Court Opinion

ID: 9410681
Source: CourtListenerOpinion
Date Created: 2023-07-24 05:00:48.672789+00
Date Added: 2024-06-11T17:20:59.351939
License: Public Domain

In the

       United States Court of Appeals
                  For the Seventh Circuit
                      ____________________
No. 22-2210
MEGAN DANIELS, et al.,
                                                 Plaintiffs-Appellants,
                                  v.

UNITED HEALTHCARE SERVICES, INC. and
UNITED BEHAVIORAL HEALTH,
                                                Defendants-Appellees.
                      ____________________

          Appeal from the United States District Court for the
                    Western District of Wisconsin.
           No. 3:19-cv-01038 — William M. Conley, Judge.
                      ____________________

       ARGUED FEBRUARY 22, 2023 — DECIDED JULY 17, 2023
                   ____________________

    Before HAMILTON, BRENNAN, and JACKSON-AKIWUMI, Cir-
cuit Judges.
  BRENNAN, Circuit Judge. Plaintiﬀs Megan, Chris, and Betsy
Daniels allege United HealthCare 1 wrongly denied insurance

   1  The Daniels sued both United HealthCare and United Behavioral
Health. United HealthCare is the named entity on the Summary Plan De-
scription, but correspondence regarding Megan’s mental health coverage
2                                                           No. 22-2210

coverage for mental health services. The district court dis-
missed each of plaintiﬀs’ claims, including for breach of con-
tract, bad faith, punitive damages, and statutory interest for
late payments. Because Wisconsin law does not permit the
Daniels to bring these claims against United HealthCare, we
aﬃrm the judgment of the district court.
                            I. Background
    Plaintiﬀs Chris and Betsy Daniels work for South Milwau-
kee School District. Through the School District, the Daniels
contracted for a health insurance plan entitled “School Dis-
trict of South Milwaukee Choice Plus Plan 1” (“the Plan”).2
The School District, per the Summary Plan Description, “self-
funds” the Plan. This means the School District, not an outside
insurer, bears sole ﬁnancial responsibility for payment of Plan
beneﬁts. The School District is also the Plan administrator and
named ﬁduciary. For help with day-to-day Plan operation,
the School District contracted with United HealthCare to
serve as the Plan’s third-party claims administrator. In that
role, United HealthCare has responsibility and authority to
deny or approve claims but is not ﬁnancially liable for paying
beneﬁts—that obligation remains with the School District.
United HealthCare thus has no contractual relationship with
Plan participants. We understand this arrangement to be com-
mon in the industry.

came from United Behavioral Health. Because any distinction between the
two entities is immaterial to our analysis, we refer to the defendants col-
lectively as United HealthCare.
    2The Daniels’s plan is a governmental plan, so the Employee Retire-
ment Income Security Act does not control. 29 U.S.C. § 1003(b)(1).
No. 22-2210                                                  3

    The contours of the Daniels’s health insurance coverage
took on new importance in 2017, when Megan Daniels—Chris
and Betsy’s daughter covered under her parents’ policy—suf-
fered a mental health emergency. Chris and Betsy sought in-
patient mental health treatment for Megan and enrolled her
in the Nashotah Program at Rogers Memorial Hospital. As
claims administrator, United HealthCare approved Megan
for a total of 24 days of inpatient treatment. It then informed
the Daniels that it would not approve additional days. Both
the Daniels and Megan’s doctors disagreed with this coverage
decision, so they appealed internally within United
HealthCare. In the meantime, the Daniels elected to continue
Megan’s inpatient treatment. The appeals proved fruitless,
and the Daniels received a ﬁnal denial of coverage notice in
May 2017. All in, United HealthCare approved payment for
$30,755.33 of Megan’s treatment which, according to the Dan-
iels, left most of Megan’s treatment expenses uncovered.
   The Daniels turned next to Wisconsin state court, ﬁling a
complaint against United HealthCare for breach of contract,
bad faith, punitive damages, and interest under Wisconsin’s
prompt pay statute. At the time of that ﬁling, it appears the
Daniels were unaware of United HealthCare’s comparatively
limited role as a third-party claims administrator.
    United HealthCare removed the case to federal court and,
in January 2020, ﬁled a motion to dismiss. Alongside that mo-
tion, United HealthCare submitted the Summary Plan De-
scription for the Daniels’s insurance policy. That document
describes United HealthCare’s role as a third-party claims ad-
ministrator—not a Plan insurer. The Daniels amended their
complaint in February 2020 and added United Behavioral
Health to the suit. But, despite the Summary Plan Description
4                                                     No. 22-2210

