COURT OF APPEALS ADDRESSES EXHAUSTION OF REMEDIES
MACIAS v. SCHWEDLER, 135 S.W.3d 826 (Tex.App.—Houston [1st Dist.] 2004, review denied)
FACTS – Manuel Macias was injured as he was walking into a plant to report to work. His ankle rolled on the edge of the roadway, causing him to fall and injure his ankle, knee, buttocks, back and body in general, and aggravating a pre-existing spinal arthritis. He made claim against his employer’s WC carrier, Continental Casualty Company. The carrier filed a notice of disputed claim. He received treatment for a sprained ankle, but upon learning that the carrier was refusing treatment for his back and the aggravated arthritis, Macias became despondent and committed suicide.
CASE HISTORY – After her husband’s death, Sara Macias, individually and on behalf of her husband’s estate and their children, filed suit for wrongful death and for bad faith against various companies and their employees involved in investigation and denial of the workers’ compensation claim. The defendants included CNA Insurance Company, RSKCo, Continental Casualty Company, Crawford & Company (the TPA), and Crawford’s employees Josie Schwedler, Helen Hardy, and Bobbie Badger, R.N. They also sued Rehabcorp, Inc., Katherine Blanchette, M.D., and William Matthews, M.D. Macias alleged that the defendants knowingly violated article 21.21 of the Texas Insurance Code by making false representations regarding the nature of the injury, failed in good faith to attempt to effectuate a prompt, fair and equitable settlement of the claim, refused to pay the claim without a reasonable investigation, hired biased doctors and medical reviewers whose task was to provide false and misleading conclusions about the injuries, made other untrue statements, and failed to provide necessary facts. The plaintiffs also alleged that the defendants engaged in fraud and unfair settlement practices through defendants Rehabcorp, Dr. Blanchette, and Dr. Matthews, who, without an examination of Macias, provided false, misleading and fraudulent statements that Macias had suffered only a sprained ankle, that an appropriate date for ending treatment should have been February 21, 2000, and that there was no direct injury to the spine from the work related incident, despite the fact that the medical records contained information that the pre-existing arthritis had been severely aggravated by the workplace injury. They also alleged that the defendants were liable for intentional infliction of emotional distress by knowingly making, publicizing, and stating to Macias and his family the false and fraudulent statements concerning the injury and medical records, despite their knowledge of the truth of his condition, and by fraudulently stating that his injury resulted only in a 2% impairment rating and that his benefits were exhausted. In addition, he plaintiffs alleged that the defendants knowingly made false and fraudulent statements that his injury was limited to his ankle and did not disclose that his injury aggravated his pre-existing arthritis. Schwedler, Hardy and Crawford & Company moved to dismiss Macias’ suit for lack of jurisdiction on the ground that the petition did not state facts showing that Macias or the plaintiffs had exhausted their remedies before the TWCC, and therefore the trial court had no jurisdiction to adjudicate his claim for benefits. The trial court granted the motion to dismiss.
HOLDING – Macias appealed, contending that this is not a suit to recover workers’ compensation benefits as damages, that there is no determination of benefits or medical treatment for the TWCC to make, and therefore there is no need to exhaust administrative remedies under the Workers’ Compensation Act. She also contended on appeal that the trial court erred by dismissing the suit for damages against the medical defendants because they are not covered by the Act. Finally, Macias alleged that the trial court should have abated their suit rather than to dismiss it. The court of appeals first addresses Macias’ contention that she was not required to exhaust administrative remedies because the suit was not one for WC benefits, but rather for fraud, breach of the duty of good faith and fair dealing, unfair settlement practices, misrepresentation of an insurance policy, and intentional infliction of emotional distress resulting in her husband’s suicide. She argued that the calculation of damages under these theories of recovery does not require a determination of entitlement to benefits and that the liability of the defendants is distinct and separate from the carrier’s liability for benefits under the WC Act. The defendants responded that American Motorists Insurance Company v. Fodge, 63 S.W.3d 801 (Tex.2001) is dispositive of Macias’ arguments. In Fodge, the Texas Supreme Court held that the court could not award compensation benefits for a denied claim except on appeal from a TWCC ruling, and neither could it award damages for a denial without a determination from the TWCC that benefits were due. Since Fodge could not recover damages for the breach of the duty of good faith to pay medical expenses unless she were entitled to medical benefits, the trial court could not adjudicate her claim without a determination by the TWCC that she was entitled to benefits. The court of appeals here agrees that Fodge controls. Without a finding by the TWCC that Macias’ injuries were compensable, a fact finder cannot find that the defendants breached their duty of good faith and fair dealing, that they engaged in unfair settlement practices, or that the adjusters and medical reviewers made false and misleading statements concerning the compensable injury. Only the TWCC can make a determination that the injuries were compensable, and there was nothing in the record to show that Macias’ claimed injuries were compensable. Therefore the trial court had no jurisdiction to adjudicate Macias’ claims. Each of Macias’ grounds for recovery depended on the assertion that benefits were wrongfully denied to Macias. There was no evidence in the record that Macias exhausted his administrative remedies with respect to the denial of medical benefits, and so the trial court did not err in granting the motion to dismiss Macias’ suit against the insurer parties. As to the medical defendants, the court holds that the same logic applies. Without a determination by the TWCC as to the validity of Macias’ claim, the trial court could not make a determination of the validity of Macias’ suit against those defendants. Finally, the court of appeals holds that nothing would be accomplished by abating the case because she would not be able to seek additional benefits from the TWCC, although the court does not state why that is so. The court of appeals holds that if the impediment to the court’s jurisdiction cannot be removed, then there is no basis for abatement, and dismissal is the only course open to the court.
