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Can Iowa Workers Sue a Workers’ Compensation Claims Administrator for Acting in “Bad Faith”?


Iowa courts have long permitted “bad faith” lawsuits against insurance companies with respect to first-party claims. That is to say, if your insurance company arbitrarily denies a valid claim that you file, you can sue the insurer for damages. In this sense, a bad-faith claim is a type of tort or personal injury case.

But how does “bad faith” work in the context of workers’ compensation? Employers normally take out workers’ compensation insurance. The employer or the insurer may then delegate responsibility for adjusting claims to a third-party administrator.

So if an Iowa workers is injured on the job, and their workers’ compensation claim is later denied without good cause, can that worker seek damages thru a bad-faith claim against the third-party administrator?

Iowa Supreme Court: Bad-Faith Claims Only Permissible Against Employers and Workers’ Compensation Insurers

The Iowa Supreme Court recently answered this question in response to a request from a federal judge. The plaintiff in this case worked for an employer in Woodbury County. The employer had workers’ compensation insurance, and the insurer delegated its authority for handling claims to a third-party administrator.

In April 2016, the employer assigned the plaintiff to work at a construction site. As the plaintiff drove onto the site’s property, his vehicle was rear-ended by another driver. The plaintiff said he suffered a lower back injury as a result of the accident.

The plaintiff maintained he was entitled to certain workers’ compensation benefits, but that either the third-party administrator or the insurance company rejected his claim. The plaintiff said neither party ever interviewed him before denying his claim, which violated applicable workers’ compensation insurance standards. This led the plaintiff to filing a claim with the Iowa Workers’ Compensation Commission. He also filed a bad-faith lawsuit against the insurer and third-party administrator in state court.

The defendants exercised their right to remove (transfer) the bad-faith lawsuit to federal court. But the federal judge was uncertain as to whether Iowa law permitted bad-faith claims against third-party administrators. He therefore asked the Iowa Supreme Court to answer the question, “In what circumstances, if any, can an injured employee hold a third-party claims administrator liable for the tort of bad faith for failure to pay workers’ compensation benefits?”

The Supreme Court’s answer was direct: There were no such circumstances. Under Iowa common law, an injured worker had no right to pursue a bad-faith claim over the denial of workers’ compensation benefits against a third-party administrator.

Writing for the Supreme Court, Justice Edward Mansfield explained that bad-faith claims against insurance companies are typically justified “by the nature of the contractual relationship between the insurer and insured.” This also applies to the relationship between injured workers and their employer’s workers’ compensation insurance carrier (or self-insured employers), where state law imposes certain “affirmative obligations” on the insurer.

But there is no similar obligation imposed upon third-party administrators. And in fact, no state except for Colorado has ever allowed this type of bad-faith claim against an administrator, Mansfield said. However, the employee can still pursue a bad-faith claim against the insurer, as its duty to deal with worker claims in “good faith” cannot be delegated to the administrator.

Speak with an Iowa Workers’ Compensation Lawyer Today

The Supreme Court’s decision provided important clarification with respect to the law in this area. Indeed, the Court reaffirmed the principle that employers and workers’ compensation insurers can be held liable if they arbitrarily deny a valid claim for benefits.

If you have been denied medical or wage-replacement benefits following a work-related accident and need assistance from an experienced Southeast Iowa workers’ compensation attorney, contact the Noyes Law Office, P.C., today.


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