Chapter 541) of the Texas Insurance Code. Liberty Mutual Ins. Co. v. Garrison Contractors, 966 S.W.2d 482 (Tex. 1998). But see, Jimenez v. Travelers Indem. Co., Civ. Act. No. H-09-1308, 2010 WL 1257802 (S. D. Tex., March 25, 2010) (no evidence of individual liability without allegation of specific facts demonstrating actionable conduct by workers’ compensation adjuster); Hornbuckle v. State Farm Lloyds, 385 F.3d 538 (5th Cir. 2004) (no liability of adjuster in absence of evidence that adjuster himself committed a violation of Texas Insurance Code or DTPA). D. Jurisdictional Issues

In Am. Motorists Ins. Co. v. Fodge, 63 S.W.3d 801 (Tex. 2001), the Supreme Court determined that a worker’s compensation claimant cannot prosecute a lawsuit against an insurer to recover benefits and damages resulting from a denial of benefits without a prior determination by the Texas Worker’s Compensation Commission that such benefits are due.


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In Fodge, the Plaintiff claimed a back injury at work. After the insurer denied the claim, a Benefit Review Officer determined that Fodge had no disability but a Contested Case Hearing Officer ruled that she had suffered a compensable back injury and the insurer stipulated to disability. The insurer timely paid the benefits ordered. Fodge then sued the insurer, asserting multiple causes of action, including both common law and statutory claims of bad faith claims handling. She claimed damages including “the loss of those sums due and owing under the workers compensation insurance policy.” Id. at 802-03. American Motorists filed a plea to the jurisdiction and motion to dismiss, claiming that only the Texas Workers’ Compensation Commission had jurisdiction to award workers’ compensation benefits and, by failing to pursue the medical benefits at issue at the Commission, Fodge had failed to exhaust her administrative remedies. Id. The trial court granted American Motorists’ motion and dismissed the suit. The court of appeals reversed, holding that Fodge’s extra-contractual claims were unrelated to her claims for compensation benefits. The Supreme Court granted the insurer’s petition for review. Id. at 803.

The Court first addressed Fodge’s claim for worker’s compensation benefits due under the policy and determined that the trial court had no jurisdiction because of the exclusive jurisdiction of the Texas Worker’s Compensation Commission. The Court then addressed Fodge’s claim for medical benefits, which had not been first presented to and ruled upon by the Commission. The Court, quoting Saenz v. Fidelity & Guaranty Ins. Underwriters, 925 S.W.2d 607, 612 (Tex. 1996), found that “’[a]llowing courts to award damages for wrongful deprivation of benefits would circumvent the Commission’s jurisdiction’ and therefore would not be permitted.” The Court then held, “Thus, just as a court cannot award compensation benefits, except on appeal from a Commission ruling, neither can it award damages for a denial in payment of compensation benefits without a determination by the Commission that such benefits were due.” Id. at 804. Finally, with respect to the claims over which the Court had no jurisdiction, the Court noted that if a claim is not within the Court’s jurisdiction, and the impediment to jurisdiction could not be removed, then it should be dismissed; but if the impediment to jurisdiction could be removed, then the Court could abate the proceedings to allow reasonable opportunity for the jurisdictional problem to be cured. Id. at 805.

E. Removing a Bad Faith Case to Federal Court –

Tough To Do If The Adjuster is Sued Oftentimes a carrier will remove a bad faith case

to Federal Court on diversity grounds. As a result,

Plaintiffs usually sue the individual adjusters. Is the addition of the adjusters enough to defeat diversity? To show that improper joinder of a resident Defendant, the removing party must show the inability of the Plaintiff to establish a cause of action against the nondiverse party. The Fifth Circuit held that an adjuster who engages in the business of insurance may be held individually liable for violations of article 21.21 of the Texas Insurance Code. Accordingly, a potential claim would exist under article 21.21 against the adjuster as an individual. Suing the individual defeated federal jurisdiction under diversity. Gasch v. Hartford Acc. & Indem. Ins. Co., 491 F.3d 278 (5th Cir 2007).

