EXTRA-CONTRACTUAL EXPOSURE AFTER RUTTIGER. DAVID BRENNER, Austin Burns Anderson Jury & Brenner, LLP

Transcription

1 EXTRA-CONTRACTUAL EXPOSURE AFTER RUTTIGER DAVID BRENNER, Austin Burns Anderson Jury & Brenner, LLP WM. RANDELL JOHNSON, Lewisville Law Office of William Randell Johnson State Bar of Texas 9 th ANNUAL ADVANCED WORKERS COMPENSATION LAW COURSE August 2-3, 2012 Austin CHAPTER 10 This paper is offered to present an objective presentation of the status of the law in extra-contractual insurance claims. This case law interpretation does not necessarily represent each author s belief as to where the law is, or should be.

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3 DAVID BRENNER BIOGRAPHICAL INFORMATION EDUCATION B.B.A. University of Texas Doctor of Jurisprudence, Baylor University PROFESSIONAL ACTIVITIES Managing Partner, Burns Anderson Jury & Brenner, LLP, Austin Texas Focus in trial and appellate practice Board Certified Personal Injury Trial Law, Texas Board of Legal Specialization Certified, Civil Trial Law, National Board of Legal Specialty Certification Fellow, Texas Bar Foundation Member, American Board of Trial Advocates VOLUNTEER ACTIVITIES BOARD OF AGUDAS ACHIM CO PRESIDENT AGUDAS BOARD OF DIRECTORS JCAA 2007-PRESENT BOARD CHAIR LAW RELATED PUBLICATIONS, ACADEMIC APPOINTMENTS AND HONORS 1. American Jurisprudence Award Contracts 2. American Jurisprudence Award Property II 3. Author/Speaker, Bad Faith Update, TADC 2002; Texas State Bard Advanced Workers Compensation Seminar; ; Author/Speaker, Extra-contractual Exposure Beyond the Labor Code, Texas Workers Compensation Commission Education Conference, 2003, 2004 and Author/Speaker, Cross-Examination of Expert Witnesses, State Bar of Texas, Advanced Workers Compensation Course, Author/Speaker Avoiding Exposure in Wrongful Discharge Claims Texas Self Insurance Association Annual Educational Conference, 2006, 2007 and Texas Super Lawyers Civil Trial

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5 WM. RANDELL JOHNSON OF COUNSEL, THE CASAUBON FIRM, LLP 117 HILLSIDE DRIVE LEWISVILLE, TEXAS TEL: 972/ FAX: 972/ CURRICULUM VITAE EXPERIENCE Assistant District Attorney, Dallas County District Attorney s Office Law Offices of Kenneth K. Stephens (Stradley, Schmidt, Stephens & Wright) Johnson and Peavey Present Law Offices of Wm. Randell Johnson Present Of Counsel, The Casaubon Firm, LLP AREAS OF PRACTICE Civil trial practice, personal injury trial practice and litigation of Texas workers compensation claims at all levels (administrative, judicial review and appeal). Current focus is on litigation of matters related to workers compensation and work-related injury claims including insurance bad faith, non-subscriber, thirdparty and retaliatory discharge/practices claims. Current practice also includes litigation of criminal cases at all levels (pre-trial, trial and appeal) but on a more limited basis (primarily Collin County only). PROFESSIONAL MEMBERSHIPS State Bar of Texas (SBOT No ) SBOT, Workers Compensation Section Collin County Criminal Defense Lawyers Association Texas Criminal Defense Lawyers Association Admitted to all State Courts Admitted to Federal District Courts, Northern and Eastern Districts Admitted to Federal Court of Appeals, Fifth Circuit EDUCATION 1976 Richardson High School, Richardson, Texas 1980 BA University of Texas at Austin, Texas 1984 JD Texas Tech University School of Law at Lubbock, Texas AWARDS/HONORS National ABA Moot Court Team (1983 and 1984) President, Texas Tech Board of Barristers Awarded Order of Barristers (1984) AV Rated, Martindale Hubbel (highest possible rating) Board Certified Civil Trial Law, Texas Board of Legal Specialization Board Certified Personal Injury Trial Law, Texas Board of Legal Specialization Board Certified Workers' Compensation Law, Texas Board of Legal Specialization

