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Thornton v. American Interstate Insurance Co.

Supreme Court of Iowa

May 19, 2017


         Appeal from the Iowa District Court for Pottawattamie County, Jeffrey L. Larson, Judge.

         Workers' compensation insurer appeals judgment on jury verdict awarding actual and punitive damages after district court on summary judgment found insurer in bad faith as a matter of law. DISTRICT COURT JUDGMENTS AFFIRMED IN PART AND REVERSED IN PART; CASE REMANDED FOR NEW TRIAL.

          Mark McCormick and Stephen H. Locher of Belin McCormick, P.C., Des Moines, for appellant.

          Tiernan T. Siems, Karen M. Keeler, and MaKenna J. Dopheide of Erickson & Sederstrom, P.C., Omaha, Nebraska, for appellee.

          Deborah M. Tharnish and Sarah E. Crane of Davis Brown Law Firm, Des Moines, for amicus curiae Property Casualty Insurers Association of America.

          Richard J. Sapp and Ryan G. Koopmans, until withdrawal, of Nyemaster Goode, P.C., Des Moines, for amici curiae Chamber of Commerce of the United States and Iowa Association of Business and Industry.


         In this appeal, we must resolve a workers' compensation insurer's multipronged challenge to a judgment on a jury verdict awarding $25 million in punitive damages and $284, 000 in compensatory damages. The plaintiff was paralyzed below his chest in an on-the-job accident. The insurer disputed whether the employee was permanently and totally disabled (PTD) and contested his petition for a partial commutation (lump-sum) award while it continued to pay full weekly PTD benefits and explore settlement. The Iowa Workers' Compensation Commissioner determined the employee was PTD and granted his petition for partial commutation. The employee sued the insurer for common law first-party bad faith.

         On cross-motions for summary judgment, the district court determined the insurer, by contesting PTD and commutation, acted in bad faith as a matter of law by March 11, 2013 (nearly four years after the accident). The court instructed the jury the insurer had acted in bad faith for those actions and instructed the jury to decide whether other actions by the insurer were in bad faith and determine damages. The jury found the insurer's bad-faith conduct began several months after the accident and awarded punitive and compensatory damages at a ratio of 88:1. The insurer appealed after its posttrial motions were denied. The plaintiff cross-appealed the denial of attorney fees incurred prosecuting the bad-faith action. We retained the case.

         The insurer argues that (1) it cannot be found in bad faith when it voluntarily and continuously paid stipulated weekly PTD benefits due under its policy, (2) the district court erred by deciding the insurer acted in bad faith as a matter of law, (3) insufficient evidence supports the compensatory damage awards, and (4) the punitive damage award is unconstitutionally excessive under the Federal Due Process Clause. For the reasons explained below, we conclude the insurer knew or should have known it lacked any reasonable basis to dispute this quadriplegic's PTD status and affirm summary judgment for the plaintiff on that issue. But the district court erred by ruling the insurer was in bad faith as a matter of law for resisting the commutation. It should have granted summary judgment for the insurer on that issue. We reverse the judgments for compensatory and punitive damages without reaching the constitutional challenge and remand the case for a new trial on the remaining bad-faith claims. Applying the American rule, we affirm the district court's ruling denying plaintiff an award of attorney fees incurred prosecuting the bad-faith action.

         I. Background Facts and Proceedings.

         A. Initial Care.

         Thirty-one-year-old Toby Thornton worked as an over-the-road truck driver for Clayton County Recycling (CCR). His job duties included picking up scrap metal in Iowa and Wisconsin and delivering it to CCR's salvage yard. On June 25, 2009, Thornton lost control of his semitruck when the load shifted. The truck rolled over, crushing the cab with Thornton inside. Thornton injured his spinal cord, face, left leg, and ribs. First responders extracted Thornton using the Jaws of Life'. He was rushed by ambulance to Mercy Hospital in Dubuque and airlifted to the University of Iowa Hospitals in Iowa City, where he underwent multiple surgeries. The accident left Thornton permanently paralyzed from the chest down with no use of his left hand and limited use of his right hand.

         American Interstate Insurance Company (American Interstate) was the workers' compensation insurer for CCR and specialized in insuring high-risk employers. It learned of Thornton's accident the next day, and its claims adjuster, Luann Baum, contacted Thornton's wife, Tara, by telephone. On June 27, Baum traveled to the University of Iowa Hospitals and assured Thornton's family that workers' compensation benefits would begin immediately.

