#28598, #28599, #28609-r-MES
2020 S.D. 39
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
…
FERN JOHNSON, Plaintiff and Appellee,
v.
UNITED PARCEL SERVICE, INC.,
and LIBERTY MUTUAL FIRE
INSURANCE CO., Defendants and Appellants.
…
APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA
…
THE HONORABLE JANE WIPF PFEIFLE
Judge
…
DAVID S. BARARI
G. VERNE GOODSELL
TERENCE R. QUINN of
Goodsell Quinn, LLP
Rapid City, South Dakota
ROBERT S. PECK of
Center for Constitutional Litigation, P.C.
Washington, D.C.
WM. JASON GROVES
Rapid City, South Dakota Attorney for plaintiff and
appellee.
…
ARGUED
FEBRUARY 21, 2019
OPINION FILED 06/24/20
JACK H. HIEB
ZACHARY W. PETERSON of
Richardson, Wyly, Wise
Sauck & Hieb, LLP
Aberdeen, South Dakota
THOMAS D. WARREN of
Baker & Hostetler, LLP
Cleveland, Ohio Attorneys for defendants and
appellants.
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SALTER, Justice
[¶1.] Fern Johnson sued her former employer, United Parcel Service (UPS),
and its workers’ compensation carrier, Liberty Mutual Fire Insurance (collectively
Appellants), alleging bad faith and conversion based on their denial of previously
ordered workers’ compensation medical benefits. A jury returned a verdict for
Johnson, awarding her general and punitive damages. On appeal, the Appellants
claim the circuit court erred when it concluded before trial that their legal
obligation to pay Johnson’s benefits was not fairly debatable and that no reasonable
basis to deny Johnson’s benefits existed. The Appellants also claim that the court
abused its discretion by excluding specific evidence of their attorney’s advice to
terminate benefits and by instructing the jury that it could not consider their
reliance upon the advice of counsel to determine whether the elements of bad faith
were met.
[¶2.] We agree that the Appellants had no reasonable basis to terminate
Johnson’s medical benefits because their legal obligation to pay was not fairly
debatable. However, we conclude the circuit court erred when it determined this
lack of a reasonable basis necessarily impacted the jury’s consideration of the
separate bad faith element concerning the Appellants’ knowledge. This error
manifested itself in the court’s evidentiary rulings restricting certain evidence and
in its jury instructions, which effectively ended the jury’s consideration of the
knowledge element. Therefore, we reverse and remand for a new trial.
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Background
[¶3.] Fern Johnson worked at UPS from 1973 to 1982 and again from 1988
to 1997. In November 1995, Johnson noticed pain in her right groin area, especially
with lifting. On January 4, 1996, Johnson experienced a sharp pain in her groin
area at the end of her shift. She saw her gynecologist that day for what she
believed was pain from endometriosis, a previously diagnosed medical condition.
Following a laparoscopy two weeks later, Johnson learned she had a hernia and
reported it to her employer the next day. Johnson underwent a combined
hysterectomy and hernia repair surgery the following month. She returned to work
on March 19, but experienced increased groin pain that kept her off work during a
period of time that spring. Johnson subsequently quit working at UPS on
December 9, 1997, due to groin and back pain.
[¶4.] Johnson initially filed for workers’ compensation benefits related to, as
relevant here, her hernia surgery and groin pain. On August 4, 2002, the
Department of Labor (DOL or Department) determined that Johnson’s hernia was
causally related to her employment at UPS, but her groin pain was not.
[¶5.] Johnson appealed to the circuit court, which reversed the
Department’s decision that Johnson’s groin pain was not compensable on March 9,
2004. The court remanded the case to the Department for further administrative
proceedings in an April 15, 2005 order.
[¶6.] On remand, the administrative law judge (ALJ) issued findings of facts
and conclusions of law, which stated in relevant part:
Pursuant to the Circuit Court’s ruling, Claimant has
demonstrated by a preponderance of evidence that her groin
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pain is causally related to her employment with Employer . . . .
Claimant is entitled . . . to necessary, suitable, and proper
medical expenses causally related to her work-related groin
condition.
(Emphasis added.) See SDCL 62-4-1 (“The employer shall provide necessary first
aid, medical, surgical, and hospital services, or other suitable and proper care
including medical and surgical supplies, apparatus, artificial members, and body
aids during the disability or treatment of an employee within the provisions of this
title.”) (Emphasis added.)
[¶7.] Following Johnson’s pro se petition for review, the DOL Secretary
affirmed the ALJ’s findings of facts and conclusions of law in a March 14, 2006
order (2006 DOL Order). The Appellants did not appeal this order 1 and paid for
Johnson’s compensable medical expenses until the spring of 2010.
[¶8.] At that point, the Appellants asked their attorney, Eric Schulte, for
advice regarding their ongoing obligation to pay Johnson’s medical benefits. The
Appellants assert that the claims adjuster assigned to Johnson’s case was not
familiar with South Dakota workers’ compensation law and sought Schulte’s advice
because of his experience and excellent reputation. Schulte recommended
scheduling an independent medical examination (IME) for Johnson with a
neurologist pursuant to SDCL 62-7-1, which generally requires claimants to
1. Though it appears true that the Appellants did not appeal the 2006 DOL
Order, which is based on the circuit court’s remand instructions, there are
references in the record suggesting they sought review of the circuit court’s
April 15, 2005 order finding Johnson’s groin condition compensable.
