Samuel De Dios v. Indemnity Insurance Company of North America and Broadspire Services, Inc. , 927 N.W.2d 611 ( 2019 )

IN THE SUPREME COURT OF IOWA
No. 18–1227
Filed May 10, 2019
SAMUEL DE DIOS,
Appellant,
vs.
INDEMNITY INSURANCE COMPANY OF NORTH AMERICA and
BROADSPIRE SERVICES, INC.,
Appellee.
Certified questions of law from the United States District Court for
the Northern District of Iowa, Mark W. Bennett, Judge.
A federal district court certified a question of Iowa law in a bad-faith
action brought by an injured worker against a workers’ compensation
carrier and a third-party claims administrator. CERTIFIED QUESTION
ANSWERED.
Anthony J. Bribriesco of Bribriesco Law Firm, PLLC, Bettendorf, for
appellant.
Jeana Goosmann and Anthony Osborn of Goosmann Law Firm,
PLC, Sioux City, for appellees.
Keith P. Duffy of Nyemaster Goode, P.C., Des Moines, for amici
curiae Iowa Defense Counsel Association and the American Insurance
Association.
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MANSFIELD, Justice.
A worker was injured on the job when his vehicle was rear-ended.
He filed a claim for benefits with the workers compensation commissioner.
Later, he filed a bad-faith action in the district court against his employer’s
workers’ compensation carrier and its third-party administrator. The
action was removed to federal court.
The federal district court has asked us to answer the following
certified question of Iowa law: “In what circumstances, if any, can an
injured employee hold a third-party claims administrator liable for the tort
of bad faith for failure to pay workers’ compensation benefits?”
In Iowa, the bad-faith cause of action arises from (1) the special
contractual relationship between insurer and insured, (2) the specific
statutory and administrative duties imposed on insurers, or (3) some
combination of the two. In workers’ compensation, we have emphasized
the statutory and administrative duties of workers’ compensation carriers.
As we discuss herein, a third-party administrator does not possess these
attributes that have led to the imposition of bad-faith liability.
Accordingly, we answer the question as follows: under Iowa law, a common
law cause of action for bad-faith failure to pay workers’ compensation
benefits is not available against a third-party claims administrator of a
worker’s compensation insurance carrier.
I. Background Facts and Proceedings.
“When we answer a certified question, we rely upon the facts
provided with the certified question,” and therefore “restate the facts as set
forth by the federal district court.” Baldwin v. City of Estherville, 915
N.W.2d 259, 261 (Iowa 2018). The United States District Court for the
Northern District of Iowa described the facts as follows:
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A. Factual Background
1. The parties
[Samuel] De Dios alleges that, at all material times, he has
been a resident of Woodbury County, Iowa, and that he was
employed by Brand Energy & Infrastructure Services. He
alleges that Brand had a workers’ compensation insurance
policy with defendant Indemnity Insurance Company of North
America, but that Indemnity “delegated its authority of
investigating, handling, managing, administering, and paying
benefits under Iowa Workers’ Compensation Laws to
[defendant] Broadspire Services, Incorporated.” Amended
Complaint, ¶ 4.
More specifically, De Dios alleges the following about
Broadspire’s duties and its relationship with Indemnity:
5. At all times material to the Petition,
the INSURANCE COMPANY and BROADSPIRE
were responsible for making timely payment of
workers’ compensation benefits to employees of
the EMPLOYER, including SAMUEL. Plaintiff will
refer to both the INSURANCE COMPANY and
BROADSPIRE collectively as “the Defendants.”
6. BROADSPIRE and the INSURANCE
COMPANY are essentially one and the same entity
for purposes of the instant action.
7. The INSURANCE COMPANY lacked
the necessary support staff to investigate on-the-
job injuries in Iowa, including SAMUEL’s on-the-
job injury.
8. The INSURANCE COMPANY lacked
the necessary support staff that had the
experience or knowledge to make an informed
decision on whether to pay benefits pursuant to
Iowa Workers’ Compensation Laws.
9. The INSURANCE COMPANY
obligated BROADSPIRE to provide actuarial
services for workers’ compensation claims,
including SAMUEL’s workers’ compensation
claim.
10. The INSURANCE COMPANY
obligated BROADSPIRE to provide underwriting
services for workers’ compensation claims,
including SAMUEL’s workers’ compensation
claim.
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11. BROADSPIRE performed the tasks of
a workers’ compensation insurance company in
Iowa.
12. BROADSPIRE received a percentage
of the premiums that the EMPLOYER paid to the
INSURANCE COMPANY.
13. BROADSPIRE’s compensation
package with the INSURANCE COMPANY was
tied to the approval or denial of workers’
compensation claims: BROADSPIRE received
more of the EMPLOYER’s premium as the
payment of workers’ compensation benefits
decreased.
14. BROADSPIRE had a financial risk of
loss for workers’ compensation claims it
administered on behalf of the INSURANCE
COMPANY, including SAMUEL’s workers’
compensation claim.
15. The INSURANCE COMPANY had a
financial risk of loss for workers’ compensation
claims that were administered by BROADSPIRE,
including SAMUEL’s workers’ compensation
claim.
16. The INSURANCE COMPANY entered
into a reinsurance agreement with BROADSPIRE
for payments made on behalf of workers’
compensation claims, including SAMUEL’s
workers’ compensation claim.
Amended Complaint at ¶¶ 5-16.
2. The accident and aftermath
De Dios alleges that, on April 8, 2016, he was assigned
by Brand to work on a construction site located on the private
property of CF Industries. To enter the property, he had to
drive past a security gate and a security guard. He alleges
that, after [he] enter[ed] the property, a vehicle driven by
Jonathan Elizondo crashed into the back of his vehicle,
damaging his vehicle and causing him injuries, including a
lower back injury. The collision was witnessed by the security
guard at the gate, Tina Gregg. De Dios reported the collision
and his work injury to Brand’s safety manager, Ismael Barba.
He alleges that Brand authorized him to choose whatever
medical provider he would like to provide care for the work
injury. De Dios chose to be treated at St. Luke’s Hospital,
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where Dr. Jeffrey O’Tool provided him with medical care for
his work injury.
On April 11, 2016, De Dios returned to work with
Brand, but his back pain worsened. On April 14, 2016, Brand
sent De Dios home because of his work injury. On April 14,
2016, Brand authorized De Dios to choose whatever medical
provider he would like to see to care for his work injury. On
April 15, 2016, De Dios’s family doctor, Alisa M. Olson, DO,
treated De Dios for the work injury. De Dios alleges that, from
April 8, 2016, through May 9, 2016, Brand refused to provide
him with “light duty” work. He alleges that, from April 15,
2016, Indemnity and Broadspire knew or should have known
that he had work restrictions as a result of his work injury;
that Brand refused to provide “light duty work” within those
restrictions; and that Indemnity and Broadspire were required
to pay him Temporary Total Disability (“TTD”) Benefits and/or
Healing Period (“HP”) Benefits until a determination of
maximum medical improvement was made by a qualified
medical expert.
3. Denial of the claim
De Dios alleges that Broadspire or, in the alternative,
Indemnity made the decision to deny him workers’
compensation benefits. He alleges that, prior to doing so,
neither Indemnity nor Broadspire interviewed him, or
interviewed or contacted the security guard, Tina Gregg, who
had witnessed the accident, or his treating physicians,
Dr. O’Tool and Dr. Olson. He alleges that the defendants’
failure to contact these people violated an insurance industry
standard of “Three-Point Contact” before denying him
workers’ compensation benefits. On June 9, 2016, De Dios
filed a workers’ compensation claim with the Iowa Workers’
Compensation Commissioner against Indemnity and
Broadspire. On August 23, 2016, Indemnity and Broadspire
filed a joint Answer with the Iowa Workers’ Compensation
Commissioner and denied liability for De Dios’s work injury.
De Dios alleges that Indemnity and Broadspire did not convey
to him the basis for their decision to deny his claim at that
time, that they, in fact, had no reasonable basis for denying
his claim, and that they knew or should have known that no
reasonable basis existed to deny his claim.
II. Standard of Review and Criteria for Answering a Certified
Question.
Regarding this Court’s power to answer certified questions of law,
Iowa Code section 684A.1 provides,
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The supreme court may answer questions of law certified to it
by the supreme court of the United States, a court of appeals
of the United States, a United States district court or the
highest appellate court or the intermediate appellate court of
another state, when requested by the certifying court, if there
are involved in a proceeding before it questions of law of this
state which may be determinative of the cause then pending
in the certifying court and as to which it appears to the
certifying court there is no controlling precedent in the
decisions of the appellate courts of this state.
Iowa Code § 684A.1 (2018).
We have therefore held,
It is within our discretion to answer certified questions from a
United States district court. We may answer a question
certified to us when (1) a proper court certified the question,
(2) the question involves a matter of Iowa law, (3) the question
“may be determinative of the cause . . . pending in the
certifying court,” and (4) it appears to the certifying court that
there is no controlling Iowa precedent.