SIGNIFICANCE – While most of the court’s opinion is no real surprise given the holding in Fodge and other cases which have required exhaustion of administrative remedies, the last portion of the opinion discussing dismissal vs. abatement is significant. For example, it is not uncommon for a plaintiff in a bad faith suit to argue that if there is no avenue to obtain additional benefits at the TWCC, there is no administrative remedy to exhaust and therefore no impediment to the bad faith suit. An example would be a situation where the time limit for filing a request for medical dispute resolution over a denial of preauthorization for back surgery has run. If the carrier eventually agrees to pay for back surgery, either voluntarily or because of a later preauthorization request, the carrier could argue that this case bars a suit based on the carrier’s earlier denial, as there is no ability to exhaust remedies on something the carrier eventually paid for. Although one might argue that Fodge would allow a plaintiff to maintain an action for delay, this case would give a carrier grounds to argue that the failure to exhaust administrative remedies as to the first request for preauthorization means the claimant could not establish the carrier was actually liable for that benefit. Therefore, the trial court in the bad faith case would arguably have no ability to rule that the carrier was actually liable for the benefit that it denied on the first go-round, since the TWCC had made no determination of liability. The fact that the carrier preauthorized a later request, or even that it simply voluntarily made payment even for the surgery that was initially requested, does not establish the carrier’s liability, and so the trial court should dismiss the claim for the initial denial and the delay as well. For a recent example of this type of situation, see the following case.
ANOTHER COURT OF APPEALS ADDRESSES EXHAUSTION OF REMEDIES
IN RE TEXAS MUTUAL INSURANCE COMPANY, 2005 WL 1763562 (Tex.App.—Dallas July 27, 2005)
FACTS – On March 12, 2002, Russell was injured at work, and Texas Mutual was his employer’s WC carrier. Between March 12, 2002 and October 13, 2003, Russell’s doctors made 19 requests for preauthorization of different procedures. Two of the procedures were a discogram and spinal fusion. The first discogram preauthorization request was made September 16, 2002. Texas Mutual denied that request, as well as a subsequent March 26, 2003 request for spinal fusion surgery. Russell did not pursue medical dispute resolution but instead underwent additional treatment that Texas Mutual had recommended. In the fall of 2003, Russell’s doctor again sought preauthorization for the discogram and spinal fusion surgery, and the requests were granted and the procedures performed.
CASE HISTORY – On May 19, 2004, Russell filed suit against Texas Mutual for breach of the duty of good faith and fair dealing, violations of the DTPA, Insurance Code, and for intentional infliction of emotional distress, alleging delay in approval of his surgery. About a year later, Russell filed an amended petition asserting the same claims but adding the delay in approval of the discogram, recommending and approving a decompression surgery without a fusion, inconsistent with his doctor’s recommendation, and delaying approval of the spinal fusion. Texas Mutual filed an answer, affirmative defenses and special exceptions. Texas Mutual then filed a plea to the jurisdiction based on Russell’s failure to exhaust administrative remedies. The trial court denied this plea.
