Boy v. Fremont Indem. Co.

• Decision Date: 26 May 1987
• Docket Number: CA-CIV
• Citation: 154 Ariz. 334,742 P.2d 835
• Parties: Bill BOY, a single man, Plaintiff-Appellant, v. FREMONT INDEMNITY COMPANY, a California corporation, Defendant-Appellee. 18644.
• Court: Arizona Court of Appeals

Page 835

742 P.2d 835

154 Ariz. 334

Bill BOY, a single man, Plaintiff-Appellant, v. FREMONT INDEMNITY COMPANY, a California corporation, Defendant-Appellee.

1 CA-CIV 8644.

Court of Appeals of Arizona,

Division 1, Department B.

May 26, 1987.

Review Denied Sept. 22, 1987.

[154 Ariz. 335] Langerman, Begam, Lewis and Marks by Wendi A. Sorensen, Samuel Langerman, Amy Langerman, Richard Langerman, Phoenix, for plaintiff-appellant.

Jones, Skelton & Hochuli by Larry J. Cohen, William R. Jones, Phoenix, for defendant-appellee.

OPINION

KLEINSCHMIDT, Judge.

This is a review of the dismissal of a worker's claims against his employer's workers' compensation insurer. We conclude: 1) the insurer did not breach its duty to act in good faith when it refused to compromise its lien against any recovery the worker had against persons other than his employer who contributed to his injury; and 2) the Industrial Commission did not have exclusive jurisdiction, pursuant to A.R.S. § 23-1022(A), over the worker's claim that the insurer breached its duty to act in good faith by failing to pay benefits.

BACKGROUND

In reviewing the dismissal for failure to state a claim, we presume that the facts alleged in the complaint are true. Maldonado v. Southern Pacific Transportation Co., 129 Ariz. 165, 166, 629 P.2d 1001, 1002 (App.1981). In 1979, Bill Boy was seriously injured on the job. At the time, he was employed by the Terry Grantham Company. The injury occurred while he was installing a sprinkler system. He fell off a ladder when a pipe fitting he was tightening broke unexpectedly. Boy filed a claim for benefits with the Industrial Commission. His employer's carrier, Fremont Indemnity (Fremont), accepted the claim.

A year later, Boy filed a third-party products liability suit against I.T.T. Grinnell Corporation, alleging that I.T.T. Grinnell had manufactured the defective pipe fitting that had caused his injury. Prior to trial, Boy and I.T.T. Grinnell attempted to settle. As part of the proposed settlement, Boy asked Fremont to compromise its statutory lien on the amount he would collect from I.T.T. Grinnell so that he himself would gain something from the settlement. Fremont was informed that if Boy's case went to trial it was unlikely that he would recover.

Fremont refused to compromise its lien. Boy refused to settle unless he could net an amount over and above that which Fremont would recover by virtue of its lien. The lien, of course, extended to workers' compensation amounts that Fremont would have to pay Boy in the future. See A.R.S. § 23-1023(C). Boy asserted that Fremont's refusal to compromise blocked the settlement. When Boy's case against I.T.T. Grinnell went to trial, the jury found no liability on the part of I.T.T. Grinnell. That verdict was reversed on appeal, and the case was remanded for a new trial. The record does not reflect its current status.

The entire procedural history of this case is not present in the record on appeal. The history is available, however, in the record of an Industrial Commission special action, Terry Grantham Co. v. Industrial Commission, 741 P.2d 313 (Ariz.App.1987), which is presently before us. This court may take judicial notice of matters of record therein. Arizona v. Thompson, 150 Ariz. 554, 555, 724 P.2d 1223, 1224, n. 1 (App.1986) (citing Hackin v. First National Bank, 5 Ariz.App. 379, 384, 427 P.2d 360, 365 (1967)).

In 1984, Boy filed with the Industrial Commission the first of a series of requests for investigation which sought certain additional benefits from Fremont. See generally A.R.S. § 23-1061(J). Boy characterized each of these requests as a "Request for Hearing." Fremont ultimately issued a notice terminating Boy's temporary benefits and requested that the Commission determine the benefits due Boy for a permanent total disability.

On September 19, 1984, the Commission issued an award which found that Boy's condition was stationary and that he was afflicted with a permanent total disability. In its award, the Commission left the amount and nature of supportive benefits to future determination. On October 29, 1984, Fremont filed with the Commission a Notice of Supportive Medical Maintenance Benefits in which it agreed to provide a portion of the benefits Boy originally sought. Thereafter, pursuant to § 23-1061(J), Boy filed a Request for Hearing seeking further benefits. Instead of scheduling the requested hearing, the Commission treated Boy's request as a protest against Fremont's notice. Boy now alleges that Fremont has refused to pay the benefits it agreed to pay in its Notice of Supportive Medical Maintenance Benefits.

The Commission scheduled formal hearings in June and July of 1985 to consider Boy's "protest" of Fremont's notice. In October of 1985, the administrative law judge presiding over those hearings issued an award granting additional benefits to Boy. In January of 1986, Fremont filed a Petition for Special Action requesting that this court review the October 1985 award.

