Court Opinion

ID: 9945585
Source: CourtListenerOpinion
Date Created: 2024-02-27 21:19:12.72499+00
Date Added: 2024-06-11T14:25:33.344736
License: Public Domain

VERMONT SUPERIOR COURT
                                    CHITTENDEN UNIT
                                     CIVIL DIVISION

                                               │
ANDREW LEISE,                                  │
 Plaintiff                                     │
                                               │
 v.                                            │          Docket No. 23-CV-3775
                                               │
CORVEL ENTERPRISE COMP., INC.,                 │
 Defendant                                     │
                                               │

                  RULING ON DEFENDANT’S MOTION TO DISMISS

       Plaintiff Andrew Leise brings this claim for insurance bad faith against CorVel

Enterprise Company, Inc., a workers’ compensation claims administrator for the State of

Vermont. CorVel moves to dismiss, arguing that there is no cause of action for bad faith

against an insurer’s agent or third-party contractor, and that Plaintiff has failed to exhaust

administrative remedies.

                                          Alleged Facts

       The following facts are alleged in the complaint. The court makes no finding as to

their accuracy.

       On June 23, 2021, Plaintiff sustained a work-related injury while employed as a

Vermont state trooper and submitted a workers’ compensation claim. Defendant CorVel

handled his claim on behalf of the State of Vermont, and at all relevant times acted as the

authorized workers’ compensation claims administrator for the State. Attorney Wesley

M. Lawrence represented the State in Plaintiff’s claim, and acted at the direction of CorVel

in defending against Plaintiff’s claim.
       On October 10, 2022, the parties reached a settlement of Plaintiff’s worker’s

compensation claim for $79,750. Attorney Lawrence confirmed the settlement by email:

“We have a deal at $79,750.00 for a Form 16 (full and final/WC claims to date of

approval). I will have proposed settlement documents to you soon.” Compl. ¶ 6.

       At that time, Plaintiff was pursuing (and continues to pursue) a civil action against

the Vermont Human Rights Commission (VHRC), its board chair, and executive director

for alleged civil rights violations and other related claims in federal court. See Leise v.

Vermont Human Rights Commission, et al., Docket No. 2:22-cv-9. The district court

granted the Commission’s motion to dismiss on immunity grounds on March 24, 2023,

and that ruling is currently on appeal before the Second Circuit.

       Plaintiff has not been paid his settlement because CorVel has refused to agree to

the language of a release that unequivocally preserves Plaintiff’s right to pursue the VHRC

suit. This, Plaintiff alleges, constitutes bad faith in violation of the covenant of good faith

and fair dealing. He alleges that CorVel “refused to approve draft after draft of proposed

release language that would have released any and all workers’ compensation obligations

to fully protect the employer without prejudice to plaintiff’s ability to pursue the VHRC

Suit” and that this “bad faith conduct was part of a scheme intended to leverage the

nonpayment of his workers’ compensation settlement to economically intimidate him and

force him to compromise the VHRC Suit.” Compl. ¶¶ 10–11.

                                         Discussion

       CorVel argues that Vermont recognizes no cause of action for bad faith against an

insurer’s agent or third-party contractor. Alternatively, it contends that Plaintiff has failed

to exhaust administrative remedies available under the Workers’ Compensation Act.

                                              2
                        1. Exhaustion of Administrative Remedies

       CorVel contends that the worker’s compensation statute provides an

administrative remedy that Plaintiff should have pursued before taking his bad faith claim

to court. However, this court already expressly rejected that argument in Garcia v. Farm

Family Ins. Co., No. 465-5-15 Cncv, 2019 WL 13172491, at *3 n.2 (Vt. Super. Ct. Aug. 28,

2019) (Ruling on Motion for Summ. J.). CorVel makes no effort to distinguish Garcia in

this respect.

                             2. Bad Faith Against Non-Insurer

       CorVel also argues that bad faith claims require an insurer-insured relationship,

and that Vermont therefore recognizes no bad faith cause of action against a third party

claims administrator. See Peerless Ins. Co. v. Frederick, 2004 VT 126, ¶ 15, 177 Vt. 441

(“Whether the claim is for tortious or contractual bad faith, an insured/insurer

relationship is still a prerequisite to sustain the claim.”). Plaintiff contends that this

court’s rulings in Garcia are dispositive of CorVel’s argument. See Garcia, supra, 2019 WL

13172491 (Aug. 28, 2019) (Ruling on Motion for Summ. J.); Garcia, slip copy, (Feb. 4,

2016) (Ruling on Motion to Dismiss).

