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Bad Faith in Workers Compensation and Texas Mutual Insurance Company v Ruttiger

Bad Faith in Workers’ Compensation and Texas Mutual Insurance Company. v. Ruttiger


The California Supreme Court created the new tort of bad faith when it decided Comunale v. Traders & General Ins. Co., 328 P.2d 198 (1958). “After the creation of the tort of bad faith, if an insurer and insured disagreed on the application of the policy to the factual situation, damages were no longer limited to contract damages as in other commercial relationships. If the court found that the insurer was wrong it could be required to pay the contract amount AND damages for emotional distress, pain, suffering, punishment damages, attorney’s fees and any other damages the insured and the court could conceive.”  Barry Zalam, Time to Put A Stake Through the Heart of the Tort of Bad Faith available at  However, the tort of bad faith in first-party claims has only been a part of Texas jurisprudence for a little over twenty-five years. Jay D. Reeve, Judicial Tort Reform: Bad Faith Cannot Be Predicated Upon The Denial Of A Claim For An Invalid Reason If A Valid Reason Is Later Shown, 27 Tex. Tech L. Rev. 351, 353 (1996). 


The Texas Supreme Court first hinted that it would recognize such a tort in 1983.  See English v. Fischer, 660 S.W.2d 521 (Tex. 1983).  In the concurring opinion, Justice Spears stated that Texas courts have historically recognized a duty of good faith and fair dealing that "springs from the relationship, not from the contract" when there is a "special relationship between the parties to a contract." Id. at. 524-25.  Four years later, in Arnold v. National County Mutual Fire Insurance Co., 725 S.W.2d 165 (Tex. 1987), the Texas Supreme Court fully recognized the tort duty of good faith and fair dealing in the first-party insurance context. Id at. 167-68. The Texas Supreme Court held that "a duty of good faith and fair dealing may arise as a result of a special relationship between the parties governed or created by a contract." Id. at 167. To establish bad faith the Texas Supreme Court established a two-prong test: (1) there must be no reasonable basis for the denial of a claim or delay in payment; or (2) the insurer must fail to determine whether there is any reasonable basis for the denial or delay. Id. 


The following year the Texas Supreme Court extended the tort of bad faith to  worker's compensation in Aranda v. Insurance Co. of North America, 748 S.W.2d 210 (Tex. 1988). The Supreme Court also changed the two-prong test set out in Arnold. The Court held that to establish bad faith the injured worker must show: (1) the absence of a reasonable basis for denying the benefits, (2) the insurer knew or should have known that there was not a reasonable basis for denying the claim or delaying payment of the claim, (3) the insurer's lack of good faith, separate and independent from the original job-related injury, proximately caused damages, and (4) the injured worker sustained actual damages as a result of the insurer’s actions.  Id. at 215. 


There were four dissenting justices to the Aranda holding.  Chief Justice Thomas Phillips, joined by Justice Barbara Culver, opposed to extending bad faith to worker's compensation claims because they believe that the Texas Workers Compensation Act had fully replaced the common law and preempted this tort action. See id. at 215.  Justice James Wallace, joined by Justice Raul Gonzalez, also dissented, but not to the idea of allowing a suit for bad faith against a workers' compensation insurer.  See id. at 218.


After Aranda bad faith lawsuits in Texas arising out of workers' compensation claims were fewer than bad faith suits arising out of property, liability, life and health insurance claims. Over the past several years however, the number of bad faith allegations against workers' compensation insurers has risen at an increasing rate in the state.  Bad faith suits are being filed across the state by numerous different firms.  This author has seen two trivial bad faith lawsuits filed by one law firm in the space of six months.  It appears a few successful jury verdicts and multiple large settlements in the past several years have fueled the surge in bad faith workers' compensation suits.  For example:


The insurer had entered into an agreed judgment with the injured worker in 1984, which required the insurer to pay for lifetime future medical. The injured worker did not seek treatment for several years. When he finally sought treatment for chronic pain and post-traumatic stress the insurer took the position that the treatment was not related to the original accident.  The injured worker sued in Harris County.  The insurer settled for $875,000.00 while waiting for the jury panel prior to trial. 


A Fort Bend County jury awarded $7,920,000.00 to a paving contractor in actual damages, punitive damages and attorney fees for claimed Texas Insurance Code violations. The jury also awarded damages on contract claims. All the claims concerned premiums and workers’ classifications for five (5) one (1) year policies.


Another Harris County jury awarded $745,000.00 to an injured worker.  The injured worker reported his injury to the insurance insurer.  Three years later he sought emergency treatment for a ruptured disc that he argued was caused by the work-related injury.  Allegedly the insurance insurer agreed to pay for the care. However, the insurer did not promptly make payment for the treatment so the injured worker sued.


