Workers' Comp Legal Corner

Court Puts Final Nail in Bad Faith Coffin

The Texas Supreme Court made clear its stance that workers' comp is the exclusive jurisdiction for all matters related to the handling of an injury claim.
By: | April 22, 2015

A high-court ruling in the case of a worker who suffered traumatic, debilitating injuries makes it clear that in Texas, decisions made in the workers’ comp claims process are not subject to bad faith lawsuits.

Even bad decisions by bad actors, are not subject to bad faith claims.

The Texas Supreme Court’s Feb. 27, 2015, ruling In re Crawford & Company held that the 1989 Act (“New Law”) overhauled the workers’ compensation system, giving the state’s Division of Workers’ Compensation broad regulatory authority to control insurance carrier behavior, obviating the need for bad faith lawsuits.

Before adoption of the New Law in 1989, the Texas Supreme Court (then mostly elected Democrats often supported by trial lawyers) extended the common law tort of good faith and fair dealing to injured workers, who are a third party to the workers’ compensation insurance contract, because of a “special relationship” between the insurance carrier and the injured worker.

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In the last 30 years, a cottage industry of bad faith litigation in workers’ compensation emerged. For example, one firm routinely filed bad faith actions when DWC ruled in their favor on some issues regarding benefits. Another filed multiple actions but offered to settle at below defense costs before starting discovery.

As the costs of bad faith exploded, insurance carriers and even some plaintiff lawyers came to believe the shield of bad faith, created to protect injured workers, was now a sword perhaps causing more harm than good.

The Supreme Court abolished most bad faith causes of actions in 2012. The court in Texas Mutual Insurance Company v. Ruttiger said some claims remained, specifically mentioning misrepresentation of the insurance policy. The plaintiff bar hoped some viable causes of action survived to protect the injured worker from bad actors (or at least insurance companies who acted badly).

The facts of the most recent case highlight the breadth of the Ruttiger decision. The carrier, through its third party administrator (Crawford and Company), believed the injured worker committed insurance fraud and reported the alleged crime to the authorities. After indictment, an investigation revealed the injured worker committed no crime. Plaintiffs filed suit for malicious prosecution, among other things.

Believing its previous Ruttinger decision was interpreted too narrowly, the court In re Crawford characterized all of the plaintiff’s complaints as disagreements with claim decision-making. The court strongly reiterated its position that DWC now has the sole jurisdiction to regulate insurance companies: DWC, not juries, would regulate bad behavior.

Previously, DWC never issued administrative violations for claim decisions such as improper denials. DWC has expressed its intent to expand its regulatory role and fine carriers for improper denials of benefits.

What does it all mean? Carriers and employers bad faith litigation and costs will decrease while administrative violations, frequency, and fine amounts will likely increase.

Attorney Stuart Colburn is a shareholder with Downs Stanford, P.C. He has extensive experience in all phases of dispute resolution before the Texas Department of Insurance, Division of Workers’ Compensation and in district courts across the state. He can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]