6 WM. RANDELL JOHNSON P. O. BOX LEWISVILLE, TEXAS TEL: 972/ FAX: 972/ CURRICULUM VITAE (Continued) SEMINARS/PAPERS Author, Lecturer & Seminar Sponsor: Workers Compensation Litigation Update 2005 & 2007 Author & Lecturer: Employer s Overview of Bad Faith Law as it applies to Workers Compensation Cases Overview of Bad Faith Law as Applied to Workers' Compensation Claims State Bar of Texas Advanced Workers Compensation Course - Carrier Waiver Co-Author and Lecturer: Job Related Injuries and the Americans with Disabilities Act Handling Workers Compensation Claims Under the Old & New Acts Tort Reform Revisited: A Consumer Protection Update Lecturer: Steps in Handling Workers Compensation Claims/Employer s Role in Workers Compensation Litigation Comparison of Old & New Workers Compensation Acts - Employer s Perspective State Bar of Texas Advanced Workers Compensation Course - Bad Faith Caselaw Update Author: 1990 State Bar of Texas Advanced Workers Compensation Course - Statutory Coverage Problems Co-Author: 1985 New Developments: Legislation and Court Decisions in Texas; Southwestern Law Journal - Criminal Procedure: Trial and Appeal. COMMUNITY INVOLVEMENT Division Coordinator, Plano Football League ( ) Board Member/Commissioner, Plano Girls Softball Association ( /2004) Board Member, Plano Baseball Association ( ) Sponsor, Weatherford Chess Club ( ) President, Weatherford Dads Club ( ) YMCA Indian Program ( ) PSHS Band Booster ( ) Texas Longhorn Band Booster ( ) Plano Senior High School Quarterback Club ( ) Coach Baseball, Basketball & Football (various youth leagues)( ) Member, St. Andrews United Methodist Church

7 Extra-Contractual Exposure After Ruttiger Chapter 10 TABLE OF CONTENTS I. INTRODUCTION... 1 II. THE HISTORICAL ADOPTION OF THE COMMON LAW DUTY OF GOOD FAITH AND FAIR DEALING III. ENTER THE INSURANCE CODE... 1 IV. EXIT THE INSURANCE CODE... 2 V. EXIT THE COMMON LAW DUTY OF GOOD FAITH AND FAIR DEALING... 2 VI. MISREPRESENTATIONS AND INSURANCE CODE SECTION i

8 Extra-Contractual Exposure After Ruttiger Chapter 10 Cases TABLE OF AUTHORITIES Aetna Cas. & Sur. Co. v. Marshall, 72 S.W.2d 770 (Tex. 1987)... 1, 2 Allstate Ins. Co. v. Watson, 876 S.W.2d 145, 150 (Tex. 1994)... 1, 2 Aranda v. Ins. Co. of North America, 748 S.W.2d 210 (Tex. 1988)... 1, 2, 3 Arnold vs. National County Mutual Fire Ins. Co, 725 S.W.2d 165 (Tex. 1987)... 1 Stewart Title v. Aiello, 941 S.W.2d 68, 71 (Tex. 1994)... 2 Texas Mut. Ins. Co. v. Ruttiger No , (Tex. June 22, 2012) available at rh.pdf... 1, 2, 3 Statutes Tex. Ins. Code , 2 Tex. Ins. Code , 3 ii