         Baum gathered wage information and calculated Thornton's weekly benefits, assuming PTD. American Interstate issued the first benefit check to Thornton on July 2 and weekly thereafter. Two weeks after the accident, American Interstate received a medical opinion from Thornton's examining physician that Thornton was PTD. It set reserves for Thornton's care at $762, 644, an amount based on PTD. Baum later testified she did so because she "believed that the injury was severe enough . . . to easily classify as a perm total."

         Thornton retained counsel for his workers' compensation claim. On July 8, his attorney wrote Baum requesting the "calculations used to arrive at Toby's weekly compensation rate" and a "wage statement for Toby's earnings for the year prior to the injury in accordance with Iowa Code Section 85.40." On August 7, counsel again wrote to Baum, noting Baum had not responded to the prior request. The second letter referred the insurer to Iowa Code section 85.41, which states the failure to furnish wage information upon request within thirty days is a simple misdemeanor. On August 25, counsel sent a third letter to Baum, stating Baum had supplied wage information but had missed the last full week Thornton worked before the accident. On September 1, counsel mailed another letter, again inquiring about weekly wages and requesting medical records. On September 24, counsel for American Interstate responded by letter, stating,

After we talked on the phone, I obtained the additional wage information from the employer. I recalculated the wage information and changed the rate based on the updated information. The new rate will be $513.18 per week. This resulted in a $7.44 per week increase and we had issued 15 weeks so far, so I also issued a check today for an additional $111.60 to bring current.
Here are the weeks and the hours I used for the calculations.

         The letter then listed thirteen weeks of wage information, including June 15 to 21, the week missed in the earlier statement. Thornton later stipulated that $513.18 was the correct weekly benefit.

         After multiple surgeries and aggressive physical, occupational, and respiratory rehabilitation, Thornton was released from the hospital in October. Thornton moved into his in-laws' home. At Thornton's request, Baum arranged for modifications to make the house handicap-accessible. American Interstate paid to install a shower and hospital bed and specially ordered a wheelchair and van matched to Thornton's height and weight. Thornton told Baum he was pleased, stating, "[V]an was great, equipment is good, bed is a little small for turning, but . . . [the new mattress] should be in by next week."

         Initially, Tara provided in-home care to Thornton. In June 2010, Baum arranged for a home healthcare nurse so Tara could return to work. That month, Thornton indicated an interest in purchasing a home, and Baum met with him to discuss housing options. In July, Baum received an email from Thornton that he needed to move out of his in-laws' home "immediately" because he and Tara were separating. Baum arranged for home-aide care, modifications to a new apartment, and for Thornton to take a disabled driver's license test. By November, Thornton had received his driver's license and a van outfitted so he could drive. He reported to Baum he was doing "great" and "ha[d] no complaints at this time." Throughout this period, American Interstate continued to pay Thornton weekly benefits at the PTD rate.

         Meanwhile, Thornton's mother passed away. She left him a small inheritance, about $3000, which Thornton used to purchase a headstone for her grave and a TV for his home for his children to watch after school. Thornton complained to his physician that he was depressed. In February 2011, Thornton attempted suicide by overdosing on pain medication. He was admitted to St. Mary's Hospital for inpatient mental health treatment. After his discharge, Thornton received outpatient counseling to cope with his depression. Thornton's treatment records show he attributed his mental problems to his mother's death and his separation from his wife, without mentioning American Interstate. Thornton did not tell Baum about his overdose or mental health treatment. Baum and American Interstate were unaware of Thornton's treatment for depression until months later when bills for payment were submitted.

         In March, Dr. Michael Rogge, Thornton's treating physician, concluded Thornton had reached maximum medical improvement (MMI). Thornton told Baum he did not want to discuss settlement options with American Interstate until his divorce was finalized. American Interstate honored his request, continuing to pay him weekly benefits at the PTD rate. In July, when internally discussing Thornton's file, Baum noted she had not assigned a permanent partial disability percentage to Thornton because "[t]his [claimant] is now a quadriplegic. . . . [H]e will be a perm[anent] total case." In January 2012, Thornton contacted Baum and told her his divorce was finalized and he was ready to discuss settlement.