However, the information relating to these efforts is incomplete, and we will
treat the 2006 DOL Order as a final administrative order.
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undergo compulsory IME’s to “determin[e] the nature, extent and probable duration
of the injury . . . .” Id.
[¶9.] The Appellants hired Dr. Bruce Norback, a board-certified neurologist,
to conduct Johnson’s IME. Dr. Norback opined that what had been described as
Johnson’s “neuroma condition” relating to her groin pain did not remain a major
contributing cause of her need for continuing medical treatment. 2 Indeed, Dr.
Norback believed “a definite diagnosis of a neuroma has never been made.” He also
thought that Johnson’s employment at UPS was no longer a major contributing
cause of her need for medical treatment related to her groin pain because she had
not worked for UPS for almost 13 years, but still experienced worsening symptoms.
[¶10.] On August 9, 2010, the Appellants, through Schulte, wrote Johnson a
letter stating that they were terminating payment of all present and future medical
expenses related to her groin pain based upon Dr. Norback’s IME findings. After
the Appellants denied Johnson’s requests for reconsideration, she filed a petition for
hearing with the Department. Following the hearing, the Department issued
findings of facts and conclusions of law, which included the finding that the
Appellants had “denied all further workers’ compensation benefits . . . based on Dr.
Norback’s opinion regarding the same issues that were litigated by the parties ten
years earlier.” The Department also concluded that the “Employer/Insurer did not
make a request to the Department for a review of the medical services or payments
made for Claimant . . . pursuant to SDCL 62-7-33.” See SDCL 62-7-33 (describing
2. At the time, Johnson’s medical treatment included radiofrequency ablation,
use of a transcutaneous electrical nerve stimulation (TENS) unit, and pool
therapy.
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the procedure for an employer or employee to ask the Department to determine
whether a changed condition warrants a modification of medical or disability
payments).
[¶11.] The Department further concluded that the causal relationship of
Johnson’s work-related activities and her groin pain had already been established
and that the “Employer/Insurer do not have the authority to approve or deny
medical treatment . . . without proper notice to the Department for a review
pursuant to SDCL 62-7-33.” After finding Johnson’s current medical treatments
suitable based on her treating doctor’s testimony, the Department reinstated
Johnson’s medical benefits on January 20, 2012. The Appellants then reimbursed
Johnson for approximately $13,000 in medical expenses that she had incurred
following their decision to terminate benefits.
[¶12.] On appeal to the circuit court, the Appellants argued that
notwithstanding the 2006 DOL Order, the provisions of SDCL 62-7-1 and SDCL 62-
1-1(7) allowed them to review Johnson’s medical condition and unilaterally
determine if her work injury “remains a major contributing cause of her . . . need for
treatment.” The circuit court disagreed and affirmed the Department’s
determination that SDCL 62-7-33 was “the proper mechanism” to review the 2006
DOL Order. In its decision, the circuit court stated that “[a]fter an award is final,
whether the injury is a major contributing cause becomes an issue only after the
employer/insurer establishes a change in condition.” The circuit court concluded
that an employer or insurer may not “decide to unilaterally ignore the Department’s
decision.” The Appellants did not appeal the circuit court’s ruling.
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[¶13.] On May 22, 2014, Johnson commenced this action against the
Appellants alleging bad faith, barratry, conversion, abuse of process, and requesting
punitive damages. In its amended answer, the Appellants raised several
affirmative defenses, including claims that the law was fairly debatable at the time
of its 2010 denial and that it had relied on the advice of counsel.
[¶14.] The parties sought to narrow or eliminate various claims and defenses
through summary judgment. The circuit court granted the Appellants’ motion for
summary judgment on the barratry and abuse of process claims, but the court
denied the motion as to the conversion claim, finding the evidence could show
Johnson met the elements to prevail on the claim. 3
[¶15.] The Appellants’ affirmative defenses relating to Johnson’s bad faith
claim were also the subjects of summary judgment litigation. In her summary
judgment motion seeking to preempt the Appellants’ defense that they relied upon
the advice of counsel, Johnson argued that the Appellants could not reasonably rely
upon legal advice that contradicted an existing order to pay medical benefits. With
regard to its fairly debatable defense, the Appellants claimed that at the time they
terminated Johnson’s benefits, utilizing the IME process to disregard orders
requiring payment of workers’ compensation benefits was an accepted practice and,
at a minimum, rendered their obligation to continue paying benefits fairly
debatable. The Appellants acknowledged that their original legal position was
foreclosed, but in their view, only by virtue of subsequent case law. They claimed
3. In her complaint, Johnson claimed that the Appellants committed conversion
by unlawfully exercising dominion over “funds required to pay for her medical
care and treatment.”
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these decisions resolved an unsettled question by definitively holding that SDCL 62-
7-33 provides the exclusive means by which an employer could seek to modify a
workers’ compensation award. The circuit court initially denied both summary
judgment motions, finding the existence of genuine issues of material fact.
