from the Iowa District Court for Pottawattamie County,
Jeffrey L. Larson, Judge.
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.
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
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.
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.
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.
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.
Background Facts and Proceedings.
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.
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.
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."
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.
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.
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."
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.
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.
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
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
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."
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
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.
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." 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.
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.
Partial Commutation Claim.
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
Interstate resisted the petition for partial commutation.
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.
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."
counsel asked to depose Alexander. Abbas emailed Rodgers,
warning that Alexander's testimony may not help the
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
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?
Q. Even with all those risks we mentioned?
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
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
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.
Interstate issued the commutation check one week later and
did not appeal the deputy's commutation decision.
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.
Alternate Medical Care.
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.
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
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.
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.
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.
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 ...