This brings to the case of Tex. Mut. Ins. Co. v. Ruttiger, 265 S.W.3d 651 (Tex. App. – Houston [1st Dist.]  2008, pet. filed).   The facts are disputed.  Mr. Ruttiger claimed that he sustained bilateral inguinal hernias after lifting a heavy bundle of metal conduit on June 21, 2004, while working as an employee of A&H Electric Company ("A&H").   Id. at 655.  Mr. Ruttiger claimed that his wife took him to the hospital and at some point he called A&H’s owner April Beall and asked her if he needed to file under workers' compensation or group health insurance. According to court testimony, Ms. Beall told him to file it under workers' compensation.  Mr. Ruttiger filled out some type of “comp form” at A&H on his way home that day, and Ms. Beall signed it.    Mr. Ruttiger further claimed he was scheduled for surgery but Texas Mutual’s adjuster, Audie A. Culbert, had “canceled” his surgery.


Although Ms. Beall had signed Ruttiger's “comp form,” she told Mr. Culbert that Mr. Ruttiger had not reported an on-the-job injury. Ms. Beall also said that her son and a co-owner of A & H, Henry Beall had said Mr. Ruttiger came to work limping that day and that Mr. Ruttiger's immediate supervisor was never told of any injury. Mr. Ruttiger alleged that Texas Mutual Insurance Company (Texas Mutual) denied him timely payment of benefits and necessary medical treatment without a reasonable basis "until finally agreeing to do so, much later in a 'Benefit Dispute Agreement.'" Ruttiger, 265 S.W.3d at 655.  Mr. Ruttiger contended that an unbiased investigation  "would have confirmed" that he sustained his injuries in the workplace and Texas Mutual’s wrongful and unreasonable delay in paying medical and income benefits caused him substantial financial hardship and medical problems. Id. at 655-56. 

Texas Mutual contended that it disputed Mr. Ruttiger’s hernias as not occurring at work, first because his employer said he may have been hurt playing softball, and later because his supervisor said he was trying to “pull the wool over somebody’s eyes,” and Mr. Ruttiger’s  roommate said he was trying to get workers’ compensation to pay for preexisting hernias.   At the second benefit review conference held on his claim, Mr. Ruttiger and Texas Mutual entered into a benefit dispute agreement (BDA). The BDA provided that Mr. Ruttiger sustained a compensable injury on June 21, 2004 and suffered disability from August 23, 2004 to January 2, 2005, but no disability from June 22, 2004 to August 22, 2004.  The BDA did not address surgery.  Four weeks after the BDA was entered into, Mr. Ruttiger’s doctor for the first time under TWCC rules requested preauthorization for surgery. 


At the end of the trial, the jury found that Texas Mutual acted in bad faith, engaged in unfair and deceptive acts or practices, and engaged in these acts and practices knowingly. Id. The jury awarded Mr. Ruttiger $ 37,500.00 for past physical pain and suffering, $ 5,000.00 for future physical pain and suffering, $ 11,500.00 for past damage to credit reputation, $ 5,000.00 for future damage to credit reputation, $ 4,500.00 for past physical impairment, $ 100,000.00 for past mental anguish, and $ 20,000.00 in additional damages based on its finding that Texas Mutual’s conduct was committed  knowingly. Id.  The trial court rendered judgment in Mr. Ruttiger's favor for $ 163,500.00 in actual damages and $ 20,000.00. Id.


Texas Mutual appealed to the 1st Court of Appeals in Houston on eight issues. The seventh and eighth issues are the main ones of interest.  In its seventh issue, Texas Mutual contended that the trial court lacked jurisdiction to award damages because Mr. Ruttiger failed to obtain a finding by the Texas Workers' Compensation Commission that Mr. Ruttiger was entitled to workers' compensation benefits. In its eighth issue, Texas Mutual contended that no cause of action exists in Texas for breach of the duty of good faith and fair dealing (bad faith) in the context of a workers' compensation claim.


Texas Mutual argued before the Court of Appeals that the Texas Supreme Court’s decision in American Motorists Insurance Company v. Fodge, 63 S.W.3d 801 (Tex. 2001) governed in this case.  The Texas Supreme Court had held that Ms. Fodge's claims for benefits due and for damages caused by the insurer's alleged bad faith denial of additional benefits were never awarded by the Texas Workers’ Compensation Commission and that Ms. Fodge’s failure to obtain a Commission ruling entitling her to those benefits denied the trial court of jurisdiction to hear her claims.  However, regarding the claims for the insurer's alleged bad faith delay in the payment of compensation benefits (which were ultimately stipulated to by the insurer), the Court of Appeals stated that the Texas Supreme Court concluded that they were "ripe for adjudication and should not have been dismissed."  Mr. Ruttiger had alleged that Texas Mutual committed bad faith in delaying payment of benefits that Mr. Ruttiger claimed Texas Mutual ultimately agreed to pay in a Benefit Dispute Agreement.  The Court of Appeals agreed that the Benefit Dispute Agreement constituted a final determination that benefits were due to Mr. Ruttiger and that the trial court had subject matter jurisdiction to hear Mr. Ruttiger's case.