[¶16.] However, the court later advised the parties that it was reconsidering
its decision on the Appellants’ fairly debatable defense. After receiving additional
briefs, the court changed its earlier ruling and granted Johnson’s motion for
summary judgment, concluding that the law regarding the Appellants’ duty to
comply with the 2006 DOL Order was not fairly debatable. As a result, the court
ordered that the Appellants were “prohibited from making arguments that they
reasonably believed they could be allowed to stop workers compensation payments
without seeking review from the Department of Labor under SDCL 62-7-33.” The
court reasoned that “[w]hen one arrives at SDCL 62-7-33, it is clear that, unless the
parties have reached an agreement or the department has approved a change, there
is no mechanism for an employer to unilaterally reduce benefits based upon an
independent medical examination.”
[¶17.] The circuit court also granted Johnson’s corresponding motions in
limine and excluded any evidence, testimony, or argument that the Appellants
“misunderstood their legal duty under SDCL 62-7-33” or their “legal duty to provide
medical benefits to [Johnson].” The Appellants were also prohibited from raising
the argument “that SDCL 62-1-1(7) created a fairly debatable basis for denial of
benefits” or from introducing evidence of their “intent” regarding the decision to
terminate Johnson’s medical benefits.
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[¶18.] Following the court’s decision to grant Johnson’s motion for summary
judgment on the Appellants’ fairly debatable defense, Johnson moved for
reconsideration of her motion for summary judgment on their advice-of-counsel
defense. The court granted Johnson’s motion in part and denied it in part,
instructing that the Appellants “can assert the fact of counsel’s advice as a
consideration . . . but they are prohibited from making an argument that they
reasonably believed they had no legal duty in this case to follow SDCL 62-7-33 or to
pay benefits at the time the decision was made.” (Second emphasis added.) The
ruling significantly curtailed the Appellants’ evidence. Schulte’s testimony
regarding his understanding of then-existing law and his asserted good-faith intent
was excluded, as was evidence that the Appellants believed they possessed a
reasonable basis for terminating Johnson’s medical benefits based on the particular
aspects of Schulte’s advice.
[¶19.] During the five-day jury trial, the court consistently sustained
Johnson’s objections based on its pretrial fairly debatable and advice-of-counsel
decisions. Several of the court’s jury instructions also implemented these rulings,
while others appear to have been drafted without regard to the rulings. For
instance, the court instructed the jury on the two principal elements of bad faith—a
lack of a reasonable basis for denial and knowledge or reckless disregard of the
absence of a reasonable basis. The court also provided the jury with a statement of
legal principles upon which to determine the existence of a reasonable basis, but
then instructed the jury as a matter of law that the Appellants had no reasonable
basis for terminating Johnson’s medical benefits.
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[¶20.] The court also instructed the jury on the legal test to determine
whether the Appellants knew that there was no reasonable basis to terminate
benefits. However, the court further instructed the jury that it could not consider
the only asserted basis for the Appellants’ claim that it lacked the requisite
knowledge for bad faith—their reliance on the advice of counsel.
[¶21.] The jury returned a verdict in favor of Johnson, awarding $500,000 for
her bad faith claim, $2,750 for the conversion claim, and $45 million in punitive
damages. The jury apportioned the damages between the two Appellants by finding
75% of the damages attributable to Liberty Mutual and 25% attributable to UPS.
[¶22.] Post-trial, the Appellants renewed their motion for judgment as a
matter of law, or alternatively a motion for a new trial, arguing Johnson failed to
prove bad faith and failed to justify the punitive damages award. The Appellants
also moved for remittitur, or alternatively, a new trial. Following a hearing, the
circuit court denied all the Appellants’ motions, but reduced punitive damages to
$10 million dollars, citing constitutional concerns. 4 The court also reduced the
conversion award to $2,042.50.
[¶23.] The Appellants raise several issues on appeal, which we restate as
follows:
1. Whether the circuit court erred when it determined that
the Appellants lacked a reasonable basis for denying
4. “The Due Process Clause of the Fourteenth Amendment prohibits the
imposition of grossly excessive or arbitrary punishments on a tortfeasor.”
Roth v. Farner-Bocken Co., 2003 S.D. 80, ¶ 44,
667 N.W.2d 651, 665 (quoting
State Farm v. Campbell, 538 U.S. 408, 416,
123 S. Ct. 1513, 1519-20,
155 L.
Ed. 2d 585 (2003)).
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Johnson’s workers’ compensation benefits because their
obligation to pay was not fairly debatable.
2. Whether the circuit court erred when it determined that
the Appellants could not use evidence of their attorney’s
advice to argue they lacked the requisite knowledge for a
finding of bad faith.
3. Whether the circuit court abused its discretion in its
evidentiary rulings and jury instructions.
4. Whether the circuit court erred when it allowed Johnson’s
bad faith claim to proceed with allegedly insufficient
evidence of pecuniary damages.
5. Whether the circuit court erred when it failed to vacate
the punitive damages award.
[¶24.] By notice of review, Johnson raises two additional issues:
1. Whether the circuit court abused its discretion when it
reduced the jury’s punitive damages award.
2. Whether the circuit court erred when it failed to award
post-judgment interest. 5
[¶25.] Given our holding, it is necessary to address only the Appellants’ first
three issues dealing with bad faith liability.
Standard of Review
[¶26.] “We review a circuit court’s entry of summary judgment under the de
novo standard of review.” Zochert v. Protective Life Ins. Co., 2019 S.D. 84, ¶ 18,
921
N.W.2d 479, 486 (quoting Harvieux v. Progressive N. Ins. Co.,
2018 S.D. 52, ¶ 9,
915
N.W.2d 697, 700). We also review “a circuit court’s decision to grant or deny a
5. In her docketing statement, Johnson identified a third issue, challenging the
circuit court’s decision to exclude evidence that the Appellants paid over $1.2
million in attorney fees defending Johnson’s claims. However, Johnson did
not develop the argument in her brief, and we deem the issue abandoned.