Baldwin, 915 N.W.2d at 265 (quoting Roth v. Evangelical Lutheran Good
Samaritan Soc’y, 886 N.W.2d 601, 605 (Iowa 2016) (omission in original)).
In this case, the answer to the certified question will determine
whether De Dios’s claim against Broadspire can proceed, and it does not
appear to us (nor did it appear to the federal district court) that there is
any controlling Iowa precedent. We conclude we should answer the
certified question.
III. Analysis.
In Dolan v. Aid Insurance Company, we first recognized the tort of
first-party insurer bad faith. 431 N.W.2d 790, 790, 794 (Iowa 1988) (en
banc). There, the plaintiff filed suit against his insurer, claiming bad-faith
failure to settle for the underinsured motorist policy limit. Id. at 791. We
found it was “appropriate to recognize the first-party bad faith tort to
provide the insured an adequate remedy for an insurer’s wrongful
conduct” because traditional breach of contract damages would not always
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be adequate to compensate for bad faith and the alternative remedy of
intentional infliction of emotional distress was inadequate due to its
limited applicability. Id. at 794.
We also found that recognition of the tort was justified “by the nature
of the contractual relationship between the insurer and insured.” Id. We
explained,
Although we do not believe this relationship involves the same
fiduciary duties as in the third-party situations, . . . we have
frequently noted that insurance policies are contracts of
adhesion. This is due to the inherently unequal bargaining
power between the insurer and insured, which persists
throughout the parties’ relationship and becomes particularly
acute when the insured sustains a physical injury or
economic loss for which coverage is sought. Recognition of
the first-party bad faith tort redresses this inequality.
Id. (citations omitted). We adopted the test for bad faith applied by the
Wisconsin Supreme Court in Anderson v. Continental Insurance Company:
To show a claim for bad faith, a plaintiff must show the
absence of a reasonable basis for denying benefits of the policy
and defendant’s knowledge or reckless disregard of the lack of
a reasonable basis for denying the claim.
Id. (quoting Anderson, 271 N.W.2d 368, 376 (Wis. 1978)). We ultimately
reversed the district court’s order denying the insurer’s motion for
summary judgment, finding as a matter of law that the insured had failed
to show the lack of a reasonable basis for the insurer’s actions under the
Anderson test. Id. at 794–95.
Four years later, we decided that our holding in Dolan logically
extended to workers’ compensation. Boylan v. Am. Motorists Ins., 489
N.W.2d 742, 744 (Iowa 1992). In Boylan v. American Motorists Insurance
Company, we held that injured workers could pursue bad-faith claims
against workers’ compensation carriers. Id. There, we reversed an order
dismissing a bad-faith tort claim brought by an employee against his
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employer’s workers’ compensation carrier. Id. at 742, 744. The district
court had found “the relationship between an injured employee and the
employer’s workers’ compensation carrier” was unlike the insurer/insured
relationship in which we had recognized tort liability for bad faith. Id. at
742. The district court relied on our reasoning in Long v. McAllister, which
held,
The insurer has a fiduciary duty to the insured but an
adversary relationship with the victim. The effect of the policy
is to align the insurer’s interests with those of the insured. In
meeting its duty to the insured, the insurer must give as much
consideration to the insured’s interests as it does to its own.
Boylan, 489 N.W.2d at 743 (quoting Long, 319 N.W.2d 256, 262 (Iowa
1982)). The district court had also observed that “an employer or workers’
compensation insurance carrier is not required to pay weekly benefits or
to pay medical service providers prior to the time the industrial
commissioner has determined the employee’s entitlement to benefits.” Id.We found, however, that Iowa statutes and the Iowa administrative
code placed obligations on insurers. Id. We recognized that Iowa Code
section 86.13 (1991) imposed “an affirmative obligation on the part of the
employer and insurance carrier to act reasonably in regard to benefit
payments . . . .” Id. We also noted section 85.27 established an
“affirmative obligation to furnish medical and hospital supplies to an
injured employee,” and “although [this] statute speaks only of the
obligation of the employer, the commissioner’s regulations consign these
obligations to the employer’s insurance carrier.” Id. 1 The regulations at
issue were Iowa Admin. Code r. 876—2.3 and r. 876—4.10. 2 Id. Rule
876—2.3 states,
1Notably,the present version of Iowa Code section 85.27 more expressly places
obligations on the carrier as well as the employer. See Iowa Code § 85.27(3) (2018).
2Cited as 343 Iowa Admin. Code 2.3, 4.10.
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Representative within the state. All licensed insurers,
foreign and domestic, insuring workers’ compensation and all
employers relieved from insurance pursuant to Iowa Code
section 87.11 shall designate one or more persons
geographically located within the borders of this state, which
person or persons shall be knowledgeable of the Iowa Workers’
Compensation Law and Rules and shall be given the authority
and have the responsibility to expedite the handling of all
matters within the scope of Iowa Code chapters 85, 85A, 85B,
86, and 87.
The Iowa workers’ compensation commissioner shall be
advised by letter of the name, address, and telephone number
of each of the persons so designated. Any change in the
identity, address or telephone number of the persons so
designated shall be reported to the Iowa workers’
compensation commissioner within ten days after such
change occurs.
(Emphasis added). Rule 876—4.10 states,
Insurance carrier as a party. Whenever any insurance
carrier shall issue a policy with a clause in substance
providing that jurisdiction of the employer is jurisdiction of
the insurance carrier, the insurance carrier shall be deemed a
party in any action against the insured.
This rule is intended to implement Iowa Code section
87.10.[3]
(Emphasis added).
Under Boylan, the predominant justification for recognizing a bad-
faith tort against workers’ compensation carriers was the existence of
certain “affirmative obligations” placed upon them by our statutory and
3Iowa Code section 87.10 states,
Other policy requirements.
Every policy issued by an insurance corporation, association, or
organization to insure the payment of compensation shall contain a clause
providing that between any employer and the insurer, notice to and
knowledge of the occurrence of injury or death on the part of the insured
shall be notice and knowledge on the part of the insurer; and jurisdiction
of the insured shall be jurisdiction of the insurer, and the insurer shall be
bound by every agreement, adjudication, award or judgment rendered
against the insured.
Iowa Code § 87.10 (2018).
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regulatory scheme. See 489 N.W.2d at 743; see also Joel E. Fenton, The
Tort of Bad Faith in Iowa Workers’ Compensation Law, 45 Drake L. Rev.
839, 847 (1997) (“This bundle of statutory and administrative obligations
imposed on the insurance carrier creates a Dolan-like relationship between
claimant and insurance carrier, which brings it into the circle of first-party
relationships.”). We also noted that the exclusive remedy defense found
in Iowa Code section 85.20 (1991) was not available to insurance carriers. 4
See Boylan, 489 N.W.2d at 743–44 (citing Tallman v. Hanssen, 427 N.W.2d
868, 870 (Iowa 1988) (“This court . . . recognized that the exclusive remedy
provision of our workers’ compensation act is applicable only to claims
against the employer and does not extend to the employer’s compensation
insurer.”)).
We extended the workers’ compensation bad-faith tort in Reedy v.
White Consolidated Industries, Incorporated, to include self-insured
employers. 503 N.W.2d 601, 603 (Iowa 1993). We explained,
4Iowa Code section 85.20 currently reads as follows:
85.20 Rights of employee exclusive.
The rights and remedies provided in this chapter, chapter 85A, or
chapter 85B for an employee, or a student participating in a work-based
learning opportunity as provided in section 85.61, on account of injury,
occupational disease, or occupational hearing loss for which benefits
under this chapter, chapter 85A, or chapter 85B are recoverable, shall be
the exclusive and only rights and remedies of the employee or student, the
employee’s or student’s personal or legal representatives, dependents, or
next of kin, at common law or otherwise, on account of such injury,
occupational disease, or occupational hearing loss against any of the
following:
1. Against the employee’s employer.
2. Against any other employee of such employer, provided that
such injury, occupational disease, or occupational hearing loss arises out
of and in the course of such employment and is not caused by the other
employee’s gross negligence amounting to such lack of care as to amount
to wanton neglect for the safety of another.
Iowa Code § 85.20(1), (2) (2018).
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A self-insured employer under the Workers’ Compensation Act
is not an employer who fails to secure insurance against
workers’ compensation liability. Without more, an employer
who fails to secure insurance against such claims merely
waives the protection of the act against common-law claims.
Iowa Code § 87.21 (1993). To be a qualified self-insured
employer under the act, it is necessary to voluntarily assume
a recognized status under the workers’ compensation laws as
an insurer. Iowa Code § 87.4 (1987). For purposes of a bad-
faith tort claim, we see no distinction between a workers’
compensation insurance carrier for an employer and an
employer who voluntarily assumes self-insured status under
the act.
Id.Then in Bremer v. Wallace, we answered the following question in
the negative: “Does Iowa recognize a common-law claim for bad-faith
refusal to pay workers’ compensation benefits by an uninsured employer?”
