Plaintiff attorneys are seeking new avenues of income. Many attorneys representing injured workers either no longer accept workers' compensation clients or enhance their current practice with personal injury, social security, and lately bad faith claims.

Why Claimant Attorneys Are Diversifying

Attorneys representing injured workers recognize several trends threatening their legal fees.  Nationally, the injury rate is decreasing yearly.  Safety-conscious employers cause fewer injuries.  In Texas , Benefit Review Conferences have reduced from 1,675 in September 2005 to 839 in June 2008.  Many Texas employers are opting out of the workers’ compensation system choosing instead a non-subscription Employee Retirement Income Security Act (ERISA) plan. Many remaining subscribers are electing networks anticipating lower overall indemnity and medical payments resulting in lower attorney fees.  Unlike other states, claimant attorneys in Texas only receive fees based on income benefits they secure for their clients; medical expenses are not considered.  Finally, Texas provides an ombudsman program to injured workers free of charge. Each of these factors contribute to reduce indemnity benefits and/or attorney fees.

Trail Blazing Bad Faith Litigation

Juries are awarding large verdicts in workers’ compensation bad faith litigation.  Doyle Raizner has won verdicts in the last twelve months equaling 4.3 million, $750,000, $400,000, and $395,000.  This does not include settlements.  Claimants’ attorneys increasingly refer cases to them.  Seizing the opportunity, other claimant attorneys are filing bad faith claims themselves.  Several Dallas and Valley attorneys recently filed their first bad faith cases.  This trend is expected to continue.

The Tipping Point:  Texas Mutual Insurance v. Ruttiger

The Ruttiger case energized claimant’s attorneys.  The facts are as follows.  Mr. Ruttiger alleged a hernia injury while lifting at work on June 21, 2004.  On June 28, 2004, the Texas Mutual Insurance (“TMI”) adjuster contacted the employer who questioned the validity of the claim.   April Beall, one of the owners, stated other employees believed the claimant was injured prior to coming to work and in fact, the claimant was limping at work before beginning a shift on June 21, 2004.  The employer also indicated Ruttiger was injured while playing softball.   The adjuster attempted to contact Ruttiger and was unsuccessful on two attempts and sent the claimant a letter.   The claimant denied receiving any phone calls or letter.  The adjuster initially tried to contact the doctor but did not have the right contact information. 

On July 7, 2004, the adjuster took the recorded statement of Henry Beall, another owner.  Mr. Beall could not confirm Ruttiger was limping prior to the injury.  He also conceded that he did not know if the claimant was playing softball or was coaching his daughter’s team.  Mr. Beall provided the adjuster the name of Ruttiger’s doctor.

On July 8, 2004, the adjuster again spoke with April Beall who alleged Ruttiger was bragging to co-workers that workers' compensation was paying for his preexisting hernia.  They scheduled a recorded statement with one employee, Adam Popovich, for July 9, 2004.  The recorded statement did not occur.  The carrier filed its denial within the 60 day time frame. 

At the time of the denial, the adjuster had not (1) spoken with the claimant; (2) requested or received medical records; or (3) confirmed either the rumor the claimant was injured playing softball or was limping before the injury.

Shortly before surgery, the doctor called Ruttiger to say the carrier “cancelled everything”.  Ruttiger contacted TMI and was informed by the adjuster the claim was denied because he was injured playing softball and not at work.  Ruttiger attempted to explain he only coached his daughter’s softball game and did not play.  He maintained he was hurt on the job.  The adjuster responded, “That’s not what I am hearing” and allegedly hung up.  The adjuster denied this version.

The adjuster admitted no one saw Ruttiger playing softball. He admitted his denial was based only on information supplied from April and Henry Beall.  The adjuster knew employers have a financial incentive to classify injuries as non-compensable.  The adjuster conceded the denial was filed without speaking to the claimant or medical providers.  The adjuster never sought medical records from the treating doctor even though he learned their names within the 60 day window to file a denial.  He did not request records from the hospital when they called or ask the names of any doctors at that facility.  He did not follow-up with the name of the doctor provided by Henry Beall.