9 Extra-Contractual Exposure After Ruttiger Chapter 10 EXTRA-CONTRACTUAL EXPOSURE AFTER RUTTIGER I. INTRODUCTION On June 22, 2012, the Texas Supreme Court concluded that the unfair claims settlement practices contained in Texas Insurance Code sections and and the Texas Deceptive Trade Practices Act are inconsistent with the Texas Labor Code in its current structure and, thus, a workers compensation claimant may not assert such causes of action. The Supreme Court also reconsidered and overruled its prior decision in Aranda and concluded the common law duty of good faith and fair dealing is no longer a viable cause of action for workers compensation claims handling. The Court concluded that the provisions of Texas Insurance Code section , which regulate the misrepresentation of an insurance policy, are not inconsistent with the Labor Code and a misrepresentation claim is not precluded, but because policy terms are of little significance in workers compensation claims handling, it appears there may no longer be a viable extra-contractual claim for workers compensation claims handling. II. THE HISTORICAL ADOPTION OF THE COMMON LAW DUTY OF GOOD FAITH AND FAIR DEALING. In 1987, the Texas Supreme Court perceived an inherently unequal bargaining power between an insurer and its policyholders. In an effort to balance the power between the insured and the insurer, the Court concluded that a special relationship exists between an insurer and its insured that forms the foundation of the insurance contract. Arnold v. National County Mutual Fire Ins. Co, 725 S.W.2d 165 (Tex. 1987). Due to the special relationship, the Court created a duty, owed by an insurer to its insured, to deal fairly and in good faith when investigating, adjusting, and settling claims. Id. Although there is no insurer/insured relationship between a workers compensation claimant and a workers compensation insurer, in 1989, the Supreme Court extended the duty of good faith and fair dealing to the relationship between a workers compensation claimant and the workers compensation carrier providing coverage of his claim. In Aranda v. Ins. Co. of North America, 748 S.W.2d 210 (Tex. 1988), the Supreme Court concluded that the Workers Compensation Act in effect at that time did not provide injured workers with an immediate recourse to address an arbitrary and unjust denial of benefits. Because the lack of recourse could result in economic calamity to the injured worker, the Aranda court chose to extend the duty of good faith and fair dealing to a workers compensation carrier in favor of injured workers. To 1 avoid running afoul of the exclusive remedy provision of the Workers Compensation Act, Aranda also concluded that in order to prevail, the injured worker must prove the breach of the duty of good faith and fair dealing caused an injury that is separate and independent from the workers compensation injury. III. ENTER THE INSURANCE CODE As the effects of Arnold and Aranda began to percolate through the judicial system, the Texas Legislature adopted insurance regulations relating to unfair claims settlement practices. Now contained within Insurance Code section , the provisions prohibited an insurer from, among other things, failing to effect a prompt and fair settlement of a claim for which liability was reasonably clear or refusing to pay a claim without conducting a reasonable investigation. TEX. INS. CODE Two significant Supreme Court cases set the stage for evaluating the Insurance Code s unfair claims settlement practices applicability to workers compensation claims. In Aetna Cas. & Sur. Co. v. Marshall, 72 S.W.2d 770 (Tex. 1987), the Supreme Court addressed whether a workers compensation claimant was granted standing to pursue an Insurance Code claim for violations of the DTPA. The workers compensation claimant did not sue Aetna for refusal to timely pay benefits owed under the Workers Compensation Act but, instead, sued Aetna for misrepresentations that their agreed judgment conferred rights that it did not. Id. at 771. Marshall claimed that despite Aenta s agreement in the judgment to pay medical expenses, it delayed payment of such expenses for some times as long as seventeen months and also refused to pay for a prescription. Marshall argued that because of this, physicians refused to provide medical treatment, hospitals refused to discharge him, and pharmacies refused to extend him credit. The Court concluded there was evidence that Aetna misrepresented the terms of the settlement agreement. Id. at 772. In his dissenting opinion, Chief Justice Gonzales argued that the Legislature never intended for court judgments, particularly in workers compensation cases, to be the basis of a DTPA. In a footnote to his dissent, Justice Gonzales noted that [T]he irony is that in the long run, the majority opinion will hurt rather than help consumers. Cases will be more difficult to settle and we may have seen the end of agreed judgment in workers compensation cases that leave future medical open. Id. at 774, footnote 2. In 1994 the Court issued two decisions relating to Insurance Code claims handling exposure. First, in Allstate v. Watson, the Court limited private causes of action to the insured and those fully aligned with the insured, holding that a third-party claimant lacks standing to sue under section 16 of Article See

