Lueck v. Aetna Life Ins. Co.

• Citation: 116 Wis.2d 559,342 N.W.2d 699
• Decision Date: 31 January 1984
• Docket Number: No. 82-1041,82-1041
• Court: United States State Supreme Court of Wisconsin
• Parties: , 115 L.R.R.M. (BNA) 3002, 100 Lab.Cas. P 10,794 Roderick S. LUECK, Plaintiff-Appellant-Petitioner, v. AETNA LIFE INSURANCE COMPANY and Allis-Chalmers Corporation, Defendants- Respondents.

Page 699

342 N.W.2d 699

116 Wis.2d 559, 115 L.R.R.M. (BNA) 3002,

100 Lab.Cas. P 10,794

Roderick S. LUECK, Plaintiff-Appellant-Petitioner, v. AETNA LIFE INSURANCE COMPANY and Allis-Chalmers Corporation,

Defendants- Respondents.

No. 82-1041.

Supreme Court of Wisconsin.

Argued Jan. 5, 1984.

Decided Jan. 31, 1984.

Gerald S. Boisits (argued), Milwaukee, for plaintiff-appellant-petitioner; Frank & Kenny, Milwaukee, on brief.

Robert C. Burrell and Maurice McSweeney (argued), Milwaukee, for defendants-respondents; Borgelt, Powell, Peterson & Frauen, S.C., Milwaukee, on brief, for Aetna Life & Cas. Co.; Stanley S. Jaspan, Renee L. Johnson and Foley & Lardner, Milwaukee, on brief, for Allis-Chalmers Corp.

CALLOW, Justice.

This is a review of an unpublished decision of the court of appeals, 112 Wis.2d 675, 333 N.W.2d 733, affirming a judgment of the circuit court for Milwaukee County, Judge Leah M. Lampone, granting summary judgment to the defendants and dismissing the plaintiff's complaint seeking damages in a bad faith tort action. We reverse the court of appeals and remand the matter for further proceedings consistent with this opinion.

The issues presented on appeal are as follows: (1) Does a union employee's cause of action for bad faith against his employer arise under section 301 of the Labor Management Relations Act, 29 U.S.C. sec. 185 (1976), thus requiring him to exhaust labor agreement remedies prior to instituting suit? (2) If an employee's bad faith claim arises under state law rather than the Labor Management Relations Act (LMRA), is the action nevertheless preempted by federal labor law? (3) Can the employee bring a bad faith claim against the administrator of a disability insurance plan based on a labor agreement negotiated between his employer and his union?

The plaintiff, Roderick S. Lueck, was an employee of the Allis-Chalmers Corporation (A-C) and a member of the International Union, United Automobile Aerospace and Agricultural Implement Workers of America (UAW), WHICH WAS THE EXCLUSIVE COLLECTIVE BargAININg agent for lueck and other A-C employees. Under the terms of the labor agreement between A-C and the UAW, A-C provided its employees with a group health and disability insurance plan. The union agreement also provided a grievance procedure to deal with disputes about insurance claims. Although A-C acted as a self-insurer for the insurance plan, it entered into a contract with the Aetna Life and Casualty Company to administer the plan. While Aetna was responsible for actually disbursing insurance payments, A-C provided the fund to pay benefits under the insurance plan, and A-C retained authority to approve all payments on individual claims.

On July 20, 1981, Lueck notified A-C that he had suffered a nonwork-related injury, and he requested disability benefits for the period he was unable to return to work. A-C began paying Lueck the disability benefits on July 20, 1981. The payments, for unexplained reasons, were repeatedly stopped and then reinstated during the period Lueck was absent from work. Ultimately, however, Lueck received all payments due him for his disability period.

On January 18, 1982, Lueck filed a complaint against A-C and Aetna. Lueck alleged that the defendants "intentionally, contemptuously, and repeatedly" failed to pay disability benefits which they had no reasonable basis for denying. Lueck further alleged that, as a result of the defendants' bad faith in dealing with his insurance claims, he incurred debts, great emotional distress, physical impairment, pain and suffering. Lueck sought $10,000 in compensatory damages and $300,000 in punitive damages. Lueck at no time filed a grievance under the grievance procedures provided by the union agreement to deal with insurance claim disputes.

On February 23, 1982, and February 26, 1982, A-C and Aetna, respectively, moved for summary judgment on the grounds that Lueck's claim was governed under or preempted by federal labor law. As a separate ground, Aetna also asserted that, as the administrator of A-C's insurance plan, it had no fiduciary duty to Lueck to deal in good faith on his disability claim and, therefore, could not be sued for bad faith. In response to Aetna's separate ground for its motion, Lueck's attorney filed an affidavit pursuant to sec. 802.08(4), Stats., stating that further discovery was needed to oppose Aetna's factual claim that it acted only as the administrator of the insurance plan.