         The next month, Baum and John Cantwell, who handles annuities, met with Thornton to discuss settlement. In preparation for this meeting, Baum noted a lump-sum payment would be important to Thornton because he had been trying to purchase a home. At the meeting, Baum and Cantwell presented Thornton with two alternative proposals for settlement. Each proposal included payment of weekly indemnity benefits (an upfront payment and annuity) and the creation of a Medicare Set Aside (MSA) and Custodial Medical Account (CMA) for future medical expenses. The MSA covered Medicare expenses; if the account was exhausted, the expenses would be picked up by Medicare. The CMA account covered other expenses. If the CMA was exhausted, Thornton would become personally liable for ongoing expenses. Both proposals also included a "Miscellaneous Medical" section, entitling Thornton to an immediate cash payment, a smaller annuity to offset Medicare deductibles, and a series of lump sums for future van purchases.

         In both proposals, American Interstate sought a "closed file" settlement to end its liability for future weekly benefits or medical expenses. Upon Thornton's death, any remaining indemnity, MSA, or CMA funds reverted to American Interstate. This structured settlement proposed by American Interstate substantially reduced its own cost of settlement. Thornton understood that "[i]t was just [the] first offer on the table, and [he] wanted to show it to [his] lawyer and get some legal representatives on it."

         B. PTD Claim.

         In May, Thornton, through counsel, filed a petition before the Iowa Workers' Compensation Commissioner seeking a determination of permanent total disability. Baum retained counsel for American Interstate, Cory Abbas. Baum disclosed to Abbas that "[American Interstate] ha[d] voluntarily accepted this claim as PTD exposure." In June, Abbas emailed Baum his initial evaluation of the claim, acknowledging that "there is not a strong argument that Claimant is not a permanent total disability." American Interstate nevertheless denied PTD in its answer to the petition.

         Counsel engaged in settlement discussions for several months. Thornton did not want to pursue a closed-file settlement, fearing that the medical funds may run out and he would become personally liable for his healthcare needs. In September, Abbas emailed Tiernan Siems, counsel for Thornton, urging a closed-file settlement for a quicker resolution because, as it could be "2-3 years before a final award is entered (considering potential appeals to the Commissioner, and potentially much longer with appeals to the Courts)." The parties proceeded to mediation in October, where Siems claimed Abbas said American Interstate would "deny, delay, appeal, and drive-up the costs" of litigation if Thornton refused to settle. Abbas denied making such a statement. The mediation was unsuccessful.

         American Interstate deposed Thornton in February 2013. Thornton testified that "[s]ome day [he'd] like to get a job" if someone could be found who would employ him "in the condition that [he was] in." On March 4, Abbas contacted Siems and informed him that Phil Davis, a vocational counselor, had been authorized by American Interstate to provide vocational rehabilitative services "if Mr. Thornton ha[d] any interest in such."[1] Siems responded by questioning the motives of Abbas for offering vocational training so close to the hearing on Thornton's PTD claim. Meanwhile, Dr. Rogge informed Abbas that he would not release Thornton to participate in vocational rehabilitation because he was PTD.

         On March 11, after conferencing with Dr. Rogge, Abbas emailed Jami Rodgers, who had succeeded Baum at American Interstate. Abbas stated, "Due to Dr. Rogge's opinions not being favorable to our defense, a follow-up written report will not be requested." He added, "As originally evaluated, there really is no possible situation where Claimant is not going to be found to be permanently and totally disabled in this matter." Abbas recommended American Interstate agree to a settlement for PTD and warned that the deputy commissioner may find "the defense unreasonable, issuing sanctions for the costs of the litigation." American Interstate nevertheless elected to proceed with the hearing contesting PTD. Rodgers explained, "[W]e may not have had a reasonable defense, but I still felt we had the right to go to hearing." On May 23, the deputy found Thornton PTD and ordered American Interstate to continue paying Thornton weekly benefits of $512.62.