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motion for judgment as a matter of law . . . de novo . . . .” Magner v. Brinkman,
2016 S.D. 50, ¶ 13,
883 N.W.2d 74, 81. “When conducting a de novo review, ‘we give
no deference to the circuit court’s decision.’” Zochert,
2018 S.D. 84, ¶ 18,
921
N.W.2d at 486 (quoting Oxton v. Rudland,
2017 S.D. 35, ¶ 12,
897 N.W.2d 356, 360).
[¶27.] Our standard of review for evidentiary rulings “requires a two-step
process[:] first, to determine whether the trial court abused its discretion in making
an evidentiary ruling; and second, whether this error was a prejudicial error that ‘in
all probability’ affected the jury’s conclusion.” Supreme Pork, Inc. v. Master Blaster,
Inc.,
2009 S.D. 20, ¶ 59,
764 N.W.2d 474, 491. “An abuse of discretion is a
fundamental error of judgment, a choice outside the range of permissible choices, a
decision, which, on full consideration, is arbitrary or unreasonable.” Andrews v.
Ridco, Inc.,
2015 S.D. 15, ¶ 14,
863 N.W.2d 540, 546 (quoting In re Jarman,
2015
S.D. 8, ¶ 19,
860 N.W.2d 1, 9).
[¶28.] “A trial court has discretion in the wording and arrangement of its jury
instructions, and therefore we generally review a trial court’s decision to grant or
deny a particular instruction under the abuse of discretion standard.” Bertelsen v.
Allstate Ins. Co. (Bertelsen II),
2011 S.D. 13, ¶ 26,
796 N.W.2d 685, 695 (quoting
Wangsness v. Builders Cashway, Inc.,
2010 S.D. 14, ¶ 10,
779 N.W.2d 136, 140).
“However, no court has discretion to give incorrect, misleading, conflicting, or
confusing instructions . . . .”
Id. (quoting Wangsness,
2010 S.D. 14, ¶ 10,
779
N.W.2d at 140). We review the circuit court’s denial of a motion for new trial under
the abuse of discretion standard. Center of Life Church v. Nelson,
2018 S.D. 42, ¶
31 n.3,
913 N.W.2d 105, 113 n.3.
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Analysis
Bad Faith in Workers’ Compensation Cases
[¶29.] Traditionally, bad faith claims against insurers have arisen in either a
third-party or a first-party context. Third-party bad faith is “based on principles of
negligence and arises when an insurer wrongfully refuses to settle a case brought
against its insured by a third-party.” Hein v. Acuity, 2007 S.D. 40, ¶ 9,
731 N.W.2d
231, 235. First-party bad faith, by contrast, is an intentional tort that most often
occurs when an insurer violates the contract with its insured and “consciously
engages in wrongdoing during its processing or paying of policy benefits . . . .” Id. ¶
10.
[¶30.] We have explained that bad faith in a workers’ compensation context is
unique:
Wrongful conduct toward an employee claimant by the
employer’s insurer in a workers’ compensation case does not fit
the traditional definition of either first- or third-party bad faith.
A bad faith claim related to workers’ compensation is not based
on an insurer’s refusal to settle its own insured’s suit as in third-party cases, but exists when an insurer breaches its duty to deal
in good faith and fairly when processing a workers’
compensation claim. And, unlike first-party bad faith, the
claimant, not the insured employer, brings the action against
the insurer. Nonetheless, it is within the first-party bad faith
context that multiple jurisdictions, including South Dakota,
recognize a bad faith cause of action based on an insurer’s
conduct in a workers’ compensation case.
Id. (citing Champion v. U.S. Fid. & Guar. Co., 399 N.W.2d 320, 324 (S.D. 1987)).
[¶31.] “[W]orkers’ compensation bad faith will not arise whenever an
insurer’s conduct toward a claimant is unreasonable.” Id. ¶ 18. Instead, an
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employee alleging a bad faith denial of workers’ compensation benefits must satisfy
the specific requirements of a two-part test:
(1) There was an absence of a reasonable basis for denial of
policy benefits; and
(2) The insurer knew or recklessly disregarded the lack of a
reasonable basis for denial.
Id. ¶ 14 (quoting Champion, 399 N.W.2d at 324).
[¶32.] The insurer, however, is permitted to “challenge claims which are
fairly debatable” and, thus, “will be found liable only where it has intentionally
denied . . . a claim without a reasonable basis.”
Id. (quoting Champion,
399 N.W.2d
at 324). As we held in Dakota, Minnesota & Eastern Railroad Corp. v. Acuity
(DM&E):
If an insured’s claim is fairly debatable either in fact or law, an
insurer cannot be said to have denied the claim in bad faith.
The fact that the insurer’s position is ultimately found to lack
merit is not sufficient by itself to establish that the insurer had
a reasonable basis to deny the claim. The focus is on the
existence of a debatable issue, not on which party was correct.
2009 S.D. 69, ¶ 20,
771 N.W.2d 623, 630 (quoting 46A C.J.S. Insurance § 1873
(2008)). In evaluating a bad faith claim, “we must look to ‘the facts and the law
available to the insurer at the time it made the decision to deny [benefits].’”