After a hearing held on March 29, 1982, the circuit court granted the defendants' summary judgment motions. The court concluded that Lueck's action arose under section 301 of the LMRA, and therefore Lueck's remedy must be pursued under the labor agreement grievance procedure. The court also ruled that, even if Lueck's claim was not governed by section 301, a separate state tort claim was preempted by federal labor law. In reaching its decision, the trial court did not address Aetna's argument that no bad faith claim could be brought against it because it had no fiduciary duty to deal in good faith with Lueck's claim. The court on May 26, 1982, entered judgment dismissing Lueck's complaint on the merits and with prejudice.

Lueck appealed the judgment to the court of appeals. The court affirmed the judgment on two grounds. First, the court held that, because Aetna was merely the administrator of A-C's insurance plan, there existed between Lueck and Aetna no fiduciary relationship upon which to base a claim of bad faith against Aetna. Second, the court held that a state law claim for bad faith against A-C was preempted by federal labor law. Lueck petitioned this court for review of the court of appeals' decision. We granted the petition for review on May 24, 1983.

The first issue we must decide is whether Lueck's bad faith claim is governed by section 301, 29 U.S.C. sec. 185 (1976), ¹ of the LMRA. Section 301 provides a jurisdictional basis for any claim arising out of a violation of a contract between an employer and a labor organization. Federal labor law governs such claims, whether they are brought in state or federal court. See Vaca v. Sipes, 386 U.S. 171, 87 S.Ct. 903, 17 L.Ed.2d 842 (1967); Smith v. Evening News Assn., 371 U.S. 195, 83 S.Ct. 267, 9 L.Ed.2d 246 (1962). However, before a section 301 action may be brought, the injured party must exhaust all available contractual remedies, in this case the grievance procedure established to handle insurance claim disputes. See Vaca, 386 U.S. at 184, 87 S.Ct. at 913; Republic Steel Corp. v. Maddox, 379 U.S. 650, 652-53, 85 S.Ct. 614, 616, 13 L.Ed.2d 580 (1965).

The defendants argue that Lueck's claim, even though denominated as a state tort claim, is grounded in and inseparable from a breach of the labor contract. They argue that to find bad faith there must first be a determination that Lueck had certain rights under the contract and that those contractual rights were breached when the defendants disputed his disability claim. The defendants assert that such breaches of contract are precisely the type of claim section 301 covers. Consequently, they argue, Lueck's claim must be dismissed because it was conceded that Lueck did not exhaust his contractual remedies prior to instituting suit.

We do not agree with the defendants' analysis of the nature of Lueck's claim. In Anderson v. Continental Insurance Co., 85 Wis.2d 675, 271 N.W.2d 368 (1978), we recognized that a bad faith claim may arise from an insurer's handling of an insured's claim under an insurance contract. We held that an insurance contract establishes a relationship between the insured and the insurer which places upon the insurer a good faith obligation to pay the reasonably undisputable claims of its insured. In establishing the precise nature of the bad faith claim, we emphasized that "the tort of bad faith is not a tortious breach of contract. It is a separate intentional wrong, which results from a breach of duty imposed as a consequence of the relationship established by contract." Id. at 687, 271 N.W.2d 368. We also noted that separate damages are recoverable for the tort of bad faith and for breach of the insurance contract. ² Id. at 686, 271 N.W.2d 368.

Lueck's claim is not for a breach of contract; rather, it is a separate and independent claim arising out of the manner in which his disability claim was handled. For purposes of pursuing this claim, Lueck need only first establish that the defendants owed him a duty by virtue of the insurance contract. Even though that duty arose initially because of the insurance provided through the labor agreement, that fact alone does not persuade us that Lueck's claim is in essence a contractual claim. ³ We disagree with the defendants' assertion that the bad faith claim is "inextricably intertwined" with the labor agreement. The specific violation of the labor contract, if there was one, is irrelevant to the issue of whether the defendants exercised bad faith in the manner in which they handled Lueck's claim. We note in this regard that, under the rule of Anderson, Lueck would have to pursue a separate claim and remedy for any breach of contract. Lueck concedes that, if he were bringing only a breach of contract claim, it would be governed by section 301. We conclude, however, that Lueck's bad faith claim is not a labor contract dispute and, therefore, is not governed by section 301. ⁴

The next issue is whether Lueck's state law claim is nevertheless preempted by federal labor law. The general rule concerning federal labor law preemption of state law claims was stated by the United States Supreme Court in San Diego Building Trades Council v. Garmon, 359 U.S. 236, 244-45, 79 S.Ct. 773, 779, 3 L.Ed.2d 775 (1959):

"When it is clear or may fairly be assumed that the activities which a State purports to regulate are protected by section 7 of the National Labor Relations Act, or constitute an unfair labor practice under section 8, due regard for...