conﬁrming that the School District—not United HealthCare—
is the Plan guarantor, administrator, and ﬁduciary, the Dan-
iels elected not to join the School District as a defendant.
    United HealthCare ﬁled a second motion to dismiss in
March 2020, which the district court granted. The court could
not identify a contractual relationship between the Daniels
and United HealthCare, so it disposed of the Daniels’s breach
of contract claims. The court then examined whether Wiscon-
sin law permits the Daniels to sue United HealthCare for tor-
tious bad faith absent contractual privity. Answering in the
negative, the court dismissed the Daniels’s bad faith claims.
That left just the Daniels’s claims for statutory interest and
punitive damages. The court dismissed both, ruling that Wis-
consin’s prompt pay statute applies only to insurers, and not-
ing that punitive damages are a form of relief, not a
standalone cause of action. The district court also elected to
dismiss without providing plaintiﬀs another chance to amend
because the Daniels were aware of all the relevant issues when
they ﬁrst amended their complaint. The Daniels appeal.
    We review de novo a district court’s dismissal of a com-
plaint under Rule 12(b)(6). KAP Holdings, LLC v. Mar-Cone Ap-
pliance Parts Co., 55 F.4th 517, 523 (7th Cir. 2022) (citation omit-
ted). At all times, we “accept[] as true all well-pleaded facts
and draw[] reasonable inferences in [the Daniels’s] favor.”
Peterson v. Wexford Health Sources, Inc., 986 F.3d 746, 751 (7th
Cir. 2021) (quoting United Cent. Bank v. Davenport Est. LLC, 815
F.3d 315, 318 (7th Cir. 2016)). Because we sit in diversity for
this case, we apply Wisconsin law and make our best predic-
tion of how the Wisconsin Supreme Court would resolve the
issues presented. See BMD Contractors, Inc. v. Fidelity & Deposit
Co. of Md., 679 F.3d 643, 648 (7th Cir. 2012) (citation omitted);
No. 22-2210                                                       5

see also Thirteen Inv. Co., v. Foremost Ins. Co. Grand Rapids Mich.,
67 F.4th 389, 392 (7th Cir. 2023) (“When faced with unresolved
issues of state law, we must predict how the relevant highest
state court would rule.”) (citation omitted).
    The Daniels concede on appeal they have “no direct con-
tractual relationship with United Healthcare” and agree their
breach of contract claims cannot proceed. So, we examine
only the Daniels’s claims for bad faith, statutory interest, and
punitive damages, on which they seek reversal. We address
bad faith ﬁrst and the Daniels’s other claims after that.
                                 II
    The tort of bad faith in Wisconsin has developed through
case law, with liability rules varying based on the type of in-
surance claim at issue and the parties involved. Roehl Transp.
Inc. v. Liberty Mut. Ins. Co., 784 N.W.2d 542, 551 (Wis. 2010);
see also Wis. JI-CIVIL 2760 (2003); Wis. JI-CIVIL 2761 (2011).
The tort generally addresses unfair handling of insurance
claims. Roehl Transport, Inc., 784 N.W.2d at 552. The central
question here is whether, under Wisconsin law, a plaintiﬀ
may sue a defendant for bad faith absent contractual privity.
If not, we must aﬃrm dismissal of the bad faith claims.
    The Daniels argue the tort of bad faith does not depend on
contractual privity and contend the district court erred in
reaching that conclusion. For the Daniels, “any party with re-
sponsibility for determining eligibility for ‘insurance type’
beneﬁts” can be held liable for acting in bad faith. As support,
the Daniels look to two areas of Wisconsin law. First, they rely
on Lueck v. Aetna Life Insurance Co., 342 N.W.2d 699 (Wis.
1984), for the rule that bad faith liability extends to agents of
an insurer, like United HealthCare, that are involved in
6                                                  No. 22-2210

administering beneﬁts. Second, they direct us to Wisconsin
Supreme Court decisions on bad faith in the worker’s com-
pensation context. Those cases, they assert, similarly show
that the tort of bad faith applies to third parties who adminis-
ter beneﬁts, even if they lack contractual privity with the
plaintiﬀ.
    United HealthCare disagrees with the Daniels’s interpre-
tation of precedent and seeks aﬃrmance. Per United
HealthCare, “[i]t is settled Wisconsin law that contractual
privity is required to assert a bad faith claim.” And Wisconsin
law, says United HealthCare, makes no exception “for claims
against a third-party administrator like [itself].”
   We begin with the Wisconsin Supreme Court’s decision in
Lueck, situating it within the historical development of Wis-
consin bad faith law and analyzing its impact. We then review
bad faith claims in the worker’s compensation context.
                               A
   Our ﬁrst task is to determine whether Lueck authorizes the
Daniels’s bad faith claims against United HealthCare. Under-
standing Lueck’s scope, and its relationship to other Wisconsin
bad faith case law, requires some background.
    Before Lueck, the Wisconsin Supreme Court had expressly
authorized three main types of bad faith claims: “third-party”
claims, “ﬁrst-party” claims, and worker’s compensation
claims. See Roehl Transport, Inc., 784 N.W.2d at 552. Third-
party bad faith claims developed ﬁrst, id., and involve an in-
sured suing an insurer for how the insurer managed a claim
ﬁled by someone not a party to the insurance policy. See Hilker
v. W. Auto. Ins. Co. of Fort Scott, Kan., 235 N.W. 413, 414–15
(Wis. 1931). A simple example is a car accident where a victim
No. 22-2210                                                     7