         C. Partial Commutation Claim.

         Eleven days later, Thornton petitioned for a partial commutation of benefits. See Iowa Code § 85.48 (2013) (allowing partial payment of lump-sum benefits with reduced weekly benefits continuing). He sought commuted benefits in a lump sum of $761, 957 to purchase a home, pay attorney fees, and invest with the assistance of a money manager. Siems had emailed Abbas over a week earlier, asking if American Interstate would agree to the partial commutation. Siems accused American Interstate of raising "frivolous defenses suggesting [Thornton] was not [PTD], " despite agreeing that he was likely entitled to a commutation. Abbas responded the next day, stating,

While I may have agreed/stated that Mr. Thornton has a significant chance of being awarded a partial commutation by a Deputy and the Commissioner (based upon the results of many current partial and full commutation decisions), I never have stated that anyone is "entitled" to a partial commutation.

         American Interstate resisted the petition for partial commutation.

         In July, Thornton received a letter from a financial advisor, explaining how a lump-sum commutation would be invested to generate a regular monthly income. The plan included a 1.8% annual fee. It also assumed no change in tax treatment, although the investment income would be taxable, unlike weekly workers' compensation payments. In November, Thornton testified at his deposition that he had not previously owned any investments, he and his wife had incurred overdraft charges before the accident, he was only "so-so" with finances, his "[c]redit cards don't get taken care of as good as they should, " he connected with this financial advisor through his brother, he had never met with any other financial advisor, he had spent a $3000 inheritance from his mother on bills and "a couple of things, " and he had never put together or operated under a monthly budget.[2]

         American Interstate retained an expert, Michael Alexander, to address whether the commutation would be in Thornton's best interest. Alexander's report noted Thornton's proposed monthly budget used a significantly lower housing cost than the anticipated cost of Thornton's home. Even without considering the taxability of investment returns, Alexander noted the lump-sum payment would have to generate a 4.44% annual return to match current weekly payments. Alexander expressed concern about Thornton's ability to avoid tapping into the principal. Alexander concluded, "A sound game plan hasn't been completed to protect or justify this lump sum commutation."

         Thornton's counsel asked to depose Alexander. Abbas emailed Rodgers, warning that Alexander's testimony may not help the insurer's resistance:

Claimant's counsel has requested a deposition of our financial expert, Michael Alexander. He is likely to tear up Mr. Alexander pretty good, as Toby's case presented a difficult position for Mr. Alexander to argue that it was not in his best interests to receive a lump sum versus weekly payments. I will keep you informed as to when the deposition is scheduled, as well as the outcome.
. . . Unfortunately, as we have previously discussed, no matter how well I am able to depose [Thornton's] experts, it will be unlikely to bring forth significant evidence that will sway a Deputy and/or the Commissioner from awarding a commutation.

         Alexander testified at his deposition "the crux" of his opinion was that a commutation would not be in Thornton's best interest because he could "take withdrawals whenever he wanted to." But Alexander acknowledged that if Thornton avoided invading the principal, commutation would be in his best interest. He noted without the partial commutation, Thornton could be unable to keep up with his expenses:

Q. There's risk that Mr. Thornton's rent and cost of food will outpace his budget unless he gets a partial commutation. A. Yes. There's also interest rate risk and market risk tied with these investments and liquidity risk if he taps the principal.
. . . .
Q. Notwithstanding all of those risks you mentioned, . . . it is still your opinion as we sit here today that if Mr. Thornton does not invade that principal of this 611- or 751, 000 or potentially one million if it had been paid out earlier, [if he] doesn't invade that principal, his best bet is getting that partial commutation?
A. Yes.
Q. Even with all those risks we mentioned?
A. Yes.

         At the partial commutation hearing on March 21, 2014, Thornton presented testimony from two experts that the commutation would be in his best interest. Thornton also presented the budget prepared by his brother, an accountant, showing how Thornton would use the commuted benefits. American Interstate pointed out the proposed budget did not account for taxes or home repair. American Interstate argued Thornton was a poor money manager, noting he had spent the $3000 inheritance without conferring with a financial advisor. It questioned whether Thornton could resist dipping into the principal of any commuted funds and referred to Thornton's children as his "vice."

