Injured South Dakota workers could lose rights, lawyers warn

Lawyers who represent injured workers in South Dakota are bracing for a proposal from the insurance industry that would limit their ability to pursue legal claims against insurance companies that are intentionally dishonest.

Representatives of the industry were scheduled to make a proposal to the state Workers Compensation Advisory Council later this month, a first step that could lead to legislation that would limit injured workers from pursuing bad faith claims against insurance companies. But that proposal will now be delayed until August, according to Mike McKnight, a Sioux Falls lawyer who represents insurance companies.

"We're going to have some further discussions — both sides, the other claimant lawyers, trial lawyers, etc. — and see if we can come to some resolution of it," McKnight said.

While the specifics have not been made public, lawyers who represent injured workers against insurance companies expect the proposal to include caps on damages awarded in bad faith cases or even barring bad faith claims from being filed in circuit court.

“There’s been a concern raised in the past that worker compensation insurance companies are unduly susceptible to liability for bad faith,” said James Marsh, who oversees the South Dakota Division of Labor and Management and the state’s worker compensation system.

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Bad faith claims involve accusations that insurance companies intentionally hid information or denied legitimate claims made by those they insure. A prominent example came last May when a federal jury in Sioux Falls awarded a woman nearly $4 million after finding that an insurance company hid the details of a $1 million insurance policy after the woman suffered catastrophic injuries in a car accident. By finding that a company acted in bad faith, a jury can levy punitive damages to punish the bad behavior and, in theory, deter future bad behavior.

But Mike Abourezk, a Rapid City attorney who won the $4 million verdict last year, said insurance companies are willing to gamble that they won’t get caught, particularly with worker compensation claims, where the claims are typically only a few thousand dollars.

By denying legitimate claims, insurance companies “are going to make more money than they lose even if they get caught now and again.”

“I have more bad faith than I could do even in five lifetimes,” Abourezk said.

Looming over the debate about bad faith in worker compensation insurance is a South Dakota Supreme Court decision from last September. In that ruling, the court reversed a lower court that threw out a case brought by James Mordhorst. Mordhorst brought a bad faith suit against Dakota Truck Underwriters and Risk Administration Services after the companies terminated worker compensation benefits for an accident Mordhorst sustained when a 275-pound couch fell on him during a furniture delivery.

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At issue in the case is a report done by an independent medical examiner retained by the insurers to evaluate Mordhorst’s injuries. The insurance company report indicated that Mordhorst’s injuries were not caused by the couch, a contradiction to what Mordhorst’s doctors found. Although the lower court ruled that the insurance companies had a “reasonable basis” to deny Mordhorst’s bad faith claim based on the independent medical examiner’s report, the South Dakota Supreme Court ruled that the opinion of a medical practitioner is not necessarily a reasonable basis for denying benefits.

Juries, says the ruling written by Chief Justice David Gilbertson, routinely evaluate the opinions of medical experts.

“We see no reason to conclude that a workers’ compensation insurer — whose chosen business deals in such matters — is incapable of the same,” Gilbertson wrote.

The ruling strips work comp insurers of the protection they had received by relying on the evaluations of doctors they paid to deny claims. And the ruling is the impetus for the industry seeking to limit future bad faith lawsuits, say lawyers who work in the area.

Watertown lawyer Seamus Culhane said the independent medical examiner reports served as an insurance policy for the insurance companies. But the supreme court ruling “upended” their system.

“They don’t like that,” Culhane said. “They want their cheap insurance policy.”

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Capping damages on bad faith claims in work comp cases would leave injured workers at the mercy of insurance companies, Culhane said. The typical case is only a few thousand dollars in damages. But lawyers spend tens of thousands on each case, and without the prospect of punitive damages lawyers won’t be able to recoup their expenses and workers will be left without recourse.

“It would turn every bank robbery scenario into a speeding ticket,” Culhane said.

Another scenario would simply bar bad faith lawsuits in work comp cases, and instead require the Division of Labor and Management to render administrative penalties. Half the states have a similar system, but Rapid City lawyer Jim Leach said he thinks bad faith is a civil action that should be decided by juries. He noted that the Seventh Amendment to the U.S. Constitution allows jury trials, and to do away with jury trials in bad faith cases would be a violation.

“I think it would be absolutely and blatantly unconstitutional,” he said.

Lee Schoenbeck, a Watertown lawyer and longtime state lawmaker, said the state has a “terrible problem” now with the way employees are getting abused and mistreated by insurance companies in work comp cases. To further limit employee rights, he said, would be a mistake.

Schoenbeck said he represents a retired police officer who was hit head on while driving for a job. The accident caused severe injuries, but every six months the insurance company simply stops paying. Often, he said, the insurance companies harass employees until the employees get fed up and settle for less money than they were entitled to.

“This isn’t how the system is supposed to work, and everybody ought to be embarrassed,” he said.