Areas of Practice:
Bad Faith in Worker’s Compensation
I. The Erosion of the Grand Bargain
Worker’s Compensation Acts in the 50 states are an outgrowth of the industrial revolution, and labor laws originating in Germany. Arizona Worker’s Compensation Handbook, §1.1, (Ray Davies, et al., Editors, 1992). The Worker’s Compensation Act is sometimes referred to as the Grand Bargain. Injured employees gave up their rights to be made whole in exchange for no-fault, expedited medical and wage benefits. Pressley v. Indus. Comm’n, 73 Ariz. 22, 28, 29 (1951).
Enactment of a Worker’s Compensation Act was a condition of statehood for Arizona. Arizona requires enactment of a worker’s compensation law in its state Constitution. Article 18, Section 8. It provides in pertinent part: “. . . and, provided further, in order to assure and make certain a just and humane compensation law in the state of Arizona, for the relief and protection of such workmen, their widows, children or dependents, as defined by law, from the burdensome, expensive and litigious remedies for injuries to or death of such workmen, now existing in the state of Arizona, and producing uncertain and unequal compensation therefore, . . .”.
The purpose of the worker’s compensation statutes is to shift the burden of loss attributed to work-related accidents from the individual employee, and place the burden of injury upon the industry and the community as a whole. Hannon v. Indus. Comm’n., 9 Ariz. App. 231, 232 (1969). We liberally construe the Act to affect its purpose of having industry bear its share of the burden of human injury as a cost of doing business. Landon v. Indus. Comm’n., 240 Ariz. 21, 25, ¶12 (App. 2016).
Over a 33 year career in worker’s compensation, I have watched the erosion of some of the fundamental principles of worker’s compensation. The slow process was underway before I got here. Perhaps one of the major flaws, is the tendency to defend worker’s compensation claims as if they are third-party casualty claims. There is a significant difference between a defense based on nothing more than a right to “put them to their proof,” as in a third-party claim, compared to a first-party defense premised upon a complete and adequate investigation that shows the benefits are fairly debatable, prior to denial. See, Lennar Corp. v. Transamerica Ins. Co., 227 Ariz. 238, 246, ¶26 (App. 2011) (“An insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.”) The situation is aggravated by lawyers who immigrate to worker’s compensation from their training in torts, sometimes not being trained in the responsibilities of first-party good faith.
“Almost every major error that can be observed in the development of compensation law, whether judicial or legislative, can be traced either to the importation of tort ideas, or, less frequently, to the assumption that the right to compensation resembles the right to proceeds of a personal insurance policy.” Larson’s Worker’s Compensation Law, Section 1.02, (1992)
The system is intended, in its design, to avoid most foreseeable causes of dispute, so that litigation should not be necessary, and employees receive medical care and promptly get back to work. The Rules of workers’ compensation are designed to prevent the need for litigation, as far as possible. See, Arizona Constitution, Art. 18, §8; Stenz v. Ind. Comm’n, 275 Ariz. 481,483, ¶13, 353 P.3d 361, 363 (App. 2015), Pressley v. Ind. Comm’n, Id., 73 Ariz. at 28.
There are multiple examples. Aggravations to pre-existing conditions are covered. Mandex v. Indus. Comm’n, 151 Ariz. 567 (App. 1986); Karber v. Indus. Comm’n, 180 Ariz. 411 (1994). Gradual or cumulative trauma injuries are compensable. Reilly v. Indus. Comm’n, 1 Ariz. App.12, Employers’ Mut. Liability Ins. Co. of Wisconsin v. Indus.Comm’n., 24 Ariz. App. 427 (1975). The successive injury doctrine holds that a second industrial injury, superimposed on a pre-existing industrial injury, whether still under treatment or stationary, must now be covered by the second injury carrier in its entirety. Kaibab Industries v. Indus. Comm’n, 196 Ariz. 601 (App. 2000). There should almost never be litigation over which carrier is responsible for an injury they both contribute to. An industrial insurer must cover aggravations caused by a second non-industrial accident. Lou Grubb Chevrolet v. Indus. Comm’n, 174 Ariz. 23 (App. 1993). The unexplained death rule provides that if an employee is found dead on the job, absent contrary evidence, the death is presumed to be work related. Hypl v. Indus. Comm’n, 210 Ariz. 381 (App. 2006). The general rule of medical causation required for compensability in worker’s compensation is that any industrial contribution will suffice. Skyview Cooling Co. v. Indus. Comm’n, 142 Ariz. 554 (App. 1984).