       In Garcia, the plaintiff sued her former employer’s workers’ compensation carrier

for bad faith. The insurer argued that Vermont did not recognize an employee’s right to

sue her employer’s workers’ compensation carrier for bad faith because there was no

insurance contract between the employee and the insurer. This court rejected that

argument, noting that because employees are the intended beneficiaries of workers’

compensation policies, they have a cause of action against the insurer for bad faith.

Garcia, slip copy at 3–4, (Feb. 4, 2016) (Ruling on Mot. to Dismiss); Garcia, 2019 WL

13172491, at *2 (Aug. 28, 2019) (Ruling on Mot. for Summ. J.) (citing Marsigli’s Estate v.

                                            3
Granite Citv Auto Sales, Inc., 124 Vt. 95, 106 (1964); 21 V.S.A. § 693; Racine v. Am. Int'l

Adjustment Co., 980 F. Supp. 745, 746 (D. Vt. 1997). Indeed, the statute makes this

explicit. 21 V.S.A. § 693 (providing that every workers’ compensation policy “shall contain

a provision setting forth the right of the employees to enforce, in their own names, the

liability of the insurance carrier . . . for the payment of such compensation, either by ﬁling
a separate claim at any time or by making at any time the insurance carrier a party to the

original claim”).

       The issue in GLcia was Whether the plaintiff could sue her employer’s workers’

compensation insurer despite not having a direct contractual relationship with the

insurer. The issue here is different: whether Plaintiff can sue a third-party administrator

rather than an insurer. GLcia does not resolve the precise question here, and there

appears to be no Vermont law that does so directly. CorVel relies primarily on De Dios v.

Indem. Ins. C0. of N. Am., 927 N.W.2d 611, 620 (Iowa 2019), amended (May 14, 2019),

where the Iowa Supreme Court held that workers’ compensation claimants cannot pursue

bad faith actions against third-party administrators even though such claims are available

against insurers. The De Dios court reasoned that a third-party administrator “is not in

an insurer/insured relationship with anyone” and “does not have to meet rigorous

ﬁnancial requirements and is not under the ongoing supervision of the workers’

compensation commissioner.” Li.

       While there is a split of authority, the De Dios approach represents the majority

position. “[M]ost jurisdictions to have considered the issue have declined to recognize

bad—faith claims against third-party administrators and other entities that are not in

privity with the insured.” De Dios, 927 N.W.2d at 623 (collecting cases). Those cases have

expressed various policy reasons for this majority rule: “An adjuster owes a duty to the
insurer who engaged him. A new duty to the insured would conflict with that duty and

interfere with its faithful performance”; and “in most cases this new duty would be

redundant, since the insurer also would be liable for unreasonable investigation or claims

handling.” Id. (quotations omitted) (brackets omitted); see also 14 Couch on Ins. § 198:17

(“While an insurer’s agent may be subject to the insurer’s duty of good faith, the agent

does not also incur personal liability to the insured. The lack of contractual privity

prevents courts from finding liability even in cases where the agent in question is a

reinsuring subsidiary.”); Lodholtz v. York Risk Servs. Grp., Inc., 778 F.3d 635, 640 (7th

Cir. 2015) (under Indiana law, “a claims adjuster does not owe a duty of care to the

insured”); Sanchez v. Lindsey Morden Claims Servs., Inc., 84 Cal. Rptr. 2d 799, 803 (Cal.

Ct. App. 1999) (“California courts have refused to extend liability for bad faith, the

predominant insurer tort, to agents and employees of the insurer) (emphasis in original);

Charleston Dry Cleaners & Laundry, Inc. v. Zurich Am. Ins. Co., 586 S.E.2d 586, 588 (S.C.

2003) (“no bad faith claim can be brought against an independent adjuster or

independent adjusting company”).

       However, there are also good arguments on the other side of this issue. Perhaps

the leading case in support of the minority approach is Scott Wetzel Servs., Inc. v.

