Sanderson v. American Family Mutual Insurance Company       (Bad Faith)

The Colorado Court of Appeals recently announced a decision that may limit the grounds upon which an injured worker can allege bad faith in the administration of a workers' compensation claim. As a result, this decision may be helpful in defending against future allegations of bad faith arising out of workers' compensation claims.   

On October 15, 2003, plaintiff was injured in an automobile accident caused by a motorist who had bodily injury liability coverage of $25,000. Because plaintiff allegedly suffered injuries in excess of that amount, the accident implicated the  Uninsured Motorist (UIM) policy with American Family, which had a $100,000 policy limit. Plaintiff and American Family proceeded to arbitration, where the arbitration panel awarded him $357,387.80 in damages. American Family paid plaintiff the remaining $75,000 policy limit. Plaintiff thereafter filed suit against American Family, claiming it had acted in bad faith in handling his claim. The trial court dismissed the bad faith claim by entering summary judgment for American Family. On appeal, Plaintiff asserted that the district court applied the wrong legal standard.

Plaintiff on appeal argued that American Family acted in bad faith because it had improperly (1) failed to follow prevailing industry investigation standards; (2) substituted the non-medical opinions of its claims attorney and claims adjuster for those of plaintiff's doctors; (3) failed to explain why plaintiff's claim was being delayed and denied; and (4) made a low settlement offer of $30,000, never explained the basis for that offer, and stubbornly refused to move from that offer.

However, based on the evidence presented and applying the appropriate standard, the Colorado Court of Appeals determined that no reasonable jury could have found that American Family acted in bad faith.  American Family argued that it had a good-faith basis to dispute the amount owed under the policy,because liability for the underlying accident was at issue. In opposing summary judgment, plaintiff presented no evidence to suggest that American Family had contested liability in bad faith or without any reasonable basis for doing so.  The Court indicated that the only evidence presented by plaintiff pertained to potential disputes as to American Family's valuation of plaintiff's claim.  The Court noted that none of this evidence, however, called into question American Family's analysis of the liability and thus, there was a lack of evidence showing bad faith. 

The Court indicated that because liability was in dispute, bad faith did not exist in the form of (1) the $30,000 counteroffer; (2) American Family's refusal to negotiate further after making the $30,000 settlement counteroffer; (3) American Family's clear indication that it was contesting liability; and (4) investigation efforts concerning American Family's valuation of potential liability for the claim.  

While not directly related to workers' compensation administration, this decision is helpful.  This decision may limit the grounds often asserted for bad faith administration of workers' compensation claims. 

The Colorado Supreme Court announced on November 15, 2010 in Volunteers of America v. Gardenswartz, that an injured plaintiff will be able to seek as damages the amounts billed by health care providers as opposed to the amounts actually paid by their health care insurers.  This will increase the amount of damages claimed by 20-30% and defendants can expect significantly higher initial demands in the near future from plaintiff's attorneys.

The Colorado Supreme Court determined that the reduction in the amounts paid by health insurers to medical providers is within the contract exception of the Collateral Source Rule, codified at C.R.S. § 13-21-111.6.  This means that defendants in personal injury cases will no longer be able to present any evidence regarding the amounts actually paid by the health insurers to argue what are reasonable and necessary medical expenses to the jury.  Defendants will have to present expert testimony on the actual costs of medical procedures charged by medical providers in order to present this defense.

This edition of Employment Law Corner addresses one of the hot issues currently existing nationwide in jurisdictions, such as Colorado, that permit the use of medical marijuana. Recently, numerous medical marijuana dispensaries have opened in the Denver-Metropolitan area.  These dispensaries are legal as a result of the enactment of the Medical Use of Marijuana for Persons Suffering from Debilitating Medical Conditions constitutional amendment (hereinafter, the "Medical Marijuana Amendment").  The Medical Marijuana Amendment gives patients using prescribed marijuana to treat a chronic debilitating disease or medical condition an affirmative defense to Colorado's criminal laws.  Colorado employers should note that the legal landscape is a little complicated with respect to an employer's right to address an employee's use of medical marijuana.  This article addresses these concerns and provides some recommendations. 

While the Medical Marijuana Amendment specifically provides, in part, that "Nothing in this section shall require any employer to accommodate the medical use of marijuana in a workplace," it may very well conflict with Colorado's Unlawful Prohibition of Legal Activities as a Condition of Employment statute ("Lawful Off-Duty Activities Statute"), C.R.S. § 24-34-402.5.  This latter statute prevents an employer from terminating the employment of an employee due to the employee's engaging in any lawful activity off the premises of the employer during nonworking hours.  The Statute, however, creates exceptions when the termination decision:  (1) relates to a bona fide occupational requirement or is reasonably and rationally related to the employment activities and responsibilities of a particular employee or a particular group of employees, rather than to all employees of the employer; or (2) it is necessary to avoid a conflict of interest with any responsibilities to the employer or the appearance of a conflict of interest.

So how might Colorado employers walk the line between their rights under the Medical Marijuana Amendment and the Lawful Off-Duty Activities Statute? While this issue has not been litigated in Colorado, courts in California and Montana have addressed the use of medical marijuana in the workplace.

