No. 83-525 

IN THE SUPREMF, COURT OF THE STATE OF MONTANA 

1984 

JAMES G. BIRKENBUEL, 

Plaintiff and Appellant, 

MONTANA STATE COMPENSATION INSURANCE 

FUND, 

Defendant and Respondent. 

APPEAL FROM: District Court of the Eighth Judicial District, 

In and for the County of Cascade, 

The Honorable John M. McCarvel, Judge presiding. 

COUNSEL OF ,%CORD: 

For Appellant: 

Hoyt & Trieweiler; Kurt M. Jackson, Great Falls, 

Montana 

For Respondent : 

Barbara L. Bozman-Moss, Agency Legal Services Bureau, 

Helena, Montana 

Submitted on Briefs: May 3, 1984 

Decided: August 28, 1984 

AUr; d 1984 Filed: 

-- -- 

Clerk 
Mr. Chief Justice Frank I. Haswell delivered the Opinion of 

the Court. 

James G. Birkenbuel appeals the decision of the Cascade 

County District Court granting defendant's motion for summary 

judgment. Birkenbuel's tort action against the State Compensation Insurance Fund (State Fund.) was dismissed pursuant to 

the exclusive remedy clause of the Workers' Compensation Act, 

section 39-71-411, MCA. We reverse. 

Plaintiff Birkenbuel suffered a compensable injury in 

1980. Birkenbuel's employer was insured by the State Fund in 

accordance with compensation Plan 111. Section 39-71-2301 et 

seq., MCA. The State Fund paid Birkenbuel bi-weekly temporary total disability payments during his healing period. 

In early 1983, the State Fund determined that 

Birkenbuel had achieved maximum healing. Settlement negotiations were initiated with the plaintiff. Birkenbuel retained 

John Hoyt to represent him in these proceedings. 

Initially the State Fund proposed that $6,000 be paid 

Birkenbuel in periodic payments. This figure was based on a 

20 percent impairment rating of the knee. Birkenbuel responded through his attorney with a $35,000 lump sum proposal. This offer was designed to allow the claimant to start 

his own business. 

The $35,000 offer was deemed excessive by the State 

Fund in light of the impairment rating and other considerations. A counteroffer of $17,325 was made to Birkenbuel. 

This counteroffer was reduced to writing, and a formal 

petition for full and final compromise settlement was submitted to Birkenbuel for his signature on May 19, 1983. 

Birkenbuel's attorney initially rejected the counteroffer, 

negotiating for a full and final settlement that could be 
reopened withj-n four years. After no success, the attorney 

for the claimant waived his fees, and drafted a cover letter 

to the State Fund accepting the terms of the petition. 

Accompanied by this letter and the petition, Birkenbuel 

traveled to the Helena State Fund office to accept the 

$17,325 offer. 

The petition was not honored by the State Fund. In 

rejecting its previous offer, the State Fund took exception 

to the strongly worded cover letter drafted by claimant's 

counsel. 

Suit was filed June 7, 1983, alleging tortious acts on 

the part of the State Fund. Specifically, Birkenbuel alleged 

the State Fund breached both a common-law and a statutory 

duty under the Unfair Trade Practices Act, section 33-18-101 

et seq., MCA, to negotiate in good faith. Alternately, the 

plaintiff alleged the State Fund acted fraudulently and 

intentionally inflicted emotional distress. Actual and 

punitive damages were requested. 

The State Fund filed a motion to dismiss arguing the 

District Court action was barred by the exclusive remedy 

provision of the Workers' Compensation Act. It was also 

argued that the State Fund was a state agency and punitive 

damages were not recoverable. 

