Opinion
No. CV-05-0511-PHX-SRB.
June 27, 2006
ORDER
This case concerns the interpretation of a workers' compensation insurance policy. Pending before this Court are Defendant Zurich American Insurance Company's Motion for Summary Judgment, filed pursuant to Federal Rule of Civil Procedure 56(b) (Doc. 65), and Defendant's Motion for Certification of Questions of Law to the Arizona Supreme Court, filed pursuant to Rule 27 of the Arizona Rules of the Supreme Court and A.R.S. §§ 12-861 et seq. (Doc. 94).
The following facts are undisputed except where otherwise noted.
Defendant issued a workers' compensation and employer's liability insurance policy to Phelps Dodge Corporation ("Phelps Dodge"), effective April 1, 2002 to April 1, 2003. The named insured includes Phelps Dodge, its affiliates, and its approved contractors and subcontractors, one of which is Bowen Machine Fabrication, Inc. ("Bowen"), Plaintiff Jim Cano's employer. On January 30, 2003, Plaintiff injured his knee while working for Bowen at a Phelps Dodge mining site. Plaintiff was carrying welding equipment up three flights of stairs when his right knee "gave way" or "popped." (Pl.'s Statement of Facts ("PSOF") ¶ 18.)
Bowen reported the accident to Defendant the day it occurred. Defendant denied Plaintiff's claim on February 12, 2003. Plaintiff filed a claim with the Arizona Industrial Commission ("Commission") on February 21, 2003. Defendant accepted Plaintiff's claim on May 18, 2003.
Plaintiff had surgery on his knee on July 22, 2003 to repair a torn meniscus. Plaintiff, who had no other health insurance, claims that because he had to wait several months for Defendant to accept his claim and authorize the surgery, he developed a sympathetic nerve disorder and pain syndrome called reflex sympathetic dystrophy ("RSD") for which he continues to receive treatment. (PSOF ¶¶ 94, 98, 102, 105, 107, 109-112.)
Plaintiff filed suit in January 2005 alleging that Defendant breached its duty of good faith and fair dealing in the handling of his claim. Plaintiff seeks compensatory damages, punitive and exemplary damages, as well as fees and costs.
Plaintiff, Defendant, Bowen and Phelps Dodge eventually settled Plaintiff's workers' compensation claim, and the Commission approved the settlement on October 13, 2005. (Def.'s Statement of Facts ("DSOF"), Ex. 3 ("Settlement").)
Defendant filed the instant motion for summary judgment, asserting that because Plaintiff is not a named insured or an assignee of the Zurich policy, Plaintiff cannot assert a common law claim for bad faith. (Def.'s Mot. for Summ. J. at 1.) Alternatively, Defendant moves for dismissal of Plaintiff's claim for income loss, mental distress, and medical expenses, on the basis that Plaintiff has already settled these claims with Defendant in a proceeding before the Commission. (Def.'s Mot. for Summ. J. at 1.)
Defendant has also requested the certification of two questions to the Arizona Supreme Court: (1) "Whether Plaintiff Jim Cano, as a `non-insured' under the Zurich's employer liability policy in question, can bring a common law bad faith action against Defendant directly or as a third-party beneficiary of that policy"; and (2) "Whether Plaintiff Jim Cano can seek damages for pain and suffering or mental/emotional distress arising from industrial injuries for which he sought worker's compensation benefits in proceedings before the Industrial Commission of Arizona, and for which he entered into a compromise and settlement agreement." (Def.'s Mot. for Certification of Questions of Law to Arizona Supreme Court ("Def.'s Mot. for Certification") at 1-2.)
II. LEGAL STANDARDS AND ANALYSIS
A. Motion for Summary Judgment
Summary judgment is appropriately granted when there are no genuine issues of material fact, and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The initial burden is on the moving party to show an absence of genuine issues of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). If the moving party meets its initial burden, then the non-moving party must set forth specific facts showing a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). In deciding a motion for summary judgment, the Court views the evidence of the non-movant in the light most favorable to that party, and all justifiable inferences are to be drawn in its favor. Anderson, 477 U.S. at 255.