IV. SIGNIFICANT CURRENT/

PENDING ISSUES A. Damages (Are Aggravation Injuries Separate

and Independent?) Many bad faith cases are brought because medical treatment was delayed after the insurer’s dispute. Several recent decisions have turned these types of cases upside down. The argument Plaintiff makes is that a bad faith dispute delays surgery or other types of medical care. The Plaintiff is damaged because he experiences pain, impairment and mental anguish as a result of not being able to have his injuries treated. Usually these damages are an aggravation of the compensable injury. The Dallas Court of Appeals, in Hulshouser v. Texas Workers’ Compensation Ins. Fund, 139 S.W.3d 789 (Tex. App.–Dallas 2004, no pet.), found that the Plaintiff must establish more than an aggravation of the compensable injury. The Court determined that these aggravation injuries were part of the compensable injury. Therefore, any delay by the insurer did not produce an “independent injury” as required by Aranda; and the employee’s claim of bad faith was barred by the exclusive remedy provision of the Texas Workers’ Compensation Act. In 2008, however, the Houston Court of Appeals, in Ruttiger, 265 S.W.3d 651, rejected the holding in Hulshouser. The Court declared that Ruttiger had presented sufficient evidence that Tex. Mut.’s breach of its duty of good faith and fair dealing caused him to suffer physical pain and suffering and physical impairment; and that such “independent injuries” were separate from his workers’ compensation claim. Accordingly, the Court affirmed the jury’s sizable award of damages for such injuries. Id. at 670-71. In addition to upholding these damages, the Ruttiger court also held that a benefit dispute agreement constituted a final determination that benefits were due, providing the trial court with subject matter jurisdiction (discussed later in this paper); held that the evidence was legally sufficient to support the


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jury finding that TMI violated the Insurance Code and engaged in unfair settlement practices by failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of the claim with respect to which liability had become reasonably clear and by refusing to pay a claim without conducting a reasonable investigation with respect to the claim; and held that the evidence was legally sufficient to support the jury’s award of mental anguish damages; but held evidence was legally insufficient to support the jury’s award of damages to Ruttiger. The Supreme Court granted the petition for review in Ruttiger, has heard oral argument and a decision in that case is pending.

In the meantime, in Burkhart v. Sedgwick Claims Mgmt. Servs., Inc., 2009 WL 2712414 (Tex. App.–Corpus Christi, No. 13-08-00351-CV, August 31, 2009, no pet.) the Corpus Christi Court of Appeals, citing Hulshouser, concluded that all of the causes of actions against Sedgwick and Concentra were barred by the exclusive remedy provisions of the Texas Workers’ Compensation Act. The case involved Plaintiff’s injuries caused by participating in a functional capacity evaluation examination. The Court reasoned that, “the damages sought by the Burkhart’s – including damages for medical care, physical pain and suffering, mental anguish and physical impairment – are of the same kind as those for which the TWCA was designed to provide the exclusive remedy.”

Even under Hulshouser and Burkhart, a plaintiff can recover for physical injuries directly caused by the extra contractual behavior of the carrier that are separate and distinct from his compensable injury, such as damage to his credit or mental anguish. In theory, a plaintiff may be able to recover other damages, such as impairment and pain and suffering damages, if those damages are separate and independent from the compensable injury. B. Dueling Doctors (Can There Be Bad Faith If

The Sides Have Doctors That Disagree?) In Lyons v. Millers Cas. Ins. Co., 866 S.W.2d 597 (Tex. 1993), the Supreme Court stated that the existence of bad faith is not determined by whether the claim was valid, but on the reasonableness of the insurer’s conduct in rejecting the claim. In Lyons, the adjuster’s reliance on experts was not found to be in bad faith, because there was no evidence that the experts’ reports were not objectively prepared or that the adjuster was unreasonable in relying on them. Id. at 601.