In January of 1986, Boy brought a bad faith action against Fremont based on Fremont's refusal to compromise its lien and its alleged failure to pay benefits. The superior court granted Fremont's motion to dismiss on the following grounds: 1) there was no privity of contract between Boy and Fremont; 2) as a matter of law, it was not within Boy's reasonable expectation that Fremont would compromise its lien; and 3) the Industrial Commission of Arizona had exclusive jurisdiction to settle benefit disputes. The superior court erred in dismissing on the grounds that Boy was not in privity of contract with Fremont. In Franks v. United States Fidelity & Guaranty Co., 149 Ariz. 291, 295, 718 P.2d 193, 197 (App.1985), we said "[a] claim by an injured employee against the workers' compensation carrier is a first-party claim, ... and the Noble elements of bad faith must be met".

FAILURE TO COMPROMISE LIEN

An insurer has a lien, to the extent of the benefits it pays an employee, on any amount which is actually collectable as a result of the employee's suit against a third person. A.R.S. § 23-1023(A), (C). The question which confronts us is whether Fremont breached its implied duty to act in good faith by refusing to compromise its lien. The essence of the implied duty to act in good faith is that "each of the parties ... [is] bound to refrain from any action which would impair the benefits which the other ha[s] the right to expect from the contract or the contractual relationship." Rawlings v. Apodaca, 151 Ariz. 149, 154, 726 P.2d 565, 570 (1986). The duty is based, in part, on fulfilling the insured's reasonable expectations. Noble v. National American Life Insurance Co., 128 Ariz. 188, 189-90, 624 P.2d 866, 867-68 (1981). Thus, we must decide whether Boy had a right to expect that Fremont would compromise its lien.

Boy's contractual relationship with Fremont is partially governed by the Workers' Compensation Act. By electing to accept the benefits of the Act, Boy becomes bound by its limitations. Chevron Chemical Co. v. Superior Court, 131 Ariz. 431, 435, 641 P.2d 1275, 1279 (1982). One of these limitations, clearly set forth in A.R.S. § 23-1023(C), is that the insurer "shall have a lien on the amount actually collectable." We interpret the statute to mean what it plainly says. See Sunstate Equipment Corp. v. Industrial Commission, 135 Ariz. 477, 479, 662 P.2d 152, 154 (App.1983). Arizona courts have consistently resisted efforts to limit the insurer's lien. E.g., Stroud v. Dorr-Oliver, Inc., 112 Ariz. 403, 409, 542 P.2d 1102, 1108 (1975) (employer's contributory negligence); Young v. Industrial Commission, 146 Ariz. 582, 584, 707 P.2d 986, 988 (App.1985) (post-judgment interest); Mannel v. Industrial Commission, 142 Ariz. 153, 158, 688 P.2d 1045, 1050 (App.1984), cert. denied, 469 U.S. 1212, 105 S.Ct. 1183, 84 L.Ed.2d 331 (1985) (death benefits); Liberty Mutual Insurance Co. v. Western Casualty & Surety Co., 111 Ariz. 259, 263, 527 P.2d 1091, 1095 (1974) (award for pain and suffering).

Boy maintains that the question of whether or not Fremont breached its duty to act in good faith hinges upon the reasonableness of Fremont's actions. He argues that it is therefore a question of fact. See Markowitz v. Arizona Parks Board, 146 Ariz. 352, 357-58, 706 P.2d 364, 369-70 (1985). We hold as a matter of law that no reasonable person would consider Fremont's compromise of its lien to be a benefit that Boy had the right to expect from the contractual relationship.

With the exception of specific statutorily authorized deductions, an insurer's lien extends to the total amount collectable. A.R.S. § 1023(C). If this is inequitable, the remedy lies with the legislature. Young v. Industrial Commission, 146 Ariz. 582, 585, 707 P.2d 986, 989 (App.1985).

Boy also argues that In re Swartz, 141 Ariz. 266, 686 P.2d 1236 (1984) stands for the proposition that an attorney should attempt to persuade the insurer to reduce its lien. He says that it would be "incomprehensible" for the court to impose such an obligation on the attorney without also imposing an obligation to compromise the lien on the insurer. In Swartz, however, the court initially noted that the State Compensation Fund was not required by statute to reduce its lien. Id. at 274, 686 P.2d at 1244. Thereafter, the court noted that "the Fund may reduce its lien, thus enabling the claimant to personally receive some monetary benefit, in order to encourage him to settle rather than go to trial," and that "in some cases where ordinarily the claimant would receive nothing from his third party claim, the Fund would agree to reduce its claim if there was a corresponding reduction in attorney's fees." Id. As the supreme court noted in Swartz, it may be to the insurer's advantage to facilitate settlement where the liability or amount of potential recovery is questionable. By compromising its lien to help achieve settlement, the insurer may guarantee at...