seeks recovery from the tortfeasor and his insurer. The victim
oﬀers to settle the claim at or near the policy limit, but the in-
surance company refuses and takes the case to trial. There, the
insurance company’s interests have diverged somewhat from
the insured’s. The insurer’s exposure is limited to the policy
maximum, so it has comparatively little to lose by declining
settlement and trying to win at trial. But the insured is respon-
sible for any excess damages resulting from a large jury ver-
dict. So, if the jury returns an award in excess of the policy
limit, the insured may seek recovery from his insurer through
a third-party bad faith claim. See Roehl Transport, Inc., 784
N.W.2d at 553.
    First-party bad faith claims, which the Wisconsin Supreme
Court ﬁrst authorized in Anderson v. Continental Insurance Co.,
271 N.W.2d 368, 374 (Wis. 1978), are more straightforward.
They involve an insured suing its own insurer for its bad faith
handling or denial of the insured’s own claims. Id.; Roehl
Transport, Inc., 784 N.W.2d at 551 n.15. The ﬁnal type, bad
faith worker’s compensation claims, arise within a statutory
system designed to speedily compensate injured employees.
Roehl Transport, Inc., 784 N.W.2d at 559. We save discussion of
worker’s compensation claims for later and start with third-
and ﬁrst-party claims.
    Early Wisconsin Supreme Court decisions recognizing
third- and ﬁrst-party bad faith claims grounded those claims
in the contractual relationship between the insured and in-
surer. See, e.g., Hilker, 235 N.W. at 414–15; Anderson, 271
N.W.2d at 374–76. For instance, when originally authorizing
ﬁrst-party bad faith claims in Anderson, the court explained
tortious bad faith “results from a breach of duty imposed as a
consequence of the relationship established by contract,” id.
8                                                    No. 22-2210

at 374, and arises out of the implied contractual duty of good
faith and fair dealing. See id. at 375–76. So, contractual privity
inhered to the ﬁrst types of tortious bad faith claims in Wis-
consin.
    The Wisconsin Supreme Court’s decision in Lueck v. Aetna
Life Insurance Co., followed shortly after Anderson and fea-
tured facts comparable to the Daniels’s suit. 342 N.W.2d at
700–01. Plaintiﬀ Lueck was a unionized employee who
received health and disability insurance under a labor agree-
ment with his employer. Id. Like the Daniels, Lueck’s
employer was responsible for paying plan beneﬁts but out-
sourced plan administration to a third party, Aetna Life and
Casualty Company. Id. at 701. After suﬀering an injury, Lueck
sought disability beneﬁts. But “for unexplained reasons” pay-
ment of Lueck’s beneﬁts was repeatedly interrupted. Id.
Lueck sued his employer and Aetna for bad faith, claiming
they “failed to pay disability beneﬁts which they had no rea-
sonable basis for denying.” Id.
    Lueck presented two related questions. First, because
Lueck obtained his insurance through a labor agreement, the
court had to determine whether federal labor law preempted
his state law tort action. Second, it was unclear if Lueck could
sue Aetna for bad faith, given that Aetna was a non-insurer
plan administrator. Aetna argued that “as the administra-
tor … it had no ﬁduciary duty to Lueck to deal in good faith
on his disability claim and, therefore, could not be sued for
bad faith.” Id. at 701. Federal preemption consumed much of
the Wisconsin Supreme Court’s attention, with the court hold-
ing that federal law did not preempt Lueck’s tort action. Id. at
703–07. The court then turned to Aetna’s argument that it
No. 22-2210                                                     9

could not be held liable for bad faith because of its limited role
as an administrator. On that issue, the court determined:
       By virtue of the contract between [Lueck’s em-
       ployer] and Aetna, Aetna became [Lueck’s em-
       ployer’s] agent for purposes of administering
       [the] insurance contract with Lueck. … As such,
       Aetna stands in the same relationship with
       Lueck as [his employer does] and, therefore, has
       the same ﬁduciary duty as the primary insurer.
Id. at 708. The court held that an “administrator still may be
held liable if, in the administration of the claim, the adminis-
trator independently engages in conduct actionable under the
tort of bad faith.” Id. In so deciding, the Wisconsin Supreme
Court appeared to weaken the need for a direct contractual
relationship in a bad faith claim, at least in comparison to An-
derson. Per Lueck, an insurer’s contractual duty of good faith
extended to its agents involved in plan administration, mean-
ing Aetna—a non-insurer plan administrator—could be liable
for bad faith. Id. But events after Lueck undercut its impact on
this case.
    The Supreme Court of the United States granted certiorari
in Lueck, reversed the Wisconsin Supreme Court’s preemption
analysis, and ordered Lueck’s action dismissed. Allis-
Chalmers Corp. v. Lueck, 471 U.S. 202, 219, 220–21 (1985). A U.S.
Supreme Court reversal often renders a state supreme court
decision obsolete. But while the U.S. Supreme Court rejected
the Wisconsin Supreme Court’s federal law preemption dis-
cussion, it did not consider the question of Aetna’s duties to
Lueck. Indeed, the U.S. Supreme Court noted “the [Wisconsin
Supreme Court] found that Aetna could be liable to Lueck for
bad-faith administration of his disability claim” but stated
10                                                           No. 22-2210

