July 18, 2018 – Workers’ compensation carriers do not always have a good reason to deny an applicant’s claim. All too often, claims adjusters deny claims without first asking whether they have a “reasonable basis” to do so. Without proper documentation regarding the claims adjuster’s reasoning, the applicant’s lawyer and the carrier’s lawyer will have to determine whether the denial was reasonable. This article gives a brief overview of the law and tips to help workers’ compensation practitioners research whether a claim denial was reasonable.

Summary of Wisconsin’s Workers’ Compensation Bad Faith Law

Bad faith claims in workers’ compensation are a fairly recent development in Wisconsin. Although Wisconsin was the first state to enact a workers’ compensation act in 1911, bad faith claims were first recognized in the 1979 Wisconsin Supreme Court case Coleman v. American Universal Ins. Co.¹ The supreme court held that the exclusivity provision of the Workers’ Compensation Act does not apply to bad faith claims based in tort law. However, the Coleman decision did not last long. The Wisconsin Legislature successfully overturned the decision in 1981 by replacing the old penalty provision of the Workers' Compensation Act with a new penalty provision giving an exclusive remedy for an insurer's bad faith conduct.

The exclusive remedy for workers’ compensation applicants today is Wis. Stat. section 102.18(1)(bp). Wis. Admin. Code § DWD 80.70(1) provides that the test to determine whether an employer’s failure or refusal to report an injury is in bad faith is whether the failure or refusal is “unreasonable.” The Wisconsin Supreme Court held in N. Am. Mech. Inc. v. LIRC² that the two-part test for bad faith established in Anderson v. Continental,³ applied to theWorkers’ Compensation Act. Under the Anderson test, the applicant must show:

1. the absence of a reasonable basis for denying the claim, and

2. the employer’s or insurance carrier’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.

The penalty for an employer’s or insurer’s failure to report an injury or failure to make payments may range from zero up to the lesser of either 200 percent of the compensation due, or $30,000.⁴ In addition, according to Wis. Stat. section 102.22(1), delayed benefits are increased by 10 percent and the carrier bears the cost. This penalty can be assessed against the employer, insurance carrier, or both.

An illustration may help flesh out what is meant by “unreasonable.” One of the more egregious examples of bad faith is exemplified in Helland v. Hypro Inc.⁵ In Helland, the insurer was assessed a 200 percent penalty for bad faith delay in payment. The insurer received a letter from the applicant’s physician indicating the applicant’s most recent treatment was related to his work injury. The employer failed to promptly pay, and there was no evidence the employer investigated the claim even after it received the physician’s letter. At the hearing, the insurer could not establish that an investigation took place. Had the insurer investigated the medical expenses and documented its investigation, it could have made an argument it had a reasonable basis to deny the claim. Instead, the insurer recklessly disregarded the fact that it had no documented reasonable basis to deny the claim. For that reason, the commission affirmed the ALJ’s 200 percent penalty for bad faith delay of payment.

On the other end of the spectrum, the Wisconsin Supreme Court dealt with a close call in Brown v. LIRC. In Brown, the supreme court affirmed LIRC’s decision that an insurance carrier’s suspension of temporary disability benefits was not in bad faith when the carrier’s suspension was based on three inaccurate sources. The carrier received information from the Wisconsin Worker’s Compensation Division that the applicant was defrauding the carrier by failing to report external income. The employee’s supervisor also told the carrier that the applicant had a new job. The carrier then hired an investigation firm who saw the applicant walk into a building with a suit on. Based on this information the carrier suspended benefits.

Even though the court upheld LIRC’s decision, it warned that a brief, inconclusive investigation would not avoid a bad-faith penalty. A reasonable investigation under the circumstances is needed before suspension of benefits occurs. Most importantly, had the supreme court applied a lower standard of review, it would have likely found the carrier’s actions unreasonable.

The accompanying table lists several additional examples where the court found an insurer’s or employer’s conduct unreasonable and penalized the insurer or employer under Wis. Stat. section 102.18(1)(bp).

How to Research What Is Reasonable

Before conducting research to determine whether your client acted reasonably or your client’s employer/insurer acted reasonably, you should request all relevant information to determine what actions the employer/insurer took. For example, regardless of what side you represent, you should request at a minimum the carrier’s claim file, the employer’s documentation of the injury, and all medical records.

Once you have gathered all of the relevant facts for your reasonableness determination, you will be able to begin researching the relevant cases and decisions on reasonableness. As with almost all workers’ compensation research, one of the best places to start is the State Bar of Wisconsin’s Books Unbound and John D. Neal and Joseph Danas Jr.’s The Worker’s Compensation Handbook. Additionally, if you have accesses to the Wisconsin Practice Series, Thomas M. Domer and Charles F. Domer’s Workers’ Compensation Law is a great source.

When researching cases discussing reasonableness, begin with Anderson v. Continental.⁶ This case created the bad faith insurance claim test, which applies to workers’ compensation claims as well.⁷ Cases or decisions that cite to Anderson that involve workers’ compensation claims will be extremely helpful. Court decisions will have the most precedential value, but LIRC decisions are more common. LIRC decisions are routinely cited in appeals to the commission and are given varying degrees of deference by the courts.

Conclusion

An applicant’s exclusive remedy for workers’ compensation bad faith claims today is Wis. Stat. section 102.18(1)(bp). The applicable regulations, Wis. Admin. Code § DWD 80.70(1), provide that the test to determine whether an employer’s failure or refusal to report an injury is in bad faith is whether the failure or refusal is “unreasonable.” Therefore, bad faith claims in the area of workers’ compensation revolves around reasonableness: the cornerstone of the Anderson test. 

Endnotes

¹ 86 Wis. 2d 615, 273 N.W.2d 220 (1979).

² 157 Wis. 2d 801, 460 N.W.2d 835 (Ct. App. 1990).

³ 85 Wis. 2d 675, 271 N.W.2d 368 (1978).

⁴ Wis. Stat. § 102.18(1)(bp).

⁵ WC Claim No. 19980030692 (LIRC Sept. 18, 2008).

⁶ 85 Wis. 2d 675, 271 N.W.2d 368 (1978).

⁷ See N. Am. Mech. Inc. v. LIRC, 157 Wis. 2d 801, 460 N.W.2d 835 (Ct. App. 1990).