Toby Thornton v. American Interstate Insurance Company
2017 Iowa Sup. LEXIS 52, 897 N.W.2d 445, 2017 WL 2200461 (2017)
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Rule of Law:
An insurer can be liable for a first-party bad-faith claim for unreasonably contesting a workers' compensation claimant's disability status, even while paying weekly benefits. However, an insurer does not act in bad faith by resisting a discretionary benefit, such as a commutation, if its basis for doing so is "fairly debatable" on either a factual or legal basis.
Facts:
- On June 25, 2009, Toby Thornton, a truck driver for Clayton County Recycling, was in a work-related accident that left him permanently paralyzed from the chest down (a quadriplegic).
- American Interstate Insurance Company, the employer's workers' compensation insurer, began paying Thornton weekly benefits at the rate for Permanent Total Disability (PTD) shortly after the accident.
- Within two weeks, American Interstate received a medical opinion that Thornton was PTD and internally set its financial reserves for the claim based on the belief that it was a "perm total" case.
- In May 2012, Thornton filed a formal petition to have his PTD status determined by the Iowa Workers’ Compensation Commissioner.
- Despite its own internal assessments and advice from its counsel that there was no strong argument against PTD, American Interstate formally denied Thornton's PTD status in its answer to the petition.
- After the Commissioner determined Thornton was PTD, Thornton petitioned for a partial commutation (a lump-sum payment) to purchase a home.
- American Interstate resisted the commutation petition, raising concerns about Thornton's financial management skills, his lack of experience with investments, and omissions in his proposed budget.
- In July 2014, Thornton's doctor prescribed a new wheelchair, but there was a delay in American Interstate authorizing and ordering the equipment, during which time Thornton was hospitalized for bursitis possibly caused by his old wheelchair.
Procedural Posture:
- Toby Thornton filed petitions with the Iowa Workers' Compensation Commissioner to determine his disability status and to receive a partial commutation of benefits.
- The deputy commissioner ruled that Thornton was permanently and totally disabled and later granted his petition for a partial commutation.
- Thornton filed a civil action against American Interstate in district court, alleging common law bad faith in the handling of his claims.
- The parties filed cross-motions for summary judgment.
- The district court granted partial summary judgment in favor of Thornton, ruling that American Interstate had acted in bad faith as a matter of law for contesting both his PTD status and his commutation petition as of March 11, 2013.
- The case proceeded to a jury trial on damages and on whether bad faith occurred before March 11, 2013.
- The jury found bad faith began earlier, on September 1, 2009, and awarded Thornton $284,000 in compensatory damages and $25 million in punitive damages.
- The district court denied American Interstate’s post-trial motions, and American Interstate appealed to the Supreme Court of Iowa. Thornton cross-appealed.
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Issue:
Does a workers' compensation insurer commit the tort of first-party bad faith by formally contesting an employee's permanent and total disability (PTD) status or petition for a partial commutation of benefits, when the insurer continuously pays the correct weekly benefits throughout the dispute?
Opinions:
Majority - Waterman, Justice.
Yes, in part, and no, in part. An insurer acts in bad faith by unreasonably contesting an employee's PTD status, but does not act in bad faith for resisting a commutation petition if the issue is 'fairly debatable.' The court reasoned that a bad-faith claim does not require a denial of payments; an unreasonable contestation of status or delay of necessary medical equipment can constitute a 'denial' of benefits. Here, there was no reasonable basis to dispute Thornton's PTD status, as the medical evidence was conclusive and the insurer's own records and counsel acknowledged this. This was bad faith as a matter of law. However, resisting the commutation was not bad faith because its approval is discretionary and depends on whether it is in the employee's 'best interest.' Given Thornton's limited financial experience and questionable budget, American Interstate had a 'fairly debatable' reason to contest it, which is the standard for avoiding bad faith. Because the lower court erroneously instructed the jury that resisting commutation was bad faith, the verdict was tainted and a new trial is required.
Analysis:
This decision refines the scope of first-party bad faith in the Iowa workers' compensation context by distinguishing between non-debatable and debatable claims. It establishes that an insurer cannot use litigation as a tactic to delay formalizing a claimant's status when the underlying facts are undisputed (like PTD for a quadriplegic), even if it continues making payments. Conversely, the ruling protects an insurer's right to litigate issues that are genuinely 'fairly debatable,' such as the discretionary determination of whether a lump-sum payment is in an individual's best interest. This holding creates a line that encourages insurers to concede obvious claims while preserving their ability to challenge more subjective or uncertain ones without facing bad-faith liability.
