Bad Faith or Lack of Diligence Under the
Indiana Worker's Compensation Act
The Indiana Worker's Compensation Act gives the Worker's Compensation Board of Indiana the ability to determine whether an employer, an employer's worker's compensation administrator or the worker's compensation insurance carrier has acted with lack of diligence, in bad faith or committed an independent tort in adjusting or settling a claim for compensation. Indiana Code § 22-3-4-12.1 provides the board with exclusive jurisdiction to make this factual determination and, at its discretion, to assess financial penalties, depending on the degree of culpability and the actual damages sustained. In addition, the board may order an attorney's fee based on the amount of the bad faith or lack of diligence award.
In cases in which the Court of Appeals construed Ind. Code § 22-3-4-12.1, the court affirmed the board's decisions that no bad faith or lack of due diligence existed where there was only a good faith dispute. There must be more than a disagreement regarding claim management or settlement to justify an award under Ind. Code § 22-3-4-12.1.
In a series of recent cases, the Court of Appeals offered guidance on how the statutory provisions should be applied and discussed what actions it feels justify an award of bad faith or lack of diligence. It clarified that, although the Worker's Compensation Act includes both bad faith and lack of diligence as a basis for an award, there are different standards for assessing conduct.
Ag One Co-Op & Trane Co. v. Scott
In Ag One Co-Op & Trane Co. v. Scott, 914 N.E.2d 860 (Ind. Ct. App. 2009), the Court of Appeals addressed a dispute over liability between two employers. The issue before the court was whether the board properly concluded Ag One, the second employer, acted in bad faith in denying benefits when the board also concluded that it was not liable for the employee's worker's compensation claim. The court reversed the Full Board's decision and remanded the case with instructions to vacate the order requiring Ag One to pay damages to the employee. In a separate concurring decision, the judge suggested that the board enter an award raising Trane's responsibility for the entire amount awarded as bad faith damages.
Briefly, the facts are that in 2002, Scott sustained a compensable shoulder injury while working for Trane. Scott's employment with Trane ended in 2003, but he was not actually released by the authorized treating physician at maximum medical improvement until January 2004. From March through May 2004, Scott was employed by Ag One. In June 2004, Scott returned to the authorized treating physician complaining of increased shoulder pain. The doctors involved with the case disagreed regarding which employer was responsible. During this dispute, neither employer provided Scott with medical benefits or compensation, and Scott went without medical care or compensation from June 2004 until September 2006.
In January 2006, the Single Hearing Member issued findings of fact and conclusions of law determining that Scott did not sustain a superseding or intervening injury at Ag One and that Trane was responsible for Scott's medical care and expenses. The Full Board affirmed the Single Hearing Member's decision in September 2006 and, at that point, Trane went ahead and provided Scott with the recommended medical care.
In addition to its compensability decision, the Full Board also stated in its award that Ag One was not released pending any claims under Ind. Code §§ 22-3-4-12 (concerning attorney's fees) and 22-3-4-12.1 (concerning damages for bad faith). After Scott filed a petition alleging bad faith against Ag One, the Single Hearing Member issued an order in November 2009 finding that Ag One had acted in bad faith. In the decision, the Single Hearing Member stated:
"The Indiana Worker's Compensation Board does not condone employers or insurance carriers allowing an injured employee to suffer without benefits when there is a dispute between defendants pertaining to liability. In order to avoid a bad faith judgment in the circumstance, one or both employers are required to take responsibility for [Scott]'s benefits and compensation and then seek reimbursement from the ultimately liable party post-adjudication."
The Single Hearing Member determined that both defendants had acted in bad faith and assessed penalties on each defendant. The Single Hearing Member also awarded additional attorney's fee to be split equally between the defendants. The Full Board affirmed the Single Hearing Member's decision. Ag One appealed the decision that it acted in bad faith.