         On May 16, 2014, the deputy granted a partial commutation. The deputy found the risk of Thornton depleting the funds to be "minimal" and stated, "It would be hard to imagine a clearer scenario where a partial commutation should be granted." The deputy further noted, "The arguments of the defendants are weak at best and appear mostly designed to delay the inevitable commutation of benefits." Thornton asked the deputy to award him the costs of both of his experts. See Iowa Code § 86.40 (2014) ("All costs incurred in the hearing before the commissioner shall be taxed in the discretion of the commissioner."); Iowa Admin. Code r. 876-4.33 (noting assessment of costs may include "the reasonable costs of obtaining no more than two doctors' or practitioners' reports"). The deputy awarded Thornton costs for two expert witnesses and signaled his disapproval of the insurer's conduct:

In this case, the defendants refused to agree to a partial commutation and provided a vigorous, albeit weak defense. Partial commutations are fairly rare. Claimant's counsel had to decide how much to invest in pursuing this claim, and it was unknown exactly how much evidence would be required. . . . The defendants essentially forced the claimant to prove his case instead of simply agreeing to what appears to be an obviously reasonable partial commutation in the best interests of the claimant.

         American Interstate issued the commutation check one week later and did not appeal the deputy's commutation decision.

         Meanwhile, on January 10, 2014, while Thornton's petition for commutation was pending, he learned he had been approved by his bank for a loan to purchase a home. Thornton testified he lost the chance to buy that home because it was sold to another person while he awaited his lump-sum payment.

         D. Alternate Medical Care.

         In July, Dr. Rogge wrote Thornton a prescription for a wheelchair replacement. Dr. Rogge wrote in his notes, "Did recommend he receive new wheelchair . . . . We did give him a new script for this today." These notes were received by Rodgers. However, Rodgers did not receive an order or copy of the prescription. Dr. Rogge sent the prescription to St. Luke's Hospital in Cedar Rapids. On September 10, Rodgers was deposed. She stated she did not know Thornton needed a new wheelchair, but if she was "ordered to get him one, she would do so." On September 17, Thornton went to St. Luke's Hospital to be measured. Two days later, Dr. Rogge signed the paperwork setting forth the specifications of the new wheelchair.

         On October 12, Thornton was hospitalized for bursitis in both elbows. Hospital records stated that his left elbow was "swollen" and "reddened" and that his pain was "very intense and he felt like his arm was on fire." According to hospital records, Thornton told the hospital staff he thought "he did bump into something last week with his elbow, but [did] not remember anything specific."

         On October 20, Rodgers learned that the wheelchair was "in the process of being ordered." A vendor had inquired about the status of the authorization and copied Thornton's counsel, who then forwarded the email to Abbas. The next day, Thornton filed a petition for alternate medical care. See Iowa Code § 85.27(4) ("If the employer and employee cannot agree on such alternate care, the commissioner may, upon application and reasonable proof of the necessity therefor, allow and order other care."). At the hearing on November 4, American Interstate conceded that "a replacement wheelchair is reasonable and necessary" and that it had already "authorized and ordered the wheelchair." The deputy found that "[b]oth parties were in agreement" and ordered American Interstate to provide a new wheelchair.

         E. Bad-Faith Claim.

         On December 26, 2013, Thornton filed a civil action against American Interstate alleging common law bad faith based on its handling of his workers' compensation claims. American Interstate filed an answer denying bad faith. After conducting discovery, the parties filed cross-motions for summary judgment. American Interstate argued summary judgment was appropriate because it was undisputed that Thornton was paid full PTD weekly benefits throughout, and that as a matter of law, it acted reasonably in handling Thornton's claims. Thornton argued American Interstate unreasonably denied he was PTD and entitled to commutation, which delayed his lump-sum payment.

         The district court partially granted Thornton's motion for summary judgment on the bad-faith claim and denied American Interstate's motion. The court rejected American Interstate's position that bad faith could not occur without a denial of payment. The court stated, "Any difference between payments owed and payments made is properly a question of damages, not denial." The court acknowledged American Interstate paid Thornton the weekly workers' compensation benefits to which he was entitled, but concluded the insurer denied him benefits when it refused to classify him as PTD, denied PTD status at the hearing, moved for reconsideration of the commissioner's adverse PTD finding, and failed to agree to a commutation. The district court concluded,

Defendant embarked upon a course of action which first challenged and ultimately denied Plaintiff's PTD status and eligibility for partial commutation, and if successful would have cancelled Plaintiff's benefits. Each of those is a 'denial' within the ambit of the bad faith tort.

         The court further determined American Interstate had no reasonable basis for denial. American Interstate was advised by counsel early on that Thornton was likely PTD and a partial commutation was in his best interests. Thus, the court found by ...

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