“Aetna has not sought review of that part of the judgment.”
Id. at 208. So, it is not clear if the Wisconsin Supreme Court’s
holding in Lueck on bad faith retains precedential value after
the U.S. Supreme Court’s partial reversal.
    The Daniels argue Lueck controls and authorizes their bad
faith claims against United HealthCare. They contend that
United Healthcare, as the School District’s agent, 3 owes them
the same ﬁduciary duties as the School District. But we view
Lueck’s current precedential value diﬀerently. Though Lueck
addressed a comparable set of facts to this case, its holding
does not reﬂect the current state of Wisconsin law. Even if
Lueck’s relevant holding survived the U.S. Supreme Court’s
reversal, Wisconsin Supreme Court decisions in the decades
before and after Lueck have consistently limited bad faith lia-
bility to parties who are connected through contract or linked
by worker’s compensation statutes. Wisconsin cases after
Lueck fail to mention it, despite featuring detailed reviews and
summaries of Wisconsin bad faith law.
    Before Lueck, the Wisconsin Supreme Court limited bad
faith liability to parties linked through a contractual relation-
ship. Anderson exempliﬁes this rule and merits additional
mention. 271 N.W.2d at 374. There, the Wisconsin Supreme
Court clariﬁed that ﬁrst-party bad faith claims are cognizable
and that insureds may sue their insurer for bad faith handling
of their own claims. Id. In so holding, the court repeatedly em-
phasized the necessity of a contractual relationship for bad
faith liability: “By virtue of the relationship between the

     3 United HealthCare argues the Daniels waived their agency theory of

liability. Because the Daniels’s arguments fail on their merits, we need not
reach the issue of waiver.
No. 22-2210                                                             11

parties created by the contract, a special duty arises, the
breach of which duty is a tort and is unrelated to contract
damages.” Id. Therefore, in its ﬁrst case directly recognizing
the tort of bad faith in the ﬁrst-party context—where litigants
like the Daniels seek recovery for bad faith handling of their
own claim—the Wisconsin Supreme Court anchored the tort
of bad faith within contractual privity.
    Between deciding Anderson and Lueck, the Wisconsin Su-
preme Court also addressed bad faith liability in Kranzush v.
Badger State Mutual Casualty Co., 307 N.W.2d 256, 261 (Wis.
1981). There, a woman was injured when the car in which she
was riding struck a pole. Id. at 257–58. She sued the driver
(who was also her husband) and his insurer. Id. at 258. After
delays in the case, the woman passed away. Her estate then
ﬁled a second suit against her husband’s insurer for refusing,
in bad faith, to settle the claim. Id. Both the state trial court and
appellate court dismissed the complaint, reasoning a third-
party claimant 4 could not pursue a claim of bad faith against
another person’s insurance company. Id. at 258–59. The Wis-
consin Supreme Court aﬃrmed. Id. at 270. “The insured’s
right to be treated fairly (and his recourse to the courts if he is
not) is rooted in the contract of insurance to which he and the
insurer are parties.” Id. at 261. The court in Kranzush also
“brieﬂy review[ed]” the three contexts in which bad faith

    4  We recognize the risk for confusion between cases involving third-
party claimants, such as Kranzush, and those involving third-party bad
faith claims. Third-party claimants have no contractual relationship to the
insurer. In the simplest scenario, a third-party claimant is a tort victim
seeking payment from the tortfeasor’s insurance. By contrast, a third-
party bad faith claim is a claim brought by the insured party against his
own insurer. In that scenario, the insured party complains of how his in-
surer handled a claim brought by a third party.
12                                                    No. 22-2210

claims had been allowed to proceed. Id. at 259. Throughout
that review, the Wisconsin Supreme Court invariably empha-
sized the link between the insurance contract and bad faith.
    The court began by characterizing third-party bad faith
claims. For those claims, “the insurer has an obligation to the
insured to exercise good faith in the settlement of the claim.”
Id. That obligation “arises by virtue of the contractual relation-
ship of the insurer and the insured.” Id. (emphasis added). A
third-party bad faith claim is therefore inextricably tied to the
contractual relationship between the insured and insurer.
Kranzush also describes ﬁrst-party bad faith claims, author-
ized in Anderson, where insureds sued their insurer for bad
faith handling of their own claim. Id. at 259–60. The Wisconsin
Supreme Court tightly coupled those claims to contractual
privity as well: “The heart of the tort recognized in Anderson
is the ﬁduciary relationship between the insurer and the in-
sured and the insurer’s breach of the duty of good faith and
fair dealing implicit in every contract.” Id. at 261. The ﬁnal cat-
egory of bad faith claims reviewed in Kranzush relates to the
worker’s compensation and involves a statutory relationship
we analyze later. Id. at 260.
   As Anderson and Kranzush demonstrate, before Lueck the
Wisconsin Supreme Court’s discussion of ﬁrst- and third-
party bad faith claims limited liability to those parties in a
contractual relationship.
   After Lueck, Wisconsin Supreme Court cases return to re-
quiring contractual privity for bad faith liability. In Danner v.
Auto-Owners Insurance, 629 N.W.2d 159, 162 (Wis. 2001), the
Wisconsin Supreme Court examined the tort of bad faith in a
new context—underinsured motorist coverage. The Danners
sought to collect on their underinsured motorist policy after a
No. 22-2210                                                     13