In 2008, the California Supreme Court decided whether an employer had to make a reasonable accommodation by permitting an employee's medical use of marijuana in the workplace. In his complaint, the plaintiff alleged that the employer violated California's Fair Employment and Housing Act ("FEHA") by terminating him because of, and failing to make a reasonable accommodation for, his disability. The plaintiff also claimed that the employer wrongfully terminated his employment in violation of public policy. In affirming the Court of Appeals decision, the California Supreme Court concluded that the plaintiff could not state a cause of action against the employer under the FEHA based on the company's refusal to accommodate his use of medical marijuana. In reaching this conclusion, the Court held that no state law can completely legalize marijuana for medical purposes because the drug remains illegal under federal law, even for medical uses. Furthermore, the FEHA does not require employers to accommodate the use of illegal drugs.

In 2009, the Montana Supreme Court heard a case in which an employee sued his employer claiming violations of the Montana Human Rights Act ("MHRA") and the Americans with Disabilities Act ("ADA") when it failed to accommodate his medical marijuana use by waiving terms of its drug testing policy.  In rejecting this argument, the Montana Supreme Court held that Montana's Medical Marijuana Act ("MMA") clearly provides that an employer is not required to accommodate an employee's use of medical marijuana. Thus, the Court concluded that failure to accommodate use of medical marijuana does not violate the MHRA or the ADA because an employer is not required to accommodate an employee's use of marijuana.        

Similarly, Colorado's Medical Marijuana Amendment does not require an employer to accommodate the medical use of marijuana in any workplace.  However, it is important to note that neither California nor Montana has a conflicting Lawful Off-Duty Activities Statute. Therefore, if an employer terminates an employee for medical marijuana use, even if used at home and not while the employee is working, there is the potential for  liability under the Lawful Off-Duty Activities Statute.  The employee in this instance could claim that the employer is violating Colorado's Lawful Off Duty Activities Statute and seek damages. 

To minimize employers' risk of being caught up in this conundrum, Colorado employers can create drug-free work policies.  Such policies can prohibit their employees from being intoxicated at the work place, which specifically prohibits illegal, drugs, alcohol, or any prescription drugs.  Employers should further ensure that their drug-free workplace policies conform to the exceptions under Colorado's Lawful Off-Duty Activities Statute (discussed above). These policies should be made clear to employees and consistently enforced.  

It is also possible that an employer could avoid this conundrum altogether by indicating in their drug-free workplace policy that all drugs that are illegal under federal or state law are prohibited.

A topic worth reviewing concerns the issue of whether medical bills can be denied if the provider fails to utilize the prior authorization procedure under the Colorado Workers' Compensat ion Rules of Procedure.   In the day-to-day administration of claims, medical care is commonly provided and bills are submitted without a prior authorization submitted by the medical provider.  Often times, respondents seek to deny such care on the basis that the medical provider failed to utilize the prior authorization procedure under the Rules of Procedure.  However, failure of a medical provider to obtain prior authorization is not an automatic basis on which to deny payment of a medical bill.  Rather, respondents must carefully review the medical treatment guidelines and fee schedule in order to properly deny medical bills under the prior authorization procedure. 

The Colorado Workers' Compensation Rules of Procedure indicate specific circumstances when prior authorization for payment must be made.  Under Rule 16-9, prior authorization is only required when:

•  a prescribed service exceeds the recommended limitations set forth in the treatment guidelines;
•  the treatment guidelines or the fee schedule specifically state that the procedure requires prior authorization; or 
• the service is not identified in the fee schedule.  

Thus, prior authorization for a particular treatment is often dictated by the medical treatment guidelines and may or may not be required depending on how that treatment is accepted under such guidelines.  For example, if an injured worker is treating for a lumbar spine injury, the medical treatment guidelines indicate that physical therapy treatment for activities of daily living should be for a maximum duration of six weeks.  If treatment is recommended beyond the six week time frame, prior authorization for payment may be required.  However, if such treatment is recommended for less than six weeks, then prior authorization is not required.   

Moreover, nowhere in the Colorado Workers' Compensation Rules of Procedure does it provide that a medical bill may be denied solely because prior authorization was not obtained.  In the absence of a non-medical reason for denying payment, a determination must be made as to whether the treatment was reasonable and necessary.  Pursuant to Rule 16-9(H), if treatment was denied for a medical reason, then payment cannot be denied simply because prior authorization was not obtained.  Instead, the denial of payment must be based on the specific medical reason, such as the treatment is not medically reasonable and necessary.  Furthermore, the denial must be supported and accompanied by an opinion from a physician or other qualified health professional. See Rule 16-11(C).  As a result, failure to obtain prior authorization becomes irrelevant.   

The bottom line is that the rules on prior authorization for payment are essentially for the protection of the injured worker and medical providers.  The purpose is to implement review of a proposed procedure not contemplated by the treatment guidelines before the treatment is undertaken and to ensure payment of the procedure if prior authorization is requested and granted.  The rule is not intended to provide an additional basis upon which payment for a medical service may be denied once the treatment occurs. 

Respondents should not assume, without checking the treatment guidelines or fee schedule, that prior authorization of a particular medical service was required.  If treatment for a particular medical service required prior authorization, respondents should still take care to ensure that denial of payment comports with the Rules of Procedure regarding denial of payment for medical and non-medical reasons.