728 N.W.2d 803, 804, 806 (Iowa 2007). Addressing Dolan, Boylan, and
Reedy, we found,
The common thread in these decisions is the
defendant’s status as an insurer, or in the case of a self-
insured employer, the substantial equivalent of an insurer.
This status reflects and is consistent with the rationale
underlying our decision in Dolan.
Id. at 805. We concluded that an uninsured employer is unlike an insurer
or self-insured employer:
A self-insured employer must meet precise
requirements to acquire that standing. Under section 87.4,
[(2001)] “groups of employers by themselves or in an
association with any or all of their workers, may form
insurance associations,” as provided in that statute “[f]or the
purpose of complying with [chapter 87].” Iowa Code § 87.4.
These “self-insured associations” must submit a plan to the
insurance commissioner for approval. Id. Approval is
conditioned on meeting rigorous financial requirements. See
Iowa Admin Code. r. 191–56.3. Once a certificate of approval
has been issued by the insurance commissioner, “the workers’
compensation self-insurance association” is authorized “to
provide workers’ compensation benefits.” Id. r. 191–56.8(1).
Thereafter, the association is subject to the continuing
supervision of the insurance commissioner. Id. rs. 191–56.9,
191–56.13.
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Id. (second alteration in original). We continued,
The defendant in this case stands in a much different
position. He did not purchase workers’ compensation
insurance or join a self-insurance association. Thus, he is not
an insurer, nor is he the substantial equivalent of an insurer.
Consequently, the actual issue in this case is whether bad-
faith tort liability for failing to pay workers’ compensation
benefits should be imposed under circumstances that do not
involve an insurer/insured relationship.
Id. at 806. We held that it should not be. Id.
To summarize, we extended bad-faith liability to workers
compensation carriers because the law imposed certain affirmative
obligations on both employers and insurance carriers, and the employer’s
exclusive remedy defense was not available to carriers. Boylan, 489
N.W.2d at 743–44. We then found that bad-faith liability could extend to
a self-insured employer because the statutory requirements and
administrative oversight exercised over self-insured employers rendered
them the substantial equivalent of insurers. Reedy, 503 N.W.2d at 603.
Thus, we characterized the key inquiry as whether an insurer/insured
relationship existed between the plaintiff and defendant. Bremer, 728
N.W.2d at 806.
In other decisions, we have amplified these points. We have
reemphasized the statutory basis within Iowa Code section 86.13 for the
bad-faith claim based on delayed payment of benefits. See Gibson v. ITT
Hartford Ins., 621 N.W.2d 388, 397 (Iowa 2001) (en banc). We have
explained that workers’ compensation bad-faith claims are considered
“first-party bad faith” claims because of their statutory and regulatory
genesis. McIlravy v. N. River Ins., 653 N.W.2d 323, 329 n.2 (Iowa 2002).
As we put it, “[W]hen first adopting the bad faith cause of action in the
workers’ compensation context, we determined that such a suit is more
accurately considered as one for first-party bad faith given ‘the obligations
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that [Iowa Code §§ 86.13, .27] [(1999)] and administrative regulations
place on the insurer.’ ” Id. (first alteration in original) (quoting Boylan, 489
N.W.2d at 743).
We have also held that workers’ compensation bad-faith claims are
subject to the statute of limitations for “other actions,” not personal injury
actions, because of their statutory grounding. See Brown v. Liberty Mut.
Ins., 513 N.W.2d 762, 764–65 (Iowa 1994). “Brown’s bad-faith claim, as
noted in Boylan, rests on Liberty Mutual’s alleged breach of its statutory
good-faith obligation to pay benefits in advance of a specific directive by
the industrial commissioner.” Id.To sum up: “[O]ur decisions indicate it is the nature of the workers’
compensation insurer’s relationship with the insured employees and
corresponding statutory duties that give rise to bad-faith tort liability.”
Thornton v. Am. Interstate Ins., 897 N.W.2d 445, 463 (Iowa 2017). Thus,
in Thornton, we reversed a finding that an insurer had opposed an
employee’s commutation petition in bad faith, noting, “Commutation is
unlike the payment of weekly benefits in which the statute commands the
employer (or insurer) to take action and, thus, establishes the type of
statutory duty for which a willful and deliberate breach can give rise to
bad-faith liability in the workers’ compensation field.” Id. at 469. 5
When we consider these existing grounds for bad-faith liability in
the workers’ compensation field, it is difficult to see how they would apply
to third-party administrators. A third-party administrator is not in an
insurer/insured relationship with anyone. See Bremer, 728 N.W.2d at
806. And unlike a self-insured employer, a third-party administrator does
5While making this observation, we elected “to decide this case based on the
factual record presented, without foreclosing the possibility that a bad-faith claim may
arise for resisting commutation under different facts.” Thornton, 897 N.W.2d at 468.
14
not have to meet rigorous financial requirements and is not under the
ongoing supervision of the workers’ compensation commissioner. Id. at
805–06.
Our workers’ compensation statutes also do not impose “affirmative
obligations” on third-party administrators as they do on insurers. Cf.
Boylan, 489 N.W.2d at 743. The Iowa workers’ compensation law refers
to third-party administrators, and thus confirms that the Iowa legislature
was aware of their role. See Iowa Code § 85.65A(3)(e) (2018) (providing
that third-party administrators are not entitled to a commission for
collecting the second injury fund surcharge); id. § 86.45(2)(e), (h) (allowing
third-party administrators access to confidential information); id.
§ 87.11E(2)(c)–(e), (f) (making third-party administrators subject to
penalties for filing false financial information). Yet this law imposes no
obligations on them relative to the handling of workers’ compensation
claims. This shows that our legislature recognized a distinction between
insurers and third-party administrators, and opted to impose “affirmative
obligations” only on the former. See Boylan, 489 N.W.2d at 743. Our
statutes do not define “insurer” as including third-party administrators.
See Iowa Code chs. 85, 86, 87. In sum, under the laws of Iowa and the
facts of this case, the third-party administrator is not an insurer, nor is it
the substantial equivalent of an insurer.
It is true that the exclusive remedy provision in Iowa Code section
85.20 logically would not bar a claim against a third-party administrator,
just as it does not bar a claim against a workers compensation carrier.
See Boylan, 489 N.W.2d at 743–44. But that observation merely clears
away a potential obstacle to such a claim; it does not provide an affirmative
reason for recognizing such a claim when Iowa workers’ compensation law
15
does not impose any relevant statutory duties on third-party
administrators.
De Dios raises the concern that the workers’ compensation carrier
could “completely delegate its authority to a third-party administrator and
that third-party administrator [could] arbitrarily deny coverage and delay
payment of a claim to an injured worker with minimal consequences . . . .”
Yet any insurer—not just a workers compensation carrier—can delegate
its duties to a third party. This doesn’t give the insurer a free pass for two
reasons. First, if the third party is an agent, then vicarious liability
applies. See Miller v. Hartford Fire Ins., 251 Iowa 665, 672–73, 102 N.W.2d
368, 373 (1960) (“If an act done by an agent is within the apparent scope
of the authority with which he has been clothed, it matters not that it is
directly contrary to the instructions of the principal; the latter will,
nevertheless, be liable, unless the third person with whom the agent dealt
knew that he was exceeding his authority or violating his instructions.”
(quoting 2 Am. Jur. Agency § 348, at 271) (1936)). Second, the
nondelegable duties imposed by Iowa statutes and administrative
regulations remain on the carrier regardless of any attempt to pass them
to a third party. As Couch on Insurance explains,
An insurer cannot delegate its duty of good faith.
Therefore, an agent of the insurer, while acting on the
insurer’s behalf by carrying out the insurer’s contractual
obligations, is under the same duty of good faith as the insurer
itself. Under varying circumstances, the good faith
requirement has been held to also apply to attorneys of the
insured.
This duty, however, only runs so far. While an insurer’s
agent may be subject to the insurer’s duty of good faith, the
agent does not also incur personal liability to the insured. The
lack of contractual privity prevents courts from finding such
liability, even in cases where the agent in question is a
reinsuring subsidiary.
16
14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 198:17, at
198-38 to 198-39 (3d ed. 2018 Update) (footnotes omitted).
Moving outside Iowa and relying on caselaw from other jurisdictions
can be problematic because many jurisdictions—approximately half—do
not recognize common law bad-faith claims against a workers’
compensation carrier. See Steven Plitt, A Jurisprudential Survey of Bad
Faith Claims in the Workers’ Compensation Context, 18 Conn. Ins. L.J. 451,
452–457 (2012). Not surprisingly, these jurisdictions do not allow third
parties to be sued for bad faith in the workers’ compensation context,
either. See, e.g., Almada v. Wausau Bus. Ins., 876 A.2d 535, 538–40
(Conn. 2005) (holding a bad-faith action against a workers’ compensation
carrier’s third-party administrator was foreclosed by an earlier ruling
barring such an action against carriers themselves); Carpenter v. Sw. Med.