car accident. Id. at 162, 164. The claim led to litigation, with
the Danners eventually suing their insurer for bad faith. Id. at
166. Auto-Owners argued that underinsured motorist cover-
age should be treated diﬀerently for purpose of bad faith than
other policies. It asserted that, because “the insurer is in an
adversarial relationship with its insured” for purposes of un-
derinsured coverage, it should not be held to a duty of good
faith and fair dealing until liability has been conclusively de-
termined. Id. at 168.
    Faced with this question, the Wisconsin Supreme Court
again reviewed the tort of bad faith: “To properly evaluate
[the insurer’s] arguments we must ﬁrst examine the tort of
bad faith in Wisconsin.” Id. The court grounded its review in
Anderson, writing “[o]ur decision in Anderson emphasized
that a special duty between the parties arose as a result of the
relationship created by the contract.” Id. at 169 (emphasis added).
That “special duty of good faith and fair dealing,” said the
court, “runs throughout the contract relationship between the
insurer and the insured.” Id. at 169–70. Based on this prece-
dent, the court rejected Auto-Owners’s attempt to limit the
scope of its duty of good faith and fair dealing and reempha-
sized the connection between the tort and contract:
       We hold that every insurance contract from its
       inception has an implied covenant of good faith
       and fair dealing between the insured and the in-
       surer. When this duty of good faith and fair
       dealing is breached, and the insured incurs
       damages as a result of that breach, a claim for
       bad faith will lie.
Id. at 171. Despite the court’s expansive discussion of bad faith
in Danner, it did not mention Lueck.
14                                                   No. 22-2210

    Less than a decade after Danner, the Wisconsin Supreme
Court again considered the tort of bad faith in Roehl Transport,
Inc., 784 N.W.2d 542. There, the plaintiﬀ purchased a policy
with Liberty Mutual for its commercial trucks. Id. at 547–48.
The policy provided up to $2 million in liability coverage but
included a deductible of $500,000. Id. at 546. When one of
Roehl Transport’s trucks collided with a motorist, Liberty
Mutual took over management of the claim. Id. at 546, 548. It
allegedly did so haphazardly, resulting in a personal injury
judgment for $830,400 against Roehl Transport. Id. at 548–49.
Roehl Transport sued Liberty Mutual for bad faith, claiming
it “missed the opportunity to settle the … claim for less than
the full amount of Roehl Transport’s $500,000 deductible.” Id.
at 549. Those facts presented a novel situation for the Wiscon-
sin Supreme Court, as the ﬁnal cost for the accident consumed
Roehl Transport’s entire deductible but fell within Roehl
Transport’s policy limit. The state supreme court was tasked
with determining whether that gave rise to a bad faith claim.
    The decision in Roehl Transport, Inc. began by broadly
summarizing “the principles of the tort of bad faith,” and em-
phasizing the connection between the tort and contractual
privity. Id. at 552. As the Wisconsin Supreme Court described,
“the tort of bad faith intrinsically relates to the nature and ex-
istence of the insurance contract. Because the duty is rooted
in the contractual relationship, this court has refused to rec-
ognize a bad faith claim when a claimant was not in a contrac-
tual relationship with an insurance company.” Id. at 553. The
court similarly identiﬁed the source of the claim: “[T]he tort
of bad faith is derived from the implied covenant of good faith
and fair dealing found in every contract.” Id.
No. 22-2210                                                    15

    After sketching the boundaries of bad faith in Roehl
Transport Inc., the Wisconsin Supreme Court “examine[d] the
seminal Wisconsin bad faith insurance cases.” Id. at 555. The
resulting survey of state law is expansive and covers many
types of bad faith claims, including in the ﬁrst-party, third-
party, and worker’s compensation contexts. It begins in 1916
and addresses cases such as Hilker (1930), Anderson (1978), and
Kranzush (1981). Id. at 555–61. Throughout, the Wisconsin Su-
preme Court reiterated “[t]he duty of good faith arises under
the insurance policy and the contractual relationship formed
between the insurance company and the insured.” Id. at 560.
Tellingly, despite the scope and depth of Roehl Transport, Inc.’s
inquiry into “seminal” bad faith cases, the decision never
mentions Lueck. We recognize that Roehl Transport dealt di-
rectly with a third-party claim and Lueck a ﬁrst-party claim,
but the Wisconsin Supreme Court’s survey of tortious bad
faith in Roehl Transport, Inc. is expansive. Indeed, the court
characterized its work as a “study of the development of the
doctrine of bad faith in insurance claims in Wisconsin case
law.” Id. at 563. The absence of Lueck from that “study,” along
with the court’s repeated grounding of bad faith liability in
contractual privity, demonstrates that the tort of bad faith
(with exception of the worker’s compensation context dis-
cussed later) requires a contractual relationship between
plaintiﬀ and defendant.
    Brethorst v. Allstate Property and Casualty Insurance Co., 798
N.W.2d 467 (Wis. 2011), arrives at the same conclusion. There,
a plaintiﬀ brought a claim for bad faith without also bringing
a discrete breach of contract claim. Id. at 472. The Wisconsin
Supreme Court was tasked with determining, among other is-
sues, whether proving breach of contract is a prerequisite to
showing bad faith. Id. at 470. To answer that question, the
16                                                  No. 22-2210