The injured worker contacted an attorney and Texas Mutual Insurance reopened the case.  The adjuster took the recorded statement of two employees after the denial period.  One stated his belief Ruttiger was “trying to pull the wool over someone’s eyes.”  The other indicated Ruttiger had a preexisting hernia condition.   The co-worker did not believe there was a compensable work related injury.  But, neither witness provided any evidence regarding a pre-existing condition that Ruttiger was limping prior to the injury, or Ruttiger injuring himself playing softball.

The parties signed a DWC-24 (Benefit Dispute Agreement) on January 6, 2005, agreeing the claimant was injured in the scope of his employment.  Subsequently, claimant filed this bad faith action.  During the discovery portion of the trial, it was determined the claimant did have a preexisting hernia condition from 1998.

The jury awarded $37,500 damages for past physical pain and suffering; $5,000 for future physical pain and suffering; $4,500 for past impairment; $100,000 for past mental anguish; and $20,000 because the wrongful denial was "knowingly" made.

The court of appeals decision is very detailed.  The court believed the adjuster should have been suspicious of the veracity of unsubstantiated allegations from April or Henry Beall at A&H.  The court stated, “ ... In sum, a reasonable juror could have believed that [the adjuster] made his decision to deny Ruttiger's claim after conducting an extremely limited, one sided investigation that produced nothing more than highly suspicious rumors and speculation from two related employer representatives.  Considering this evidence, as well as Ruttiger's direct testimony that he had, in fact, suffered an on the job injury, a reasonable juror could have found that, at the time TMI denied Ruttiger's claim, the injuries would have become reasonably clear.”

The court also believed TMI did not follow its own standards or the statute by relying upon an unsubstantiated rumor that Ruttiger was actually injured playing softball.  The court concluded, “TMI failed to fulfill its obligation to conduct an adequate investigation before denying Ruttiger's claim.  A reasonable juror could have concluded, that, at the time TMI denied Ruttiger's claim, there was simply no information supporting a ‘bona fide’ coverage dispute.  Contrary to TMI's argument, the evidence certainly did not ‘conclusively’ establish ‘powerful reasons’ to dispute Ruttiger's claim.”

The court further noted the co-workers’ statements were taken after the denial.  However, even considering the statement, the court found nothing in Mr. Popovich and Mr. Martin’s testimony that concludes the claimant did not suffer a compensable injury or an aggravation of his preexisting condition.  Finally, the evidence reflected the 1998 hernia injury was not the basis of the dispute originally filed.

The court believed TMI did not attempt to contact the injured worker, or, "at best only made minimal effort to do so."  The adjuster also hung up on the claimant and refused to listen to his version of the events.  The court found fault with TMI relying upon the owner's unverified statements Ruttiger had been injured while playing softball and not hurt on the job.

This case is certainly a warning to insurers.  This is the first case that finds bad faith liability when the carrier signed a benefit dispute agreement before the CCH accepting liability for the claim.  Perhaps, more importantly, the court believes the carrier has a duty to assess and consider their own insured’s credibility.  This case sets forth several lessons for all carriers:

1. Courts want a successful three point contact.  Two unsuccessful phone contacts and a letter is considered ”minimal”;
2. Carrier must request, receive, and consider claimant’s medical records.  Failing to follow up with medical providers is generally a violation of the carrier’s own guidelines and will be negatively viewed in a bad faith context;
3. Carriers must assess their own insured and the credibility of statements provided by the insured.   In this case, the court believed TMI should have been highly suspect of the veracity of the unsubstantiated allegations provided by their insured;
4. Claimant testified the adjuster hung up on him even though this was denied by the adjuster.  Carriers could very well choose to record all conversations with injured workers to protect against such allegations;
5. Courts will assess facts generated by the carrier’s investigation prior to the denial to determine the quality of the investigation and whether the carrier had legitimate grounds to dispute or if liability was reasonably clear;
6. The court believed the basis of the denial was an unsubstantiated and unverified rumor.  Rumors must be verified if they are the basis of a dispute.  The fact the claimant has the burden of proof is immaterial to the court; and
7. Carrier must investigate to confirm compensability and accept coverage when liability becomes reasonably clear.

