Bad Faith Litigation in Work Comp – but not what you’d think.

By Ross A. Bridges, VBM Attorney

Article written January 25, 2023

Attempts at pursuing a bad faith lawsuit against a workers' compensation insurer by an injured worker have been attempted many times over the years. They have, however, been routinely denied by the higher courts.  Furthermore, there are statutory protections for workers' compensation insurers for these types of bad faith actions.  That said, a workers' compensation insurance carrier may not be immune from a bad-faith action by its excess carrier.

In the case of United Fire and Casualty Company v. Advantage Workers' Compensation Insurance Company, the excess carrier sued the primary insurer alleging that the primary could have, but failed to, settle a claim against it for the primary insurer’s policy limit.  The excess carrier further alleged that this failure wrongfully caused the excess carrier damage because the claim was subsequently settled only after the primary and excess carrier agreed to pay double the primary insurer's limits.

This case was brought in the federal court for the Western District of Missouri, but the federal court applied Missouri law in its analysis and Order.  The court held that an excess insurer may assert a subrogation claim against a primary insurer if the primary insurer wrongfully refuses to settle a claim and if that refusal increases the amount the excess carrier is ultimately required to pay.  The court went on, however, to conclude that the primary carrier never actually had an opportunity to settle its claim within policy limits.  It appears that the claimant continued a demand in excess of the primary carrier's limits.  Furthermore, there was no evidence that the primary carrier ever had a reasonable opportunity to settle within its policy limits.

This case shows that a worker’s compensation insurance carrier, self-insured trust or self-insured employer is not absolutely immune from a bad faith lawsuit. Although situations may be rare, there is at least the possibility that such an entity could be sued by its excess carrier for failure to resolve a case within its underlying policy limits. Also, it is important to note that a primary carrier could be held in bad faith either by settling a claim that is in excess of the policy limit or by suffering a judgment by a court that exceeds the primary carrier's policy limits.

It may be helpful to consider when negotiating to settle a workers' compensation claim that has permanent and total disability or an expansive future medical potential to remember that any actions that are not supported by legitimate defenses could result in an action by an excess carrier for defending a claim or refusing to settle a claim in bad faith. For example, it is not difficult to imagine a situation where worker’s compensation carrier offers settlement money for a minimal injury only, but later suffers a permanent and total disability award with lifetime medical. Such an injury could exceed the primary limits for many policies subjecting an excess carrier to exposure. If you have any questions about a case or additional tips to prevent any type of action for bad faith by an excess carrier, do not hesitate to contact our office for advice.

If you have any questions about workers' compensation, please do not hesitate to reach out to us.   |   (573) 777-4488  |