court once more “examine[d] the development of the tort of
bad faith in Wisconsin” before turning to the issue at hand. Id.
at 473. Its observations mirror those already mentioned:
       Clearly, a person cannot have a valid ﬁrst-party
       bad faith claim against an insurer if the person
       has no contract with the insurer `… because the
       insurer’s implied covenant of good faith and
       fair dealing arises out of the relationship created
       by the contract. If there is no contract, the in-
       surer has no duty to act in good faith with re-
       spect to a claim.
Id. at 480; see also id. at 476 (“[A] bad faith claim arises from
the contractual relationship between the parties … .”).
    Against that backdrop, the court concluded that while
“[a]n insured may file a bad faith claim without also filing a
breach of contract claim,” id. at 470, “some breach of contract
by an insurer is a fundamental prerequisite for a first-party
bad faith claim against the insurer by the insured.” Id. at 482.
In other words, “[t]he fact that a first-party bad faith claim is
a separate tort and may be brought without also bringing a
breach of contract claim, does not change the fact that first-
party bad faith cannot exist without some wrongful denial of
benefit under the insurance contract.” Id. at 480. As reflected
in that rule statement, tortious bad faith emanates from the
duty present in a contract. Brethorst’s discussion of bad faith
does not mention Lueck.
    Wisconsin’s civil pattern jury instructions on bad faith
make the same point. The comment to the instruction for a
first-party bad faith claim states, “[b]y virtue of the relation-
ship between the parties created by an insurance contract, a
No. 22-2210                                                   17

special duty arises, the breach of which is a tort and is unre-
lated to contract damages.” Wis. JI-CIVIL 2761 (2011); see also
Wis. JI-CIVIL 2760 (2003) (linking bad faith liability in the
third-party excess verdict context to contractual duties).
    In sum, Wisconsin Supreme Court cases such as Danner,
Roehl Transport, Inc., and Brethorst, along with the pattern jury
instructions, persuade us of two things. First, other than on a
single occasion via an agency theory in Lueck, the Wisconsin
Supreme Court has limited third- and first-party bad faith
claims to parties sharing a contractual relationship. Second,
the nearly forty-year-old decision of Lueck does not represent
current Wisconsin law. Even if Lueck’s holding on bad faith
survived the U.S. Supreme Court’s reversal in 1985, the case
has been set to the side. The Wisconsin Supreme Court has
examined the tort of bad faith and the scope of its liability nu-
merous times since and has done so in painstaking detail.
Those surveys function as a museum of Wisconsin bad faith
law, and we cannot ignore Lueck’s complete absence as an ex-
hibit. Even more, Wisconsin’s abandonment of Lueck goes be-
yond the cases we have discussed. By our count, Wisconsin
courts have cited to Lueck only twice since its reversal and
never in the last thirty years. Of those two references, one was
in a dissent, Universal Foods Corp. v. Labor & Industry Review
Commission, 467 N.W.2d 793, 797–98 (Wis. Ct. App. 1991)
(Fine, J., dissenting), and the other merely acknowledged that
Lueck had been reversed. See Int’l Ass’n of Machinists & Aero-
space Workers, IAM Local 437 v. United States Can Co., 441
N.W.2d 710, 714 (Wis. 1989). And no court has ever cited Lueck
for an agency theory for bad faith liability. Given this history,
especially the Wisconsin Supreme Court’s omission of the
case in several discussions and rulings in this area of the law,
we decline to resurrect Lueck as controlling law. That case
18                                                   No. 22-2210

does not authorize the Daniels to sue United HealthCare for
bad faith.
    Before moving on, we briefly address two other cases re-
lied on by the Daniels. They point to Poling v. Wisconsin Phy-
sician Service, 357 N.W.2d 293 (Wis. Ct. App. 1984), which they
suggest is supportive of bad faith liability “outside the tradi-
tional insurer-insured relationship.” In Poling, plaintiff Nellie
Poling received health insurance through “a group health in-
surance policy issued by the state of Wisconsin and adminis-
tered by [Wisconsin Physicians Service].” Id. at 296. When
WPS denied a claim, Poling sued. Id. Poling prevailed on her
bad faith claim at a jury trial and, on that point, the Wisconsin
Supreme Court affirmed. Id. at 295, 297–98.
    While Poling features a plaintiff prevailing on a bad faith
claim against a health plan administrator, the case does not
support the Daniels’s position. Despite the unique surround-
ing facts, Poling still had a contractual relationship with WPS.
The same jury that awarded bad faith damages to Poling also
awarded her breach of contract damages. Id. at 295. In fact,
WPS’s breach of contract liability was not even at issue in Pol-
ing, as WPS “d[id] not appeal th[e] breach of contract award.”
Id. So, contrary to the Daniels’s assertions, Poling is not an ex-
ample of the Wisconsin Supreme Court extending bad faith
liability into a non-contractual relationship.
   The Daniels also look to McEvoy by Finn v. Group Health
Cooperative of Eau Claire, 570 N.W.2d 397, 401 (Wis. 1997), in
which the Wisconsin Supreme Court addressed “whether the
common law tort of bad faith applies to [health maintenance
organizations].” Contrary to traditional insurance companies,
health maintenance organizations play a larger role in defin-
ing a “network” of specific, preferred providers, which HMO
No. 22-2210                                                   19