In State Farm Lloyds v. Nicolau, 951 S.W.2d 444 (Tex. 1997), however, the Texas Supreme Court identified the type of evidence that would allow a jury to infer that an expert’s report was not objectively prepared, such as: (1) the firm’s performance of a

substantial amount of work for insurance carriers; (2) the expert’s awareness that the carrier would be required to pay if he provided a particular opinion; and (3) the expert was selected because the carrier knew the expert’s general view of this type of claim would be favorable to its position. Id. at 448-50.

Expert shopping has also been found to give rise to bad faith exposure. In a situation where a carrier would disregard not only a treating doctor’s opinion, but its own peer review doctor’s opinion, and then sought a third opinion, the Court found a “dogged pursuit of a predetermined course of action to deny the claim” as opposed to reasonable investigation. Liberty Mutual v. Crane, 898 S.W.2d 944, 950 (Tex.App.—Beaumont, 1995, no writ).

Durst v. Tex. Mut. Ins. Co., No. 04-09-00430-CV, 2010 WL 3332198, unpublished opinion, (Tex. App.–San Antonio, August 25, 2010, pet. denied) is a very recent case that discusses dueling doctors. The issue presented was the extent to which Durst’s work injury aggravated his pre-existing degenerative back condition. After a surgery request, a peer review doctor opined that Durst’s symptoms were “more a natural result of an aging process and degenerative process in the lumbar spine [rather than from his work injury]”. A Designated Doctor then concluded that Durst’s disc herniations were work related. The DWC ruled in Durst’s favor, as did a state court jury after the insurer appealed. Id. at *3.

Durst then brought a bad faith suit. Tex. Mut. filed two summary judgment motions, claiming conflicting medical opinions established it had a reasonable basis to deny the claim “as a matter of law.” The first motion, supported by medical opinions and exhibits from the underlying claim, was denied. Id. at *7. In a second motion, however, Tex. Mut. presented evidence from five qualified physicians who agreed with its peer reviewer that the degenerative conditions were pre-existing and not aggravated by the compensable injury; and opined that the peer reviewer’s opinion was medically reasonable and was not a “sham.” This motion was granted. Id. at *8. The San Antonio Court of Appeals affirmed the summary judgment in the carrier’s favor. The evidence showed that there was a bona fide dispute as to the extent of injury. The Court also rejected the claimant’s claim that the carrier had to prove that the pre-existing conditions were the “sole cause” of his complaints in order to dispute them. Id. at 12. C. Aggravation of a Pre-existing Condition—Does

the Carrier Have to Show “Sole Cause”? The Houston Court of Appeals, in Tex. Mut. Ins. Co. v. Morris, 287 S.W.3d 401 (Tex.App.—Houston [14th Dist.] 2009, pet. filed), ruled that, to defeat


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coverage, the insurance carrier does have to show that a pre-existing condition was the “sole cause” of the injured worker’s present disability or incapacity. However, the carrier’s doctor had never opined that the prior injury was the sole cause. Thus, the Court indicates, the jury could have reasonably concluded that the prior injury would not have provided a reasonable basis for denying the claim. Id. at 417.

On the other hand, in Durst v. Tex. Mut. Ins. Co., No. 04-09-00430-CV 2010 WL 3332198, unpublished opinion (Tex. App.—San Antonio, August 25, 2010, pet. denied), the San Antonio Court of Appeals rejected the Plaintiff’s claim that the carrier had to prove the pre-existing conditions were the “sole cause” of his complaints in order to dispute them. The Court recognized that the “sole cause” concept did not apply to the extent of injury dispute before it. Id. at *12.

