946 N.W.2d 1
S.D.2020Background
- Fern Johnson worked for UPS and developed a groin/hernia condition; a final Department of Labor (DOL) order (2006) found her groin pain compensable and entitled her to necessary medical expenses.
- UPS and its insurer (Liberty Mutual) paid benefits until 2010, then—based on an independent medical exam (IME) and advice from counsel Eric Schulte—unilaterally terminated payment of future medical benefits.
- The DOL reinstated benefits in 2012, concluding the employer/insurer must use SDCL 62-7-33 to seek modification of a final award; the circuit court later affirmed that ruling on appeal.
- Johnson sued UPS and Liberty for bad faith and conversion; at summary judgment the circuit court held as a matter of law the duty to pay was not "fairly debatable" and excluded much of the defendants’ advice-of-counsel evidence.
- At trial the jury found for Johnson (large general and punitive awards); the trial court later reduced punitive damages but denied post-trial relief for the defendants.
- The South Dakota Supreme Court held the defendants had no reasonable basis to terminate benefits (final DOL order controlled) but reversed and remanded because excluding counsel-advice evidence and the jury instructions improperly collapsed the separate bad-faith knowledge element and prejudiced the defendants.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether termination of benefits was "fairly debatable" (reasonable basis) | Johnson: final DOL order made obligation clear; termination lacked reasonable basis. | UPS/Liberty: use of an IME and prevailing practice made the law debatable. | Court: Held for Johnson—no reasonable basis; final DOL order and SDCL 62-7-33 required compliance. |
| Whether defendants could use attorney advice to negate knowledge/reckless-disregard element | Johnson: counsel advice contradicting a final order cannot excuse bad faith. | Defendants: relied in good faith on counsel (Schulte); his advice relevant to knowledge. | Court: Reversed trial rulings excluding such evidence; advice-of-counsel is relevant to the knowledge inquiry and should be presented to the jury. |
| Whether exclusion of Schulte’s testimony and related instructions was proper | Johnson: exclusion warranted because law was not fairly debatable; jury need not consider counsel advice on legality. | Defendants: exclusion improperly prevented jury from assessing defendants’ knowledge/recklessness. | Court: Held exclusion and instructions were erroneous and prejudicial—they collapsed distinct bad-faith elements and require retrial. |
| Remedy/stage of case after errors | Johnson: jury verdict and reduced punitive award should stand. | Defendants: new trial or JMOL because evidence improperly excluded and instructions directed verdict on knowledge. | Court: Affirmed legal ruling on lack of reasonable basis but reversed judgment and remanded for new trial on bad-faith liability (evidence/instructions error). |
Key Cases Cited
- Champion v. U.S. Fid. & Guar. Co., 399 N.W.2d 320 (S.D. 1987) (articulates two-part workers’ compensation bad-faith test)
- Dakota, Minn. & E.R.R. Corp. v. Acuity, 771 N.W.2d 623 (S.D. 2009) (insurer may challenge claims that are "fairly debatable")
- Bertelsen v. Allstate Ins. Co., 833 N.W.2d 545 (S.D. 2013) (discusses knowledge/reckless-disregard factors and jury’s role)
- Call v. Benevolent & Protective Order of Elks, 307 N.W.2d 138 (S.D. 1981) (final DOL decisions have res judicata effect in workers’ comp)
- Whitney v. AGSCO Dakota, 453 N.W.2d 847 (S.D. 1990) (SDCL 62-7-33 provides department authority to modify awards)
- Hayes v. Rosenbaum Signs & Outdoor Advertising, Inc., 834 N.W.2d 878 (S.D. 2014) (rejects use of IME to unilaterally terminate benefits under earlier precedent)
- Crabb v. Nat’l Indem. Co., 205 N.W.2d 633 (S.D. 1973) (reliance on counsel is a factor but not dispositive on insurer good faith)
- Maness v. Meyers, 419 U.S. 449 (U.S. 1975) (parties must obey valid court orders until vacated/modifed)