The motion to dismiss was converted to a motion for 

summary judgment by the District Court. Plaintiff took the 

depositions of Robert F. Owens, the claims examiner for the 

State Fund who handled plaintiff's workers' compensation 

claim, Peter J. Strizich, supervisor of the State Fund claims 

department, and A. G. Pillen, a former bureau chief of the 

State Fund. 
The court granted summary judgment for the State Fund 

and dismissed Birkenbuel's complaint. Birkenbuel appeals 

this judgment raising the following issues: 

(1) Is a tort action against the State Fund for bad 

faith in settling a. cornpensable claim barred by the exclusive 

remedy provision of the Workers' Compensation Act? 

(2) Are punitive damages recoverable against the State 

Fund? 

In essence, the exclusive remedy clause of the Workers' 

Compensation Act, section 39-71-411, MCA, immunizes the 

employer from common-law actions for work-related injuries. 

Elimination of common-law actions was the quid pro quo surrendered by workers in return for the benefits of a statutory 

system of more certain compensation for work-related injuries 

regardless of fault. 

Certain exceptions have been recognized to the exclusive remedy clause and a related provision in the Act, section 39-71-2905, MCA. The latter section provides that the 

penalties and assessments of Chapter 71 are the only assessments that can be made against an insurer for compensation 

disputes. 

The District Court failed to acknowledge two prior 

decisions of this Court construing exclusive remedy exceptions. In Hayes v. Aetna Fire Underwriters (1980), 187 Mont. 

1-48, 609 P.2d 257, we held an injured worker could a.ssert a 

separate claim in District Court alleging a private insurer 

committed intentional torts and acted in bad faith in adjusting and processing a compensation claim. The defendant in 

Hayes was a Plan I1 private insurer of the plaintiff's employer. Section 39-71-2201 et seq., MCA. In Vigue v. Evans 

Products Co. (1980), 187 Mont. 1, 608 P.2d 488, we applied a 
similar ruling to a Plan I self-insurer. Section 39-71-2101 

et seq., MCA. The current case presents the third 

situation--a tort action against the State Fund, the Plan I11 

insurer. 

The reasoning of our decisions in Hayes and Vigue is 

equally applicable to the present case. The alleged tortious 

conduct did not arise within the employment relationship of 

Birkenbuel and his employer. The emotional injury described 

in the complaint occurred subsequent in time to his employment and is not work-related. 

Our statutory system of workers' compensation does not 

provide workers with benefits for injury sustained from 

settlement negotiations with an insurance carrier. As such, 

the exclusivity provisj-ons of the Workers ' Compensation Act 

do not bar independent actions for tortious conduct arising 

from such interactions. Any contrary interpretation would 

result in the inequity whereby workers surrendered more 

protection than they received when our statutory system of 

compensation was adopted. 

Birkenbuel pled a breach of common-law and statutory 

duties of good faith in insurance settlement negotiations. 

The State Fund argued that it is not a private insurance 

company and not subject to the provisions of the insurance 

code. 

Bad faith in claim settlement is an actionable tort 

independent of the insurance code; we need not reach the 

question of the applicability of the code to the State Fund. 

In Lipinski v. Title Ins. Co. (Mont. 1982), 655 P.2d 970, 

977, 39 St.Rep. 2283, 2291, we held ". . . insurance companies have a duty to act in good faith with their insureds, 
and that this duty exists independent of the insurance 

contract and independent of the statute." 

The State Fund may not be a private insurance company 

that actively pursues the sale of insurance policies. However, it is a publicly administered body that indemnifies 

employers for work-related injuries. Insurance contracts are 

executed with employers who choose Plan I11 coverage. These 

employers pay premiums for the coverage and at the end of th.e 

year the State Fund returns excess funds to its insureds in 

the form of dividends. The question of whether or not the 

State Fund is technically an insurance company presents a 

needless exercise in semantics. For all practical purposes 

the State Fund is involved in the business of insurance. 

What this Court said in Hayes is equally true today: 

". . . No one should be allowed intentionally and tortiously to cut off a 

claimant unilaterally for whatever purpose they choose and then hide behind 

workers' compensation exclusivity in 

assurance that the only retribution will 

come in the form of a compensation penalty paid for by society. 

