A NEW BREACH IN THE WALLS: The Oklahoma Supreme Court Opens The Flood Gates For Insurance Bad Faith Lawsuits Based On Failure To Pre-Authorize Medical Treatment in Summers v. Zurich American Ins. Co.

June 19, 2009

By: Brooks A. Richardson

A NEW BREACH IN THE WALLS:

The Oklahoma Supreme Court Opens The Flood Gates

For Insurance Bad Faith Lawsuits Based On Failure To

Pre-Authorize Medical Treatment in Summers v. Zurich American Ins. Co.

By: Brooks A. Richardson, Esq., Fellers, Snider, Blankenship, Bailey & TippensJune 19, 2009

I. Introduction: The Floodgates Have Opened.

Since the inception of the tort of insurance bad faith in Oklahoma, the underlying basis for a first party bad faith claim always has been the insurer’s failure or refusal to timely pay monetary benefits that were allegedly due under the terms of the insurance policy. Every opinion from the Oklahoma Supreme Court and Court of Civil Appeals that discussed bad faith liability recognized that such liability was based on the insurer’s underlying duty to pay insurance benefits -- to indemnify for covered losses. If an insurer failed to fulfill its duty to indemnify in good faith, the insurer could be liable for both the insurance proceeds and extra-contractual damages. The Oklahoma Uniform Jury Instructions clearly identify the insurer’s duty to pay under the insurance contract as an essential element of the first-party bad faith claim.

On May 26, 2009, the Oklahoma Supreme Court departed from this long-standing precedent and recognized -- without any analysis -- a bad faith claim premised on “Insurer’s refusal to authorize court-ordered medical treatment, not on a refusal to pay monetary benefits.” Summers v. Zurich American Insurance Company, 2009 OK 33, ¶ 7. The Summers decision is remarkable for its abrupt departure from the legal underpinnings of the implied covenant of good faith and fair dealing. No longer must an insurer have delayed or denied a contractual obligation to pay to be subjected to bad faith tort damages. Now, an insurer can be sued in tort for failing to timely provide non-monetary services it never agreed to provide in the insurance policy.

While the court’s decision in Summers arises from a case involving the handling of a workers’ compensation claim, it can readily be cited (and probably will) to support new bad faith causes of action arising from the handling of many different insurance claims, such as failure to timely pre-authorize medical treatment while handling MedPay and Uninsured Motorist claims, and failure to timely pre-authorize repair work in homeowners’ and auto property damage claims. With the floodgates open, the potential now exists for an explosion in Oklahoma bad faith litigation based on insurers’ handling of insureds’ requests for non-monetary services that are not benefits under the applicable insurance policy.

II. The Summers Case.

A. The Petition.

Plaintiff Nancy Summers filed her Petition alleging bad faith on November 19, 2007. The Petition was filed after Ms. Summers spent more than three years in Workers’ Compensation Court (WCC) seeking wage benefit payments and compensable medical treatment for a work-related injury. The WCC had entered several different orders during 2005 and 2006 awarding medical and wage benefits and authorizing “reasonable and necessary medical treatment.” The WCC also subsequently entered orders authorizing specific and particular medical treatment to be provided to Ms. Summers.

On October 16, 2007, the WCC entered an Order that first cited some of its prior orders authorizing “reasonable and necessary medical treatment,” then authorized more specific and particular medical treatment, then directed the employer and its workers’ compensation insurer, Zurich American Insurance Company, to pay for particular medical treatments already given, then directed the employer and Zurich American to “take all reasonable measures to facilitate claimant’s treatment as set out herein within 30 days of the filing date of this order.” The October 16, 2007 Order did not contain any reference to or discussion of whether the employer and Zurich American had failed to timely provide any of the benefits specifically awarded in that order, much less whether they did or did not have “good cause” for any such failure.

Thirty days later, Ms. Summers filed her Petition alleging bad faith in Oklahoma District Court. The Petition alleged “[t]hat Defendant’s refusal to comply with the Court’s order and provide benefits in a timely manner constitutes a breach of contract, resulting in a willful and intentional violation of its duty of good faith and fair dealing.” The Petition did not specify how the Defendant, Zurich American, had refused to comply with any court order, or what “benefits” it had failed to provide in a timely manner.

B. Summary Judgment And Appeal.

Zurich American moved for summary judgment on grounds that Summers had failed toobtain certification of any unsatisfied workers’ compensation award prior to bring her bad faith action. Zurich American argued that certification of an unsatisfied workers’ compensation order was a necessary pre-requisite to filing a bad faith action arising from an insurer’s handling of a claim for workers’ compensation benefits, based on the Oklahoma Supreme Court’s decision in Sizemore v. Cont’l Cas. Co., 2006 OK 36, 142 P.3d 47.

In Summers’ response to the Motion for Summary Judgment, she admitted there was no certification from the WCC of any unsatisfied order, but argued that it was not required. The response also states: Nancy Summershas been unjustifiably denied the prompt medical care ordered by the WCC. Zurich [American] should be held to account for its unreasonable delay in providing these benefits.” This was the only sentence in Summers’ response that discussed the alleged failure to provide “prompt medical care” as a basis for her bad faith action.

