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Legal Issues

Bad Faith Claims Are Barred Against Third-Party Administrators - June 14, 2019

In De Dios v. Indemnity Insurance Company of North America, the Iowa Supreme Court set out to answer a certified question of law: Can third-party administrators be liable for bad faith failure to pay workers’ compensation benefits?  As a matter of first impression, the Iowa Supreme Court concluded a common law claim for bad faith is not available against third-party administrators. 


Samuel De Dios was injured in a motor vehicle accident while working for Brand Energy & Infrastructure Services.  He filed a claim for workers’ compensation benefits and the employer and insurance carrier denied the claim based on the coming and going rule.  In his Arbitration Decision, Deputy Grell concluded the injury arose out of and in the course of De Dios’ employment.  On appeal, Commissioner Cortese affirmed.  De Dios later filed a bad faith action against the employer’s workers’ compensation insurance carrier and the third-party administrator.    


In its decision, the Iowa Supreme Court reasoned that a third-party administrator does not possess the attributes of an insurance carrier, nor does it have an affirmative, statutory obligation to act, so it cannot be held liable in bad faith for failure to pay workers’ compensation benefits.  The court noted bad faith liability had been extended to workers’ compensation insurance carriers in Boylan v. American Motorists Insurance because Iowa statutes and the Iowa Administrative Code placed obligations on these insurance carriers regarding payment of workers’ compensation benefits.

Bad faith liability was then extended to self-insured employers in Reedy v. White Consolidated Industries, Inc., because the court found these self-insured employers voluntarily assume the self-insured status, a status recognized under the Iowa Workers’ Compensation Act, carrying with it the statutory obligation to act.  However, in Bremer v. Wallace, the court declined to extend bad-faith liability to uninsured employers because they are not substantially equivalent to an insurer and there is no insurer/insured relationship. 

In the De Dios case, the court found there was no insurer/insured relationship involving the third-party administrator stating, “[a] third-party administrator is not in an insurer/insured relationship with anyone.”  The court also found the third-party administrator was not under any statutory obligations to act or under the supervision of the Iowa Workers’ Compensation Commissioner.  The case has been remanded to the United States District Court for the Northern District of Iowa to resume the proceedings on the underlying issue of whether there was bad faith liability for the insurance company. 

Impact of Decision

The impact of this decision is that third-party administrators cannot be held liable in bad faith for failing to pay workers’ compensation benefits.  However, the court noted that workers’ compensation insurance carriers may still be liable for the acts of their third-party administrators via vicarious liability. 

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