Examination Servs., Inc., 381 S.W.3d 583, 588 (Tex. App. 2012) (holding
that a bad-faith claim against an administrative services firm was barred
by Texas precedent disallowing bad-faith claims against workers’
compensation carriers themselves).
De Dios asks us to follow the approach of Colorado, the only
jurisdiction that to our knowledge has allowed bad-faith claims against
third-party administrators or other entities retained by workers
compensation carriers. In Scott Wetzel Services, Inc. v. Johnson, the
Colorado Supreme Court held the bad-faith tort was available against
independent claims adjusters. 821 P.2d 804, 811 (Colo. 1991). The court
explained,
[A]n independent claims adjusting company . . . acting on
behalf of a self-insured employer owes a duty of good faith and
fair dealing to an injured employee in investigating and
processing a workers’ compensation claim even in the absence
of contractual privity with the employee.
17
Id. at 813. Yet the court was very clear that this duty derived from
Colorado’s statutory and regulatory scheme governing workers’
compensation:
The duty of good faith and fair dealing owed by insurers
and self-insurers to workers’ compensation claimants is
rooted in the Act. The regulations promulgated under the Act
specifically contemplate the use of claims administration
services by self-insured employers as an important part of the
scheme for delivery of workers’ compensation benefits by self-
insured employers. . . . [The] . . . regulations . . . require that
“[e]ach permit holder [i.e., self-insured employer] shall have
within its own organization ample facilities and competent
personnel to service its own program with respect to claims
and administration or shall contract with a service company to
provide the services.”
The self-insurer regulatory scheme therefore specifically
envisions the use of independent claims administration
services to provide benefits. . . . The role of a claims adjusting
service, therefore, derives not solely from its contract with the
self-insured employer, but is based on statute and regulation
as part of the benefit-delivery process.
Id. at 811–12 (second and third alteration in original) (emphasis in original)
(citations omitted) (quoting 7 Colo. Code Regs. § 1101-4:3 (1990)). The
court further elaborated in a footnote:
For the purpose of our analysis it is not significant
whether the claims adjusting service is an independent
contractor or an agent of the employer. It is the statutory and
regulatory structure and the adjuster’s participation in the
investigation and processing of claims that give rise to the
duty and not the contract between the employer and claims
adjusting service, or the law of principal and agent.
Id. at 812 n.10. Iowa does not have the same statutory and regulatory
scheme.
In any event, Colorado is one of the relatively few jurisdictions that
allow claims against third-party administrators generally, i.e., outside the
workers compensation realm. See Farr v. Transamerica Occidental Life Ins.
Co. of Cal., 699 P.2d 376, 385–86 (Ariz. Ct. App. 1984) (finding that an
18
entity that collected premiums, handled claims according to the insurer’s
guidelines, and received a commission on premiums collected could be
sued in bad faith notwithstanding a lack of privity with the insured); Cary
v. United of Omaha Life Ins., 68 P.3d 462, 469 (Colo. 2003) (en banc), as
modified on denial of reh’g (May 19, 2003) (“When a third-party
administrator performs many of the tasks of an insurance company and
bears some of the financial risk of loss for the claim, the administrator has
a duty of good faith and fair dealing to the insured . . . .”); Wathor v. Mut.
Assur. Adm’rs, Inc., 87 P.3d 559, 563 (Okla. 2004) (“In a situation where a
plan administrator performs many of the tasks of an insurance company,
has a compensation package that is contingent on the approval or denial
of claims, and bears some of the financial risk of loss for the claims, the
administrator has a duty of good faith and fair dealing to the insured.”);
Merriman v. Am. Guarantee & Liab. Ins., 396 P.3d 351, 360 (Wash. Ct. App.
2017) (finding that an independent claims administrator can be sued for
bad faith because it is subject to the same relevant statutory duties as an
insurer); but see Meineke v. GAB Bus. Servs., Inc., 991 P.2d 267, 270–71
(Ariz. Ct. App. 1999) (“Creating a separate duty from the adjuster to the
insured would thrust the adjuster into what could be an irreconcilable
conflict between such duty and the adjuster’s contractual duty to follow
the instructions of its client, the insurer.”); Riccatone v. Colo. Choice Health
Plans, 315 P.3d 203, 207 (Colo. App. 2013) (“[A]bsent a financial incentive
to deny an insured’s claims or coerce a reduced settlement, a third party
that investigates and processes an insurance claim does not owe a duty of
good faith and fair dealing to the insured.”); Trinity Baptist Church v. Bhd.
Mut. Ins., 341 P.3d 75, 81 (Okla. 2014) (“[T]his Court will only apply the
duty of good faith and fair dealing to a third party stranger to the insurance
19
contract when the third party acts so like an insurer that it develops a
special relationship with the insured . . . .”).
Iowa has not taken that step. And most jurisdictions to have
considered the issue have declined to recognize bad-faith claims against
third-party administrators and other entities that are not in privity with
the insured. See Lodholtz v. York Risk Servs. Grp., Inc., 778 F.3d 635, 640–
41, 641 n.11 (7th Cir. 2015) (finding that Indiana law does not impose a
duty running from a claims adjuster to an insured and that this is “the
rule adopted by the majority of American jurisdictions”); The William
Powell Co. v. Nat’l Indem. Co., 141 F. Supp. 3d 773, 782–83 (S.D. Ohio
2015) (“Ohio law most strongly points to the conclusion that, absent
privity, an insured may not sue a third-party claims administrator for
adjusting its claim in bad faith.”); McLaren v. AIG Domestic Claims, Inc.,
853 F. Supp. 2d 499, 511 (E.D. Pa. 2012) (noting that Pennsylvania does
not allow bad-faith claims against third-party administrators); Simmons v.
Cong. Life Ins., 791 So.2d 360, 365–66 (Ala. Civ. App. 1998) (affirming
summary judgment in favor of a third-party administrator on a bad-faith
claim based on lack of privity), aff’d in part, vacated in part, rev’d in part
on other grounds, Ex Parte Simmons, 791 So.2d 371 (Ala. 2000); Sanchez
v. Lindsey Morden Claims Servs., Inc., 84 Cal. Rptr. 2d 799, 803 (Ct. App.
1999) (“Our decision is consistent with the majority of cases in other
states, which hold that an independent adjuster hired by the insurer owes
no duty of care to the insured.”); Charleston Dry Cleaners & Laundry, Inc.
v. Zurich Am. Ins., 586 S.E.2d 586, 588 (S.C. 2003) (holding that “no bad
faith claim can be brought against an independent adjuster or
independent adjusting company” due to the lack of privity); Natividad v.
Alexsis, Inc., 875 S.W.2d 695, 697–98 (Tex. 1994) (finding that a claims
adjustment firm could not be sued in bad faith by the injured employee
20
because it was not part of the special relationship among the employee,
the employer, and the insurer); Carpenter, 381 S.W.3d at 588–89
(summarizing Texas authority that forecloses actions against adjusting
and administrative services firms for bad faith because of a lack of privity);
Hamill v. Pawtucket Mut. Ins., 892 A.2d 226, 230 (Vt. 2005) (“We concur
with the majority view that public policy considerations do not favor
creating a separate duty on the part of independent adjusters that would
subject them to common-law tort actions by insureds who have suffered
economic loss as the result of allegedly mishandled claims.”).
Various policy reasons have been given for this majority rule. “An
adjuster owes a duty to the insurer who engaged him. A new duty to the
insured would conflict with that duty and interfere with its faithful
performance. This is poor policy.” Sanchez, 84 Cal. Rptr. 2d at 802. Also,
“in most cases this [new duty] would be redundant, since the insurer also
would be liable for unreasonable investigation or claims handling.” Id. We
have already noted this latter point.
In the workers compensation field, our precedent holding the
compensation carrier to a duty of good faith and fair dealing vis-à-vis the
injured worker rests upon statutes and regulations directed specifically at
the carrier. See Thornton, 897 N.W.2d at 463; McIlravy, 653 N.W.2d at329 n.2; Gibson, 621 N.W.2d at 397; Brown, 513 N.W.2d at 764–65;
Boylan, 489 N.W.2d at 743. These statutes and regulations do not apply
to third-party administrators. Thus, if we were going to begin recognizing
bad-faith claims against insurance intermediaries, as opposed to insurers
themselves, workers compensation would be an unusual place to start.
De Dios asks us to follow the Colorado approach. That is, he urges
us to hold that when a third-party administrator “acts sufficiently like an
insurer,” that administrator can be sued for bad faith as if it were an
21
insurer. But this area of law already has a workable bright line in our
view—a line established by the legislature. Iowa Code sections 87.1, 87.4,
and 87.11 delineate the entities that act as insurers under our workers
compensation system. 6
IV. Conclusion.
For the foregoing reasons, we have answered the certified question
as stated above. We therefore return the case to the United States District
Court for the Northern District of Iowa for further proceedings consistent
with this opinion.
CERTIFIED QUESTION ANSWERED.
All justices concur except Appel and Wiggins, JJ., who dissent.