After a hearing, the district court granted summary judgment to Zurich American on the basis that Summers had not obtained any certification of an unsatisfied WCC order. On accelerated appeal, the Court of Civil Appeals affirmed the trial court’s entry of summary judgment based on the lack of a certified WCC order.

Summers petitioned the Oklahoma Supreme Court for certiorari. In her Certiorari Petition, Summers complained that “the Court of Civil Appeals did not address the issue of how a Workers’ Compensation Claimant might ever reduce to judgment a non-monetary award of medical benefits,” and argued that Sizemore did not establish certification of an unsatisfied workers compensation order as a requisite to a bad faith action. In answer, Zurich American focused on Sizemore and its certification requirement versus the Sizemore Court’s subsequent order denying rehearing in which the Court held that a claimant need not seek enforcement of a certified award before filing a bad faith action, but certification itself was still required. In Reply, Summers again argued that the certification pre-requisite could not be accomplished “for an order awarding reasonable and necessary medical benefits.” The Oklahoma Supreme Court granted certiorari.

C. The Supreme Court Opinion.

A 6-3 majority opinion confirmed that certification of an unsatisfied prior workers’ compensation award is a necessary pre-requisite to filing an insurance bad faith claim arising from a workers’ compensation claim. Opinion at ¶¶ 9-14. However, the Majority also decided, sua sponte, that the WCC’s Order of October 16, 2007 was the “functional equivalent” of a certification order demonstrating that Zurich American lacked “good cause” for complying with the WCC’s prior awards (Opinion at ¶¶ 17-20). Likewise, the Majority also held that Summers could pursue her claim for bad faith premised on “Insurer’s alleged continuing failure to authorize the overdue court-ordered medical treatment.” Opinion at ¶20.

III. An Abrupt Departure from Precedent.

The Summers Court’s sua sponte recognition of a “functional equivalence” exception to the certification pre-requisite is controversial, but the ultimate impact of this specific holding will be limited to bad faith actions arising from workers compensation cases. The most dramatic impact of Summers is its abrupt departure from precedent when it recognized a bad faith cause of action against a workers’ compensation insurer premised on allegations of the carrier’s “refusal to authorize court-ordered medical treatment, not on a refusal to pay monetary benefits.” Opinion at ¶7. For the very first time, this Court has opened the door to bad faith suits against insurers based on their failure to provide non-monetary services they never agreed to perform in their insurance policies.

A. Bad Faith Premised On Failure To Timely Pay Contractual Benefits.

Throughout the course of the Oklahoma Supreme Court’s bad faith jurisprudence, the essence of its rulings always concerned the denial (or delay) of payments due contractually.¹ The Court of Civil Appeals likewise based its analysis of bad faith law on denial or delay of payment of monetary benefits due under the insurance contract.² The Uniform Civil Jury Instruction approved by the Oklahoma Supreme Court for bad faith causes of action arising from first-party insurance claims specifically requires, as an essential element, a finding that the insurer was required under the insurance policy to pay the plaintiff’s claim. See OUJI-Civ.2d No. 22.2(1).

The Summers Court’s recognition of a bad faith cause of action based on an Insurer’s failure to pre-authorize medical treatment (i.e., guarantee payment for future medical care) completely departs from this long-standing jurisprudence. Although there may not be any contractual provision requiring an insurance company to pre-approve or pre-authorize medical treatment, or which conditions payment of benefits on obtaining pre-authorization for medical care, the Court has held that a bad faith cause of action can exist. By recognizing a cause of action for bad faith against an insurer for failure to pre-authorize treatment -- a contingency that is not in the insurance policy -- the Court veers away from its jurisprudence requiring a bad faith claim be premised upon breach of a contractual duty.

B. Pre-Authorized Medical Treatment Is Not An Automatic Contractual

Benefit or Right, But Now May Be The Basis For Bad Faith Liability.

Workers’ compensation insurance policies do not typically contain any provision to require or provide for pre-authorization of medical treatment.³ Unlike many managed care plans and health maintenance organizations, workers’ compensation insurance policies do not condition payment for treatment on a patient or doctor having obtained pre-authorization for that treatment.

In that sense, workers’ compensation insurance policies are similar to coverage for medical payments in automobile insurance policies. MedPay coverage insures reasonable expenses for necessary medical services to treat bodily injuries suffered by an insured as a result of an accident. The “reasonable and necessary” limitation is virtually identical to a standard workers’ compensation court order directing benefits to pay for “reasonable and necessary” medical treatment. If a workers’ compensation carrier can be sued for bad faith tort liability on the basis that questioning whether a specific medical treatment proposed by a physician is “reasonable and necessary,” and not immediately guaranteeing payment for that proposed treatment, then so too can a MedPay insurer be asked under the threat of bad faith to pre-authorize proposed medical care. In neither case was pre-authorization a contractual right, duty or benefit, but in both cases pre-authorization becomes an issue under the rubric of “reasonable and necessary” treatment.

