Hein v. Acuity
| Decision Date | 18 April 2007 |
| Docket Number | No. 23903.,23903. |
| Citation | 2007 SD 40,731 N.W.2d 231 |
| Parties | Wynnette HEIN, Plaintiff and Appellant, v. ACUITY, Defendant and Appellee. |
| Court | South Dakota Supreme Court |
James D. Leach, Rapid City, South Dakota, Attorney for plaintiff and appellant.
Susan Brunick Simons, Kristi Geisler Holm, of Davenport, Evans, Hurwitz & Smith, LLP, Sioux Falls, South Dakota Attorneys for defendant and appellee.
[¶ 1.] In a workers' compensation case, can a claimant maintain a separate action for bad faith solely on the basis of unreasonable conduct by the employer's insurer, absent proof of any wrongful denial of benefits? After receiving benefits for a job-related injury, the claimant sought rehabilitation benefits and the insurer denied her request. The claimant petitioned pro se for benefits with the Department of Labor and the insurer counterclaimed seeking reimbursement of all benefits previously paid. When the claimant hired an attorney, the insurer withdrew its counterclaim. While her rehabilitation claim was still pending, the claimant brought a separate bad faith action against the insurer for its conduct in submitting an unfounded counterclaim. The circuit court dismissed the complaint on the ground that it failed to state a claim upon which relief can be granted. We affirm because in the context of workers' compensation claims, where no contractual relationship exists between the workers' compensation claimant and the insurer, a bad faith action must include a wrongful denial of benefits, not merely wrongful conduct.
[¶ 2.] Wynnette Hein injured her back on October 7, 2002, while working for her employer, Stanley Johnson Construction. As a result of her injuries, she underwent back surgery. Acuity, as the employer's workers' compensation insurer, paid Hein medical and disability benefits. Ultimately, however, Hein was unable to return to her job as a construction worker. She then sought rehabilitation benefits for retraining, but Acuity denied her request.
[¶ 3.] In June 2004, Hein filed a pro se petition with the Department of Labor, wherein she asked for rehabilitation benefits. Acuity answered by averring that she failed to state a claim for which relief can be granted, failed to give timely notice of her injury, and all her previous benefits were mistakenly paid in good faith. Acuity counterclaimed, therefore, demanding that she reimburse "medical and indemnity benefits paid" in error. After she hired an attorney, Hein responded to the counterclaim, contending that it was an attempt "to intimidate [her] from pursuing her legitimate claim for benefits." She further alleged that Acuity did not "in good faith believe that [she] owe[d] them anything" and that the counterclaim was "abusive and should be denied."
[¶ 4.] Acuity amended its answer and withdrew its counterclaim. It acknowledged that "although timely written notice was not provided of the October 7, 2002 injury, Employer and Insurer admit that [her] supervisors were aware of the incident." It still denied that Hein had shown an entitlement to rehabilitation benefits.1
[¶ 5.] With her workers' compensation claim still pending, Hein brought suit in circuit court against Acuity for bad faith.2 According to Hein, Acuity acted in bad faith when it did not conduct a reasonable investigation, failed to consider evidence it had in its possession, and sought reimbursement for benefits paid when it knew it had no reasonable basis to deny benefits retroactively or to claim that she owed anything. Hein's complaint further alleged:
19. When it made the counterclaim, Acuity knew that the value of Hein's rehabilitation benefits claim was less than $10,000, and knew that with a claim of such value, it was unlikely that Hein would be able to retain an attorney to represent her.
20. Acuity knew the counterclaim would make it even less likely that Hein would be able to obtain an attorney.
21. Acuity knew that without an attorney, Hein would be unable to prosecute her claim for rehabilitation benefits effectively, or to defend the counterclaim effectively, and would be more likely to be intimidated into giving up her claim for rehabilitation benefits.
* * *
23. Hein was able to obtain an attorney, James D. Leach, to represent her.
24. Hein's attorney noticed the depositions of the relevant witnesses with respect to the counterclaim.
25. Prior to the depositions being taken, Acuity admitted that the counterclaim lacked any basis, and filed an Amended Answer withdrawing it.
Because of this alleged conduct, Hein asserted that Acuity breached its duty of good faith and fair dealing and caused her emotional distress for which she requested compensatory damages. She also sought punitive damages "to deter Acuity from continuing similar misconduct against other injured employees."
[¶ 6.] Acuity answered and moved to dismiss under SDCL 15-6-12(b)(5) (Rule 12(b)(5)). It contended that because Hein's claim for rehabilitation benefits was still pending with the Department, the case should be stayed until she exhausted her administrative remedies. Moreover, Acuity argued that to the extent Hein's bad faith claim was "based upon statements made in judicial proceedings, such statements are absolutely privileged and not actionable." Accordingly, Acuity asked that Hein's complaint be dismissed in its entirety and with prejudice.