Bertelsen v. Allstate Ins. Co., (Bertelsen III),
2013 S.D. 44, ¶ 17,
833 N.W.2d 545, 554
(quoting DM&E,
2009 S.D. 69, ¶ 19,
771 N.W.2d at 629) (abrogated on other
grounds by Magner,
2016 S.D. 50,
883 N.W.2d 74). 6
6. Where, as here, a circuit court determines some or all of the issues in a case
through pretrial summary judgment proceedings, we will affirm only when
(continued . . .)
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Reasonable Basis for Denial if Law is Fairly Debatable
[¶33.] Before discussing SDCL 62-7-33 and the development of decisional law
surrounding efforts to modify or terminate benefits, we begin by stating a more
fundamental set of rules. The first lies at the heart of our judicial system: Parties
must obey a valid order unless or until it has been vacated, modified, or overturned.
See Merrill v. Altman, 2011 S.D. 94, ¶¶ 21-22,
807 N.W.2d 821, 826 (discussing the
“nullify[ing] . . . effect” if this Court were to recognize a petition “in violation of
previously entered . . . court orders”). So central is this principle to the “orderly . . .
administration of justice” that it applies even when the order is erroneous or infirm.
Maness v. Meyers,
419 U.S. 449, 459,
95 S. Ct. 584, 591,
42 L. Ed. 2d 574 (1975);
United States v. United Mine Workers,
330 U.S. 258, 293,
67 S. Ct. 677, 696,
91 L.
Ed. 884 (1947). It follows as an interior principle that parties may not subvert a
valid order simply by overlooking it. See Osgood v. Osgood,
2004 S.D. 22, ¶ 21,
676
N.W.2d 145, 151 (quoting Storm v. Durr,
2003 S.D. 6, ¶ 17,
657 N.W.2d 34, 38)
(“[C]ourt order[s] are not invitations, requests, or even demands; they are
mandatory.”).
[¶34.] This idea of giving effect to valid orders is the premise underlying our
law of civil contempt. Indeed, the first requirement in an effort to invoke a court’s
civil contempt power is the existence of a valid order. See DeHaven v. Hall,
2008
S.D. 57, ¶ 29,
753 N.W.2d 429, 439 (expired order was no longer a valid order
capable of enforcement through contempt).
________________________
(. . . continued)
there are no genuine issues of material fact and the legal questions have been
correctly decided. DM&E, 2009 S.D. 69, ¶ 14,
771 N.W.2d at 628-29.
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[¶35.] We have not distinguished between judicial orders and valid final
administrative orders on issues of enforceability and preclusive effect. “An
unappealed administrative decision becomes final and should be accorded res
judicata effect.” Jundt v. Fuller, 2007 S.D. 62, ¶ 12,
736 N.W.2d 508, 513. In the
specific context of workers’ compensation, we have recognized the res judicata effect
of a final Department decision. Call v. Benevolent & Protective Order of Elks,
307
N.W.2d 138, 140 (S.D. 1981). 7
[¶36.] Applying these rules here, we agree with the circuit court’s conclusion
that the Appellants’ duty to pay Johnson’s medical benefits was not fairly debatable
because it was stated in a final administrative order. Their decision to terminate
Johnson’s benefits, therefore, lacked a reasonable basis. Under basic principles that
have long animated the rule of law, the Appellants were obligated to comply with
the 2006 DOL Order unless or until the order was altered by the Department to
relieve them of their obligation.
[¶37.] As it was, the 2006 DOL Order resolved the question of Johnson’s
medical benefits, stating unequivocally that Johnson was “entitled . . . to necessary,
suitable, and proper medical expenses causally related to her work-related groin
condition.” The Appellants do not dispute the validity of the order, or its text, or its
7. As further explained in Call, workers’ compensation decisions are not final in
the res judicata sense where, in exceptional cases, the Department maintains
jurisdiction over specific claims. However, even in these instances, the
parties would still need to invoke the authority of the Department to seek a
change in the order.
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finality. 8 Indeed, they complied with it, at least until the point they elected to
disregard it in favor of Dr. Norback’s IME. Any obligation to read the 2006 DOL
Order as authoritative and binding was, in their view, only revealed by our
decisions issued in other cases after their decision to terminate benefits. However,
we cannot accept this argument because it does not align with plain statutory
requirements or the historical development of our decisional law.
[¶38.] As to the former, the unremarkable fact that SDCL 62-7-1 authorized
the Appellants to require Johnson to undergo an IME does not mean they could
condition their compliance with the 2006 DOL Order upon the IME’s results.
Indeed, we cannot envision an interpretation of SDCL 62-7-1 that would support an
employer’s unilateral decision to terminate previously ordered benefits. Though the
text allows an employer to assess an employee’s condition which may, in turn,
impact a claim for benefits, SDCL 62-7-1 does not cede the Department’s authority
to make that determination to the employer:
An employee entitled to receive disability payments shall, if
requested by the employer, submit himself or herself at the
expense of the employer for examination to a duly qualified
medical practitioner or surgeon selected by the employer, at a
time and place reasonably convenient for the employee . . . . The
examination shall be for the purpose of determining the nature,
extent, and probable duration of the injury . . . and for the
purpose of ascertaining the amount of compensation which may
be due the employee from time to time for disability according to
the provisions of this title . . . .