The issue of pre-authorization in the context of a workers’ compensation case or a MedPay claim exists as a matter of convenience for medical professionals, not as a matter of contractual right under the insurance policy. Many medical professionals want to know they will be paid before agreeing to treat a patient for a reduced fee from an insurer. Accordingly, these medical professionals ask for pre-authorization of proposed treatment from workers’ compensation carriers. In cases where the reasonableness and necessity of the proposed treatment for a work-related injury are clear, some insurers may choose to pre-authorize such treatment.

However, many situations arise when medical professionals can disagree on what specific care is “reasonable and necessary” to treat a compensable injury or medical condition. One doctor may believe a back injury can be resolved with physical therapy, while another may believe a simple fusion is indicated, and another recommends a double-discectomy. Some doctors may believe ten follow-up visits are reasonable, while some may feel only five visits are necessary. In such cases, the scope of what constitutes “reasonable and necessary” treatment is unclear and makes pre-authorization impossible or impracticable. The best determiner of what is reasonable and necessary medical treatment is to examine what treatment is actually given by a provider (under the risk of only receiving partial payment later), not what treatment a provider wants to provide if the insurer pre-authorizes payment for it.

CONCLUSION

In the wake of Summers, insurers and district courts should be prepared for the flood of new bad faith lawsuits based on failure or refusal to timely pre-authorize medical treatment even when no such contractual benefit or requirement exists in the underlying insurance policy.

¹See Skinner v. John Deere Ins. Co., 2000 OK 18, ¶ 16, 998 P.2d 1219, 1223 (“tort liability arises only where there is a clear showing that the insurer unreasonably, and in bad faith, withholds payment of the claim of its insured”)(emphasis added); Garnett v. Gov’t Employees Ins. Co., 2008 OK 43, ¶ 27, 186 P.3d 935, 944 (trial court did not err in granting summary judgment to insurer on bad faith claim for failure to pay a portion of UIM claim); Sizemore v. Cont’l Cas. Co., 2006 OK 36, ¶ 26, 142 P.3d 47, 54 (common law tort action exists against an insurance carrier for failure to pay workers’ compensation award); Fehring v. State Ins. Fund, 2001 OK 11, ¶ 26, 19 P.3d 276, 284 (discussing potential liability of workers’ compensation insurer for failure to timely pay a workers’ compensation award); Barnes v. Oklahoma Farm Bureau Mut. Ins. Co., 2000 OK 55, ¶ 51, 11 P.3d 162, 180-81 (discussing the availability of attorney’s fees for bad faith refusal to pay against an insurer); Newport v. USAA, 2000 OK 59, ¶¶ 12-24, 11 P.3d 190, 196-97 (issue of bad faith against insurer for making “low ball” offers for payment was for jury to decide); Anderson v. U.S. Fidelity and Guar. Co. , 1997 OK 124, ¶ 11, 948 P.2d 1216, 1218 (no bad faith claim for delay in payment before workers’ compensation court made its award); Kincade ex rel. Linville v. Group Health Services of Oklahoma, Inc., 1997 OK 88, ¶ 17, 945 P.2d 485, 491 (holding Federal Employees Health Benefits Act does not pre-empt state law cause of action in tort arising out of an insurer’s bad faith refusal to pay valid claim); Buzzard v. Farmers Ins. Co., 1991 OK 127, 824 P.2d 1105, 1112 (exhaustion of liability coverage is not a defense to bad faith claim against an insurer for failing to pay underinsured motorist benefits); Goodwin v. Old Republic Ins. Co., 1992 OK 34, ¶ 14, 828 P.2d 431, 435 (holding a common law tort action lies for bad faith intentional failure to pay benefits under a workers’ compensation award); Roach v. Atlas Life Ins. Co., 1989 OK 27, 769 P.2d 158, 162 (action for bad faith lies in favor of life insurance beneficiary when insurer delays payment of policy proceeds); McCorkle v. Great Atlantic Ins. Co., 1981 OK 28, 637 P.2d 583 (insured brought bad faith action for failure to pay policy limits; court held bad faith against an insurer extended to all kinds of insurance policies); Christian v. Am. Home Assur. Co., 1977 OK 141, 577 P.2d 899 (reversing summary judgment for insurer and remanding for further proceedings on a bad faith failure to pay claim).

²See Heintz v. Trucks for You, Inc., 1999 OK CIV APP 64, ¶ 11, 984 P.2d 255, 258 (affirming dismissal of insured’s bad faith claim for delay in payment); Duensing v. State Farm Fire and Cas. Co., 2006 OK CIV APP 15, 131 P.3d 127 (insurer’s conduct of withholding payment was reasonable as a matter of law); Cooper v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pennsylvania, 1996 OK CIV APP 52, 921 P.2d 1297, 1299 (bad faith for delay in payment arises only after there has been an award against employer); Miller v. Liberty Mut. Fire Ins. Co., 2008 OK CIV APP 65, 191 P.3d 1221 (summary judgment denied on bad faith delay in payment of benefits).

³Again, the existence or non-existence of a contractual duty to pre-authorize medical treatment was never at issue in the district court below, so the underlying workers’ compensation insurance policy is not part of the record on appeal. Insurer can submit the insurance policy as a supplemental exhibit if the Court requests it or deems it necessary.