6Citing to Bremer, De Dios argues that any entity that is “the substantial
equivalent of an insurer” should be liable in bad faith. See Bremer, 728 N.W.2d at 805.
But this language needs to be read in context. Bremer was making the point that under
the workers compensation law, a self-insured employer is the substantial equivalent of
an insurer in terms of its statutory and regulatory duties. See id. That is not true of a
third-party administrator.
22
#18–1227, DeDios v. Indem. Ins. Co.
APPEL, Justice (dissenting).
In this case, a federal court has asked us to decide whether a third-
party administrator may be subject to liability for the tort of bad faith in
the handling of a workers’ compensation claim. The majority believes
there is no basis in Iowa law for extending bad-faith liability to third-party
administrators in the workers’ compensation setting. I disagree.
I. The Nature of the Problem: Outsourcing the Insurance
Function.
Although resisted fiercely for decades, it is now widely accepted that
first and third parties may bring bad-faith claims against insurers. These
bad-faith claims arise even though there is no privity of contract in third-
party claims and even though there is no express statutory authorization
of such claims. Bad-faith claims are particularly important in the
administration of workers’ compensation systems, where injured workers
seek prompt and efficient adjustment of claims related to workplace
injuries.
No one can seriously doubt that the potential of a bad-faith claim is
a powerful deterrent that tends to prevent an insurance company from
taking advantage of its position of power in the claims handling process.
Bad-faith claims can affect an insurance company’s bottom line, and no
insurance company employee wants to be a decision-maker on a claim
that exposes the employer to potentially substantial liability. Liability for
bad-faith claims is an essential component of the effective control of
insurance practices and protection of the insureds’ interests.
In recent years, however, insurance companies are increasingly
“outsourcing” insurance operations to third parties. Through such
“outsourcing,” the real functions of insurance may be performed by these
23
third parties. But the third parties are not subject to insurance regulation,
and according to traditional rules related to lack of privity as well as
narrow views of agency, other courts in the past have held that insurance
intermediaries such as third-party administrators are not liable to the
insured for bad-faith claims.
Some courts and scholars have regarded this situation as simply
untenable. As noted by one insurance commentator,
with reduced incentive to discharge their duties well, the other
intermediaries frequently act negligently, recklessly, or even
in bad faith, needlessly creating claims imbroglios that could
be avoided, minimized, or streamlined.
Jeffrey W. Stempel, The “Other” Intermediaries: The Increasingly
Anachronistic Immunity of Managing General Agents and Independent
Claims Adjusters, 15 Conn. Ins. L.J. 599, 603 (2009) [hereinafter Stempel].
I think anyone who has fussed with a third-party administrator in an
insurance context will know exactly what the commentator is talking
about.
Depending on the method used to compensate the third-party
administrator, the need for accountability for bad-faith conduct may
increase. For instance, a compensation scheme that provides greater
compensation to a third-party administrator as the claims paid decrease
provides a powerful incentive to act in a fashion against the interests of
the insured.
In recent years, a body of caselaw has developed addressing the
question of whether third-party administrators should be liable to an
insured for poor claims handling. Although some cases adhere to the
traditional view affording immunity to third-party administrators and
other intermediaries, a growing body of caselaw has come to a contrary
result.
24
As will be seen below, no Iowa case has yet directly addressed the
question of whether a third-party administrator may be held accountable
for bad-faith torts by an insured. We thus have a choice in our common
law development: should Iowa continue to adhere to traditional notions of
privity or agency notwithstanding the growth of insurance intermediaries
that have assumed many of the functions of an insurer? Or, instead,
should Iowa follow the path of the cases that hold, in light of changed
circumstances, that traditional approaches should give way to a more
modern conception of the tort of bad faith? For the reasons expressed
below, I would choose the latter course.
II. Evolving Caselaw on Third-Party Administrators’ Liability in
the Insurance Context.
A. Introduction. As Stempel has noted, the traditional view of
some courts has been that a bad-faith claim could not be brought against
a third party if there was no privity of contract. See, e.g., Gruenberg v.
Aetna Ins., 510 P.2d 1032, 1038–39 (Cal. 1973) (en banc); see also
Stempel, 15 Conn. Ins. L.J. at 615 (discussing Gruenberg). In order to
satisfy the privity requirement in bad-faith tort cases involving workers’
compensation insurance, the courts engaged in a legal fiction, namely,
that the employee should be considered a party to the contract between
the insured and the insurer.
Privity notions have also sometimes been asserted in an effort to
defeat a bad-faith claim against an intermediary insurance service
provider. The argument is that as an agent of the insurer, the agent is
liable only to its principal for potential shortcomings in the claims process.
Increasingly, however, just as privity was eliminated as an obstacle
to first- and third-party bad-faith actions against an insurer, the
traditional view that an agent of the insurer performing insurance
25
functions for the insurer cannot be held liable for bad faith has been
challenged in a number of states. These case developments were well
summarized by Professor Jeffrey W. Stempel in his presentation to the
Association of American Law Schools Insurance Law Section’s meeting in
2008, which was devoted to the examination of the role of insurance
intermediaries. Stempel, 15 Conn. Ins. L.J. at 604–13; see also Hazel Beh
& Amanda M. Willis, Insurance Intermediaries, 15 Conn. Ins. L.J. 571,
583–84 (2009). According to Stempel, “the greater near-autonomous role
now shouldered by . . . [third-party administrators] and independent
adjusters demands that they be treated under the law on a par with the
insurers they represent.” Stempel, 15 Conn. Ins. L.J. at 603.
B. Negligence Claims Against Third-Party Insurance Providers.
The first challenge to the application of privity in the context of insurance
adjusters arose in a series of cases where insureds claimed that the
insurance adjusters were negligent in the handling of claims. As noted by
Stempel, three cases illustrate the nature of the common law development.
Stempel, 15 Conn. Ins. L.J. at 630–37.
In Continental Insurance v. Bayless and Roberts, Inc., 608 P.2d 281,
286–87 (Alaska 1980), the Alaska Supreme Court considered a case where
a subsidiary of the insurance company functioned as a claims department
and was sued for its failing to adequately investigate a claim and keep its
insured informed regarding case developments. The Bayless court held
that because of the lack of a contract with the insured, no contractual
claim could be brought. Id. at 287. The court held, however, that the
adjuster “could be held liable for negligence arising out of a breach of the
general tort duty of ordinary care.” Id.The New Hampshire Supreme Court came to a similar conclusion in
Morvay v. Hanover Insurance, 506 A.2d 333, 334–35 (N.H. 1986). See
26
Stempel at 15 Conn. Ins. L.J. at 632–35. In this property damage case,
an independent investigator hired to examine the cause of the fire
determined it had a suspicious origin, leading to denial of the claim. See
506 A.2d at 333–34. The district court dismissed the policyholder’s claim
against the third-party investigator on grounds of lack of privity. Id. at
334. The Morvay court reversed, noting among other things that
“investigators are under a general duty to use due care in the performance
of their work.” Id. at 334. The scope of the duty in Morvay, however, could
be limited by limitations set by the contract with the insurer. Id. at 335.
If the contract called for a $200 investigation, for example, the
investigator’s obligation was to use reasonable care in performing the work
within the limits set by the insurer and advise the insurer if the
investigator believed the scope of the investigation was too limited to come
with a reliable result. Id.
The Mississippi Supreme Court considered the question of whether
a third-party adjuster could be liable for negligence in Bass v. California
Life Insurance, 581 So. 2d 1087, 1088 (Miss. 1991). See Stempel, 15
Conn. Ins. L.J. at 635. In Bass, the Mississippi Supreme Court rejected
the contention that the adjuster could be liable for negligence to the policy
holder. 581 So. 2d at 1090. But the Mississippi Supreme Court held that
the adjuster could be held liable for gross negligence, malice, or reckless
disregard of the rights of the policyholder if the adjuster had sufficient
independent authority to rule on claims without insurer approval. Id.
These cases generally stand for the proposition that tort liability is
distinguishable from contract liability and that agency principles do not
provide complete immunity where an independent insurance service
provider has wide autonomy in the determination of claims decisions. Of
27
course, in all these cases, the insured had no direct contract with the
insurer or with the insurer’s agent.
C. Application of Bad-Faith Tort to Third-Party Insurance
Administrators. I now turn to consider cases that deal with a narrower
proposition than negligence, namely, whether third-party administrators
may be subject to bad-faith claims.
The development of the law in Oklahoma begins with the case of
Wolf v. Prudential Insurance Co. of America, 50 F.3d 793 (10th Cir. 1995).
In Wolf, the United States Court of Appeals for the Tenth Circuit
considered whether a third-party administrator could be liable for bad-
faith administration of claims under Oklahoma law. Id. at 797. The Wolf
court noted under the facts of the case that plan administrator had
primary control over administering the plan and received a percentage of
the premiums paid for participant coverage. Id. at 797–98. The Wolf court
concluded that although the plan administrator was a stranger to the
contract between the insured and the insurer, that was not the end of the
matter. Id. at 798. According to the Wolf court, the analysis “should focus
more on the factual question of whether the administrator acts like an
insurer such that there is a ‘special relationship’ between the
administrator and insured that could give rise to a duty of good faith.” Id.
at 797.
