Iowa Supreme Court Reverses Important Point in Bad Faith Case

Previously, in the matter of Thornton v. American Interstate Insurance Company, a workers’ compensation Claimant had filed a bad faith lawsuit against the applicable workers’ compensation insurer for bad faith. Many allegations were made, but the primary thrust of the Petition was that the employer had no reasonable grounds to dispute that the Claimant was permanently and totally disabled and accordingly, committed bad faith when the employer refused to voluntarily agree to a request for Commutation. The District Court agreed with the Claimant and found that the failure to agree on a voluntary basis for a commutation constituted bad faith. This resulted in a significant multi-million dollar award against the employer for punitive damages.
After a series of appeals, the Iowa Supreme Court reversed the District Court on the issue of the bad faith arising out of a failure to agree to a voluntary commutation. Essentially, the Iowa Supreme Court in Thornton v. American Interstate Insurance Company, 897 N.W. 2d 445(Iowa 2017) noted that the District Court finding that the insurer knew that there was no basis to dispute the allegation that the permanent total disability was appropriate. However, the Iowa Supreme Court determined that the District Court erred by concluding, as a matter of law, that the insurer was in bad faith for resisting commutation. Essentially, the Iowa Supreme Court determined that the insurer’s refusal to stipulate to partial benefits via voluntary commutation did not constitute bad faith.
A couple of key points. First, this is an important case in the context of the Iowa Supreme Court noting that a simple failure to stipulate to a commutation petition did not arise to bad faith, given the facts in the Thornton case. Second, insurers and employers should be aware that given the initial decision by the District Court in Thornton, legislation was introduced in 2017 and enacted which essentially expressly stated that a commutation is not appropriate absent employer agreement. What does this mean?
To start, a simple disagreement regarding the appropriateness of a commutation will not as a matter of law constitute bad faith. Second, given the recent amendments to the Iowa Workers’ Compensation Act regarding commutations, Claimants do not have the unilateral right to seek commutation before the Commission even absent agreement. However, we would encourage employers and insurers to consider why a commutation is being requested before unilaterally denying the same. Sometimes there may be valid reasons for commutations and, frankly, there may be some benefits to employers related to the same. Also, the Iowa Supreme Court’s decision in Thornton, although favorable, is not a blanket statement that bad faith allegations and/or damages cannot arise out of commutation situations. Take each case on a case by case basis, analyze the facts and make a well-reasoned decision.
For questions regarding Iowa workers’ compensation contact Iowa workers’ compensation attorney Paul Barta at PBarta@baylorevnen.com.