8. Under SDCL 62-7-18, a petition for review is not considered final until it is
“deemed the final decision of the department and subject to appeal.”
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[¶39.] Nor does the additional consideration of SDCL 62-1-1(7) support a
reasonable legal conclusion that a favorable IME could authorize the Appellants to
act on their own to terminate Johnson’s benefits. Subsection (b) of the statute
merely defines a compensable injury as one that “remains a major contributing
cause of the disability, impairment, or need for treatment” when it combines with a
preexisting condition. SDCL 62-1-1(7)(b). Indeed, the only statutory authority to
modify or terminate benefits—either now or in 2010 when the Appellants
terminated Johnson’s medical benefits—is found at SDCL 62-7-33, which provides
in relevant part:
Any payment, including medical payments . . . made or to be
made under this title may be reviewed by the Department of
Labor and Regulation . . . at the written request of the employer
or of the employee and on such review payments may be ended,
diminished, increased, or awarded subject to the maximum or
minimum amounts provided for in this title, if the department
finds that a change in the condition of the employee warrants
such action.
[¶40.] The provenance of our cases identifying this statutory procedure as the
correct method for modifying a final Department order dates back nearly thirty
years before the Appellants’ decision to terminate Johnson’s benefits. In our 1981
decision in Call, we observed that the Department’s final decision regarding
benefits could “be modified only upon a showing of change of condition pursuant to
SDCL 62-7-33.” 307 N.W.2d at 140. Though this statement was not central to the
holding in Call, we unmistakably incorporated it into our decisional law less than a
decade later when we described SDCL 62-7-33 as the means of invoking the
Department’s authority to modify final workers’ compensation orders. See Whitney
v. AGSCO Dakota,
453 N.W.2d 847, 850 (S.D. 1990) (citing Call,
307 N.W.2d 138)
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(“By virtue of SDCL 62-7-33, Department has continuing jurisdiction to adjust any
payment from the original injury based upon a change of condition occurring since
the last award.”). In Larsen v. Sioux Falls School District, three years later, we
again cited the statute as “[a] statutory exception to the finality rule . . . which gives
the Department continuing jurisdiction to adjust payments when there is a physical
change in the employee’s condition from that of the last award.” 509 N.W.2d 703,
707 (S.D. 1993); see also Sopko v. C & R Transfer Co.,
1998 S.D. 8, ¶ 11,
575 N.W.2d
225, 230 (holding that SDCL 62-7-33 is “South Dakota’s statutory exception to the
finality rule”).
[¶41.] Against this historical backdrop, the Appellants’ argument that we
first recognized SDCL 62-7-33 as the exclusive means of modifying a Department
order after their 2010 decision to terminate Johnson’s medical benefits is not
sustainable. As it relates to SDCL 62-7-33, our 2011 decision in Stuckey v. Sturgis
Pizza Ranch simply acknowledged, again, that the statute is the means by which a
party in a workers’ compensation action can seek to modify a previous award of
benefits.
2011 S.D. 1, ¶ 27,
793 N.W.2d 378, 389.
[¶42.] Our subsequent decision in Hayes v. Rosenbaum Signs & Outdoor
Advertising, Inc. directly rejected an employer’s effort to use a compulsory IME to
unilaterally terminate workers’ compensation benefits, but it did so under
previously established legal principles, including SDCL 62-7-33.
2014 S.D. 64, ¶ 29,
834 N.W.2d 878, 886 (citing Kasuske v. Farwell, Ozmun, Kirk & Co.,
2006 S.D. 14, ¶
12,
710 N.W.2d 451, 455). If Hayes was novel in any way, it was because it involved
an employer’s continuing obligation to pay benefits following an order dismissing—
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not granting—a claimant’s request for workers’ compensation benefits. Id. ¶ 3.
However, any imprecision turning on that distinction would have no impact here
because the 2006 DOL Order was a final order to pay benefits.
[¶43.] In an attempt to harbor their position within Hayes’ holding, the
Appellants claim that prior to Hayes, no case had held that SDCL 62-7-33 was the
only way an employer could seek to modify a workers’ compensation order. The
claim is too ambitious, however, for two reasons. First, the Appellants overlook our
decision in Whitney where we held that SDCL 62-7-33 was the means by which the
Department can modify a final award of benefits. 453 N.W.2d at 850. Second,
nothing in the text of SDCL 62-7-33 could support the argument that the statute is
restricted to requests by the employee to modify a final workers’ compensation
order. In fact, the opposite is true. The provisions of the statute expressly
authorize the modification of an order “at the written request of the employer or of
the employee” with the possibility that the workers’ compensation payments “may
be ended, diminished, increased, or awarded . . . .” SDCL 62-7-33 (emphasis added).
[¶44.] Simply put, there was no change in the law occasioned by our decisions
in Stuckey and Hayes. It may well be that the prevailing currents of workers’
compensation practice had, temporarily, discounted our precedent and the text of
SDCL 62-7-33 by viewing the use of an IME as a means of terminating an
employee’s benefits. 9 But that does not make the practice right, or reasonable, or
9. The Appellants suggest that comments by the ALJ, indicating an
unfamiliarity with an employer’s use of SDCL 62-7-33, supports the view of
an unsettled legal landscape. We do not believe these anecdotal observations
should be read as an authoritative statement of the law, particularly given
(continued . . .)
