Texas Supreme Court: Bad Faith Tort Inconsistent with Workers’ Comp System

In what has been called a landmark decision, the Supreme Court of Texas has found that a bad faith cause of action is inconsistent with the current workers’ compensation system.

The Court’s decision strengthens a law affecting millions of Texans, the Workers’ Compensation Act, according to Texas Mutual Insurance Co.

In a 5-4 decision in Texas Mutual Insurance Co. v. Timothy J. Ruttiger, the Court overruled its 1988 Aranda decision that had created the bad faith claims-handling tort in workers’ compensation, the insurer announced.

Justices Guzman, Hecht, Johnson, Wainwright and Willett concurred with the Court’s opinion, written by Justice Phil Johnson. Justice Willett wrote a concurring opinion. The dissenting justices were Green, Jefferson, Lehrmann and Medina.

“The Supreme Court has acted with courage and integrity by upholding the remedies and protections that the Legislature has granted to injured workers,” Mary Barrow Nichols, general counsel and senior vice president for Texas Mutual, said in the announcement released by the insurer. “This decision is fundamental to the health of the entire workers’ comp system.”

When the Ruttiger case first came to the courts in 2004, lawsuits claiming “bad faith” against all insurance carriers, Texas Mutual included, were on the rise, the insurer said. Texas Mutual disputed Ruttiger’s claim for an on-the-job injury because his employer reported that he was hurt at a non work-related softball game. Texas Mutual ultimately entered into a compromise agreement with Ruttiger over the claim.

In 2006, a trial court found that the company’s adjuster had acted in “bad faith” by believing the employer instead of Ruttiger. The court awarded money to Ruttiger in excess of the amounts Texas Mutual had already paid him to cover his medical costs and replace his wages. He was awarded additional money for his “mental anguish over having his claim disputed.”

The First Court of Appeals in Houston upheld the original decision in 2008, and Texas Mutual appealed to the Supreme Court. In August 2011, the Supreme Court of Texas reversed the Houston Court of Appeals decision and rendered judgment that Ruttiger take nothing on his Insurance Code and Texas Deceptive Trade Practices Act claims. The Court also remanded the plaintiff’s common law good faith and fair dealing claims to the Houston Court of Appeals for further consideration.

Both sides requested a rehearing, suggesting that the Court reconsider fully the question of whether the 1989 overhaul of the Texas workers’ compensation system “eliminated the need for” a common law cause of action for breach of the duty of good faith and fair dealing. The requests were granted by the Court on Feb. 17, 2012.

In his concurring opinion, Justice Don R. Willett explained: “[T]he continued existence of bad-faith claims will subvert the Legislature’s meticulous soup-to-nuts system, one augmented by an immense regulatory and adjudicatory framework that, taken together, now regulates virtually every aspect of how a carrier handles a workers’ comp matter. . . [T]he inherently fuzzy nature of the bad-faith tort has a tendency to produce conflicting liability standards inconsistent with the Legislature’s statutory approach to carrier malfeasance and accountability.”

Justice Willett’s opinion continued: “I think it unwise to invite these potential complications, particularly in an area so imbued with public policy trade-offs, and where the Legislature has specifically addressed our concerns over how comp claims are processed. Aranda was rooted in specific claims-handling inequities in the pre-1989 comp system, inequities the Legislature has re-balanced. Accordingly, in light of the Legislature’s hermetic workers’ compensation regime, the time has come for the Court — exercising its authority to define and delimit common-law remedies — to overrule Aranda, a judicial gap-filler whose underlying rationale no longer exists.”

Bruce Wood, associate general counsel and director of workers’ compensation of the American Insurance Association (AIA), also applauded the Court’s decision in Ruttiger.

In an announcement released by the AIA, Wood said the decision, which overturns the Court’s 1988 split decision in Aranda, effectively “ends common law bad faith actions with respect to workers’ compensation in Texas. This decision can be expected to enhance market stability and eliminate unnecessary litigation over claims practices — conduct that with the 1989 law changes now is within the purview of the Workers’ Compensation Division and its parent agency, the Department of Insurance.”

Obviously, a 5-4 decision is closer to a split decision than a unanimous one.

Chief Justice Wallace B. Jefferson wrote a dissenting opinion, stating the Court’s decision “disrupts the statutory equilibrium and substitutes its judgment for the Legislature’s.”

Jefferson explained: “Whether allowing extra-contractual claims makes sense is a different question than whether the laws, as written, permit their pursuit. The Court correctly observes that the Act carefully balances competing interests. The Legislature struck that balance by acknowledging and limiting the common law claims the Court abolishes today.”

Lawmakers did not make “the Act exclusive with respect to extra-contractual claims,” Jefferson wrote. Therefore, he would have not eliminated Ruttiger’s claims, but “would affirm the court of appeals’ judgment. Because the Court does otherwise, I respectfully dissent.”

Source: Texas Mutual Insurance Co., AIA, Texas Supreme Court