Will Common Law Bad Faith Survive in Texas? Texas Mutual Insurance Co. v. Ruttiger

On Wednesday, April 14, 2010, the Texas Supreme Court heard oral arguments in the case of Texas Mutual Insurance Company v. Ruttiger. This case made its way to the Supreme Court following a jury trial in Galveston County where Mr. Ruttiger recovered a verdict of approximately $183,000.00 against Texas Mutual for alleged violations of the Texas Insurance Code, the Texas Deceptive Trade Practices Act, and the common law tort of bad faith. The Houston First Court of Appeals affirmed the judgment in favor of Mr. Ruttiger on the issues related to TMIC's liability for bad faith and violations of the DTPA and Insurance Code. TMIC then appealed to the Supreme Court.

During oral argument and in its briefs, TMIC argued that the common law bad faith cause of action is no longer necessary because the TDI/DWC has extensive enforcement powers and dispute resolution processes that render bad faith unnecessary. These powers and processes did not exist before the “new law” was passed. TDI/DWC has the authority to issue fines against insurers for improper conduct, to resolve disputes via expedited benefit review conferences and contested case hearings, and to issue interlocutory orders for payment of compensation and/or medical benefits. When the Supreme Court extended the bad faith cause of action to workers' compensation claims in Aranda v. Insurance Co. of North America, 748 S.W.2d 210 (1988), these dispute resolution processes and enforcement powers did not exist.

Several of the justices directed questions to counsel for both parties that could lend some insight into whether common law bad faith will survive.

Justice Eva Guzman asked TMIC's counsel whether the “new law” really provides quick relief on compensability issues. TMIC's counsel responded that the claimant could either ask for a BRC or go to CCH which, according to DWC statistics, could take an average of 45 days. Counsel also reminded Justice Guzman that the Labor Code provides for expedited hearings.

Justice O'Neill and Chief Justice Jefferson directed questions to TMIC's counsel regarding whether the legislature has recognized the continued existence of common law bad faith after passage of the “new law” by capping punitive damages in the 1993 amendments and by not specifically overruling this cause of action statutorily. TMIC's counsel responded that the legislature's recognition of a punitive damages cap was simply deference by the legislature to the Supreme Court's creation of the common law cause of action rather than the legislature agreeing that such a cause of action actually exists. When Chief Justice Jefferson asked if there is any evidence that the legislature to date has expressed any intent to overrule the common law bad faith cause of action, counsel answered no.

During the presentation by Ruttiger's attorney, Justice Hecht observed that the Labor Code appears to have made the Aranda decision “dead letter” since the compensation system covers all of the problems addressed by the Aranda case. Justice Johnson similarly observed that the Labor Code includes sanctions now that did not exist before the bad faith cause of action was created by the Aranda decision.

Justice Johnson also observed in this case that it was several months before the first BRC was scheduled and several months after the injury before Ruttiger's counsel even asked for a BRC. He went on to add, picking up on comments made by Justice Hecht, that Texas now has a system where the carrier pays benefits until there is a denial (between day 15 and day 60) and then at that point upon filing of the denial, the employee can ask for a BRC. Justice Johnson expressed concerns that a claimant's attorney could “leverage up” the system by creating delays and then suing for bad faith.

When Justice Johnson asked about the availability of interlocutory orders under the prior system or at the time Aranda was decided, Ruttiger's counsel responded that I.O.'s are not mandatory now and they are “rarely granted” by the DWC.

In a seemingly “big picture observation” of the recent revival of bad faith lawsuits in Texas, Justice Hecht asked Ruttiger's counsel why the bad faith issue seems to have arisen in so many cases “all of a sudden” across the state. Justice Hecht said that it “seems that the giant has suddenly awakened after being asleep for a while.”

Lastly, Justices Medina and Guzman expressed concerns to TMIC's counsel about “unscrupulous” or “incompetent” adjusters and whether the elimination of the bad faith cause of action will be sufficient incentive for insurance carriers to police themselves. In response to these questions from both Justices, TMIC's counsel pointed out again that the employee could pursue remedies at the DWC including expedited dispute resolution.

In summary, the Supreme Court in deciding the Ruttiger case will revisit the common law bad faith cause of action it adopted in workers' compensation cases over twenty (20) years ago in the Aranda decision. The Court will certainly grapple with policy and legislative changes that have occurred in the past two (2) decades as it does so. The Court could eliminate the statutory and common law causes of actions altogether or leave parts of the cause of action still standing. The safest observation that can be made at this point is that the law on bad faith will change in some fashion when the final decision is issued.

This article by Andrew Schreck is reprinted with permission from a Downs Stanford advisory.