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render the underlying legal premise fairly debatable. See Larsen, 509 N.W.2d at
707-08 (noting that we were “at a loss to explain Department’s former practice” of
treating a “Form 111 agreement” as a non-final award, considering its text and our
prior decisions). Even after a concerted effort to offset any distorting effects from
the passage of time, we cannot conceive of a reasonable basis to justify the
Appellants’ decision to terminate Johnson’s medical benefits.
[¶45.] Therefore, the circuit court correctly determined that Schulte’s advice
unreasonably deviated from existing law and the obligations imposed by the 2006
DOL Order. 10 There are no disputed issues of material fact, and the Appellants
lacked a reasonable basis for terminating Johnson’s medical benefits because their
obligation to pay was not fairly debatable. Under the circumstances, the court
properly determined as a matter of law the first requirement of the bad faith test
was met. See Champion,
399 N.W.2d at 324. However, we must further consider
whether the circuit court incorrectly extended this initial ruling beyond its limit
into the second distinct bad faith element—concerning the Appellants’ knowledge—
________________________
(. . . continued)
the finality of the 2006 DOL Order, our established body of decisional law,
and the clear and unambiguous text of SDCL 62-7-33.
10. On appeal, the Appellants argue that Schulte’s statutory analysis combined
with what they describe as imprecision in the 2006 DOL Order to provide a
reasonable basis for denying coverage. However, during an offer of proof
before the circuit court, Schulte testified that he relied solely on his
interpretation of SDCL 62-1-1(7) and SDCL 62-7-1 without mentioning the
2006 DOL Order or the findings and conclusions upon which it is based.
Under these circumstances, we will not consider the Appellants’ argument
about the breadth of the 2006 DOL Order or any alleged ambiguity in its
provisions. However, the argument is unavailing in any event because it
would, at most, only address a decision to deny a specific disputed claim for
medical treatment, not a decision to terminate all medical benefits.
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through its additional summary judgment ruling, jury instructions, and evidentiary
rulings.
Knowledge of a Lack of Reasonable Basis for Denial
[¶46.] In addition to establishing the absence of a reasonable basis for
denying workers’ compensation benefits, a plaintiff alleging bad faith must also
prove an employer’s and insurer’s “knowledge or reckless disregard of the lack of a
reasonable basis for denial.” See Bertelsen III, 2013 S.D. 44, ¶ 52,
833 N.W.2d at
563 (quoting DM&E,
2009 S.D. 69, ¶ 17,
771 N.W.2d at 629). Even where a court
can determine an obligation to pay was not fairly debatable as a matter of law, we
emphasized in Bertelsen III that the knowledge inquiry is a separate factual
determination for the jury. Id. ¶ 54.
[¶47.] Our effort in Bertelsen III to formulate a list of knowledge
considerations such as “negligence in processing the claim, an inadequate proof of
loss, or an agreement by the insured to delay payment” was illustrative, not
exhaustive. Id. Indeed, long before our decision in Bertelsen III, we recognized that
an insurer’s reliance on the advice of counsel is among the factors that may be
considered when a jury is determining a question of bad faith:
[W]e do not agree that reliance on counsel is the sole decisive
test of good faith in the present action. It is merely one factor to
be considered. An insurer cannot discharge its entire
responsibility to an insured “by simply employing a competent
attorney and abiding by his decision concerning advisability of
settlement.”
Crabb v. Nat’l Indem. Co., 87 S.D. 222, 228,
205 N.W.2d 633, 636 (1973) (internal
citation omitted).
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[¶48.] Here, the circuit court erred when it expanded its decision that the
Appellants lacked a reasonable basis for their denial into the separate issue of their
knowledge. Despite the court’s effort to apply our decision in Bertelsen III, it
overlooked the critical fact that the insurer in that case did not obtain the advice of
counsel concerning its obligation to pay.
[¶49.] In Bertelsen III, we accepted the argument that the Plaintiff’s auto
insurer lacked a reasonable basis for denying benefits following the initial denial by
the Plaintiff’s workers’ compensation insurer. We focused our review of the jury’s
bad faith verdict on the insurer’s knowledge, and framed the corresponding issue as
“whether there was sufficient evidence for the jury to find that [the auto insurer]
delayed payment with knowledge of the absence of a reasonable basis to delay
payment or in reckless disregard of the absence of a reasonable basis to delay
payment.” Bertelsen III, 2013 S.D. 44, ¶ 18,
833 N.W.2d at 555. However, we
observed the insurer made no effort to learn or clarify the extent of its clear
statutory obligation to pay benefits and “could have contacted legal counsel” to
ascertain the controlling law.
Id.,
2013 S.D. 44, ¶ 20,
833 N.W.2d at 555 (quoting
Walz v. Fireman’s Fund Ins. Co.,
1996 S.D. 135, ¶ 13,
556 N.W.2d 68, 72). Under
the circumstances, knowledge of the duty to pay the insured’s claim could be
directly imputed to the insurer which was, therefore, prohibited from arguing that
it “reasonably believed it had no statutory duty to pay upon [the workers’
compensation insurer’s] denial of . . . coverage.”
[¶50.] In this case, however, the Appellants did seek the assistance of
counsel. Though we agree with the circuit court that Schulte’s advice did not
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provide a reasonable basis for denying Johnson’s benefits, it does not automatically
follow that the Appellants knew the degree to which his advice was improvident.