The court found the reasoning of Borgman v. Sugar Creek Animal Hospital, 782
N.E.2d 993 (
"[The plaintiff's] allegation that [the worker's compensation insurance carrier]'s actions constituted bad faith necessarily fails because [the employee] did not meet her burden of proof of the underlying claim that she was improperly denied worker's compensation benefits."
Id. at 998. The Ag One Court endorsed the essence of the holding in Borgman that "there can be no bad faith in denying benefits if, in fact, the employer did not act improperly in denying benefits." 914 N.E.2d 860 at 863.
The court next discussed claims of bad faith in the insurance context generally and reasoned that:
"In the context of the denial of insurance claims, a finding of bad faith requires evidence of a state of mind reflecting a dishonest purpose, moral obliquity, furtive design, or ill will. Poor judgment and negligence … do not amount to bad faith; the additional element of conscious wrongdoing must be present. A claim does not arise simply because an insurance claim is erroneously denied."
914 N.E.2d at 864 (quotation and citation omitted). The court then stated that if a claim does not arise because of an erroneous denial, "we are unable to agree with the board that Ag One somehow acted in bad faith in properly denying [the employee's] claim for benefits." Id.
The court sympathized with Scott's dilemma, that he went without medical care while the employers disputed liability, but said "we fail to see how Ag One can be said to have acted in bad faith in denying Scott's claim for benefits when Ag One was ultimately found not to be liable for such benefits." 914 N.E.2d 860 at 864.
The court did go on to note that, if either employer had paid for treatment but was ultimately determined not to be liable, that employer would have been entitled to reimbursement from the other employer, and it encouraged employers in like situations to come to an early agreement to share treatment costs pending a determination as to who is liable. It noted this would facilitate resolution of such claims, and further noted that, as a general rule, the court would uphold such findings by the board under its deferential standard of review.
Eastern Alliance Ins. Group, Chubb Ins. Group and Total Interior
Systems of America LLC v. Elizabeth Howell
In July 2010, the Court of Appeals addressed the issue regarding the sufficiency of evidence needed to support the board's conclusion that an employer acted with a lack of diligence in Eastern Alliance Ins. Group, Chubb Ins. Group and Total Interior Systems of America LLC v. Elizabeth Howell, 929 N.E.2d 922 (Ind. Ct. App. 2010). In this case, the court was confronted with a dispute between insurance companies. The court reversed the board's decision to assess lack of diligence penalties against both insurers and remanded with instructions to vacate the penalties assessed against Eastern Alliance, one of the employer's insurers.
Howell suffered a compensable injury in June 2005 while she was employed by Total Interior Systems America (TISA). In February 2007, she suffered an aggravation of that injury, also related to her work. Eastern provided TISA's worker's compensation insurance coverage from the first injury to Oct. 15, 2006, and thereafter Chubb Insurance Group provided TISA's coverage. Eastern paid all the compensation and statutory medical expenses related to the original June 2005 injury. After the February 2007 aggravation, TISA notified both Eastern and Chubb of the continuing medical expenses and requested payment. Eastern investigated the claim and concluded that the medical care was attributable to an incident occurring during Chubb's coverage period. Eastern nonetheless offered to split the expenses with Chubb and later resolve the obligation to pay, but Chubb refused. During this coverage dispute, neither company paid Howell's medical bills and she went approximately 2.5 years without compensation. Howell filed an application and, ultimately, Chubb was found to be responsible for paying for her medical care.
The Single Hearing Member's decision, which was affirmed by the Full Board, determined that Chubb was responsible for coverage with respect to the February 2007 aggravation. The award noted that Eastern's offer to split the expenses was appropriate and that Chubb refused the offer because it thought it could defend against the claim as untimely. The judge also noted that the medical record weighed heavily in favor of finding Chubb responsible. Nonetheless, the board assessed lack of diligence penalties against both Chubb and Eastern. Eastern appealed the board's decision assessing penalties against it. Chubb did not participate in the appeal.
