Thornton v. Am. Interstate Ins. Co.

• Decision Date: 19 May 2017
• Docket Number: No. 15-1032,15-1032
• Citation: 897 N.W.2d 445
• Parties: Toby THORNTON, Appellee, v. AMERICAN INTERSTATE INSURANCE COMPANY, Appellant.
• Court: Iowa Supreme Court

897 N.W.2d 445

Toby THORNTON, Appellee,

v.AMERICAN INTERSTATE INSURANCE COMPANY, Appellant.

No. 15-1032

Supreme Court of Iowa.

Filed May 19, 2017

Rehearing Denied June 22, 2017

Mark McCormick and Stephen H. Locher of Belin McCormick, P.C., Des Moines, for appellant.

Tiernan T. Siems, Karen M. Keeler, and MaKenna J. Dopheide of Erickson & Sederstrom, P.C., Omaha, Nebraska, for appellee.

Deborah M. Tharnish and Sarah E. Crane of Davis Brown Law Firm, Des Moines, for amicus curiae Property Casualty Insurers Association of America.

Richard J. Sapp and Ryan G. Koopmans, until withdrawal, of Nyemaster Goode, P.C., Des Moines, for amici curiae Chamber of Commerce of the United States and Iowa Association of Business and Industry.

WATERMAN, Justice.

In this appeal, we must resolve a workers' compensation insurer's multipronged challenge to a judgment on a jury verdict awarding $25 million in punitive damages and $284,000 in compensatory damages. The plaintiff was paralyzed below his chest in an on-the-job accident. The insurer disputed whether the employee was permanently and totally disabled (PTD) and contested his petition for a partial commutation (lump-sum) award while it continued to pay full weekly PTD benefits and explore settlement. The Iowa Workers' Compensation Commissioner determined the employee was PTD and granted his petition for partial commutation. The employee sued the insurer for common law first-party bad faith.

On cross-motions for summary judgment, the district court determined the insurer, by contesting PTD and commutation, acted in bad faith as a matter of law by March 11, 2013 (nearly four years after the accident). The court instructed the jury the insurer had acted in bad faith for those actions and instructed the jury to decide whether other actions by the insurer were in bad faith and determine damages. The jury found the insurer's bad-faith conduct began several months after the accident and awarded punitive and compensatory damages at a ratio of 88:1. The insurer appealed after its posttrial motions were denied. The plaintiff cross-appealed the denial of attorney fees incurred prosecuting the bad-faith action. We retained the case.

The insurer argues that (1) it cannot be found in bad faith when it voluntarily and continuously paid stipulated weekly PTD benefits due under its policy, (2) the district court erred by deciding the insurer acted in bad faith as a matter of law, (3) insufficient evidence supports the compensatory damage awards, and (4) the punitive damage award is unconstitutionally excessive under the Federal Due Process Clause. For the reasons explained below, we conclude the insurer knew or should have known it lacked any reasonable basis to dispute this quadriplegic's PTD status and affirm summary judgment for the plaintiff on that issue. But the district court erred by ruling the insurer was in bad faith as a matter of law for resisting the commutation. It should have granted summary judgment for the insurer on that issue. We reverse the judgments for compensatory and punitive damages without reaching the constitutional challenge and remand the case for a new trial on the remaining bad-faith claims. Applying the American rule, we affirm the district court's ruling denying plaintiff an award of attorney fees incurred prosecuting the bad-faith action.

I. Background Facts and Proceedings.

A. Initial Care. Thirty-one-year-old Toby Thornton worked as an over-the-road truck driver for Clayton County Recycling (CCR). His job duties included picking up scrap metal in Iowa and Wisconsin and delivering it to CCR's salvage yard. On June 25, 2009, Thornton lost control of his semitruck when the load shifted. The truck rolled over, crushing the cab with Thornton inside. Thornton injured his spinal cord

, face, left leg, and ribs. First responders extracted Thornton using the Jaws of Life™. He was rushed by ambulance to Mercy Hospital in Dubuque and airlifted to the University of Iowa Hospitals in Iowa City, where he underwent multiple surgeries. The accident left Thornton permanently paralyzed from the chest down with no use of his left hand and limited use of his right hand.

American Interstate Insurance Company (American Interstate) was the workers' compensation insurer for CCR and specialized in insuring high-risk employers. It learned of Thornton's accident the next day, and its claims adjuster, Luann Baum, contacted Thornton's wife, Tara, by telephone. On June 27, Baum traveled to the University of Iowa Hospitals and assured Thornton's family that workers' compensation benefits would begin immediately.