In Arizona, "there is a legal duty implied in an insurance contract that the insurance company must act in good faith in dealing with its insured on a claim, and a violation of that duty of good faith is a tort." Noble v. Nat'l Am. Life Ins. Co., 624 P.2d 866, 868 (Ariz. 1981). To succeed on a claim for bad faith, an intentional tort, "a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim." Id. Accord Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276, 279 (Ariz. 2000).
1. The Policy Language
The policy at issue in this case begins with a "General Section" that states in paragraph A: "This . . . policy is a contract of insurance between you (the employer named in item 1 of the Information Page) and us (the insurer named on the Information Page)." (DSOF, Ex. 1 ("Zurich Policy") at 6.) The employer named in item 1 of the Information Page is Phelps Dodge and references "Endorsement U-WC-321-A," which lists a series of Phelps Dodge companies under "The Owner Group" and "Approved Contractors and Subcontractors," of which Bowen is included. (Zurich Policy, at 2-3; DSOF ¶ 2.) Paragraph B of the General Section is entitled, "Who Is Insured," and it states, "You are insured if you are an employer named in item 1 of the Information Page." (Zurich Policy, at 6.)
The page numbers begin with the first page of Exhibit 1, not the numbers at the bottom of the insurance policy.
Part One of the Zurich Policy provides workers' compensation insurance coverage for "bodily injury by accident or bodily injury by disease" occurring during the policy period. (Zurich Policy, at 6.) The policy states:
B. We Will Pay
We will pay promptly when due the benefits required of you by the workers' compensation law.
C. We Will Defend
We have the right and duty to defend at our expense any claim, proceeding or suit against you for benefits payable by this insurance. We have the right to investigate and settle these claims, proceedings or suits.
. . . .
(Zurich Policy, at 6-7.)
2. Plaintiff's Standing Under the Zurich Policy
Defendant argues first that Plaintiff cannot assert a common law claim for bad faith because "Plaintiff is not an insured on Zurich's policy, nor an assignee of Zurich's insured" and is "a stranger to the Phelps Dodge/Bowen policy. . . ." (Def.'s Mot. for Summ. J. at 1.) Defendant asserts, in essence, that because the Zurich Policy does not state that the carrier shall be directly liable to the employee, then Plaintiff's only remedy is within the Arizona Workers' Compensation Act. (Def.'s Mot. for Summ. J. at 6, citing A.R.S. § 23-963.) As support for this argument, Defendant cites Franks v. United States Fidelity Guaranty Co., 718 P.2d 193 (Ariz.App. 1985).
Plaintiff argues that the Policy does contain "an intention to directly benefit the injured employee" within paragraph H.3 of Part One of the Policy. (Pl.'s Resp. at 11-12.) Paragraph H.3 says that where "required by law," Defendant is "directly and primarily liable to any person entitled to the benefits payable by this insurance." Defendant argues that because A.R.S. § 23-963 does not require such language to be included in a worker's compensation policy in Arizona, then that language "is not a part of Zurich's policy." (Def.'s Reply at 6.) It is debatable what law the Policy is referring to when it says "required by law"; however, because the Court concludes that Plaintiff may assert a bad faith claim under Arizona law, it need not decide this issue.
Franks, though, is of little help to Defendant. In Franks, the court considered "whether a cause of action for bad faith is barred by the exclusive jurisdiction of the Workers' Compensation Act remedy." Id. at 196-97. The court answered in the negative, recognizing that "bad faith by a carrier in the handling of a workers' compensation claim does not arise out of and in the course of employment" and so the exclusive remedy provision of the Workers' Compensation Act "does not apply." Id. at 198. The court held, "A claim by an injured employee against the workers' compensation carrier is a first-party claim, and the Noble elements of bad faith must be met." Id. at 197 (citing Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1272 (Colo. 1985)).