Johnson, 821 P.2d 804 (Colo. 1991). There, the Colorado Supreme Court held that “an

independent claims adjusting company . . . acting on behalf of a self-insured employer

owes a duty of good faith . . . to an injured employee in investigating and processing a

workers’ compensation claim even in the absence of contractual privity with the

employee.” Id. at 813. The court reasoned that Colorado’s “self-insurer regulatory scheme

. . . specifically envisions the use of independent claims administration services to provide

benefits” and that, because of the structure of the state’s Workers’ Compensation Act, the

                                             5
claims adjuster “was aware that it was instrumental in carrying out Safeway’s duties to

workers’ compensation claimants.” Id. at 812. The court further explained that its

conclusion served the purposes behind the workers’ compensation system, including the

“humanitarian purpose of assisting injured workers and their families, by giving them a

reliable source of compensation,” and to provide “a method whereby claims arising out of

employment-related accidents may be speedily resolved.” Id. (citations omitted). “In the

absence of an obligation to deal in good faith and fairly, self-insured employers and claims

adjusting services may create obstacles to payment. This kind of delaying tactic runs

counter to the goals of workers’ compensation.” Id.

       The Colorado regulation at issue in Wetzel specifically referenced third party

administrators that contract with self-insurers. See 7 Colo. Code Regs. § 1101-4:3 (“Each

permit holder shall have within its own organization ample facilities and competent

personnel to service its own program with respect to claims and administration or shall

contract with a service company competent to provide these services.”) (emphasis

added). Notably, a Vermont regulation seems to contemplate that plaintiffs can sue third

party administrators directly. See Vt. Admin. Code 4-3-64:17 (stating that the Insurance

Commissioner may penalize a third party administrator if the administrator “has, without

just cause, caused covered individuals to accept less than the amount due them or caused

covered individuals to employ attorneys or bring suit against the TPA or a payor which it

represents to secure full payment or settlement of such claims”).

       Colorado is not alone in following the minority approach. Plaintiff cites several out-

of-state cases where courts have permitted bad faith claims against third party

administrators, with varying degrees of persuasiveness. See, e.g., Ferrari v. Helmsman

Mgmt. Servs., LLC, No. CV N17C-04-270 MMJ, 2020 WL 3444106, at *4–5 (Del. Super.

                                             6
Ct. June 23, 2020) (stating, with little analysis, that a plaintiff can sue a third party

administrator directly for bad faith handling of workers’ compensation claim because

administrator’s duty is coextensive with insurers’ under general agency law); Falline v.

GNLV Corp., 823 P.2d 888, 890–94 (Nev. 1991) (explaining that there was no rational

basis to treat self-insured companies or their third party administrators differently from

insurance carriers as to bad faith actions, and that the legislative scheme for sanctioning

self-insured employers was not an exclusive remedy); Aslakson v. Gallagher Bassett

Servs., Inc., 729 N.W.2d 712, 726–27 (Wis. 2007) (holding that language of Workers’

Compensation Act did not explicitly bar plaintiff’s bad faith claim against third-party

administrator, and that allowing such a claim comports with public policy and purposes

of Act).

       The most potent defense of the minority approach comes from the De Dios dissent.

In that dissent, Justice Appel raised numerous points that support his conclusion that an

insurance intermediary should be held liable for bad faith when it acts as the “functional

equivalent” of an insurer. De Dios, 927 N.W.2d at 632–33. He noted that the idea of

privity between an employee and the employer’s workers’ compensation carrier has

“always been a legal fiction,” and that what really matters in a bad faith claim is the

“functional relationships that arise from insurance relationships, not privity of contract.”

Id. at 632. He recognized the perverse incentives that can arise from the use of insurance

intermediaries. Id. at 633. He further decried the “increased bureaucratization and

compartmentalization of business practices” that have become a feature of 21st century

life, and that,

                  if accepted as legal barriers, tend to prevent direct
                  accountability for wrongful conduct. Layers upon layers of
                  bureaucracy impair responsiveness. In the workers’

                                              7
              compensation arena, the employer hires an insurer and now
              the insurer in turn may hire a third-party administrator.

              But where there is no direct accountability, service may
              deteriorate. We all know the potential scenario. The phone
              rings and no one answers. One is put on hold for hours. The
              right hand knows not what the left hand is doing. No one is
              familiar with the file. A person with decision-making
              authority cannot be found. Delay. Delay. Delay. This type of
              behavior could lead to bad-faith exposure of an insurance
              company. The exact same type of behavior should lead to bad-
              faith exposure when a third-party administrator assumes the
              functions of the insurer.