Workers compensation benefits are not enumerated in the policy. The standard form ISO worker’s compensation policy provides in pertinent part: “We promise to pay, promptly when due, the benefits required of you by the worker’s compensation law.” Medical and disability benefits, as well as procedures, are all provided for in the statutes, regulations, and case law interpreting those statutes and regulations, of each state’s worker’s compensation act.
These are the essential three. 1) A compensable claim is one that occurs “by accident arising out of and in the course of his employment.” A.R.S. §23-1021. “Arising out of” refers to an injury originating from a risk associated with the employment. Lane v. Indus. Comm’n, 218 Ariz. 44 (App. 2008). “In the course of” refers to the time, place and circumstances of the injury. Royall v. Indus Comm’n, 106 Ariz. 346 (1970).
2) “Promptly, on notice to the employer, every injured employee shall receive medical, surgical and hospital benefits or other treatment, nursing, medicine, surgical supplies, crutches and other apparatus, including artificial members, reasonably required at the time of the injury, and during the period of disability. Such benefits shall be termed medical, surgical and hospital benefits. A.R.S. §23-1062(A). Notice to the employer is notice to the carrier, and vice-versa.
3) The first installment of wage compensation is to be paid no later than the twenty-first day after written notification by the Commission to the carrier of the filing of a claim unless the right to compensation is denied. A.R.S. §23-1062(D). During temporary disability, compensation thereafter is due every two weeks; when the injury is stationary, if permanent disability occurs, permanent disability benefits are payable no later than every 30 days. Id.
This following statute is one of the most abused provisions. “If the insurance carrier or self-insurer does not issue a notice of claim status denying the claim within twenty-one days from the date the carrier is notified by the Commission of a claim or of a petition to reopen, the carrier shall pay immediately compensation as if the claim were accepted, from the date the carrier is notified by the Commission of a claim or petition to reopen until the date upon which the carrier issues a notice of claim status denying such claim. Compensation includes medical, surgical, and hospital benefits. This section does not apply to cases involving seven days or less of time lost from work.” A.R.S. §23-1061(M).
As written, the insurer may take as long as it needs or wants to investigate a claim. But unless there is a complete and adequate investigation, showing that compensability is fairly debatable, so that the claim may be denied in good faith, benefits must be provided commencing on the twenty-first day. The carrier is free to deny further benefits once it completes an investigation that justifies a good faith denial. But until an investigation shows a good faith basis to contest benefits, the legislature has determined benefits should be provided in the interim. The intent of the Act collapses otherwise.
Depending on an adjustors caseload, twenty-one days may be a rapid investigation timeline. Currently undecided by any court of competent jurisdiction, are the bad faith consequences of a denial simply to avoid the tiding over provisions of subsection M. Twenty-one days is the investigation time allowed by the legislature to investigate a claim. There are no provisions for an extension of time in the Worker’s Compensation Act, as there are for other insurance. See AAC R20-6-801. Yet, it is not an uncommon occurrence, that case handlers assigned more files than they could possibly comply with under the statutory requirements of worker’s compensation, will simply deny the claim. The claim is then turned over to an attorney, who utilizes the 6-18 month litigation process at the ICA, to investigate, sometimes accepting the claim on the eve of hearing? Under this scenario, the purpose of the Act is prorated for carrier convinces.
II. GREED IS NOT GOOD
In the quest for ever improved profitability that began in earnest during the 1980s, tremendous resources were devoted to finding ways for insurance companies (and other industries) to become more profitable. Many of these studies were conducted by McKinsey & Company. From Good Hands to Boxing Gloves, David Berardinelli , Michael Freeman, Aaron Deshaw, Trial Guides, LLC, 2006.
There is nothing wrong with an insurance company making profit. That is the essential purpose of any for-profit corporation. The argument of bad faith advocates, however, is that the profit function does not belong in the Claims Department. The underwriting, actuarial, marketing, and investment departments should be fully focused on profit. But claim handling is an undertaking of “utmost good faith and fair dealing.” “Often the insured is in an especially vulnerable economic position when a casualty loss occurs.” Noble v. National American Life Ins. Company, 128 Ariz. 188, 190 (1981).
