Legal Issues

Bad Faith When Penalty Benefits Denied - March 4, 2019

Joni L Ploeger

Update: Further review was denied by the Iowa Supreme Court on July 12, 2019.

The Iowa Court of Appeals recently decided a case finding that if penalty benefits were not awarded as part of a workers’ compensation action because the employer/insurance carrier’s denial of benefits was reasonable, then bad faith cannot be awarded as part of a civil claim.  Dunlap v. AIG, Inc., File No. 17-1503 (Iowa Ct. App. 2019).  The court reasoned a finding of bad faith was barred by issue preclusion. 

Workers’ Compensation Litigation

Regarding the underlying workers’ compensation action for a 2007 work injury, Deputy Workers’ Compensation Commissioner Jon Heitland found the employer/insurance carrier did not act unreasonably in denying weekly benefits when relying on a doctor’s release to full duty and a doctor’s opinion finding against causation.  Commissioner Christopher Godfrey affirmed on appeal, but the district court reversed.  The Iowa Court of Appeals affirmed the Commissioner’s decision holding, “we agree there was a reasonable basis for [the employer]’s position that no benefits were owing to Dunlap.”

Bad Faith Litigation

On the subsequent civil action asserting bad faith, the district court found issue preclusion was appropriate because the insurance carrier had the burden of proving its denial was reasonable on the underlying workers’ compensation action, also an essential element in establishing bad faith.  On appeal, the Iowa Court of Appeals affirmed.  The court explained that because the reasonableness of the denial had previously been decided through the workers’ compensation litigation, the issue could not be relitigated through the bad faith action.  “While the tort of bad faith is not within the jurisdiction of the workers’ compensation commissioner, the reasonable-basis issue itself was directly before the agency as part of the determination of whether Dunlap was entitled to penalty benefits under section 86.13.” 

Nevertheless, the insurance carrier has filed for further review of the Iowa Court of Appeals decision because the court also found the insurance carrier’s denial of a subsequent 2012 work injury was not reasonable.  The issue of whether the denial of benefits was reasonable was not an issue presented during the underlying workers’ compensation action, so issue preclusion was not an available argument.  The Iowa Court of Appeals found that an expert opinion denying causation is not sufficient in and of itself to show a denial is fairly debatable.  “Rather, an insurer can only rely upon a reasonable opinion denying causation to successfully defeat a claim of bad faith.”  This issue may be taken up by the Iowa Supreme Court if it accepts the request for further review. 

Going Forward

For employers and insurance carriers, it is important to remember that penalty benefits can only be avoided if the denial of benefits is reasonable.  Otherwise, there can be exposure for a finding of bad faith as well.  Conversely, a finding by the agency that the denial was reasonable will preclude a claimant from later bringing a civil lawsuit for bad faith on the same basis.

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