Firm News

Law Alert: Texas Supreme Court Severely Cuts Back Workers' Compensation Bad Faith

August 29, 2011

In Texas Mutual Insurance Co. v. Timothy J. Ruttiger, the Texas Supreme Court held that claims against workers’ compensation insurers for unfair settlement practices may not be made under the Insurance Code, and thus eliminating DTPA claims arising under the Insurance Code as well. However, workers can still pursue claims against insurers under the Insurance Code for misrepresenting provisions of their policies. Additionally, seven members of the Court would consider whether Aranda—case extending the common law action for breach of the duty of good faith and fair dealing to the workers’ compensation system—should be overruled. Four justices would hold that Aranda should be overruled while three would not. Because the court of appeals did not reach the issues involving the cause of action for breach of the duty of good faith and fair dealing, the Court remanded the issue for further proceedings. Based on the Court’s discussion and analysis of whether the common law claim for breach of the duty of good faith and fair dealing remains a viable cause of action, it is certainly possible that the Houston Court of Appeals will hold that workers’ compensation claimants can no longer bring this cause of action. Should the Houston Court of Appeals find that the common law claim is still viable that issue will almost certainly make its way back to the Court for final determination.

This case involves a workers’ compensation claimant, Ruttiger, who claimed he was injured on the job. Texas Mutual’s investigation indicated that Ruttiger may have been injured while playing softball, and it filed a denial of the claim after issuing one income benefit payment. While his claim was still pending before the Texas Workers’ Compensation Commission—now known as the Texas Department of Insurance, Division of Workers’ Compensation referred to hereafter as “DWC”—and before Ruttiger had reached maximum medical improvement, he sued the insurer and adjuster for alleged violations of the Texas Insurance Code and Deceptive Trade Practices Act, and breach of the common law duty of good faith and fair dealing.

The Court first addressed Texas Mutual’s jurisdictional argument, relying on American Motorists Ins. Co. v. Fodge, 63 S.W.3d 801 (Tex. 2001), that a trial court lacks jurisdiction over a workers’ compensation claims-handling suit unless the DWC had determined that the worker is entitled to specific benefits wrongly denied or delayed. In Fodge, the DWC only addressed the claimant’s claim for income benefits because the claimant never raised the issue of the denial of medical benefits. The Supreme Court found that because only the DWC can determine a claimant’s entitlement to benefits, a court cannot award damages for a denial or delay in payment of benefits until the DWC finds such benefits are due. Unlike in Fodge, Ruttiger entered into a benefit dispute agreement addressing his entitlement to both income and medical benefits. As a result, at the time of suit there were no issues to be resolved by the DWC, and therefore he did not have to continue through the administrative process. Because Ruttiger exhausted his administrative remedies, the Court held that the trial court had jurisdiction over his suit.

The Court next addressed Ruttiger’s Chapter 541.060 Insurance Code claim for unfair settlement practices. Texas Mutual argued that because the Labor Code and DWC rules set specific deadlines and procedures for paying and denying workers’ compensation claims, and impose penalties for failing to comply with them, allowing a claimant to recover extra-contractual damages under the Insurance Code would be inconsistent with what the Legislature deemed to be adequate protection for workers. In response, Ruttiger argued that under Aetna Casualty v. Surety Co. v. Marshall, 724 S.W.2d 770 (Tex. 1987), an employee has a cause of action under the Insurance Code against a workers’ compensation carrier. Marshall was decided prior to the 1989 amendments to the Workers’ Compensation Act (“Act”). The Court drew on its recent discussion of the relationship between a general statutory cause of action and one in which the statute had a more detailed, specific claims resolution process in City of Waco v. Lopez, 259 S.W.3d 147 (Tex. 2008) to find that allowing workers’ compensation claimants to bring causes of action for unfair settlement practices under the Insurance Code would significantly undermine the Act which has carefully constructed rights, remedies and procedures. Additionally, the Court found that the limited definition of “settlement” in the Act does not fit with the construct of section 541.060. For these reasons, the Court held that Ruttiger may not assert a cause of action under section 541.060. Further, the Court held that the Legislature did not intend for workers’ compensation claimants to have a cause of action under section 542.003—a claim that an insurer failed “to adopt and implement reasonable standards for prompt investigation of claims arising under its policies”—for the same reasons the Court found workers’ compensation claimants cannot assert a cause of action under section 541.060.

The Court did not rule out all Insurance Code claims for workers’ compensation claimants. The Court held that claims under section 541.061 for misrepresentation of an insurance policy are not at odds with the dispute resolution process of the workers’ compensation system because section 541.061 does not specify that it applies in the context of settling claims. However, the Court then went on to find that in Ruttiger’s case, there was legally insufficient evidence to support a finding that Texas Mutual misrepresented its policy because the “dispute between Ruttiger and the insurer was over whether Ruttiger’s claim was factually within the policy’s terms—whether he was injured on the job.”

With regard to Ruttiger’s DTPA claim, the Court concluded that the viability of the DTPA claim depended on the validity of the Insurance Code claims. The Court held that because all of Ruttiger’s Insurance Code claims failed, he could not recover on his DTPA claim.

Finally, the Court discussed Ruttiger’s claim that the insurer breached the common law duty of good faith and fair dealing. For reasons similar to the Court’s analysis and finding that workers’ compensation claimants cannot bring Insurance Code claims for unfair settlement practices, four of the Justices agreed that claimants should no longer be allowed to pursue a claim for breach of the duty of good faith and fair dealing. In Aranda v. Insurance Co. of North America, 748 S.W.2d 210 (Tex. 1988), the Court had extended the common law cause of action for breach of the duty of good faith and fair dealing to the handling of workers’ compensation claims. The three reasons for doing so were: “(1) the disparity of bargaining power between compensation insurers and employees, (2) the exclusive control that an insurer exercises over processing of claims, and (3) arbitrary decisions by carriers to refuse to pay or delay payment of valid claims leaves the injured employees with no immediate recourse.” The Court pointed out that Aranda was decided before the amendments to the Act. The Court also noted that the amendments to the Act adequately addressed all of the original reasons for extending the cause of action for breach of the duty of good faith and fair dealing onto the workers’ compensation system. The Court concluded that the Act “eliminates the need for a judicially imposed cause of action outside of the administrative processes and other remedies in the Act.” Ultimately, the Court did not reach a decision regarding the validity of bringing a breach of the duty of good faith and fair dealing claim because the court of appeals did not address the issue. The Court has remanded this issue back to the Houston First District Court of Appeals for further proceedings.