Arizona’s workers compensation system helps employees who are injured on the job receive necessary medical care and treatment. Injured workers’ claims are processed through the Arizona Industrial Commission. The ICA not only processes claims, but also resolves legal disputes that may arise concerning issues of compensability, continuing benefits, loss of earning capacity and others.
During this process, injured workers might allege that insurance carriers, adjusters or employers have handled their claims in bad faith. These claims can take many forms, but typically involve allegations that a claim was either denied without reasonable basis, or that it was accepted but subsequent benefits were unreasonably delayed or denied. In many states, these bad faith claims must be resolved exclusively within the administrative agency tasked with processing workers’ compensation claims. Employees cannot file separate lawsuits in state or federal court.
Arizona is not one of those states.
In Arizona, workers can bring separate “bad faith” lawsuits against carriers, third-party administrators, employers and the individual adjusters responsible for investigating their workers compensation claims. Workers can file these lawsuits at any time during the life of a claim, and the lawsuits can continue even after the underlying claim is resolved. In addition, the type and amount of monetary damages available in bad faith lawsuits can far exceed policy limits, and can include statutory penalties, interest, attorneys’ fees, emotional distress and punitive damages. Jury verdicts can reach into the tens of millions of dollars.
In Arizona, bad faith can occur when an insurer (or self-insured employer) intentionally denies or fails to administer a workers compensation claim without a reasonable basis. What is reasonable can depend on the circumstances. Many cases contain allegations that the insurer failed to properly investigate the claim. This can involve everything from not interviewing relevant witnesses to not timely requesting or reviewing medical records to denying or delaying scheduled treatment to unreasonably late payment of benefits.
Even those employers who are not self-insured can be held liable for bad faith under an “aiding and abetting” theory. Workers claim their employers, though not directly responsible for administering or paying benefits, know the insurers are acting unreasonably, and assist in that unreasonable conduct by downplaying or dismissing the initial injury report, sending false or inaccurate information to the insurer, or by otherwise not cooperating in the investigation.
Given the significant potential liability for bad faith, what can be done to minimize risk?
First, employers should conduct a thorough and timely investigation. Denying a workers compensation claim is not, in and of itself, bad faith. But failing to conduct a reasonable investigation, or denying a claim without reasonable justification, can be. Adjusters should gather all the information needed to effectively and fairly evaluate the claim. This means timely identifying and interviewing witnesses, gathering and reviewing medical records and following necessary leads. Adjusters should be prompt and courteous in their communications with injured workers and keep them reasonably informed of significant developments in the claim. To that end, adjusters should work diligently to overcome language barriers that may exist.
Second, employers need to understand that documentation is critical. Potential defendants must do more than simply act reasonably in their handling of a workers compensation claim — they must be able to prove they acted reasonably. The adjuster’s claim file is one of the first things that will be turned over to plaintiff’s counsel during litigation. The file should clearly document what steps were taken as part of the investigation, and when. For example, dates and summaries of conversations with the injured worker, witnesses and medical providers should be recorded. Documents in the file should be date stamped when received.
Third, if a carrier opts to deny coverage for the specific claim, comments in the claim file should be consistent with investigation results and the ultimate decision to deny. Clearly state all reasons the claim is being denied, citing policy language if possible. The level of detail will vary depending on the circumstance, but the denial and supporting documentation in the file should be as specific as practicable.
Although it may not always be possible to avoid bad faith litigation, knowing that these claims exist, and taking reasonable steps to investigate and manage a claim, are important first steps in minimizing potential liability.
Robert Vaught is a partner in Quarles & Brady’s Labor & Employment Practice Group. He regularly counsels human resources and risk management personnel regarding Title VII, ADEA, FMLA, ADA, OSHA, wage and hour matters, hiring and discipline issues and wrongful discharge and bad faith complaints, and represents employers in related proceedings in state and federal courts, and before the Equal Employment Opportunity Commission, Department of Labor, and state administrative agencies.