Supreme Court Eliminates Bad Faith Tort?
by Octavio A Dominguez
In a 5-4 decision, a split Texas Supreme Court held in Texas Mutual Insurance Co. v. Ruttiger that workers’ compensation claimants can no longer assert a common-law claim for breach of the duty of good faith and fair dealing. 55 Tex. Sup. Ct. J. 912 (Tex. 2012). The decision overruled the Court’s decision in Aranda v. Insurance Co. of North America.
The duty of good faith and fair dealing arises out of a special trust relationship between the parties. Twenty-five years ago, the Court expressly recognized a special relationship apart from a fiduciary relationship in Arnold v. National County Mutual Fire Insurance Co. In Arnold,the duty of good faith and fair dealing was imposed on an insurer based on the disparity of bargaining power and the exclusive control that the insurer exercised over the processing of claims. Over the years, the Court has been reluctant to impose a similar duty in other relationships.
But it did in Aranda. Decided one year after Arnold, the Court in Aranda extended the duty of good faith and fair dealing to injured workers suing workers’ compensation carriers. The Court explained that workers’ compensation claims processing was functionally indistinct from first-party insured claims processing in three ways: (1) the disparity of bargaining power; (2) the exclusive control that the insurer exercised over the processing of claims; and (3) the ability of carriers to make arbitrary decisions to pay or delay a valid claim, leaving the injured employee with no immediate recourse.
Following Aranda, the 72nd Legislature overhauled the workers’ compensation system in 1989 with the Workers’ Compensation Act (WCA). Under the WCA, the Texas Department of Insurance regulates claims by establishing processing standards, ordering expedited reviews, issuing binding orders for payment and setting up Benefit Review Conferences (BRCs), which are non-adversarial, informal dispute resolution meetings between the parties.
It was this revision that the Court focused on in Ruttiger. In that case, a compensation insurance carrier initially denied benefits to Timothy Ruttiger,alleging the injuries were not work-related. Three months after the dispute began, Ruttiger finally requested a BRC and the parties settled. Ruttiger then sued the carrier and alleged, among other claims, bad faith in the processing of the claim.
The jury sided with Ruttiger, but last summer the Court ruled that Ruttiger take nothing under the other claims and sent the common-law bad faith claim back for reconsideration by the First Court of Appeals in Houston. Before the appellate court acted, the Court granted a request for a rehearing on that issue.
On rehearing, the Court held the bad faith claim distorted the new WCA system and frustrated the Legislature’s intent to resolve the dispute expeditiously. It noted that an incentive existed for an injured worker to delay seeking immediate relief because even if a carrier complied completely, as Texas Mutual did, it could still be liable under common law.
The dissent argued that the Legislature did not abrogate the claim in the WCA, and in fact recognized it, and thus the claim was compatible with the revised system. The majority countered that the dissent not only incorrectly interpreted the WCA, but also failed to address“[t]he essential question” which was “to what extent the judiciary will respect the Legislature’s function of addressing the concerns and adjusting the rights of parties[.]”
Justice Willett’s concurrence provided perhaps a stronger argument: Aranda was no longer needed because the WCA’s changes remedied the concerns underlying Aranda. Once the conditions no longer existed, the bad faith claim was no longer necessary.
The Court’s decision can be expected to reduce litigation over claims practices. It eliminates one of the most frequently pleaded causes of action in workers’ compensation disputes in Texas. The claimant must now rely solely on the process set out by the WCA and should generally request a BRC as soon as it is apparent that the insurer will contest the claim.
The potential liability for insurers is also reduced, thus providing them with increased predictability when making decisions on challenging claims. Going through the BRC process may cost the parties more time and effort initially, but it will ultimately resolve disputes more quickly than litigation. With more claims settled prior to litigation, legal costs may well decrease which could lead to a reduction in rates for employers.
Octavio Arturo Dominguez is an attorney at Touchstone, Bernays, Johnston, Beall, Smith & Stollenwerck, LLP. He can be reached at firstname.lastname@example.org.