Baum gathered wage information and calculated Thornton's weekly benefits, assuming PTD. American Interstate issued the first benefit check to Thornton on July 2 and weekly thereafter. Two weeks after the accident, American Interstate received a medical opinion from Thornton's examining physician that Thornton was PTD. It set reserves for Thornton's care at $762,644, an amount based on PTD. Baum later testified she did so because she "believed that the injury was severe enough ... to easily classify as a perm total."

Thornton retained counsel for his workers' compensation claim. On July 8, his attorney wrote Baum requesting the "calculations used to arrive at Toby's weekly compensation rate" and a "wage statement for Toby's earnings for the year prior to the injury in accordance with Iowa Code Section 85.40." On August 7, counsel again wrote to Baum, noting Baum had not responded to the prior request. The second letter referred the insurer to Iowa Code section 85.41, which states the failure to furnish wage information upon request within thirty days is a simple misdemeanor. On August 25, counsel sent a third letter to Baum, stating Baum had supplied wage information but had missed the last full week Thornton worked before the accident. On September 1, counsel mailed another letter, again inquiring about weekly wages and requesting medical records. On September 24, counsel for American Interstate responded by letter, stating,

After we talked on the phone, I obtained the additional wage information from the employer. I recalculated the wage information and changed the rate based on the updated information. The new rate will be $513.18 per week. This resulted in a $7.44 per week increase and we had issued 15 weeks so far, so I also issued a check today for an additional $111.60 to bring current.

Here are the weeks and the hours I used for the calculations.

The letter then listed thirteen weeks of wage information, including June 15 to 21, the week missed in the earlier statement. Thornton later stipulated that $513.18 was the correct weekly benefit.

After multiple surgeries and aggressive physical, occupational, and respiratory rehabilitation, Thornton was released from the hospital in October. Thornton moved into his in-laws' home. At Thornton's request, Baum arranged for modifications to make the house handicap-accessible. American Interstate paid to install a shower and hospital bed and specially ordered a wheelchair and van matched to Thornton's height and weight. Thornton told Baum he was pleased, stating, "[V]an was great, equipment is good, bed is a little small for turning, but ... [the new mattress] should be in by next week."

Initially, Tara provided in-home care to Thornton. In June 2010, Baum arranged for a home healthcare nurse so Tara could return to work. That month, Thornton indicated an interest in purchasing a home, and Baum met with him to discuss housing options. In July, Baum received an email from Thornton that he needed to move out of his in-laws' home "immediately" because he and Tara were separating. Baum arranged for home-aide care, modifications to a new apartment, and for Thornton to take a disabled driver's license test. By November, Thornton had received his driver's license and a van outfitted so he could drive. He reported to Baum he was doing "great" and "ha[d] no complaints at this time." Throughout this period, American Interstate continued to pay Thornton weekly benefits at the PTD rate.

Meanwhile, Thornton's mother passed away. She left him a small inheritance, about $3000, which Thornton used to purchase a headstone for her grave and a TV for his home for his children to watch after school. Thornton complained to his physician that he was depressed. In February 2011, Thornton attempted suicide by overdosing on pain medication. He was admitted to St. Mary's Hospital for inpatient mental health treatment. After his discharge, Thornton received outpatient counseling to cope with his depression. Thornton's treatment records show he attributed his mental problems to his mother's death and his separation from his wife, without mentioning American Interstate. Thornton did not tell Baum about his overdose or mental health treatment. Baum and American Interstate were unaware of Thornton's treatment for depression until months later when bills for payment were submitted.

In March, Dr. Michael Rogge, Thornton's treating physician, concluded Thornton had reached maximum medical improvement (MMI). Thornton told Baum he did not want to discuss settlement options with American Interstate until his divorce was finalized. American Interstate honored his request, continuing to pay him weekly benefits at the PTD rate. In July, when internally discussing Thornton's file, Baum noted she had not assigned a permanent partial disability percentage to Thornton because "[t]his [claimant] is now a quadriplegic.... [H]e will be a perm[anent] total case." In January 2012, Thornton contacted Baum and told her his divorce was finalized and he was ready to discuss settlement.

The next month, Baum and John Cantwell, who handles annuities, met with Thornton to discuss settlement. In preparation for this meeting, Baum noted a lump-sum payment would be important to Thornton because he had been trying to purchase a home. At the meeting, Baum and Cantwell presented Thornton with two alternative proposals...