Brown v. Liberty Mut. Ins. Co., 93-658

• Decision Date: 23 March 1994
• Docket Number: No. 93-658,93-658
• Parties: Greg BROWN, Plaintiff, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant.
• Court: Iowa Supreme Court

Page 762

513 N.W.2d 762

Greg BROWN, Plaintiff, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant.

No. 93-658.

Supreme Court of Iowa.

March 23, 1994.

Iris J. Post and David C. Duncan of Grefe & Sidney, Des Moines, for defendant.

John Riccolo and David L. Baker of Riccolo & Baker, P.C., Cedar Rapids, for plaintiff.

Considered by LARSON, P.J., and CARTER, LAVORATO, NEUMAN, and TERNUS, JJ.

NEUMAN, Justice.

The United States District Court for the Northern District of Iowa has certified two questions to this court arising out of a suit for bad-faith failure to pay workers' compensation benefits. The questions posed are as follows:

1. When does a cause of action for bad faith failure to pay workers' compensation benefits accrue--the date the claim is denied by the insurer, the date the industrial commissioner first determines that the injury and/or disability is compensable under the Iowa Workers' Compensation Act, or at some other time?

2. What limitation period applies to the bringing of such a cause of action--the two-year period of Iowa Code section 614.1(2), the five-year period of section 614.1(4), or some other period?

The facts giving rise to the inquiry are not disputed. On June 11, 1987, plaintiff Greg Brown allegedly suffered a work-related back injury. He claimed workers' compensation benefits from his employer, United Parcel Service, and its insurance carrier, defendant Liberty Mutual Insurance Company. Liberty Mutual denied the claim by letter on July 20, 1987.

Brown then filed a petition for arbitration with the Iowa Industrial Commissioner, seeking weekly benefits, medical expenses, and penalties pursuant to Iowa Code section 86.13 (1987). Liberty Mutual's answer alleged that Brown's disability did not stem from his employment, but from preexisting medical problems.

The industrial commissioner heard the contested case and, on May 18, 1989, ruled that Brown was entitled to 110 weeks of permanent partial disability benefits, twenty-three weeks of healing-period benefits, statutory interest, medical expenses, mileage fees, and costs. Liberty Mutual promptly paid the award. The issue of penalty benefits was mediated separately, ultimately resulting in a $10,000 settlement.

On March 20, 1991, Brown filed suit in the Iowa District Court alleging bad faith in Liberty Mutual's original denial of the claim. Brown sought both actual and punitive damages for economic loss resulting from the delay, severe mental and emotional distress, and damage to his reputation in the community. Following a general denial by Liberty Mutual, the action was removed to federal court. A statute-of-limitations defense interposed by Liberty Mutual led to the court's inquiry concerning the accrual date of Brown's cause of action and selection of the correct limitation period.

I. Accrual of claim. Generally speaking, an action " 'accrues' when all the elements are known, or in the exercise of reasonable care should have been known, to the plaintiff." LeBeau v. Dimig, 446 N.W.2d 800, 801 (Iowa 1989); Sandbulte v. Farm Bureau Mut. Ins. Co., 343 N.W.2d 457, 462 (Iowa 1984). The two elements necessary to sustain a first-party claim of bad-faith failure to pay insurance benefits are (1) absence of a reasonable basis for denying benefits under the policy, and (2) proof of the insurer's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. Dolan v. Aid Ins. Co., 431 N.W.2d 790, 794 (Iowa 1988). This court recently extended the tort to redress the bad-faith nonpayment of workers' compensation benefits. Boylan v. American Motorists Ins. Co., 489 N.W.2d 742, 744 (Iowa 1992). Our Boylan decision rested, at least in part, on the employer's affirmative duty under section 86.13 "to act reasonably in regard to benefit payments in the absence of specific direction by the commissioner." Id. at 743.

The federal court's first question suggests two possible target dates for accrual of the action--the date the claim is denied by the carrier or the date the industrial commissioner determines the worker's eligibility for benefits. Liberty Mutual argues in favor of the denial date, claiming all the information pertinent to the cause of action is necessarily known by the time denial is communicated. Brown counters that, until the industrial commissioner rules on the employee's benefit eligibility, the district court is without jurisdiction to act. This court held in Tallman v. Hanssen, 427 N.W.2d 868, 870 (Iowa 1988), however, that the administrative exclusivity of workers' compensation adjudication does not extend to independent torts.

Brown also argues that any trial court adjudication of the bad-faith issue in advance of administrative proceedings could well result in an inconsistent and anomalous outcome. A review of several recent decisions, however, easily persuades us otherwise.

As already noted, Boylan recognized the employer's statutory obligation to act in good faith prior to the commissioner's determination of benefit eligibility, thus exposing the insurer to potential bad-faith liability in advance of an administrative decision. Boylan, 489 N.W.2d at 743. In a close analogy outside the workers' compensation context, we have held that a bad-faith suit may be commenced prior to a determination of benefit eligibility. See Handley v. Farm Bureau Mut. Ins. Co., 467 N.W.2d 247, 249 (Iowa 1991) (judgment against defendant driver not condition precedent to action against insurer for bad-faith denial of underinsured motorist benefits). Finally, we recently ruled that although issue preclusion principles make it desirable to have the extent of an insurer's liability determined administratively before the district court entertains a bad-faith action, we declined to mandate the result Brown now urges. Reedy v. White Consol. Indus., Inc., 503 N.W.2d 601, 603-04 (Iowa 1993). Viewing the matter more an issue of case management than adjudicative "ripeness," we merely encouraged courts to await final agency decision whenever feasible. Id. at 604.

Two other jurisdictions that have squarely faced the issue have both ruled that an insurer's denial of coverage letter puts the claimant on reasonable notice of potential bad faith, thereby fixing the cause of action's accrual date. ALFA Mut. Ins. Co. v. Smith, 540 So.2d 691, 693 (Ala.1988); Davis v....