Consequently, the focus of the claims handler should be making good on the promise of coverage. “The primary duty of the claim representative is to deliver the promise to pay. Therefore, the claim representative’s chief task is to seek and find coverage, not to seek and find coverage controversies or to deny or dispute claims.” The Claims Enviroment, p.13, Markham, Quinley, Thompson, Insurance Institute of America, 1st Ed., 1993.
Nevertheless, the concept of turning the claims office into a “profit center” was born. To this day the acknowledgement of the claims department as a profit center stills features prominently in some insurers internal documents. Exhibit A is a slide from one worker’s compensation carrier, circa early 2000s. During one year, they found they paid out 13% more on workers comp claim expense (benefits) than the industry average. The industry average was determined based on reporting to A.M Best Company, and the National Council of Compensation Insurers (NCCI). The company audited selected claims, looking for “leakage” or overpayment. Leakage was determined by calibration teams. See Exhibit B.
The auditing process determined they had been overpaying claims by 13%! Voila!
Exhibit C is promotional material from a TPA advertising their ability to pay less in claims than others. And Exhibit D is yet another TPA advertising its ability to beat the industry average on claim payments. How can a company do that year after year? It can only occur by playing with the numbers, or underpaying claims.
III. CATASTROPHIC BAD FAITH CLAIMS
The pressure to save money has led to the occurrence of specious claim denials. One known study segregated worker’s compensation claims into three categories: those paying $5,000.00 or less, those from $5,000.00 to $50,000.00, and those over $50,000.00. The study determined there was little expected return by focusing adjustor efforts in the lower level claims. There could be a greater return by refocusing adjustors efforts on the middle and higher tier claims. Exhibit E. Some of these processes hold adjustors accountable for meeting financial expectations, such as average expense per claim, average TTD days, using preferred medical providers, and others. However, exposure of these express requirements has resulted in reported damage cases. Those express requirements have shifted to something else in more recent cases.
The process has taken its toll on the men and women adjusting claims as well. “When employees are held accountable to measures beyond their control, they will either succumb to the temptation to cut corners on claims to achieve their numbers or end up leaving the company. Over time, this creates a core of remaining employees who are increasingly willing to adopt biased approached to claim decisions.” Elliott Flood, former VP of Texas Mutual Insurance Company.
IV. THE LEGAL BASICS OF WORKERS COMPENSATION BAD FAITH
A claim by an injured employee against the workers’ compensation carrier is a first-party claim. Franks v United States Fidelity & Guarantee Company, 149 Ariz. 291, 295, 718 P.2d 193, 197 (App. 1985); Travelers Ins. Co. v Savio, 706 P.2d 1258, 1272 (Colo. 1985); and Mendoza v McDonald’s Corp. 222 Ariz. 139, ¶32, 213 P.3d 288 (App. 2009). The right to bring a civil bad faith action for the manner in which workers’ compensation benefits have been administered was recognized in Hayes v Continental Insurance Company, 178 Ariz. 264, 872 P.2d 688 (1994); Boy v Fremont, 154 Ariz. 334, 742 P.2d 835 (App. 1987) and other cases. The ICA has exclusive jurisdiction to determine compensability and benefits under the Act. A.R.S.§23-1022(A), Gibbons v. Indus. Comm’n,197 Ariz. 108 (App. 1999).
Workers’ compensation is a system of statutory benefits. The carrier’s coverage and benefit obligations arise under the insurance contract, applicable provisions of the Arizona Workers’ Compensation Act, A.R.S. §23-901 et. seq., rules and regulations promulgated under the Act (A.A.C. R20-5-101 through R20-5-164), and case law interpreting those obligations. See Rowland v. Great States Insurance Company, 20 P.3d 1158, 199 Ariz. 577 (App. 2001). The tort of bad faith arises when the workers’ compensation carrier intentionally denies, or fails to process or pay a claim without a reasonable basis for such action, although such acts or omissions are not the exclusive bases for a bad faith claim. Rowland v. Great States, supra. The duty of the carrier to conduct a reasonable investigation as part of its decision-making process, and to give equal considerations to the interests of the insured worker, are established as a matter of law. RAJI (Civil) 6th Ed.; Rowland v. Great States, supra. Although insurance carriers have the unilateral power to issue Notices of Claim Status and administer benefits, corresponding to that power is the responsibility to issue notices and administer benefits responsibly. University of Arizona v. Industrial Commission, 160 Ariz. 131, 770 P.2d 1177 (App. 1988).