D. Summary Judgment for Insurer—

Recently Upheld in El Paso The El Paso Court of Appeals recently rejected an insured’s argument that summary judgment is never appropriate with respect to whether an insurer’s liability is reasonably clear, and upheld judgment rendered by the trial court in favor of a worker’s compensation insurer. In Aleman v. Zenith Ins. Co., No. 08-09-00168,--- S.W.3d----, 2011 WL 1663152 (Tex. App.—El Paso May 4, 2011, no pet. h.), the Court considered evidence that “conclusively established that Zenith did not know nor should it have known it was reasonably clear that the claim was covered.” Id. at *5. The claimant relied on the Supreme Court’s Giles opinion and argued that the question of whether an insurer’s liability had become reasonably clear is a fact issue for the jury. The Court of Appeals held that this rule is not absolute, and does not preclude traditional summary judgment on such grounds. Id. The Court also held that Zenith was not required to identify specific medical literature on which it relied in rejecting the insured’s claim, even though the denial notice stated that “[t]he medical literature does not support a causal relationship between the work activities and the diagnosed carpal tunnel syndrome.” Id. at *6-7. E. Exhaustion of Remedies – What has Recently

Been Done With Fodge It is clear that before a Plaintiff can bring a bad faith case, he must first exhaust his administrative remedies in the underlying workers’ compensation case. Many recent decisions have ruled on whether this has been done. In Ruttiger, 265 S.W.3d 651, the 14th District Houston Court of Appeals ruled that a Benefit Dispute Agreement constituted an exhaustion of the Plaintiff’s administrative remedies; and

therefore, the trial court had subject matter jurisdiction to hear his case. Id. at 658.

Similarly, in Kelly v. Am. Interstate Ins. Co., ___, S.W.3d ___, No. 14-0-0083, (Tex. App.—Houston [14th Dist.] November 25, 2008, pet. filed) (not designated for publication), the 14th District Houston Court of Appeals also addressed exhaustion of administrative remedies based upon a Benefit Dispute Agreement (actually three agreements). The central question was “whether a claimant can sue a carrier for denial of specific benefits based upon an agreement to provide general benefits, without first exhausting administrative remedies through the TWCC process.” Id. at *6. Since none of the benefit dispute agreements addressed medical benefits, the insurer retained the authority and responsibility to approve or deny requests for preauthorization. Because Kelly did not submit any denied preauthorization requests to the TWCC, he failed to exhaust his administrative remedies and the trial court lacked subject matter jurisdiction over his claims alleging delay of medical benefits. Id. at *9.

In Johnson v. Zurich Am. Ins. Co., No. 05-09-0087-CV, 2009 WL 3337663 (Tex. App.—Dallas 2009, no pet.), the carrier disputed medical treatments as not reasonable and necessary. The Plaintiff had not pursued these disputes through medical dispute resolution. Therefore, the trial court found that he did not exhaust his administrative remedies under Fodge, and granted Defendants Plea to the Jurisdiction and dismissed the case. The Dallas Court of Appeals affirmed. Id. at *2.

The same is true in In Re Liberty Mut. Fire Ins. Co., 295 S.W.3d 344 (Tex. App.–Corpus Christi 2008) (orig. proceeding), mand. granted, 295 S.W.3d 327 (Tex. 2009) (per curiam). Here the Texas Supreme Court, in a per curiam opinion, held that by demanding pre-authorization for office visits when it was not required and by failing to request pre-authorization for surgery when it was required, the claimant had avoided all administrative review of his claim for medical services. The Court conditionally granted the petition for writ of mandamus and instructed the trial court to grant the plea to the jurisdiction and dismiss the case. Id. at 329.