participants must ordinarily choose from to receive covered
care. Id. at 402. If a network provider can render care, partici-
pants must typically use that provider, or their policy will not
cover the costs. But, as the Wisconsin Supreme Court ex-
plained in McEvoy, “[w]here such network physicians are not
equipped to provide necessary medical care to a subscriber,
the HMO, pursuant to its contract, may authorize coverage
for payment for out-of-network treatment.” Id. Whether an
HMO could be held liable for bad faith was a question of first
impression. Id. at 401.
    Examining the tort of bad faith and the role of HMOs, the
court concluded, “HMOs making out-of-network benefit de-
cisions are insurers for purpose of application of the tort of
bad faith.” Id. at 403. Yet, while McEvoy partially applied the
tort of bad faith into the HMO context, its holding is not as
significant as the Daniels allege. The plaintiffs in McEvoy, as
HMO subscribers, were still bound to the HMO through con-
tract. Id. at 404 (explaining that an “HMO is under a contrac-
tual duty to provide or pay for reasonable services to remedy
the subscriber’s condition up to the subscriber’s policy lim-
its”) (emphasis added). That contractual relationship played
a crucial role in the Wisconsin Supreme Court’s analysis.
When comparing HMOs to traditional insurers, the court ob-
served, “[i]n the course of the contractual relationship be-
tween the HMO and subscriber, a power imbalance similar to
that between a classical insurer and policyholder exists.” Id.
at 402. As such, McEvoy sheds little light on this dispute. The
plaintiffs in McEvoy had a contract with the HMO, so their
bad faith claim was rooted in contractual privity.
20                                                             No. 22-2210

   Neither Poling nor McEvoy are contrary to the requirement
that under Wisconsin law, contractual privity is necessary for
bad faith liability. 5
                                      B
   We turn now to plaintiffs’ second argument, which points
to bad faith claims in the realm of worker’s compensation.
Those claims receive different treatment under Wisconsin law
than first- and third-party bad faith claims.
    Wisconsin law allows certain bad faith claims in the
worker’s compensation context to proceed, even when con-
tractual privity is lacking between plaintiff and defendant.
The Daniels, who have no contractual relationship with
United HealthCare, naturally look to this area of law for sup-
port. They direct our attention to Aslakson v. Gallagher Bassett
Services, 729 N.W.2d 712, 714 (Wis. 2007), a case involving a
bad faith claim made against Wisconsin’s Uninsured Employ-
ers Fund and its third-party claims administrator. We again
start with some background before examining how Aslakson
and worker’s compensation case law fits into this appeal.
   In Coleman v. American Universal Insurance Co., 273 N.W.2d
220, 221–22 (Wis. 1979), the Wisconsin Supreme Court held
that employees may sue their employer’s insurer for bad faith
processing of worker’s compensation claims—even though
employees have no direct contractual relationship with their

     5The Daniels also cite Ferris v. Location 3 Corp., 804 N.W.2d 822, 828
(Wis. Ct. App. 2011), for the rule that an agent is liable for his own tortious
conduct even when acting on behalf of a principal, but what matters is
whether United HealthCare owed the Daniels a duty of good faith and fair
dealing, such that they could be held liable under bad faith in the first
place.
No. 22-2210                                                   21

employer’s insurer. In reaching that holding, the court made
a broad statement: “[T]he rationale of Anderson is applicable
not only to the claim of a first-party insured against its insur-
ance company, but is also applicable when the case involves
a third-party claim against an insurer.” Id. Standing alone,
that statement suggests an expansion of bad faith liability,
such that any outside claimant might sue an insurer for bad
faith despite no contractual privity. But the Wisconsin Su-
preme Court and Legislature curtailed that decision and lan-
guage.
    In Kranzush, that court carefully confined the reach of Cole-
man and explained why bad faith claims are permissible in the
worker’s compensation context absent a contractual relation-
ship between plaintiff and defendant. 307 N.W.2d at 261. The
court reasoned that “owing to the design of the worker’s com-
pensation laws, the injured employee and the insurance
carrier occupy relative positions which are analogous to the
insurer-insured relationship at the heart of the Anderson tort.”
Id. So, “[u]nder th[ose] legislatively imposed conditions, it is
reasonable for the employee to expect fair dealing from the
insurer, and it is not unreasonable to impose upon the insurer
that duty.” Id. at 262. That qualification both affirmed the role
contractual privity plays in the tort of bad faith and explained
why the worker’s compensation context is different.
    Still, the Wisconsin Supreme Court recognized that its lan-
guage in Coleman was broad and could be read to generally
authorize third-party claimants—lacking any contractual
privity or statutory relationship to an insurer—to sue for bad
faith. Id. “To erase any doubt,” the court in Kranzush in-
structed that Coleman’s language “is not to be taken to confer
a general right of action upon third-party claimant tort
22                                                          No. 22-2210

victims against the tortfeasor’s insurer.” Id. The Wisconsin Su-
preme Court meant what it said—it denied precisely that type
of claim later in the same opinion. See id. at 257. Kranzush thus
clarified that Coleman’s holding is limited, flowed from “the
special conditions which attend the relationship of an injured
employee and the worker’s compensation carrier,” and fea-
tured “considerations unique to the worker’s compensation
situation.” Id. at 262. The Wisconsin legislature also inter-
vened, abrogating Coleman and declaring statutory remedies
to be the sole option for worker’s compensation claimants al-
leging bad faith against their employer or employer’s insurer.
See WIS. STAT. § 102.18(1)(bp) 6; Graef v. Cont’l Indem. Co., 959
N.W.2d 628, 635 (Wis. 2021) (explaining that § 102.18(1)(bp)
“specifically and explicitly provided an exclusive remedy for
bad faith claims against employers and their insurers”); Aslak-
son, 729 N.W.2d at 725 (“The legislature was apparently un-
happy with the Coleman decision and revised the statutes to
respond to Coleman.”).
    This background sets the stage for Aslakson, which fea-
tures a particular set of facts. Aslakson involved Wisconsin’s
Uninsured Employers Fund, a state-run entity which “pro-
vides compensation to employees who suffer injuries for
which their uninsured employer is liable.” 729 N.W.2d at 714
(citation omitted). The Wisconsin Department of Workforce