It turns out that the Tenth Circuit’s prediction of how the Oklahoma
courts would decide the issue of potential liability of third-party
administrators was accurate. In Wathor v. Mutual Assurance
Administrators, Inc., 87 P.3d 559, 561 (Okla. 2004), the Oklahoma
Supreme Court considered a case where the employer offered employees
access to health insurance through a self-funded insurance program, the
Oklahoma County Health and Dental Plan. The Oklahoma County Health
28
and Dental Plan contracted with Mutual Assurance Administrators (MAA)
to administer the plan. Id. The plaintiff claimed that the MAA, as third-
party administrator, breached its duty of good faith in the administration
of benefits. Id.The Wathor court noted that the special relationship between an
insurance company and the insured gave rise to a special relationship that
created a nondelegable duty of good faith and fair dealing on the part of
the insurer. Id. at 561–62. Thus, Oklahoma County Health and Dental
Plan was potentially on the hook for bad faith. Id. at 562.
The Wathor court emphasized, however, that “the imposition of a
nondelegable duty on the insurer does not necessarily preclude an action
by an insured against a plan administrator for breach of an insurer’s duty
of good faith.” Id. The Wathor court favorably cited Wolf, 50 F.3d at 797,
for the proposition that the focus should be on the factual question of
whether the plan administrator acted sufficiently like an insurer to give
rise to a duty of good faith. 87 P.3d at 562. The Wathor court declared,
In a situation where a plan administrator performs many of
the tasks of an insurance company, has a compensation
package that is contingent on the approval or denial of claims,
and bears some of the financial risk of loss for the claims, the
administrator has a duty of good faith and fair dealing to the
insured.
Id. at 563. Notably, the holding in Wathor did not turn on substantive
support from the Oklahoma’s workers’ compensation scheme. See id.;
Stempel, 15 Conn. Ins. L.J. at 641 (discussing Wathor).
The Colorado Supreme Court considered whether a third-party
administrator could be liable to a bad-faith claim from an insured in a
health insurance context in Cary v. United of Omaha Life Insurance, 68
P.3d 462, 463 (Colo. 2003) (en banc). In Cary, the court considered a claim
against a third-party administrator working for a health insurance
29
company. Id. The Cary court noted that it had decided several cases
holding a third-party administrator potentially liable for bad-faith claims
under workers’ compensation laws. Id. at 466–67. But the Cary court
noted that the court had also extended potential bad-faith exposure of
third-party liability claims in settings other than workers’ compensation.
Id. at 467–68. For example, in Transamerica Premier Insurance v. Brighton
School District 27J, 940 P.2d 348, 349 (Colo. 1997) (en banc), the Colorado
Supreme Court concluded that a third-party administrator could be liable
for bad faith in the context of suretyship. So, the Cary court reasoned,
the notion of bad-faith liability was not limited to workers’ compensation
setting. See 68 P.3d at 468.
The Cary court recognized that an insurer had nondelegable duties.
Id. at 466. But, the Cary court declared,
[T]he existence of this non-delegable duty does not mean that
a third-party claims administrator never has an independent
duty to investigate and process the insured’s claim in good
faith. When the actions of a defendant are similar enough to
those typically performed by an insurance company in claim
administration and disposition, we have found the existence
of a special relationship sufficient for imposition of a duty of
good faith and tort liability for its breach—even when there is
no contractual privity between the defendant and the plaintiff.
Id.
The Cary court recognized that a prior case, Scott Wetzel Services,
Inc. v. Johnson, 821 P.2d 804, 805 (Colo. 1991) (en banc), was based in
part on Colorado’s workers’ compensation statute and that those
considerations were not present in the health insurance context of Cary.
See 68 P.3d at 467. Yet, the Cary court concluded that the special
relationship between an insured and a third-party administrator was
sufficient to support a claim of bad faith. Id. at 468; see Stempel, 15 Conn.
Ins. L.J. at 644–47 (discussing Cary).
30
A New Mexico appellate court considered the question of bad-faith
liability for a third-party administrator in Dellaira v. Farmers Insurance
Exchange, 102 P.3d 111, 112 (N.M. Ct. App. 2004). In Dellaira, an
insurance company issued an automobile policy to an insured. Id.Another company “directed, handled, administered, and adjusted all
claims.” Id. When the claimant was dissatisfied with a property damage
claim, she sought to join the management company as a defendant,
employing a breach of good-faith theory. Id. at 113. The management
company defended on the ground that there was no contract of insurance
between the insured and the management company. Id.According to the Dellaira court, “An entity that controls the claim
determination process may have an incentive similar to that of an
unscrupulous insurer to delay payment or coerce an insured into a
diminished settlement.” Id. at 115. Under these circumstances, the
management company “acts as an insurer and is therefore bound within
the special relationship created through the insurance contract.” Id. The
Dellaira court saw no reason why to limit bad-faith liability where “an
entity related to or pursuant to agreement with the insurer issuing the
policy has control over and makes the ultimate determination regarding
the merits of an insured’s claim.” Id. The Dellaira court cited Cary, 68
P.3d at 478, for the proposition that an entity that controls the claim
determination process may have an incentive similar to that of an
unscrupulous insurer to delay payment or deny it altogether. Id.; see
Stempel, 15 Conn. Ins. L.J. at 637 n.79.
At least one case in California supports the notion that a third-party
administrator may be liable for bad-faith torts. In Delos v. Farmers Group,
Inc., 155 Cal. Rptr. 843, 846 (Ct. App. 1979), an insured sought to recover
from a management company for bad-faith denial of a claim. The
31
management company did not have a direct contract with the insured. Id.
at 848. But the Delos court concluded that a bad-faith claim would lie
against the management company. Id. at 849. According to the Delos
court, a contrary rule, among other things, would “deprive a plaintiff from
redress against the party primarily responsible for damages.” Id.; see
Stempel, 15 Conn. Ins. L.J. at 647 n.104.
Finally, the Arizona Supreme Court considered the question of bad-
faith liability of third-party administrators in Sparks v. Republic National
Life Insurance, 647 P.2d 1127, 1137–38 (Ariz. 1982) (en banc). In this
case, the Arizona Supreme Court considered the viability of a bad-faith
claim against a company that was not in privity with the insured but
provided insurance services. Id. The Sparks court concluded that lack of
privity was not a bar to the claim and that the parties were jointly and
severally liable for bad faith. Id. The Sparks court suggested it proceeded
on a joint venture theory, but the traditional elements of a joint venture
such as sharing profit and loss were not present in the case. 7 Id. at 1138.
A later Arizona case relied on Sparks in finding a third-party administrator
could be liable for a bad-faith claim even though there was no direct
contract with the insured. Farr v. Transamerica Occidental Life Ins. Co. of
Cal., 699 P.2d 376, 386 (Ariz. Ct. App. 1984); see Stempel, 15 Conn. Ins.
L.J. at 647 n.103.
7Similar loose language about a “joint venture” was utilized in Albert H. Wohlers
& Co. v. Bartgis, 969 P.2d 949, 959 (Nev. 1998) (per curiam). Like Sparks, the case does
not appear to apply traditional joint venture requirements. See id. As noted by Professor
Stempel, when the language is peeled back, the Nevada Supreme Court
appears to be saying that where an intermediary acting within its authority
makes a key coverage decision in place of the insurer, the intermediary
should be liable like an insurer, particularly if the intermediary has
economic incentives adverse to coverage and is involved in significant
administrative operations for the insurer.
Stempel, 15 Conn. Ins. L.J. at 643 n.94.
32
There have, of course, been cases to the contrary. For instance, in
Natividad v. Alexsis, Inc., 875 S.W.2d 695, 696 (Tex. 1994), a narrow
majority of the Supreme Court of Texas declined to permit a claim that an
adjusting firm and claims adjuster breached the duty of good faith and fair
dealing in a workers’ compensation context. The five-member Natividad
majority stated that “the duty of good faith and fair dealing has only been
applied to protect parties who have a special relationship based on trust
or unequal bargaining power.” Id. at 697 (emphasis added). The Natividad
majority said that without a contract, there can be no special relationship
and no duty of good faith and fair dealing. Id. at 698.
Four members of the Texas Supreme Court dissented. Id. at 700
(Gammage, J., concurring in part and dissenting in part). While the
dissenters recognized there was no contract between the third-party
administrator and the insured, there was a contract between the insurer
and the third-party administrator to handle the claims of the insured’s
employees according to the terms of the insurance policy. Id. The
Natividad minority noted that “[a] special relationship is one ‘marked by
shared trust or an imbalance in bargaining power.’ ” Id. at 701 (quoting
Fed. Deposit Ins. Corp. v. Coleman, 795 S.W.2d 706, 708–09 (Tex. 1990)).