". . . any party involved in the business 

of insurance knows its rights and responsibilities as well as its obligation to 

deal in good faith and with fairness 

toward those who are entitled to protection of the Workers' Compensation Act." 

609 P.2d at 262. 

The State Fund has sought to sidestep the precedent of 

Vigue and Hayes by asserting in its brief that the decisions 

were ba.sed on the finding tha.t the defendant insurers 

violated the policy and the spirit of the insurance code, 

". . . in particular section 33-18-201, MCA." 

The insurance code played no part in our decision in 

Hayes or Vigue. Section 33-18-201, MCA, which relates to 

unfair trade practices, is neither cited nor referred to in 
either Hayes or Vigue. As discussed above, both cases were 

decided upon our interpretation of the exclusivity provisions 

of the Workers1 Compensation Act, sections 39-71-411 and 

39-71-2905, MCA. 

The District Court cited the decisions of Palmer v. 

R.L. Kautz & Co. (1983), 141 Cal.App.3d 155, 190 Cal.Rptr. 

139, and Gonzales v. United States Fidelity & Guar. (1983), 

99 N.M. 432, 659 P.2d 318, in support of its conclusion of 

law. These cases represent the law of two jurisdictions that 

have adopted an interpretation of their workers1 compensation 

legislation different than that we adopted in Hayes and 

Vigue . 

In California a worker can bring an ind-ependent action 

for intentional tortious conduct by an insurer provided the 

conduct is sufficiently outrageous and reprehensible. See 

Unruh v. Truck Insurance Exchange (1972) , 7 Cal. 3d 616, 102 

Cal.Rptr. 815, 498 P.2d 1063 (action a.llowed when insurance 

agent established ostensible romantic relationship with 

claimant, took her to Disneyland, secretly filmed her reacting to his manipulations of rope bridges and then showed the 

film to a compensation court producing further emotional 

trauma to claimant). Unruh was a landmark California decision which we cited with general approval in both Hayes and 

Vigue . 

The California Supreme Court in Unruh and subsequent 

appellate court decisions in that state have focused on the 

level of reprehensibility present. Mere negligent delay and 

rejection of claims that an insurance company considers 

exaggerated are not actionable. Palmer, supra. California 

decisions interpreting the California Labor Code's 

exclusivity provision have not been based on whether the 
injury arose within the employment relationship. For instance in Fremont Indem. Co. v. Superior Court, Etc. (1982), 

133 Cal.App.3d 879, 184 Cal.Rptr. 184, the appellate court 

specifically stated that the distinction of a separate injury 

not arising in the course of employment does not remove the 

exclusive jurisdiction of the California Workers' Compensation Appeals Board. In Hayes and Vigue, we adopted the 

opposite position. For this reason California decisions on 

remedy exclusivity are of limited assistance to our jurisdiction. Apart from the broad proposition set forth in 1972 by 

Unruh that intentional torts are actionable, our case law has 

independently evolved. 

The New Mexico decision of Gonzales is more readily 

distinguished. Gonzales is a recitation of the general rule 

followed by New Mexico that if the Workers' Compensation Act 

provides a remedy for t.he alleged wrong, the remedy is exclusive. In both Gonzales and the earlier New Mexico decision 

of Dickson v. Mountain States Mut. Cas. Co. (1982), 98 N.M. 

479, 650 P.2d 1, independent tort actions were held. to be 

barred. In deciding Hayes and Vigue, we rejected the reasoning of jurisdictions like New Mexico that have generally held 

independent actions barred by their workers' compensation 

acts. See for example Hixon v. State Compensation Fund 

(1977), 115 Ariz. 392, 565 P.2d 898; Massey v. Armco Steel 

Co. (Tex.Civ.App. 1982), 635 S.W.2d 596; see generally 

Annot., 8 A.L.R.4th 902 (1981). 