The San Antonio Court Appeals, in In re Tex. Mut. Ins. Co. and Evie Villareal, 329 S.W.3d 1 (Tex. App.—San Antonio 2009) (orig. proceeding) mand. pending, No. 09-0508, “split the baby” with respect to exhaustion based upon a Benefit Dispute Agreement (“BDA”). Since neither the claimant nor the hospital sought a determination for payment of the medical bills until the period of time for disputing the denial of the bills had expired, the bad faith claim based on denial of medical benefits was dismissed for refusal to exhaust


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administrative remedies. Id. at *6. However, the Court agreed with the claimant as to his allegations of wrongful delay in payment of temporary income benefits. While the dispute agreement did not mention temporary income benefits or address disability, the carrier had paid temporary income benefits in full prior to BDA. The Court found when the agreement was executed there were no remaining disputed issues as to the payment of those benefits and the pursuit of administrative remedies was deemed useless. Id. at *7. The Court also disagreed with the insurer’s contention that the claimant was required to seek “delay remedies”, such as an interlocutory order for payment of benefits or an expedited resolution of his claim in order for the trial court to have jurisdiction over his bad faith claims. The Court noted that neither the statute providing for the interlocutory order nor the statute providing for expedited resolution required a claimant to request these remedies as an exclusive remedy. Therefore, the trial court did not abuse its discretion in denying the plea to the jurisdiction on this basis. Id.. In one of the few opinions on jurisdiction favoring the Plaintiff, the 14th District Houston Court of Appeals, in Stinson v. Ins. Co. of the State Pa, 286 S.W.3d 77 (Tex. App.–Houston [14th Dist.] 2009, pet. denied) reversed a dismissal granted by the trial court based on jurisdictional grounds based upon the Court’s finding that there was evidence to support a proper pre-authorization request for physical therapy and the insurance carrier did not issue a written denial of pre-authorization. Id. at 89. The court found the case analogous to Ruttiger, in that the medical necessity of physical therapy was no longer at issue because the insurer did not send a written denial in response to Stinson’s preauthorization requests so there were no further administrative procedures for Stinson to exhaust. “Medical necessity of physical therapy from February 2005 forward no longer was at issue in light of the carrier’s assent.” Id. at 90. See also, In re Tex. Mut. Ins. Co. and Gloria Williams, No. 05-09-00214-CV, 2009 WL 909725 (Tex.App.—Dallas 2009), application for mand. filed. Another 14th District Houston Court of Appeals case, Cunningham Lindsey Claims Mgmt., Inc. v. Snyder, 291 S.W.3d 472 (Tex. App.–Houston [14th Dist.] 2009, pet. filed) is significant because it involves a final judgment of almost $1.5 million plus attorney’s fees and costs in favor of the Plaintiff. The Plaintiff argued that a compensability dispute delayed his surgery. After pre-authorization for this surgery was denied in December 2002, Defendants disputed the compensability of the claim. Plaintiff prevailed on the compensability dispute, with favorable recommendations after a September 2003 benefit

review conference, a CCH decision and order in November 2003 and an Appeals Panel Decision in February 2004. After prevailing, Plaintiff again requested pre-authorization for the surgery in April 2004, which was granted. Plaintiff argued that the compensability dispute is what delayed the back surgery. Id. at 478. Defendants argued that Plaintiff did not timely (or ever) request reconsideration of the initial denial of the December 2002 request for pre-authorization. The Houston Court of Appeals agreed with Defendants and concluded that Snyder had failed to exhaust his administrative remedies. Id. at 479.

The Court found Plaintiff’s claims to be dependent on the determination that she was entitled to pre-authorization of the surgery when requested prior to the time the claim was disputed. Id. at 478. This is the usual posture of these delayed surgery cases. Nothing is done about any request for surgery until the compensability issue is resolved. The court here found that the request for IRO should have been made, and then the request would have been held in abeyance until the compensability issue was decided. Id. at 481. The claimant’s failure to act on the initial request for pre-authorization was an abandonment of the dispute at that time. This was true even though the surgery was later approved. Id. at 483.