Subsequent Arizona workers' compensation cases have followed Franks and allowed an injured worker to bring a common law bad faith action against a workers' compensation insurance carrier. See Boy v. Fremont Indem. Co., 742 P.2d 835 (Ariz.App. 1987) ("The superior court erred in dismissing on the grounds that [the employee] was not in privity of contract with [the insurance carrier]."); Hayes v. Cont'l Ins. Co., 872 P.2d 668 (Ariz. 1994) (holding that the recent change in Arizona's workers compensation statute at A.R.S. § 23-930, which gave the Commission exclusive jurisdiction over statutory bad faith claims, did not prevent an injured worker from bringing a common law bad faith claim against the insurance carrier as recognized in Boy and Franks); Rowland v. Great States Ins. Co., 20 P.3d 1158 (Ariz.App. 2001) (holding that the common law cause of action for bad faith extends to workers' compensation insurers and that "[i]t is undisputed that [the employee] was a third-party beneficiary of the worker's compensation insurance contract between his employer and [the carrier].")
Defendant attempts to counter these Arizona cases following the Franks precedent by focusing on the Colorado case cited by the Franks court. (Def.'s Mot. for Summ. J. at 6.) In Colorado, the state workers' compensation act required every workers' compensation policy to "contain a clause to the effect that the insurance carrier shall be directly and primarily liable to the employee," thus allowing the "employee [to] stand in the same position as an insured in a private insurance contract." Savio, 706 P.2d at 1272 (citing § 8-44-105, 3 C.R.S. (1973)). Defendant argues, "This is significant because Arizona's Workers' Compensation Act that applies to this action, unlike Colorado's, does not require Zurich's policy to contain a clause that Zurich is primarily or directly liable to injured employees." (Def.'s Mot. for Summ J. at 6, citing A.R.S. § 23-963) (emphasis in original.) The Franks court, though, never said that the policy at issue contained language to the effect that the carrier is directly liable to the employee; Defendant here merely argues that the policy at issue in Franks "apparently" contained such a clause. (Def.'s Reply at 2.) The Court will not infer that the policy at issue in Franks contained language similar to the policy at issue in Savio when the Franks court never even stated the policy's terms.
Also, during oral argument, Defendant asserted that "the policy in the Franks case was of the nature of a first-party policy like a medical policy. Zurich's policy is a liability policy like an auto policy," which "protects its insured's liability to the injured claimant" and does not make "the injured claimant a third party beneficiary." (Tr. 7:1-9.) Defendant, however, has not cited any language from the policy at issue in Franks and appears to assume that it differs from the policy Zurich issued to Phelps Dodge.
Defendant also argues that the "passing references" to Franks made by the courts in Rowland, Boy and Hayes "have no precedential value for the issue presented by Zurich because these issues were either assumed or not decided." (Def.'s Reply at 5.) The Court is not persuaded by Defendant's argument. All three cases — Rowland, Boy and Hayes — state that an employee may assert a bad faith claim against the employer's insurance carrier, and the Court finds nothing to distinguish this case from those Arizona precedents. The other insurance cases cited by Defendant in its motion are inapposite because they are not workers compensation cases.
The Court finds that Plaintiff has standing under Arizona law to bring a bad faith claim against Defendant. Therefore, Defendant's Motion for Summary Judgment is denied.
B. Alternative Motion to Dismiss
Defendant has alternatively moved to dismiss claims by Plaintiff that the Commission has "already decided" or "were subject to decision" by the Commission. (Def.'s Mot. for Summ. J. at 14.) Defendant asserts that because Plaintiff "sought workers' compensation benefits for medical expenses and income losses allegedly arising for injury to his knee, resulting RSD and mental distress," any bad faith claim by Plaintiff is limited "to those damages which are above and beyond the benefits which could have been available to him under the compensation statutes. Those damages would only potentially include damages for pain and suffering." (Def.'s Mot. for Summ. J. at 15,17.)
Plaintiff counters that he is not making a "claim for income loss and medical expenses in this insurance bad faith lawsuit" and there is no dispute in that regard. (Pl.'s Resp. at 13.) Rather, Plaintiff argues that his claim for psychiatric or mental distress resulting from Zurich's alleged bad faith conduct is distinct from any claims stemming from his injury. (Pl.'s Resp. at 13.)