The circuit court’s determination that the absence of a fairly debatable reason for
terminating Johnson’s benefits necessarily meant that the Appellants “understood
[their] legal duties” marks the critical point at which the court incorrectly
transferred its ruling from the first bad faith element to the second. By
reconsidering and granting Johnson’s summary judgment motion to preclude the
Appellants’ advice-of-counsel defense, the court collapsed the two distinct elements
of bad faith into one. There were, to be sure, genuine issues of disputed material
fact regarding the Appellants’ knowledge that should have prevented the circuit
court’s grant of partial summary judgment.
[¶51.] In this regard, the Appellants claimed that they lacked knowledge of
their obligation to continue paying benefits because of Schulte’s advice. They
claimed that they consulted Schulte in a good faith effort to seek assistance because
the assigned claims examiner lacked experience with South Dakota workers’
compensation law. Citing the fact that part of Schulte’s practice focused upon
workers’ compensation defense for employers and insurers, the Appellants
contended that Schulte was not consulted simply as an expedient to immediately
terminate Johnson’s medical benefits, but instead to provide legal advice on the
extent of their ongoing obligation.
[¶52.] Whether the jury would have accepted the Appellants’ argument that
they lacked knowledge of a reasonable basis for terminating Johnson’s benefits is a
separate inquiry, but one the jury was not allowed to meaningfully undertake. The
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circuit court excluded the specific evidence of Schulte’s advice and foreclosed the
jury’s consideration of the Appellants’ knowledge with the formulation of its jury
instructions. Absent this testimony, the jury could not properly determine whether
the Appellants knew they had no reasonable basis or had acted with reckless
disregard to terminate Johnson’s medical benefits.
[¶53.] Based upon its summary judgment ruling on the Appellants’ advice-of-
counsel defense, the circuit court’s jury instructions had a profound impact on the
bad faith verdict for Johnson. For example, Instruction 25 detailed an employer’s
liability for an employee’s work-related injury and the legal process an employer
must follow to modify or terminate a claimant’s benefits through the Department
before concluding, “You are instructed that the [Appellants] may not argue, and you
may not conclude that the [Appellants] misunderstood these legal duties.” In
addition to holding the Appellants to the same standard as an experienced attorney,
Instruction 25 ended the jury’s inquiry into the Appellants’ knowledge concerning
the absence of a reasonable basis to terminate Johnson’s benefits.
[¶54.] Further, Instruction 27 expressly advised the jury that it could not
consider Schulte’s advice “when determining whether [the Appellants] knew there
was no reasonable basis . . .” for denying benefits. The circuit court allowed limited
use of only the bare fact that Schulte advised the Appellants to obtain an IME, but
this evidence was incomplete and of little utility if the purported significance of the
IME and its context are excluded. The court could have instructed the jury that
evidence relating to Schulte’s advice could be used only for a limited purpose, i.e., it
could not be used to consider whether a reasonable basis existed to terminate
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Johnson’s medical benefits, but the jury could consider it solely to determine the
Appellants’ knowledge. Evidence of Schulte’s advice was surely relevant to this
determination, and it should not have been excluded.
[¶55.] The circuit court abused its discretion in excluding this evidence as it
related to the question of the Appellants’ knowledge. Likewise, the circuit court
abused its discretion by giving the jury instructions that effectively directed a
verdict in favor of Johnson on the question whether the Appellants knew of or
recklessly disregarded the lack of a reasonable basis for denial of the medical
benefits. We believe these errors impacted the outcome of the case and require a
retrial on the Appellants’ liability for bad faith.
[¶56.] Additionally, the details of Schulte’s advice were relevant to the
question of punitive damages. 11 A circuit court may allow a jury to consider a
punitive damages award only after a finding of “willful, wanton or malicious
conduct on the part of the party claimed against.” SDCL 21-1-4.1. Instruction 36
allowed jurors to consider, as a factor in determining the amount of punitive
damages, “[w]hether the harm was the result of intentional malice, trickery or
deceit, or mere accident.” Schulte, whom the circuit court found to be credible,
emphatically denied any effort to act maliciously. However, through the court’s
evidentiary rulings and jury instructions, the jury was unable to assess the strength
of Schulte’s explanation for his advice in its determination whether to award
punitive damages or the amount.
11. The issue of punitive damages was not bifurcated from the liability portion of
the trial, and we are not suggesting bifurcation was required, particularly
given the fact that the parties did not request it.
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Conclusion
[¶57.] The circuit court correctly determined that the Appellants lacked a
reasonable basis for terminating Johnson’s medical benefits because her claim to
continued benefits was not fairly debatable. However, the court’s subsequent
decision to extend its fairly debatable ruling into a broader prohibition of any
argument or evidence suggesting that the Appellants knew they lacked a
reasonable basis for terminating Johnson’s benefits was erroneous. The error led to
the exclusion of relevant evidence and incorrect jury instructions that impacted the
jury’s verdict. Under the circumstances, the Appellants were prejudiced. The
judgment for Johnson is reversed, and the case is remanded to the circuit court for
retrial.
[¶58.] GILBERTSON, Chief Justice, and KERN and JENSEN, Justices, and
MEANS, Circuit Court Judge, concur.
[¶59.] MEANS, Circuit Court Judge, sitting for vacancy.
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