The Court of Appeals did not address Texas Mutual’s eighth issue in which Texas Mutual contended that no cause of action exists in Texas for the breach of the duty of good faith and fair dealing.  Instead, addressing one of Texas Mutual’s other issues, the Court of Appeals cited to the Texas Supreme Court’s decision in Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 49 (Tex. 1997), as well as the Court of Appeals’ own decision in Travelers Personal Sec. Ins. Co. v. McClelland, 189 S.W.3d 846, 852 (Tex. App.—Houston [1st Dist.] 2006, no pet.), for the proposition that under the Texas Insurance Code an insurer commits by denying or delaying payment of a claim when the insurer knew or should have known that it was reasonably clear that the claim was covered. 


The Court of Appeals modified the trial court’s judgment to delete that portion of the judgment awarding Mr. Ruttiger damages for his loss of credit reputation. The Court affirmed the remainder of the judgment.  Ruttiger, 265 S.W.3d at 673.  Texas Mutual filed a petition for review with the Texas Supreme Court.   


Texas Mutual argued in its petition for review that Aranda v. Insurance Co. of North America limits a worker’s bad-faith recovery to an “independent injury,” “separate from the compensation claim.  In holding that aggravation of hernias due to delay in surgery and associated pain count as “independent injury” under Aranda, the Houston First Court of Appeals was mistaken as to what is an independent injury.   


Texas Mutual also argued in its petition for review that American Motorists Insurance Company v. Fodge held that courts lack jurisdiction to award bad-faith damages for wrongful denial or delay of workers’ compensation benefits  unless the Texas Workers’ Compensation Commission first made a determination that such benefits were due.  Texas Mutual contends a BDA is not an agency determination of compensability. 


Texas Mutual additionally argued in its petition for review that Aranda allowed bad-faith claims-handling suits in Texas workers’ compensation based on certain key assumptions that are no longer correct.  Texas Mutual contends that common-law bad-faith and similar Insurance Code claims-settlement causes of action have no place in today’s statutory worker’s compensation context.


Texas Mutual further argued in its petition for review that the Court of Appeals held that bad-faith liability may be based on the facts the insurer subjectively relied upon when disputing compensability, and that facts discovered later (including undisputed facts such as the medical records of preexisting hernias) can be disregarded by the jury unless they “conclusively” prove lack of compensability. 


On February 12, 2009, Liberty Insurance Corporation, the American Insurance Association and the Property Casualty Insurers Association of America represented by Thomas R. Phillips and Steven M. Tipton filed an amici curiae brief with the Texas Supreme Court.  Mr. Phillips is a former Chief Justice of the Supreme Court of Texas.  He also dissented in the Aranda case.


Liberty Insurance Corporation, the American Insurance Association and the Property Casualty Insurers Association of America (Amici) argue that the requirements and standards for adjusters and insurers in the context of workers’ compensation claims handling do not merely conflict with those imposed by the Houston Court of Appeals; they are irreconcilable.  For example, the Appeals Panels (which rely on court precedent) have held that hearsay is admissible and may even support a fact finding in a insurer’s favor.  However, the Court of Appeals in Ruttiger says that a insurer’s reliance on hearsay to dispute a claim is evidence not only of bad faith, but also of subjective knowledge that the insurer’s actions are “false, deceptive, or unfair.”  In the workers’ compensation claims handling context, a claim of injury only raises a fact question; the burden of proof is on the claimant.  And a insurer may choose to disbelieve the claimant’s version of the facts.  However, the Court of Appeals in Ruttiger said the claimant’s  assertion that he was injured on the job was sufficient to support a finding of bad faith because the adjuster should have been dubious of information he received from four other sources – after all, those sources failed to “conclusively establish” that Mr. Ruttiger was seeking compensation for a pre-existing condition or an injury he incurred on his day off.   


The Amici also argue that court precedent states that the history of an alleged injury in a medical record is not enough to prove that the injury was sustained in the manner claimed.  But under the Court of Appeals holding in Ruttiger, the failure to obtain medical records is evidence that the insurer’s compensability investigation was unreasonable.  The Division of Workers’ Compensation says there are no fixed standards for an initial investigation, so that even a single contact with the employer may be sufficient.  The Court of Appeals holding in Ruttiger, on the other hand, says that the failure to use the so-called “three point contact” is evidence of bad faith.  The Amici further argue that under the Texas Workers’ Compensation Act, the claimant’s allegations in the employer’s first report of injury is evidence only that a report was made, not that an injury actually occurred.  That report may not be used as evidence against the insurer or employer if the facts are contradicted by the insurer or employer.  Tex. Lab. Code § 409.005(f).  However, the Court of Appeals holding in Ruttiger indicates that where the report contradicts information obtained from an employer, the insurer should be “highly suspect of the veracity” of the employer. 


On Friday, February 13, 2009, the Texas Supreme Court, in Ruttiger, requested the record from the Houston Court of Appeals be filed with the clerk of the Court and requested briefing on the merits from the parties. 


There is the possibility that the Supreme Court will hold that there is no common law bad faith in workers’ compensation.  After all the Court recently overruled its prior decision in the  Downs case (81 S.W.3d 803)(Tex. 2002) in the case of Southwestern Bell Telephone Co. v. Mitchell, No. 05-0171 (Tex. 2008).

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