We reaffirm our approval of those decisions upholding 

the right of a worker to assert a separate claim for tortious 

conduct occurring outside the employment relationship and 

during the processing and settlement of a workers' compensation claim. Stafford v. Westchester Fire Ins. Co. of N.Y., 
Inc. (Alaska 1974), 526 P.2d 37; Gibson v. Nat. Ben Franklin 

Ins. Co. (Me. 1978), 387 A.2d 220; Hollman v. Liberty Mut. 

Ins. Co. (8th Cir. 1983), 712 F.2d 1259 (interpreting South 

Dakota law) ; Coleman v. A-merican Universal Ins. Co. (1970), 

86 Wis.2d 615, 273 PJ.W.2d 220; Martin v. Travelers Insurance 

Company (1st Cir. 1974), 497 F.2d 329. 

Our decisions in Hayes, Vigue and Lipinski apply just 

as vigorously to the State Fund as they do Plan I self-insurers and Plan I1 private insurers. 

Holding that Birkenbuel is entitled to pursue his cause 

of actions based in tort we must decide whether punitive 

damages are recoverable against the State Fund. 

The State Compensation Insurance Fund is a separate 

bureau within the Division of Workers' Compensation of the 

Department of Labor and Industry. The lower court concluded 

as a matter of law: "The State Fund (Plan 111) is a state 

agency subject to the Montana Torts Claims Act and punitive 

damages are not recoverable." Our decision in White v. State 

(Mont. 1983), 661 P.2d 1272, 40 St.Rep. 507, was cited in 

support of the trial court's decision. 

In White this Court upheld th.e constitutionality of 

section 2-9-105, MCA, which immunizes the State from punitive 

damage assessments. We noted in White that the primary 

purpose of assessing punitive damages is to deter future 

unlawful conduct of the tort-feasor. The problem with assessing punitive damages against the government is that the 

deterrent effect is very remote; blameless taxpayers are the 

ones punished while the blameworthy agency is often not 

motivated to change its actions in conformance. White, 

supra. 
This question applied to the State Fund is a close one. 

The Fund is imbued with many of the administrative indicia of 

a state agency. However, it is not directly funded by taxpayers. The State Fund is supported by premiums collected 

from its subscribing insureds. 

A substantial punitive award, such as the $250,000 

requested in the present case, would ultimately be charged to 

these subscribing employers. Annual dividends woul-d be 

proportionately reduced to compensate for the punitive 

assessment. 

Consequently, the purpose of assessing punitive damages 

would not be furthered by a recovery against the State Fund. 

Blameless employers would bear the brunt of the assessment. 

Accordingly, we hold punitive damages are not recoverable 

against the State Fund. 

The summary judgment of the District Court is reversed. 

The case is remanded for further proceedings in accordance 

with this opinion. 

3il&,WW& 

Chief Ju'stice 

We concur: 

yL 42- 

Justices 
Mr. Justice Frank B. Morrison, Jr. specially concurs as 

follows: 

I concur in the result. However, with respect to the 

punitive damage issue I cannot subscribe to the rationa.le. 

In First Bank Billings v. Transamerica Insurance Co. 

(Mont. 1984), 679 P.2d 1217, 41 St.Rep. 573, we held that it 

did not violate public policy to provide insurance coverage 

for punitive damages although such insurance coverage removed 

the punitive burd.en from defendant and had the potential for 

shifting it to the insurance carrier and its policyholders. 

Furthermore, the argument made by the majority could as well 

be applied to any insurance carrier against whom an award of 

punitive dama.ges has been made. In all cases the insurance 

carrier would pass the loss back to its policyholders. This 

ha.s never provided the courts with reason to insulate such 

carriers from liability for punitive assessments. 

I would simply hold that the State Insurance Fund is 

part of state government and immune from punitive damages 

under the applicable statute. White v. State (Mont. 1983),