The time for measuring the imbalance giving rise to a duty of good faith,
according to the Natividad minority, was not at the time of contract
formation but at the time of alleged denial or delay in payment. Id. at 700–
01.
The Natividad minority noted prior caselaw where the Texas
Supreme Court had noted that “ ‘[a]n insurance company has exclusive
control over the evaluation, processing and denial of claims’ and can use
that control in such a way that would subject the insured to ‘economic
calamity.’ ” Id. at 701 (alteration in original) (quoting Aranda v. Ins. Co. of
33
N. Am., 748 S.W.2d 210, 212 (Tex. 1988), overruled on other grounds by
Tex. Mut. Ins. v. Ruttiger, 381 S.W.3d 430, 433 (Tex. 2012); Arnold v. Nat’l
Cty. Mut. Fire Ins., 725 S.W.2d 165, 167 (Tex. 1987)). Here, the Natividad
minority observed, the exclusive control that is so threatening is held not
by the carrier, but by its agent. Id. The Natividad minority concluded that
the reasoning for recognizing the duty to the covered employee’s carrier
extends as well to the carrier’s agent. Id.Another leading case cited by opponents of application of a bad-faith
tort to insurance intermediaries is Sanchez v. Lindsey Morden Claims
Services, Inc., 84 Cal. Rptr. 2d 799 (Ct. App. 1999). In Sanchez, the failure
of an independent adjuster to timely pay a valid $15,000 claim related to
repair of an urgently needed dryer ordered by a customer of the insured
led to a judgment against the insured for $1.325 million. Id. at 800.
Remarkably, this case does not cite the usual privity and limitations of
agency theories but instead fashions its approach based upon perceived
public policy. Id. at 801–03; see Stempel, 15 Conn. Ins. L.J. at 657. The
Sanchez court reasoned that if auditors in California have immunity, then
third-party administrators should have immunity. Id. at 801–02. The
Sanchez court warned that a third-party intermediary could face liability
in excess of that faced by the principal. Id. at 802. See generally Stempel,
15 Conn. Ins. L.J. at 656–75 (discussing Sanchez and potential mischief
of intermediary immunity).
III. Iowa Caselaw on Bad-Faith Torts.
There have been a number of Iowa cases dealing with the question
of bad-faith torts in the insurance context. A review of these cases
demonstrates that the issue before us is one of first impression and that
our precedent does not prevent us from choosing to join the evolving
34
caselaw extending potential liability, at least under some circumstances,
to third-party administrators.
The first case of interest involving a first party bad-faith claim is
Dolan v. Aid Insurance, 431 N.W.2d 790, 790 (Iowa 1988) (en banc). In
this case, we recognized that an insured could bring an action in tort
against an insurer for bad-faith conduct related to a claim made by its
insured. Id. In a brief opinion, we distilled the arguments for and against
the first party bad-faith tort as posing the question of
whether the contractual relationship between the insurer and
insured is sufficiently special to warrant providing the insured
with additional protection and, relatedly, by determining
whether the insured’s remedies for the insurer’s wrongful
conduct are adequate without resort to the tort of bad faith.
Id. at 792. We noted in prior cases we were not required “to closely
scrutinize the contractual relationship between the insurer and insured,
or to evaluate the adequacy of the insured’s remedies were the insurer to
engage in wrongful conduct.” Id. at 793.
We then went on to state that we were “convinced traditional
damages for breach of contract will not always adequately compensate an
insured for an insurer’s bad faith conduct.” Id. at 794. We then concluded
that a bad-faith tort in the first-party setting was appropriate “to provide
the insured an adequate remedy for an insurer’s wrongful conduct.” Id.We added that we “also” thought recognition of the tort was justified by
the contractual relationship between the insurer and insured, noting that
contracts of insurance are contracts of adhesion. Id.The next case of interest is Boylan v. American Motorists Insurance,
489 N.W.2d 742, 742 (Iowa 1992). The question in this case was whether
a first party tort of bad faith applied in the workers’ compensation setting.
Id. We noted that Iowa’s workers’ compensation statute imposes an
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affirmative obligation to furnish medical and hospital supplies to an
injured employee and that administrative regulations place the obligation
on the insurer. Id. at 743. We also concluded that the penalty provisions
of the workers’ compensation statute were not designed by the legislature
to provide an exclusive remedy for wrongful conduct by carriers with
respect to the administration of workers’ compensation benefit. Id. at 744.
In finding that the tort of bad faith did apply, we cited a number of
“well-reasoned decisions” from other courts. Id. at 743. Some of the well-
reasoned decisions found first-party bad faith supported not by the
language of the workers’ compensation statute but by independent duties
owed to the claimants. See id. For instance, in one of the well-reasoned
decisions, Kaluza v. Home Insurance, 403 N.W.2d 230, 236 (Minn. 1987)
(en banc), the Minnesota Supreme Court found that the claim was an
“independent tort” that was “not within the scope of the workers’
compensation system.” In another well-reasoned case, the Montana
Supreme Court emphasized that “courts have upheld the right to bring an
action for independent intentional torts because the tortious conduct,
which gives rise to the action, does not arise out of the original employment
relationship.” Hayes v. Aetna Fire Underwriters, 609 P.2d 257, 261 (Mont.
1980). In the well-reasoned case of Coleman v. American Universal
Insurance, 273 N.W.2d 220, 223 (Wis. 1979), superseded by statute as
stated in Aslakson v. Gallagher Bassett Services, Inc., 729 N.W.2d 712, 725
(Wis. 2007), the Wisconsin Supreme Court approved a bad-faith claim,
noting that when the “claimed injury was distinct in time and place from
the original on-the-job physical injury which was subject to the
Compensation Act. . . . The Act does not cover the alleged injury.” Thus,
three of the well-reasoned cases endorsed by the Boylan court did not rely
on statutory provisions in a workers’ compensation statute to support a
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bad-faith claim. Given the Boylan court’s warm citation to these cases,
there is no reason to think that statutory support is necessary for a valid
bad-faith claim in the workers’ compensation setting.
The next case in the line of authority is Reedy v. White Consolidated
Industries, Inc., 503 N.W.2d 601, 602 (Iowa 1993). In this case, we held
that the tort of bad faith applied where the employer was self-insured. Id.at 602–03. We noted that in order to be self-insured under the Iowa
workers’ compensation act, the employer has to assume the status of an
insurer. Id. at 603. For the purpose of bad-faith tort claims, there was no
difference between an employer acting as an insurer and an employer’s
insurance company. Id. Although unstated in Reedy, the reason for the
equivalence is that when an entity assumes the functions of an insurer, it
has tremendous power over the claims of the insured regardless of its legal
classification. See id. The Reedy holding embraces a functional rather
than a formalistic approach to the tort of bad faith. See id. at 602–03.
The final Iowa bad faith case is Bremer v. Wallace, 728 N.W.2d 803,
804 (Iowa 2007). In Bremer, we considered a case where a workers’
compensation claimant asserted a bad-faith claim against an employer
who did not have a workers’ compensation carrier and was not self-insured
under Iowa’s workers’ compensation statute. Id. at 803–04. Here, the
employer was not acting as an insurance company in evaluating and
adjusting claims. Id. at 805–06. It was a naked entity with no insurance
dimension. Id. The company plainly was not acting as the functional
equivalent of an insurer, and for that reason, the tort of bad faith was not
available. Id.In Bremer, we took a functional approach. Id. We explained that in
Boylan we recognized the tort of bad faith because the self-insured
employer was “the substantial equivalent of an insurer.” Id. at 805. Yet
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in Bremer the adhesive nature of an insurance contract was not involved.
Id. at 806. Further, we observed that the claimant could have foregone
workers’ compensation entirely and brought an ordinary civil action for
damages against the employer. Id.IV. Discussion.
In order to resolve the question before us, we must consider whether
the notion of privity should be a bar to bad-faith claims against third-party
administrators. We must also determine whether bad-faith claims against
a third-party administrator can arise only expressly or by implication from
a statute. If the answer to these preliminary questions is no, we must then
determine whether the tort of bad faith applies to third-party
administrators, and if so, in what settings.
It is clear to me that the question of privity is no bar to the bad-faith
claim asserted in this case. In the workers’ compensation context, the
claim that privity exists between an employee and the employer’s
insurance carrier has always been a legal fiction. What is important in a
bad-faith claim is the functional relationships that arise from insurance
relationships, not privity of contract. See, e.g., Cary, 68 P.3d at 466–68;
Wolf, 50 F.3d at 797–98; Wathor, 87 P.3d at 562–63; Dellaira, 102 P.3d at
115. Where third-party intermediaries have the power to affect the
insurance interests of the claimant, they should be answerable in tort for
their bad-faith actions.
We have seen this movie before. The “ ‘citadel’ of privity” was
vigorously defended in products liability cases even though the formal
structure of the law did not comport with reality. Stempel, 15 Conn. Ins.