10 Extra-Contractual Exposure After Ruttiger Chapter 10 Allstate Ins. Co. v. Watson, 876 S.W.2d 145, 150 (Tex. 1994). The Court explained that to permit any other statutory construction would create conflicting duties and compromise the insurer s loyalties and obligations owed to the insured. Id. Then, in Stewart Title v. Aiello, the Court explained and distinguished its Marshall holding, explaining that in Marshall, Aetna faced liability to Marshall based upon an agreed judgment to which both Aetna and Marshall were parties, and in which Aetna agreed to investigate the claim and serve in the capacity of Marshall s insurer, paying future medical bills as they were incurred. Stewart Title v. Aiello, 941 S.W.2d 68, 71 (Tex. 1994). Absent this agreement, the claim would have sounded in contract and not in tort. Id. Of significance is that a compromise settlement agreement, of the nature entered into in Marshall, is no longer viable in workers compensation claims in Texas. IV. EXIT THE INSURANCE CODE On June 22, 2012, the Texas Supreme Court revisited the applicability of the Insurance Code claims handling practices to workers compensation claims. What is clear is that based on the Ruttiger decision, a workers compensation claimant cannot recover for violations of Insurance Code sections and , and also may not recover for violations of the Texas Deceptive Trade Practices Act. Texas Mut. Ins. Co. v. Ruttiger No , (Tex. June 22, 2012) available at n/08075/ rh.pdf. Distinguishing its prior decision in Marshall, the Court notes that the workers compensation landscape changed since Marshall. Differences between the dispute resolution processes under the old law and new Act are stark. Under the old Industrial Accident Board (IAB) prehearing process, no testimony was taken and the only discernible result was a recommendation. The formal hearing was more formality than hearing. Under the old law, IABs were no more than a way station on the way to the courthouse. Ruttiger, , slip op. at 14. The majority opinion noted that in contrast to the Act in effect at the time of Marshall, the current Act provides significantly more meaningful proceedings at the administrative level so as to reduce the number and cost of judicial trials, speed up the time for the entire dispute resolution process, and facilitate interlocutory payment of benefits pending final resolution of disputes. To achieve these purposes, the amended Act contains detailed procedures and penalties for failures of the various interested parties to comply with the statutory and regulatory requirements. Id., slip op. at After evaluating the mechanics of the dispute resolution process, the Court concluded that the Act has multiple, and sometimes redundant, additive penalty and sanction provisions for enforcing compliance with its requirements. Permitting a workers compensation claimant to additionally recover by simply suing under general provisions of Insurance Code section or would be inconsistent with the structure and detailed processes of the Act. Not only would such recovery be inconsistent with the Act, it could also result in rewarding an employee who is dilatory in utilizing the Act s detailed resolution process. Id., slip op. at V. EXIT THE COMMON LAW DUTY OF GOOD FAITH AND FAIR DEALING The Supreme Court in Ruttiger then revisited its holding in Aranda. Aranda v. Ins. Co of North America, 748 S.W.2d 210 (Tex 1988). The court noted that in Aranda, it concluded that an employee should be entitled for three reasons: (1) the disparity of bargaining power between compensation insurers and employees, (2) the exclusive control that an insurer exercises over processing of claims, and (3) arbitrary decisions by carriers to refuse to pay or delay payment of valid claims leave the injured employees with no immediate recourse. After comparing the differences between the workers compensation laws in effect during the time of Aranda with the current Act, the Court concluded that the reforms were intended to provide benefits to employees in a more timely fashion, and achieving those results reduced the disparity in bargaining positions between the employee and insurer, imposing controls over the carriers processing of claims and controlling the ability of carriers to make arbitrary decisions about refusing or delaying payment. Ruttiger, , slip op. at 30. The act addresses the disparity in bargaining in part by providing an Office of Injured Employee Counsel. Id. The majority concluded that the key question is not whether the Legislature intended to abrogate the common law duty of good faith and fair dealing when it enacted the Workers Compensation Act but, instead, to what extent the judiciary will respect the Legislature s function of addressing concerns and adjusting rights of parties to the system as part of its policy-making function. Id., slip op. at 34. The Aranda cause of action operates outside the Act and in many instances in direct opposition to the Act s goals and processes. Id. The Act effectively eliminates the need for a judicially imposed cause of action outside the administrative processes and other 2