Compensability is based upon an injury that arises out of and in the course of employment. A.R.S. §23-1021. Factual determinations made in any Notice of Claim Status, that is final, are res judicata. A.R.S. §23-947. All factual determinations established by administrative finality before the Industrial Commission of Arizona, or by litigation before the Industrial Commission of Arizona, are established, preclusive and binding in a civil bad faith action. Mendoza, 222 Ariz. 139, 213 P.3d 288.
Employees give up their rights to be made whole by tort damages under the workers’ compensation system. All they receive are medical treatment and a percentage of capped wages. A.R.S. §23-1041, 1044, 1045, 1062. In exchange, a fundamental purpose of the Act is to provide injured employees with an expedited, no fault method to receive medical and disability benefits. Grammatico v. Industrial Comm’n, 211 Ariz. 67, ¶17, 117 P.3d 786 (2005).
Among these mechanisms are accelerated investigation and payment schemes. The statutorily established time to investigate a claim and pay benefits following the carrier’s notice of a claim is 21 days. A.R.S. §23-1061(M). A Carrier may not issue a Notice of Claim Status denying the claim, without an adequate factual foundation supporting that denial. A.A.C. R20-5-163(B)(1); See, Lennar Corp. v. Transamerica Ins. Co., 227 Ariz. 238, 246, ¶26 (App. 2011). Except as otherwise provided by law, the insurance carrier shall process and promptly pay compensation and provide medical, surgical and hospital benefits, without the necessity for the making of an award or determination by the Commission. A.R.S. §23-1061(G). Medical care is to be provided promptly upon notice. A.R.S. § 23-1062(A). The Act is “to be given a broad and liberal construction in order to effectuate [its] evident intent and purpose.” Ossic v. Verde Central Mines, 46 Ariz. 176,186, 49 P.2d 396, 401 (1935); Aitken v. Indus. Comm’n, 183 Ariz. 387,392, 904 P.2d 456, 461 (1995) (“[W]e have consistently applied workers’ compensation laws liberally, remedially, and in a manner ensuring that injured employees receive maximum available benefits.”)
Bad faith occurs when a carrier denies benefits without a reasonable basis, and knows its position is groundless, or “fails to undertake an investigation adequate to determine whether its position is tenable.” Rawlings v. Apodaca, 151 Ariz. 149, 160, 726 P.2d 565, 576 (1986).
“While it is clear that an insurer may defend a fairly debatable claim, all that means is that it may not defend one that is not fairly debatable. But in defending a fairly debatable claim, an insurer must exercise reasonable care and good faith. Here are the basic rules.
The tort of bad faith arises when the insurer ‘intentionally denies, fails to process or pay a claim without a reasonable basis.’ (Citation omitted). While an insurer may challenge claims which are fairly debatable, (citation omitted), its belief in fair debatability ‘is a question of fact to be determined by the jury’ (citation omitted). An insurance contract is not an ordinary commercial bargain; ‘implicit in the contract and the relationship is the insurer’s obligation to play fairly with its insured.’ (Citation omitted). The insurer has ‘some duties of a fiduciary nature,’ including ‘[e]qual consideration, fairness and honesty.’ (Citation omitted). Thus, ‘an insurer may be held liable in a first party case when it seeks to gain unfair financial advantage of its insured through conduct that invades the insured’s right to honest and fair treatment,’ and because of that, ‘the insurer’s eventual performance of the express covenant — by paying the claim — does not release from liability for bad faith.” Zilisch v. State Farm Mutual Auto Co., 196 Ariz. 234, 995 P.2d 276 at ¶19-20 (2000).
Zilisch succinctly summarized an insurer’s duty in claim adjusting. Although the case was not a workers compensation case, it illustrates how the duties in first-party claims are universal no matter the coverage:
“The carrier has an obligation to immediately conduct an adequate investigation, act reasonably in evaluating the claim, and act promptly in paying a legitimate claim. It should do nothing that jeopardizes the insured’s security under the policy. It should not force an insured to go through needless adversarial hoops to achieve its rights under the policy. He cannot low ball claims or delay claims hoping that an insured will settle for less. Equal consideration of the insured requires more than that”. Id. at ¶21.
These standards are affirmed in the regulations promulgated under the Act. It is bad faith to unreasonably delay the payment of disability benefits, or to delay authorization for, or receipt of, medical benefits or treatment. A.A.C. R20-5-163(A)(2). It is bad faith to interpose a defense that is not well grounded in fact or warranted by existing law. A.A.C. R20-5-163(A)(1).