Iowa Supreme Court Issues Decision in Cases Addressing Potential Liability for Work Comp Insurers & TPAs

Two recent cases decided by the Iowa Supreme Court addressed potential liability of workers’ compensation insurers and third-party administrators for civil damages beyond the workers’ compensation system. In both cases, the Court refused to expand the law beyond its present application.

Clark, et al v. Insurance Company of the State of Pennsylvania

In Clark, et al v. Insurance Company of the State of Pennsylvania, the Court found that a statute providing immunity to a workers’ compensation carrier for failing to inspect an employer’s premises was constitutional.

The six plaintiffs in Clark sued a workers’ compensation carrier in district court, alleging that the insurer failed to conduct an inspection of a wind blade manufacturer’s premises, and they were harmed by exposure to hazardous chemicals as a result. The carrier filed a motion to dismiss based on Iowa Code Section 517.5, which prohibits civil liability for inspections performed by insurance carriers. The plaintiffs filed a resistance, arguing that the section was unconstitutional. They challenged the constitutionality on multiple fronts: equal protection, inalienable rights, and due process.

Before stating its opinion, the Court outlined a detailed history of the “grand bargain” or “quid pro quo” between employers and employees, dating back to the development of the workers’ compensation systems in the United States. It noted that the legislature enacted Section 517.5 in response to its decision in Fabricus, and then discussed cases where the constitutionality of the workers’ compensation act was in question. Ultimately, the Court found that legislature had a rational basis for enacting Section 517.5.

De Dios v. Broadspire

In De Dios v. Broadspire, it declined to extend the tort of bad faith to a workers’ compensation third-party administrator.

The Court was asked to decide whether an injured worker could sue a third-party administrator for bad faith. After a comprehensive analysis of the history of bad faith litigation in the workers’ compensation context, the court concluded workers’ compensation insurers were subject to the tort of bad faith because the law imposed certain affirmative obligations upon them, obligations that it did not impose on third-party administrators.

The court rejected the plaintiffs’ argument that the insurer could delegate its’ duties to a third-party administrator, who could then deny legitimate claims without reason and avoid liability. As the court noted, the third-party administrator is an agent of the insurer, and thus vicarious liability applies. Further, the duties imposed upon the insurer by the workers’ compensation act are non-delegable, and therefore, the acts of the third-party administrator remain the acts of the insurer.

What does this mean for you?

The state of the law remains the same for insurance carriers who either fail to inspect or negligently inspect an employer’s premises: Section 517.5 provides immunity. For third-party administrators, their liability for “bad faith” is limited to their contractual obligations to their insurer clients.

If you have questions about these cases, or any other aspect of Iowa workers’ compensation law, please give us a call.

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