As Defendant notes, Plaintiff appears to have conceded any claims for lost income and medical expenses, even though Plaintiff's Initial and Fourth Disclosure Statements asserted claims for income loss and medical expenses. (Def.'s Reply at 9-10; Def.'s Additional Statement of Facts, Exs. 5-6.)
In addition, Plaintiff argues that although his treatment for depression since his injury was discussed in the case before the Commission, it was "not considered to be part of the basis for the disability impairment rating agreed upon by the parties," and that the Settlement specifically states that the depression "has not been established as an industrial liability" and will be "entitled to res judicata/claim preclusion effect on the issue of whether [Plaintiff's] current major depressive disorder is an industrial liability." (Pl.'s Resp. at 13, citing Settlement, at 7.) The Settlement goes on to say that Plaintiff "further agrees that this Compromise and Settlement Agreement will be entitled to res judicata and claimed [sic] preclusion effect on the issues of whether [plaintiff's] residuals to his right lower extremity should be compensated for on an unscheduled basis." (DSOF, Ex. 3 at 7.)
Earlier on page 7, the Settlement uses the phrase "residuals from the meniscectomy and his reflex sympathetic dystrophy," and the Court assumes that the reference to "residuals" later on that same page refers to the same thing (i.e., the meniscectomy and RSD).
The Court agrees with Plaintiff that his compensable claims and damages in the workers' compensation context are separate from an injury caused by an insurer's bad faith handling of the claim. As the Franks court noted, "The injury that occurs as a result of the tort of bad faith is a separate and distinct injury from the original industrial injury to the worker giving rise to the election of remedy under compensation law. The injury resulting from the intentional tort of bad faith is not compensable under the worker's compensation scheme because it does not arise out of or in the course of employment." Franks, 718 P.2d at 201. Thus, while the issue of whether Plaintiff's current major depressive disorder is an industrial liability is precluded by the parties' Settlement, whether the depression and other emotional distress stem from Defendant's alleged bad faith handling of Plaintiff's claim is not precluded by the Settlement.
Defendant argues that because Plaintiff asserted RSD in his claim before the Commission and because the parties reached a Settlement, then Plaintiff "cannot make a claim for pain and suffering arising from an RSD condition for purposes of this bad faith case." (Def.'s Reply at 11.) Plaintiff's claim, though, is that his RSD was either caused by or exacerbated by the delay in receiving appropriate treatment for his injury due to Defendant's alleged bad faith handling of his claim. While the Settlement includes the parties' representations related to the RSD and an agreement that "the residuals from the meniscectomy and his [RSD] [are] confined to his right lower extremity," it makes no representations that the RSD was the result of delay in treatment or Defendant's alleged bad faith in handling Plaintiff's claim. Therefore, Defendant's alternative motion to dismiss is denied.
Defendant also argues that the doctrines of res judicata, collateral estoppel and accord and satisfaction "bar any claims presented or which could have been presented by [Plaintiff] in the past proceedings with the Industrial Commission." (Def.'s Mot. for Summ. J. at 14.) To the extent Plaintiff is making any claims for lost income or medical expenses that were covered in the Settlement agreement, those claims are barred. However, claims related to whether Plaintiff's RSD was caused by a delay in treatment due to Defendant's alleged bad faith in handling his claim are not barred by the doctrines of res judicata, collateral estoppel or accord and satisfaction.
C. Motion for Certification of Questions of Law
Defendant has asked this Court to certify two questions of law to the Arizona Supreme Court. The Arizona Supreme Court "may answer questions of law certified to it by . . . a United States district court . . . if there are involved in any proceedings before the certifying court questions of law of this state which may be determinative of the cause then pending in the certifying court and as to which it appears to the certifying court there is no controlling precedent in the decisions of the supreme court and the intermediate appellate courts of this state." A.R.S. § 12-1861.
Here, there is controlling precedent for both questions that Defendant is asking to be certified to the Arizona Supreme Court. See discussion infra Parts IIB C. Therefore, Defendant's motion is denied.
IT IS ORDERED denying Defendant's Motion for Summary Judgment (Doc. 65).
IT IS FURTHER ORDERED denying Defendant's Motion for Certification of Questions of Law to the Arizona Supreme Court (Doc. 94).