Attorneys representing injured workers are eager to file more bad faith lawsuits.  Carriers must review their policies and procedures, provide additional training to employees, and insure proper supervisory control on all denials.  Failure to deny a case based upon legitimate facts could subject a carrier to an errors and omissions action by the insured.  However, disputing a case based upon unsubstantiated rumors may lead to a bad faith claim by the injured worker.  Adjusters should complete three-point contact, substantiate facts on which a denial is based, and round table with supervisors and/or legal counsel prior to denying a case. 

Bad Faith Causes of Actions

Plaintiff attorneys will generally allege three causes of action or theories of recovery.  First, plaintiffs will allege the adjuster violated the common law duty of good faith and fair dealing. The common law duty of good faith and fair dealing is generally confined to parties with a contractual relationship.  For example, the insured purchases insurance coverage from an insurance carrier, the insurer.  The insured and insurer are both parties to a contract.  The insurer owes the common law duty of good faith and fair dealing to the insured.  In workers’ compensation, the injured worker is not a party to the insurance contract.  But, the courts have extended this duty from the first two parties of the contract because of a “special relationship” between the workers’ compensation insurance carrier and an injured worker.  Thus, the insurer now owes a duty to a third party and must accept liability when liability becomes reasonably clear.  The insurer must conduct an adequate, reasonable investigation.  An insurer is legally required to investigate each case to confirm compensability; the insurer may not investigate for the purpose of establishing a defense.  An insurance carrier need not be right but must be reasonable in their denials.   Bad faith liability is not available if there is a bona fide dispute regarding liability.

The second cause of action is statutory.  Former Article 21.21 has been codified in Texas Insurance Code Section 541.060. The statutory provisions in some ways mirror the common law duty.  However, plaintiff attorneys believe the statutory language extends duties to entities or persons other than a workers’ compensation carrier.  In other words, Third Party Administrators may have duties under the statutory bad faith provisions independent of the insurer.  This theory of recovery is hotly contested and discussed below.

Deceptive Trade Practice Act (DTPA) is the third legal avenue.  Again, plaintiff attorneys believe it extends to Third Party Administrators and adjusters.

Political Entities Enjoy Sovereign Immunity

Political entities enjoy sovereign immunity from a “bad faith” law suit.  The courts have refused to find waiver of governmental immunity.  Therefore, political entities are immune from all three causes of action.  However, plaintiff attorneys are filing statutory bad faith claims against Third Party Administrators.

Third Party Administrators

Third Party Administrators (TPAs) contract with insurance carriers or self-insured employers to administer their claims.  TPAs hire workers’ compensation adjusters and other claim professionals.  In Natividad v. Alexsis Inc. 875 S.W.2d.695 ( Tex. 1994), the Texas Supreme Court held that a TPA owed no duty to an injured worker. The insurance carrier is responsible for the acts or omissions of its TPA.  Therefore, an injured worker could pursue a bad faith action against the insurance carrier for the TPA’s acts or omissions.   Injured workers complain that sovereign immunity precludes recovery and therefore fairness dictates TPAs should be liable despite the Natividad doctrine.

However, some courts refuse to apply the Natividad doctrine to statutory bad faith or DPTA claims. Under this reading or interpretation of Natividad, injured workers can pursue a “bad faith claim” (the statutory bad faith and DPTA regulations) against a TPA.  Eventually, the Texas Supreme Court must resolve this issue.

Conclusion

The claims professional is faced with ethical dilemmas every day.  The changing landscape may result in attorneys reviewing adjuster’s actions and decisions with the benefit of hindsight.  Insurers must ensure all policies and procedures are followed prior to a denial and continue to investigate to confirm compensability when new evidence becomes available.

© Copyright 2008 by Downs Stanford, P.C. All rights reserved. This article, which was written by Stuart D. Colburn and Charles E. Morse, is reprinted with permission.