Id. at 635; see also Jeffrey W. Stempel, The “Other” Intermediaries: The Increasingly

Anachronistic Immunity of Managing General Agents and Independent Claims Adjusters,

15 Conn. Ins. L.J. 599, 603 (2009) (“Today, [] the greater near-autonomous role now

shouldered by [managing general agents], TPAs[,] and independent adjusters demands

that they be treated under the law on a par with the insurers they represent.”).

       Notwithstanding the persuasive points made by the De Dios dissent, two Vermont

cases that arose in the homeowners’ insurance context—while not precisely on point—

strongly suggest that our Supreme Court would follow the majority approach. See Hamill

v. Pawtucket Mut. Ins. Co., 2005 VT 133, ¶ 12, 179 Vt. 250; Murphy v. Patriot Ins. Co.,

2014 VT 96, ¶ 19 n.4, 197 Vt. 438. In Hamill, the insured sued the insurer’s independent

adjusters for negligence to recover for mold growth as a result of allegedly negligent

mishandling of his claim for water damage. The Court held that the adjusters owed no

duty in negligence to the insured because the insured sought damages for purely

economic loss recoverable under contract law against the insurer. Hamill, 2005 VT 133,

¶¶ 9–14. Moreover, subjecting adjusters to potential tort liability could create conflicting

loyalties, and adjusters could face potentially open-ended liability. Id. ¶¶ 15–16. The Court

                                             8
also rejected the insured’s argument that Vermont statutes imposed a duty of care upon

independent insurance adjusters as to insured policyholders. Id. ¶¶ 17–19.

       In Murphy, the insured brought claims for negligence and bad faith against her

homeowners’ insurer. The Court affirmed the trial court’s grant of summary judgment for

the insurer. It held that, as to the negligence claim, the insurer did not have a duty to

handle the insured’s claims in a reasonable manner. Hamill, 2005 VT 133, ¶¶ 10–16. As

to the bad faith claim, it held that neither inconsistencies between the adjuster’s report

and deposition nor the insurer’s disagreement with the adjuster’s conclusion supported a

bad faith claim. Id. ¶¶ 17–25. The Court also noted in a footnote:

                Neither party has addressed whether the good or bad faith of
                the adjuster, who was not an employee of defendant, can be
                imputed to Patriot for purposes of a bad faith claim. We held
                in Hamill that “insureds may seek redress for such injuries
                through . . . bad-faith actions against their insurers.” 2005 VT
                133, ¶ 14. We assume from that statement that Patriot would
                be liable for damages caused by the bad faith of the adjuster
                even though Patriot did not act in bad faith independently of
                the adjuster.

Id. ¶ 19 n.4.

       Notably, neither Hamill nor Murphy involved a bad faith claim brought against an

insurer’s adjuster or other third party administrator. Hamill involved a negligence claim

brought against the adjuster, while Murphy involved a bad faith claim brought against the

insurer. However, the rationale for not subjecting independent adjusters to an additional

tort duty toward the insured echoes the rationale from De Dios. Moreover, the Court

strongly suggested that the adjuster’s bad faith would be imputed to the insurer, and that

the insured’s remedy would be a bad faith action against the insurer. Indeed, the Court’s

language in Hamill would seem to foreclose such an action against the intermediary:

                                               9
             We concur with the majority view that public policy
             considerations do not favor creating a separate duty on the
             part of independent adjusters that would subject them to
             common-law tort actions by insureds who have suffered
             economic loss as the result of allegedly mishandled claims. As
             noted, insureds may seek redress for such injuries through
             breach-of-contract and bad-faith actions against their
             insurers.

Hamill, 2005 VT 133, ¶ 14. Notably, the Iowa Supreme Court cited Hamill—along with

many other cases—to support its proposition that “most jurisdictions to have considered

the issue have declined to recognize bad-faith claims against third-party administrators

and other entities that are not in privity with the insured.” De Dios, 927 N.W.2d at 623.

Given our Supreme Court’s decisions in Hamill and Murphy, this court must grant the

motion to dismiss.

                                         Order

      Defendant’s motion to dismiss is granted.

Electronically signed on February 25, 2024 pursuant to V.R.E.F. 9(d).

                                           10