11 Extra-Contractual Exposure After Ruttiger Chapter 10 remedies in the Act. Recognizing and respecting the Legislature s prime position in enacting, studying, analyzing, and reforming the system, and its efforts in having done that, the Supreme Court concludes that Aranda should be, and is, overruled. Id., slip op. at 36. VI. MISREPRESENTATIONS AND INSURANCE CODE SECTION Not only does the Ruttiger opinion address whether a claim can be brought for unfair claims settlement practices, but it also addresses whether the Workers Compensation Act conflicts with a claim for making misrepresentations under the policy. In this respect, the Court concluded that section is not at odds with the dispute resolution process of the workers compensation system. Id., slip op. at 26. However, the Court noted that although recovery based upon section may not be precluded by the Act, there was legally insufficient evidence to support a finding based upon misrepresentation. Texas Insurance Code section provides: It is an unfair method of competition or an unfair or deceptive act or practice in the business of insurance to misrepresent an insurance policy by: (1) making an untrue statement of material fact; (2) failing to state a material fact necessary to make other statements made not misleading, considering the circumstances under which the statements were made; (3) making a statement in a manner that would mislead a reasonably prudent person to a false conclusion of a material fact; (4) making a material misstatement of law; or (5) failing to disclose a matter required by law to be disclosed, including failing to make a disclosure in accordance with another provision of this code. TEX. INS. CODE While workers compensation policies can be complex and include many endorsements, from a claimant s perspective, the terms of the standard Texas policy providing coverage for workers compensation claims generally provide: Part One Workers Compensation Insurance A. How This Insurance Applies This workers compensation insurance applies to bodily injury by accident or bodily injury by disease. Bodily injury includes resulting death. 1. Bodily injury by accident must occur during the policy period. 2. Bodily injury by disease must be caused or aggravated by the conditions of your employment. The employee s last day of last exposure to the conditions causing or aggravating such bodily injury by disease must occur during the policy period. B. We Will Pay We will pay promptly when due the benefits required of you by the workers compensation law. C. We Will Defend We have the right and duty to defend at our expense any claim, proceeding or suit against you for benefits payable by this insurance. We have the right to investigate and settle these claims, proceedings or suits. We have no duty to defend a claim, proceeding or suit that is not covered by this insurance. D. We Will Also Pay We will also pay these costs, in addition to other amounts payable under this insurance, as part of any claim, proceeding or suit we defend: 1. reasonable expenses incurred at our request, but not loss of earnings; 2. premiums for bonds to release attachments and for appeal bonds in bond amounts up to the amount payable under this insurance; 3. litigation costs taxed against you; 4. interest on a judgment as required by law until we offer the amount due under this insurance; and 5. expenses we incur. E. Other Insurance We will not pay more than our share of benefits and costs covered by this insurance and other insurance of self-insurance. Subject to any limits of liability that may apply, all shares will be equal until the loss is paid. If any insurance or self-insurance is exhausted, the shares of all remaining insurance will be equal until the loss is. It is the statutory framework and rules, and not the policy language, that generally form the evaluation of 3

12 Extra-Contractual Exposure After Ruttiger Chapter 10 compensability, the entitlement to benefits, and the basis for plain language notices required to dispute entitlement to benefits. Thus, despite absence of privity, it is unlikely that a workers compensation claimant will find that misrepresentations relating to the terms of the policy will ever formulate a basis for recovery. 4