[¶ 7.] At the hearing on Acuity's motion, Hein argued that she was not required to exhaust her administrative remedies because Acuity's bad faith conduct was independent of her claim for rehabilitation benefits. She further alleged that her bad faith claim did not rest solely on Acuity's pleadings in the underlying workers' compensation case. These pleadings, she maintained, were merely evidence of Acuity's bad faith. Acuity, on the other hand, argued that without the privileged pleadings Hein's bad faith claim would fail.
[¶ 8.] In its ruling, the circuit court first concluded that Hein's claim was premature because the underlying workers' compensation issue was still pending with the Department. Next, the court examined "whether a cause of action for bad faith can be predicated upon responsive pleadings to a claim." It reasoned that because an absolute pleading privilege is recognized in South Dakota for actions such as defamation, deceit associated with defamation and negligence, and intentional, negligent, and reckless infliction of emotional distress associated with defamation, the privilege should extend to the tort of bad faith. Nonetheless, the court stated that "[e]ven should the pleading privilege not be held to extend that far, these pleadings cannot rise to a level which constitutes bad faith." Thus, the court dismissed Hein's amended complaint with prejudice under Rule 12(b)(5), on the ground that it failed to state a claim for which relief could be granted. Hein appeals.
[¶ 9.] Customarily, bad faith litigation can be classified as either first-or third-party bad faith. Third-party bad faith is traditionally based on principles of negligence and arises when an insurer wrongfully refuses to settle a case brought against its insured by a third-party. Kunkel v. United Security Ins. Co. of New Jersey, 84 S.D. 116, 121, 168 N.W.2d 723, 726 (1969) (); Crabb v. Nat'l Indem. Co., 87 S.D. 222, 229-30, 205 N.W.2d 633, 637 (1973). Third-party bad faith exists when an insurer breaches its duty to give equal consideration to the interests of its insured when making a decision to settle a case.
[¶ 10.] First-party bad faith, on the other hand, is an intentional tort and typically occurs when an insurance company consciously engages in wrongdoing during its processing or paying of policy benefits to its insured. Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032, 1036 (1973); Champion v. U.S. Fidelity & Guar. Co., 399 N.W.2d 320, 324 (S.D.1987). In these cases, the parties are adversaries, and therefore, an insurer is permitted to challenge claims that are fairly debatable. However, a frivolous or unfounded refusal to comply with a duty under an insurance contract constitutes bad faith. Champion, 399 N.W.2d at 324 (citing Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1275 (Colo.1985)); see also Isaac v. State Farm Mut. Auto. Ins. Co., 522 N.W.2d 752, 758 (S.D.1994); Julson v. Federated Mut. Ins. Co., 1997 SD 43, ¶ 6, 562 N.W.2d 117, 119-20.
[¶ 11.] Wrongful conduct toward an employee claimant by the employer's insurer in a workers' compensation case does not fit the traditional definition of either first-or third-party bad faith. A bad faith claim related to workers' compensation is not based on an insurer's refusal to settle its own insured's suit as in third-party cases, but exists when an insurer breaches its duty to deal in good faith and fairly when processing a workers' compensation claim. And, unlike first-party bad faith, the claimant, not the insured employer, brings the action against the insurer. Nonetheless, it is within the first-party bad faith context that multiple jurisdictions, including South Dakota, recognize a bad faith cause of action based on an insurer's conduct in a workers' compensation case. Champion, 399 N.W.2d at 324; see also Reed v. Hartford Accident & Indem. Co., 367 F.Supp. 134, 135 (E.D.Pa.1973); Stafford v. Westchester Fire Ins. Co. of New York, Inc., 526 P.2d 37, 43-44 (Alaska 1974), overruled on other grounds, Cooper v. Argonaut Ins. Cos., 556 P.2d 525 (Alaska 1976); Travelers Ins. Co., 706 P.2d at 1275; Gibson v. Nat'l Ben Franklin Ins. Co., 387 A.2d 220, 222-23 (Me.1978); Southern Farm Bureau Cas. Ins. Co. v. Holland, 469 So.2d 55, 58 (Miss.1984); Hayes v. Aetna Fire Underwriters, 187 Mont. 148, 609 P.2d 257, 261 (1980); Coleman v. Am. Universal Ins. Co., 86 Wis.2d 615, 273 N.W.2d 220, 223-24 (1979).
[¶ 12.] Hein structures her claim as though ...
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