South Dakota Supreme Court weighs in on bad-faith insurance claims

The high court reversed the trial court’s dismissal of a bad-faith claim in the workers’ compensation context.

On September 28, 2016, in a unanimous opinion, the Supreme Court of South Dakota reversed a trial court ruling that had dismissed a lawsuit alleging that a workers' compensation insurer had terminated a claimant's workers' compensation benefits in bad faith. In this important opinion, the court made insightful observations about the handling of medical evidence by a workers' compensation insurer in a bad-faith insurance claim.

Jake Mordhorst, a young furniture deliverer, was injured when a heavy sofa fell off a delivery truck onto his head and shoulders. The plaintiff claimed the injury was painful and an MRI showed a herniated disk. After receiving workers' compensation benefits for about a year, the insurance company that insured his employer terminated his benefits based on the opinion of an independent medical examiner, called an IME, who said that the injury was only a strain that had lasted 18 days.

Mordhorst had his benefits reinstated after a hearing before the South Dakota Department of Labor in which the agency disagreed with the termination. Thereafter,

Mordhorst sued the insurer for bad faith and punitive damages (those meant to punish the defendant's behavior), but the state trial court granted the defendant's motion to dismiss the case, agreeing with the company that the plaintiff had failed to state a valid legal claim because the IME's opinion was a reasonable basis on which to deny benefits.

What is a bad faith insurance claim?

Put simply, the law requires a powerful insurance company to handle claims by its policyholders with good faith. When an insurer unfairly denies a claim, the insured party may decide to file a lawsuit alleging that the company acted in bad faith. Examples of bad-faith insurance company behavior:

  • Unreasonable delay in processing a claim
  • Denial of a claim that is clearly covered
  • Denial of a claim that is contrary to all the available evidence
  • Failure to adequately investigate the circumstances of a claim

What did the Supreme Court say?

In its opinion, the court said that the trial court's opinion that the insurer's reason for denying the benefits was reasonable was "immaterial" because the issue a court must decide in a motion to dismiss for failure to state a valid claim is whether if the facts alleged by the plaintiff were true, they could form the basis of a bad-faith claim.

The Supreme Court held that Mordhorst had indeed stated a valid claim, reversing the trial court and sending the case back for reconsideration.

To state a bad-faith insurance denial claim in South Dakota, a plaintiff must prove that there was not a reasonable basis to deny the claim and that the insurance company knew this. According to the opinion, this knowledge can be implied when the insurer shows "reckless indifference to facts or proofs ..."

The court said that the IME's statement that there were no objective medical findings to support the plaintiff's claims of pain was in contrast to the earlier MRI and other objective findings and therefore that a jury could find that the IME's report was not a reasonable basis on which the insurer could have denied the claim. The doctor's opinion was not binding on the insurance company, because it has the authority to reasonably reject a doctor's opinion.

Bad-faith insurance claims are complex procedurally and factually. Seek the advice of an attorney if you question whether an insurance company denial was in good faith.

With offices in Sedona, Arizona, and San Diego, California, the lawyers of Dawson & Rosenthal, P.C., represent clients in bad-faith denials of insurance claims.