HOLDING – Texas Mutual then brought this request for mandamus relief. Such relief is available only if the trial court clearly abused its discretion in this case and if Texas Mutual has no adequate remedy by appeal. The court of appeals cites another the case styled In re Texas Mutual Insurance Company, 157 S.W.3d 75 (Tex.App.—Austin 2004, no pet.), for the principle that the erroneous denial of a plea to the jurisdiction based on exclusive agency jurisdiction justifies mandamus relief when that denial interferes with the agency’s legislatively mandated function and purpose of the agency and clearly disturbs “the orderly processes of government.” When an agency has exclusive jurisdiction over a dispute until the party has exhausted all of the administrative remedies within the agency, the trial court has no subject matter jurisdiction and must dismiss any claim within the agency’s exclusive jurisdiction. Here, Texas Mutual argued that the trial court lacked jurisdiction because Russell did not exhaust any of his administrative remedies, such as by requesting medical dispute resolution over the carrier’s denial of preauthorization. Russell responded that since Texas Mutual approved the discogram and surgery, there was no dispute left for the TWCC to resolve. Russell’s claims are based on an improper delay in authorization for the requested procedures and improper authorization of alternative procedures, but since he never requested dispute resolution of the initial denial of authorization for the discogram and fusion, the court is unable to find that Texas Mutual should have paid for those procedures. Although the discogram and fusion were eventually authorized, that is not “any type of determination by the Commission that the initial denial of the procedures and authorization of alternative procedures were improper.” The court of appeals holds that, in fact, “there does remain a dispute for the Commission to resolve” and Russell has not exhausted his remedies by obtaining a ruling from the TWCC on that dispute. Since Russell has not exhausted his remedies, the trial court has no jurisdiction. The court of appeals also holds that Texas Mutual has no adequate remedy at law. Allowing the trial court to proceed when it does not have jurisdiction would interfere with the TWCC’s authority and disturb the “orderly processes of government.” Therefore, the court of appeals conditionally grants the writ of mandamus, ordering the trial court to vacate the order denying Texas Mutual’s plea to the jurisdiction.
SIGNIFICANCE – See the discussion in Macias v. Schwedler. This is one of the types of situations we were referring to in discussing the significance of that case. Here, although the court of appeals finds that “there does remain a dispute for the Commission to resolve,” that may be overstating things a bit. Since Russell did not timely pursue his remedies for the first request for discogram and surgery, the TWCC would not accept the case for medical dispute resolution, and Russell might argue that he therefore has no remaining dispute for the TWCC to resolve. However, the answer to that is that Russell did have remedies to pursue to resolve the dispute. He simply did not do so on a timely basis, and the trial court therefore has no ability to resurrect the question of whether Texas Mutual should have authorized the procedures the first time. Note that this case has not yet been published and therefore is subject to revision.
SUPREME COURT FINDS REAL ESTATE AGENT SUBJECT TO DTPA – MAY APPLY TO ADJUSTERS
MILLER v. KEYSER, 90 S.W.3d 712 (Tex.2002)
FACTS – Barry Keyser worked as a sales agent for D.B. Interests, Inc., d/b/a The Homemaker. Keyser sold Homemaker homes in a subdivision located in Pearland. Keyser showed prospective purchasers the different lots, as well as how each home would fit on the lots. The lots were subject to a 20-foot drainage easement held by the Brazoria County Drainage District. Each purchaser knew about the easement. Keyser represented to the purchasers that the lots were oversized, and that the lots could be fenced along the back of the property line, where the easement was located. The homeowners paid a premium for the “oversized” lots. In 1994, after building their homes, some homeowners received a letter from the drainage district telling them that all fences in the easement must be removed.
CASE HISTORY – Various homeowners including Miller sued the owner of The Homemaker, Dennis Bailey, and Barry Keyser for common-law fraud and misrepresentations in violation of the DTPA, alleging that Keyser misrepresented the size of the lots and where the fencing could be placed. The homeowners also joined The Homemaker, but all claims against the corporation were dismissed as untimely. At trial, the trial court granted a directed verdict in favor of Dennis Bailey, as he had no direct communication with the homeowners and made no misrepresentations about the lots. After the jury answered questions in favor of the homeowners (although finding that Keyser did not commit fraud), the trial court rendered judgment against Keyser. Keyser appealed, arguing that a corporate agent cannot be held personally liable for company misrepresentations. The court of appeals reversed the trial court’s judgment, holding that an agent acting within the scope of his employment cannot be held personally liable under the DTPA. Since Keyser had acted only in the course of his employment, the court of appeals held that the trial court erred in rendering judgment against him personally.
HOLDING – The homeowners appealed. The Supreme Court writes that under the DPTA, a consumer may bring suit against any person whose false, misleading or deceptive acts are the producing cause of the consumer’s harm, and may also bring suit for “any unconscionable action or course of action by any person.” (emphasis added) A “Person” is defined as “an individual, partnership, corporation, association or other group, however organized.” The Court therefore holds that Keyser is liable for his own DTPA violations. The Court also holds that Keyser may be held liable under the DTPA even if he did not know that his representations were false, or even if he did not intend to deceive the consumer. The Court also holds that if there is evidence that the agent personally made misrepresentations, then the agent may be held personally liable. Even though the jury found that Keyser acted “solely within the course and scope of his employment…as an agent for [T]he Homemaker,” this finding does not excuse him from DTPA liability. Although §17.555 of the DTPA provides that an agent acting on behalf of the corporation and in the scope of his employment may seek indemnity from one who, under the statute or at common law may have liability, this merely means he may seek indemnification from his employer if the employer is responsible for the misrepresentation. It does not excuse him from party status or from personal liability.