L.J. at 605. In MacPherson v. Buick Motor Co., 111 N.E. 1050, 1051–55
(N.Y. 1916), Justice Cardozo cut through the privity doctrine to allow
injured parties to directly attack the underlying tortfeasor in a product
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liability case, namely, the product manufacturer. Cardozo teaches us to
see through the formalism of privity and address the realities on the
ground to establish direct claims against those responsible for foreseeable
injuries to innocent third parties. See id.Because it is based on power relationships and the foreseeability of
harm to the insureds, a claim of bad faith sounds in tort, not in contract.
There are ample reasons to impose tort liability for bad-faith performance
by a third-party insurance administrator. The power imbalance is just as
great, and perhaps greater, as between an insurance company and the
insured. Surely it is reasonably foreseeable that the insured will suffer
potentially significant injury as a result of poor handling of a claim. If the
third-party administrator performs the critical functions of an insurer—
adjustment of claims with a financial incentive to delay or deny
payments—a bad-faith claim should lie regardless of a web of formal
documentation attempting to create artificial barriers between the insured
and the people actually deciding their fate. It is “the logic of tort law,” not
contract, that gives rise to the bad-faith tort against insurance
intermediaries. Stempel, 15 Conn. Ins. L.J. at 695.
An insurance intermediary “in essence stepped into the shoes of the
insurer for these claims and thus logically should be held to the same legal
standards governing the insurer.” Id. at 624. Further, there is ample
authority to hold the agent liable for its torts. The Restatement (Third) of
Agency section 7.01 (2006) provides,
An agent is subject to liability to a third party harmed by the
agent’s tortious conduct. Unless an applicable statute
provides otherwise, an actor remains subject to liability
although the actor acts as an agent or an employee, with
actual or apparent authority, or within the scope of
employment.
39
It seems to me there is ample reason to recognize a bad-faith tort where
an insurance intermediary has the broad discretion to handle an
insurance claim, where the harm to the insured from a bad-faith treatment
of the claim is foreseeable, and where the intermediary acts with Professor
Stempel’s list of bad-faith practices: misrepresentation, dishonesty, deceit,
gross negligence, recklessness, or sharp practices. Stempel, 15 Conn. Ins.
L.J. at 715.
Another factor that drives me toward the conclusion that the tort of
bad faith liability for insurance intermediaries should be recognized is the
perverse incentives that can arise from the relationship between the
insurer and the intermediary. The insurance company hires an
intermediary to save money, of course. The intermediary will desire to
maintain or strengthen its business, and that can be done by limiting
claims payouts. Further, in order to be competitive, the insurance
intermediary may resist proper claims handling and instead choose to
arbitrarily limit its staff, thereby encouraging shortcuts in the claims
process. Further, through use of a third-party intermediary, an insurer
may maintain a warm public relations posture while intentionally
employing a third-party administrator with the expectation that its agent
will limit payouts through whatever means the agent might consider
effective. These risks are further enhanced when compensation
arrangements contain incentives that increase payouts as claims liability
lessens. The interests of the insured do not figure into the financial
equation, or at least not in a positive way.
There is nothing in our caselaw that precludes recognizing a bad-
faith tort where an insurance intermediary is the functional equivalent of
the insurer. None of our caselaw addresses the issue, and the mere fact
that a tort was found under the facts presented in Dolan, Boylan, or Reedy
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does not preclude the finding of a bad-faith tort in a somewhat different
context. We employed a functional approach in Bremer, where we declared
that because a naked employer was not “the substantial equivalent of an
insurer,” the bad-faith tort would not lie. 728 N.W.2d at 805. The
converse should also be true, namely, that where a third-party
administrator is the substantial equivalent of an insurer, a bad-faith tort
should lie. See 1 Jeffrey W. Stempel, Stempel on Insurance Contracts
§ 10.02[A], at 10–17 (3d ed. 2006) (“The key determinant is whether the
third party administrator is both acting like an insurer and subject to the
danger that it will, like an insurer acting in bad faith, place its own
economic interest ahead of the interests of the policyholder.”), as cited in
Robertson Stephens, Inc. v. Chubb Corp., 473 F. Supp. 2d 265, 275 (D.R.I.
2007) (adopting functional approach in predicting Rhode Island law).
And, I do not think our caselaw somehow limits potential third-party
claims to cases where obligations arise under workers’ compensation
statutes. In Boylan, the court cited affirmative duties under the statute of
employers and insurers to provide medical benefits. 489 N.W.2d at 743.
But the reference does not mean that bad-faith torts arise only when
statutes support them. Indeed, the first party bad-faith claim in Dolan
was not based on statutes. 431 N.W.2d at 794. Further, the Boylan
court’s citation of “well-reasoned cases” where bad-faith claims were found
independent of the workers’ compensation statutes cuts dead against
reading some kind of statutory requirement into Boylan. 489 N.W.2d at
743. We should not assume that the references to “well-reasoned cases”
in Boylan were that negligent. In any event, it has been the duty of
common law courts to develop the scope of tort law and apply it in new
contexts as circumstances change, not fossilize it as if the goal were
placement in a legal history museum.
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The majority stresses that an insurance company cannot delegate
its duty to act in good faith and that the insurance company remains liable
for the bad-faith actions of its agent. But tort law functions better if the
person directly responsible for bad-faith acts is financial responsible for
resulting damage.
It is consistent with encouraging responsible conduct by
individuals to impose individual liability on an agent for the
agent’s torts although the agent’s conduct may also subject
the principal to liability. Moreover, an individual agent, when
liable to a third party, may be available as a source of recovery
when the principal on whose behalf the agent acted is not.
Restatement (Third) of Agency § 7.01 cmt. b (2006). As noted by Professor
Stempel, “It is discordant for the law to impose substantial obligations and
potential liability on insurers as principals but then to simultaneously
prohibit actions against their agents, agents who often have independent,
almost unsupervised authority over the claims process.” Stempel, 15
Conn. Ins. L.J. at 705. Further, a fact finder might find the degree of
culpability for punitive damages to be greater against a third-party
administrator who directly caused the problem rather than for an
insurance carrier who is simply inattentive to the claims adjustment
process performed by its agent.
I recognize, of course, that there is tired authority to the contrary.
Much of it reflects older law that simply repeats legal formulas. Some of
it seems oblivious to the basic tort principle that persons who are closest
to wrongful conduct should be accountable to the wronged party for
maximum deterrence.
Among the weakest cases rejecting a bad faith claim against third-
party administrators is Sanchez. The Sanchez court compared liability of
insurance intermediaries to auditors, 84 Cal. Rptr. 2d at 801–02, but the
analogy is off the mark. Here, we are not dealing with endless liability to
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unknown persons, but only liability to claimants or policy holders who are
well known to the insurance intermediary.
Further, the claim of conflicting loyalties has been subject to
criticism. The Sanchez court stated that since “[a]n adjuster owes a duty
to the insurer who engaged him[,] [a] new duty to the insured would
conflict with that duty, and interfere with its faithful performance. This is
poor policy.” Id. at 802. According to Professor Stempel:
Actually, it is poor analysis by the court. The claims adjuster
represents the insurer. By law, the insurer cannot give regard
only to its own interests; it must not only consider the
interests of the policyholder but give them at least “equal”
consideration, a legal rule internalized in the custom and
practice of insurance (where adjusters frequently describe
their role as being required to “look for coverage” rather than
“look for reasons to deny coverage”). The adjuster, like the
insurer, therefore already has obligations to the policyholder.
By immunizing the adjuster from a damages action, the
Sanchez Court merely deprived the policyholder of a legal right
that it already possessed, i.e., a right to have the adjuster act
in the same manner as the insurer is required to act.
Stempel, 15 Conn. Ins. L.J. at 665–66.
In conclusion, one of the features of life in the 21st century is the
increased bureaucratization and compartmentalization of business
practices that, if accepted as legal barriers, tend to prevent direct
accountability for wrongful conduct. Layers upon layers of bureaucracy
impair responsiveness. In the workers’ compensation arena, the employer
hires an insurer and now the insurer in turn may hire a third-party
administrator.
But where there is no direct accountability, service may deteriorate.
We all know the potential scenario. The phone rings and no one answers.
One is put on hold for hours. The right hand knows not what the left hand
is doing. No one is familiar with the file. A person with decision-making
authority cannot be found. Delay. Delay. Delay. This type of behavior
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could lead to bad-faith exposure of an insurance company. The exact
same type of behavior should lead to bad-faith exposure when a third-
party administrator assumes the functions of the insurer.
I can think of no other area where it is more critical to have direct
accountability than in insurance—where issues of extraordinary
importance and urgency to the insured are increasingly handled by
faceless and insulated third-party bureaucracies. To me, one of the
essential functions of our tort system is to ensure that parties responsible
for the foreseeable injuries that they cause through their misconduct,
particularly those done in bad faith, are held directly accountable.
V. Conclusion.
For the above reasons, we should recognize a potential bad-faith
claim against third-party administrators in the insurance context when
they, in essence, undertake the essential functions of an insurance
company as alleged in this case. This ordinarily requires a fact-based
determination. I would so answer the certified question in this case.
Wiggins, J., joins this dissent.