     6The relevant part of that section reads: “If the division determines
that the employer or insurance carrier suspended, terminated, or failed to
make payments … as a result of malice or bad faith, the division may in-
clude a penalty in an award to an employee for each event or occurrence
of malice or bad faith. That penalty is the exclusive remedy against an em-
ployer or insurance carrier for malice or bad faith.” WIS. STAT.
§ 102.18(1)(bp)
No. 22-2210                                                   23

Development oversees the Uninsured Employers Fund, and
that Department contracted with Gallagher Services to serve
as its third-party administrator. Id. Under that arrangement,
Gallagher Services handled plaintiff Christopher Aslakson’s
worker’s compensation claim. Id. Aslakson received the
worker’s compensation payments he was owed but only after
a protracted legal battle with Gallagher Services. Id. at 716. As
a result, Aslakson sued the Uninsured Employers Fund and
Gallagher Services for bad faith. Id.
    The Uninsured Employers Fund enjoys sovereign immun-
ity as a state entity, so it was dismissed from the suit. Id. But
Aslakson’s claim against Gallagher Services rose to the Wis-
consin Supreme Court, which had to determine whether the
claim was cognizable as a matter of statutory and common
law. The court first concluded that under such facts, the Wis-
consin’s Workers Compensation Act did not proactively bar
a bad faith claim against Gallagher Services. Id. at 724.
Though the court acknowledged exclusive statutory remedies
had replaced the tort of bad faith for most worker’s compen-
sation claims, id. at 719–20, it concluded that the applicable
statute had not considered the situation in Aslakson, as it did
not account for the potential bad faith of the Uninsured Em-
ployers Fund. Id. at 725–26. That left the court to decide
whether Aslakson could hold Gallagher Services, as the
Fund’s third-party claims administrator, liable for bad faith.
Partially reviving its reasoning in Coleman, the court ruled
that Aslakson could pursue his claim. Id. at 726–28.
    The Daniels point to Aslakson as supporting their claim
against United HealthCare. We understand why, as Aslakson
featured the Wisconsin Supreme Court authorizing a bad
faith claim against a third-party claim administrator.
24                                                No. 22-2210

Nonetheless, we read Aslakson as combining the worker’s
compensation context with distinctive factual circumstances.
As the Wisconsin Supreme Court explained in Kranzush and
other cases, the worker’s compensation context implicates
special rules for the tort of bad faith. Because worker’s com-
pensation claims are “the object of a sweeping statutory
scheme,” they have their own bad faith jurisprudence, and
decisions implicating that regime are not translatable to other
claims. Roehl Transport, Inc., 784 N.W.2d at 560 (quoting Kran-
zush, 307 N.W.2d at 261).
    Moreover, Aslakson featured the additional complication
that the Uninsured Employers Fund had immunity. In that
case, the plaintiff would have no one to sue if he could not
bring a bad faith claim against the third-party claims admin-
istrator. That sovereign immunity factor, not present here, un-
derlies the Wisconsin Supreme Court’s holding in Aslakson,
729 N.W.2d at 727. So reliance on worker’s compensation case
law, such as Aslakson, cannot save the Daniels’s bad faith
claim against United HealthCare. The Wisconsin Supreme
Court has concluded that rules applicable in that context are
not to be extended beyond the bounds of worker’s compensa-
tion. Kranzush, 307 N.W.2d at 261–62. Under diversity juris-
diction we are bound by that state’s substantive law.
                              III
    The Daniels also bring claims for punitive damages and
statutory fines under WIS. STAT. § 628.46. They cannot recover
interest under that provision for benefits wrongly denied. The
statute deals only with “overdue payments” that should have
been made on time by an insurer. § 628.46(1). United
HealthCare is not an insurer, and with their other claims dis-
missed, the Daniels cannot demonstrate that payment on their
No. 22-2210                                                 25

claims is overdue. Because we dismiss each of the Daniels’s
substantive claims, they also have no basis on which to re-
cover punitive damages. Brown v. Maxey, 369 N.W.2d 677, 680
(Wis. 1985) (“We stress that punitive damages are in the na-
ture of a remedy and should not be confused with the concept
of a cause of action.”).
                              IV
   The Wisconsin Supreme Court is no stranger to the tort of
bad faith, having surveyed its state law on that topic many
times over several decades. Wisconsin law does not authorize
the Daniels to recover from United HealthCare for bad faith.
Their related claims for statutory interest and punitive dam-
ages likewise fall short. The district court properly dismissed
the Daniels’s amended complaint, so its judgment is
AFFIRMED.