SIGNIFICANCE – Although this is not an insurance case, we believe it probably gives support to the federal court’s ruling in Montes, infra.
FEDERAL COURT FINDS ADJUSTERS MAY HAVE 21.21 LIABILITY
MONTES v. AMERICAN HOME ASSURANCE COMPANY, 2005 WL 1540170 (U.S. District Court, N.D., Texas June 29, 2005)
FACTS – Juan Montes brought a bad faith claim against American Home in state court by way of counterclaims to an underlying claim for WC benefits. He alleged breach of the duty of good faith and fair dealing, violations of the DTPA, violations of the Texas Insurance Code, and intentional infliction of emotional distress.
CASE HISTORY – After Montes’ extra-contractual claims were severed, American Home’s TPA, Specialty Risk Services (“SRS”) filed a notice of removal to federal court on the basis that the federal court had jurisdiction because all of the parties were citizens of different states. Diversity is a common ground for removal of a suit to federal court, and the case was in fact removed from state court to federal court. Montes then moved to have the extra-contractual claims remanded to state court, as he had also sued SRS’ adjuster, Mary Soheili. Montes and Soheili are both citizens of Texas, and SRS argued that Montes improperly joined Soheili solely to defeat diversity jurisdiction, as joining her would deprive the federal court of jurisdiction and require it to remand the case to state court. The test for improper joinder is:
whether the defendant has demonstrated that there is no possibility of recovery by the plaintiff against an in-state defendant, which stated differently means that there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against an in-state defendant.
The parties disputed whether Montes could maintain a suit against Soheili for violations of the Texas Insurance Code. Montes alleged that the defendants engaged in unfair practices in the handling of his WC claim. Particularly, he alleged that the defendants did not bring about a prompt, fair and equitable settlement of a claim whose liability was reasonably clear in violation of Texas Insurance Code Article 21.21, §4(10)(a)(ii), and that the defendants refused to pay the claim without conducting a reasonable investigation in violation of §4(10(a)(viii). The court states that Article 21.21, §2 defines a “person” as “any individual, corporation, association…including agents, brokers, adjusters and life insurance counselors.” Furthermore, §3 states that “No person shall engage in this state in any trade practice which is defined in this Act as, or determined pursuant to this Act to be, an unfair method of competition or an unfair or deceptive act or practice in the business of insurance.” As Montes alleged that Soheili and the other defendants violated the prohibitions contained in §4, the result turns on whether the duties under §4 belong to the insurance carrier alone, or whether the adjuster may be held liable under the statute. The defendants cited Natividad v. Alexsis, 875 S.W.2d 695 (Tex.1994) for the proposition that Montes’ cause of action was against only the carrier, however the federal court states that Natividad dealt only with the common law duty of good faith and fair dealing, and the Texas Supreme Court stated in that case that no cause of action under Article 21.21 was before the Court. After Natividad was decided, §4(10) of Article 21.21 was added to match the duties imposed on carriers at common law. Since Article 21.21 states that “adjusters” are “persons” who are prohibited from engaging in the described acts, the federal court holds that it is unable to say that an adjuster cannot be held personally liable for violations of Article 21.21. The court also relies on Liberty Mutual Insurance Company v. Garrison Contractors, 966 S.W.2d 482 (Tex.1998), where the Texas Supreme Court held that Article 21.21 provides a cause of action against insurance company employees whose duties call for them to engage in the business of insurance. Therefore, the federal court holds that Montes’ motion to remand to state court should be granted, as it could not find that Soheili was improperly joined simply to defeat diversity jurisdiction.
SIGNIFICANCE – Note that this is a ruling by a federal district court, not an appellate court, but it illustrates that point that at least this court believes that individual adjusters may be considered to be engaged in the business of insurance and may have personal liability for violations of Article 21.21, §4. Because of this opinion, we can expect that plaintiffs will be more inclined to join individual adjusters in their bad faith suits, not only to defeat removal to federal court, but also to bring added pressure on all defendants.
J.T. Parker & Associates, L.L.C.
1341 W. Mockingbird Ln., Suite 300W
Dallas, TX 75247