On appeal, Eastern argued that penalties for lack of diligence should not be awarded against an entity which is ultimately deemed not responsible for the underlying claim. The court agreed, citing Ag One Co-Op v. Scott, 914 N.E.2d 860, 863-864 (Ind. Ct. App. 2009), and Borgman v. Sugar Creek Animal Hospital, 782 N.E.2d 993, 998 (Ind. Ct. App. 2002).
The court's decision first distinguished between lack of diligence and bad faith. It noted in its reasoning in Ag One that, for a finding of bad faith, there needed to be a showing of a state of mind reflecting a dishonest purpose, moral obliquity, furtive design or ill will, and that poor judgment or negligence were insufficient. 929 N.E.2d 922, 926. Lack of diligence, however, does not require conscious wrongdoing on the part of the actor. A lack of diligence can be proven by simply showing a failure to exercise the attention and care that a prudent person would exercise – in other words, acting negligently. Id. The court noted that it would be wrong to combine lack of diligence with bad faith and require conscious wrongdoing in the former case.
Nonetheless, while lack of diligence does not require conscious wrongdoing, there still has to be evidence that the actor failed to exercise the attention and care of a prudent person. Based on the board's findings that the record was in Eastern's favor, and that Eastern offered a reasonable compromise to Chubb which was refused, the court found that the award of a penalty for lack of diligence against Eastern was not supported by the record. Eastern acted in a reasonably prudent manner by refusing to pay the claim when there was no apparent reason to believe it was required to do so. The court found that the board's conclusion that Eastern acted with lack of diligence was, therefore, clearly erroneous, and the decision was reversed. The claim was returned to the Full Board for a determination as to whether the entire penalty should be assessed against Chubb.
Brooks v. Zores, Inc.
In an unreported decision, the court addressed whether the board properly dismissed a bad faith claim filed against an employer. Brooks v. Zores, 2010 Ind. App. Unpub. LEXIS 1287 (Ind. Ct. App. 2010). The court affirmed the board's decision because the employer was found not to be liable for the underlying claim.
Brooks filed a bad faith claim after the Single Hearing Member issued a decision that he had not carried his burden of proving a compensable claim. Brooks alleged that the employer acted with bad faith and committed fraud based on a manager's hearing testimony. The Single Hearing member dismissed the petition for bad faith and Brooks filed an application for review by the Full Board. The Full Board affirmed the dismissal of the bad faith claim finding that, even if the allegations were true, it was not material to the Single Hearing member's decision.
In its analysis, the court referenced its conclusions in Borgman, that accusations of bad faith necessarily fail if the employee does not meet the initial burden of proving that the underlying claim for worker's compensation benefits was improperly denied. Brooks, 2010 Ind. App. Unpub. LEXIS 1287, *12 . The court also referenced its Ag One decision and repeated that it failed to see how an employer can be said to have acted in bad faith in denying the employee's claim for benefits when the employer was ultimately found not to be liable for such benefits. Id. In both the Borgman and Ag One cases, the board determined whether the employer had acted in bad faith as well as whether the employee was entitled to benefits under the Act. In this case, the board determined that Brooks was not entitled to receive worker's compensation benefits and Brooks did not appeal the board's determination. The court, therefore, found there can be no bad faith in denying benefits where the employer is not responsible for the underlying claim. Id.
With these decisions, the court offers guidance on the statutory provisions and the standard of conduct that would give rise to an award of bad faith or lack of diligence. The court emphasized the deferential standard of review and the fact that the board has the discretion to make the factual decision whether the accused action warrants an award under Ind. Code § 22-3-4-12.1. These decisions reflect that the court and the board are inclined to find actions are sufficient to justify an assessment of penalties for bad faith or lack of diligence if the dispute results in the employee not receiving statutory benefits.
Ann Stewart's primary area of practice is representing employers in workers' compensation cases and employment-related matters, including the Americans with Disabilities Act, Family Medical Leave Act, sexual harassment and discrimination.