Two additional 14th District Houston Court of Appeals cases could be significant. In In re Liberty Ins. Corp. and Michelle Yaklin, 321 S.W.3d 360 (Tex. App.—Houston [14th Dist.] 2010) (orig. proceeding); mand. filed 11/15/10, styled In re Sheila Kennedy, No. 10-0934, the Court reiterated that a CCH Decision and Order on compensability or extent does not get you there (provide jurisdiction) if what you are really arguing about is a delay in receiving surgery. Eventual approval of the needed surgery does not relate back to the time period when it was initially discovered that the surgery was necessary. Likewise, the Court in In re Tex. Mut. Ins. Co., 321 S.W.3d 655 (Tex. App.—Houston [14th Dist.] 2010) (orig. proceeding), mand. filed 12/31/10 styled In re Adrian Harding, No. 10-1050, ruled that resolution of an extent dispute did not resolve a medical dispute concerning a proposed surgery. Therefore, a compensability award in February 2008 did not relieve the Plaintiff or his doctors from exhausting his administrative remedies after a pre-authorization request for surgery was denied in April 2008. Furthermore, a September 2008 pre-authorization for surgery did not relate back to address the medical necessity of any treatment for which preauthorization was required during the period of alleged delay (between January 2007 and February 2008) while the extent of injury was being disputed. The claimant failed to exhaust his administrative remedies for damage during that time. Id. at 664.


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Finally, the Waco Court of Appeals recently issued an interesting opinion in In Re Tex. Mut. Ins. Co., 333 S.W.3d 925 (Tex.App.—Waco 2011, no pet.). In this case a workers’ compensation claimant sued both Texas Mutual and his employer. He sued his employer for alleged wrongful termination and discrimination. He sued Texas Mutual for alleged aiding and abiding, conspiracy, and tortious interference with a contract. The claims against Texas Mutual were based upon the employer’s notes that a Texas Mutual adjuster told the employer that the claimant had reached MMI, that the employer did not have to find the work for the claimant, and that the employer did not have to hold the position for the claimant. Id. at 928.

Texas Mutual filed a Plea to the Jurisdiction arguing that the trial court did not have subject matter jurisdiction over two key issues in the case: 1) whether Bell was at MMI; and 2) whether Bell was able to return to work on August 27, 2007. The trial court denied the motion. The Waco Court of Appeals court ruled that the determination of whether the adjuster’s statements misrepresented the Division of Workers’ Compensation’s determination of Bell’s MMI and ability to return to work did not involve a decision within the exclusive jurisdiction of the Division. The court also ruled that the trial court can adjudicate Plaintiff’s claims against Texas Mutual while the Plaintiff fully embraces as he must, “the accuracy and finality of the date he reached MMI, his percentage of impairment ratings, and his return to work date.” Therefore, the trial court did not abuse its discretion in denying Texas Mutual’s Plea to the Jurisdiction. Id. at 929-30.

V. SO MUCH IS NOT KNOWN (WHAT ISSUES

ARE TO BE DECIDED?) The authors count at least 9 bad faith cases that are currently pending before the Texas Supreme Court. Thus, the outcome of many cases discussed in this paper is still up in the air. Ruttiger is the big case, but by no means the only important case pending. Following are some of the more significant issues still to be decided. A. Jurisdictional Issues

1. Does a Benefit Dispute Agreement constitute an exhaustion of administrative remedies. Ruttiger and In re Tex. Mut. Ins. Co. and Evie Villareal

2. Does the failure to request or the refusal of the TWC to grant interlocutory or expedited relief satisfy Fodge? Ruttiger

3. Does a court lack subject matter jurisdiction of a bad faith claim over delay of income benefits if the claimant does not seek a determination that the benefits were owed? In re Tex. Mut. Ins. Co. and Evie Villareal

4. Does a Benefit Dispute Agreement silent on disability concerning a compensable injury exhaust administrative remedies as to income benefits? In re Tex. Mut. Ins. Co. and Evie Villareal

5. Does the voluntary payment of TIBS constitute a “determination” that TIBS were due? In re Tex. Mut. Ins. Co. and Evie Villareal

6. Does the failure to promptly initiate the dispute process and request an interlocutory order constitute a failure to exhaust administrative remedies? In re Tex. Mut. Ins. Co. and Gloria Williams.

7. Does the fact that a request for a pre-authorization of a medical procedure was eventually authorized constitute a determination that an initial denial was improper? Cunningham Lindsey Claims Mgmt., Inc. v. Schneider

8. Under what circumstances can a Contested Case Hearing Decision or an agreement regarding compensability or extent of injury constitute a determination regarding medical benefits under Fodge? In Re Liberty Ins. Corp. and Michelle Yaklin

B. Bad Faith Liability Issues

1. Is Aranda’s Application of Common Law Bad Faith in the handling of workers’ compensation cases necessary or prudent? In other words, because of the 1989 Act should common law workers’ compensation bad faith go away? Ruttiger

2. Does a workers’ compensation claimant have standing to sue a workers’ compensation insurer under the Texas Insurance Code? Ruttiger

3. With respect to “knowing violations,” what constitutes evidence of actual awareness of unfair claims handling and risk of serious harm? Ruttiger

4. What is a separate and independent injury? Aranda recognized only a loss of credit reputation. Can a Plaintiff also sue for delayed damages such as pain and suffering, impairment and mental anguish arising from the delay brought on by the dispute. In other


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words, will Hulshouser go statewide? Ruttiger

5. Can lack of reasonable investigation alone without a finding that liability was reasonably clear form the basis of an Insurance Code violation? Morris

6. What do you have to show to show mental anguish? Morris

7. Does sole cause in a pre-existing condition case apply? Morris

8. If the healthcare provider delays providing medical services because of an unresolved compensability or extent dispute, can this form the basis for a bad faith case? In re Tex. Mut. Ins. Co. and Gloria Williams

9. Does a delay by either the claimant or his attorney in initiating the dispute process serve as the basis for a bad faith case? In re Tex. Mut. Ins. Co. and Gloria Williams

10. Does the Plaintiff have to show lack of objectivity to every doctor who supports the insurance company’s position? Durst

VI. WHERE WILL THIS END UP—

OUR GUESS These issues have been pending for some time.

Most of them were discussed at last year’s meeting. At the risk of being completely and utterly wrong, the authors, (sometimes in agreement and sometimes not) take the following “educated” guesses at where some of the issues in bad faith litigation might end up after the Supreme Court decides these pending cases. While some argue there is support for eliminating bad faith claims in the workers’ compensation context, under the current circumstances, it appears unlikely that common law and statutory bad faith claims will be eliminated entirely. Hulshouser will likely prevail statewide; virtually eliminating bad faith claims related to delay in surgery or other medical care. Benefit dispute agreements, to the extent parties continue to be willing to enter them, will likely suffice to exhaust administrative remedies, but only to the extent they establish entitlement to the benefits at issue. Voluntary agreements to start paying benefits will not. Even if damages based upon delay in surgery or medical treatment survive, there will be no jurisdiction to pursue these claims unless the medical treatment delayed is pre-authorized or ordered by an IRO. A statutory knowing violation will be very difficult to prove (or at least be very difficult to uphold on appeal) in much the same way as punitive damages in common law claims have been severely limited. The Ruttiger type facts will not support a knowing violation. Finally, the Supreme Court will figure out a way to further limit mental anguish damages. Either a medical

diagnosis of depression or anxiety or medical expert testimony may be needed to establish such damages. What will be left will primarily be disputes of compensability and disability that result in extreme mental anguish by a Plaintiff who suffered severe economic damages after having income benefits denied/delayed for a substantial amount of time. Will the rulings eliminate bad faith lawsuits, claims of continued bad faith by insurers or resolve perceived inequities in allowing claims for bad faith in the workers’ compensation context? No. But perhaps we will have new, exciting and hopefully different issues to discuss this time next year.

Documents

EXTRA-CONTRACTUAL CLAIMS IN TEXAS WORKERS’ …