FERN JOHNSON, Plaintiff and Appellee, v. UNITED PARCEL SERVICE, INC., and LIBERTY MUTUAL FIRE INSURANCE CO., Defendants and Appellants.
#28598, #28599, #28609-r-MES
IN THE SUPREME COURT OF THE STATE OF SOUTH DAKOTA
OPINION FILED 06/24/20
2020 S.D. 39
APPEAL FROM THE CIRCUIT COURT OF THE SEVENTH JUDICIAL CIRCUIT PENNINGTON COUNTY, SOUTH DAKOTA
THE HONORABLE JANE WIPF PFEIFLE Judge
DAVID S. BARARI, G. VERNE GOODSELL, TERENCE R. QUINN of Goodsell Quinn, LLP, Rapid City, South Dakota
ROBERT S. PECK of Center for Constitutional Litigation, P.C., Washington, D.C.
WM. JASON GROVES, Rapid City, South Dakota, Attorney for plaintiff and appellee.
JACK H. HIEB, ZACHARY W. PETERSON of Richardson, Wyly, Wise, Sauck & Hieb, LLP, Aberdeen, South Dakota
THOMAS D. WARREN of Baker & Hostetler, LLP, Cleveland, Ohio, Attorneys for defendants and appellants.
[¶1.] Fern Johnson sued her former employer, United Parcel Service (UPS), and its workers’ compensation carrier, Liberty Mutual Fire Insurance (collectively Appellants), alleging bad faith and conversion based on their denial of previously ordered workers’ compensation medical benefits. A jury returned a verdict for Johnson, awarding her general and punitive damages. On appeal, the Appellants claim the circuit court erred when it concluded before trial that their legal obligation to pay
[¶2.] We agree that the Appellants had no reasonable basis to terminate Johnson’s medical benefits because their legal obligation to pay was not fairly debatable. However, we conclude the circuit court erred when it determined this lack of a reasonable basis necessarily impacted the jury’s consideration of the separate bad faith element concerning the Appellants’ knowledge. This error manifested itself in the court’s evidentiary rulings restricting certain evidence and in its jury instructions, which effectively ended the jury’s consideration of the knowledge element. Therefore, we reverse and remand for a new trial.
Background
[¶3.] Fern Johnson worked at UPS from 1973 to 1982 and again from 1988 to 1997. In November 1995, Johnson noticed pain in her right groin area, especially with lifting. On January 4, 1996, Johnson experienced a sharp pain in her groin area at the end of her shift. She saw her gynecologist that day for what she believed was pain from endometriosis, a previously diagnosed medical condition. Following a laparoscopy two weeks later, Johnson learned she had a hernia and reported it to her employer the next day. Johnson underwent a combined hysterectomy and hernia repair surgery the following month. She returned to work on March 19, but experienced increased groin pain that kept her off work during a period of time that spring. Johnson subsequently quit working at UPS on December 9, 1997, due to groin and back pain.
[¶4.] Johnson initially filed for workers’ compensation benefits related to, as relevant here, her hernia surgery and groin pain. On August 4, 2002, the Department of Labor (DOL or Department) determined that Johnson’s hernia was causally related to her employment at UPS, but her groin pain was not.
[¶5.] Johnson appealed to the circuit court, which reversed the Department’s decision that Johnson’s groin pain was not compensable on March 9, 2004. The court remanded the case to the Department for further administrative proceedings in an April 15, 2005 order.
[¶6.] On remand, the administrative law judge (ALJ) issued findings of facts and conclusions of law, which stated in relevant part:
Pursuant to the Circuit Court’s ruling, Claimant has demonstrated by a preponderance of evidence that her groin
pain is causally related to her employment with Employer . . . . Claimant is entitled . . . to necessary, suitable, and proper medical expenses causally related to her work-related groin condition.
(Emphasis added.) See
[¶7.] Following Johnson’s pro se petition for review, the DOL Secretary affirmed the ALJ’s findings of facts and conclusions of law in a March 14, 2006 order (2006 DOL Order). The Appellants did not appeal
[¶8.] At that point, the Appellants asked their attorney, Eric Schulte, for advice regarding their ongoing obligation to pay Johnson’s medical benefits. The Appellants assert that the claims adjuster assigned to Johnson’s case was not familiar with South Dakota workers’ compensation law and sought Schulte’s advice because of his experience and excellent reputation. Schulte recommended scheduling an independent medical examination (IME) for Johnson with a neurologist pursuant to
undergo compulsory IME’s to “determin[e] the nature, extent and probable duration of the injury . . . .” Id.
[¶9.] The Appellants hired Dr. Bruce Norback, a board-certified neurologist, to conduct Johnson’s IME. Dr. Norback opined that what had been described as Johnson’s “neuroma condition” relating to her groin pain did not remain a major contributing cause of her need for continuing medical treatment.2 Indeed, Dr. Norback believed “a definite diagnosis of a neuroma has never been made.” He also thought that Johnson’s employment at UPS was no longer a major contributing cause of her need for medical treatment related to her groin pain because she had not worked for UPS for almost 13 years, but still experienced worsening symptoms.
[¶10.] On August 9, 2010, the Appellants, through Schulte, wrote Johnson a letter stating that they were terminating payment of all present and future medical expenses related to her groin pain based upon Dr. Norback’s IME findings. After the Appellants denied Johnson’s requests for reconsideration, she filed a petition for hearing with the Department. Following the hearing, the Department issued findings of facts and conclusions of law, which included the finding that the Appellants had “denied all further workers’ compensation benefits . . . based on Dr. Norback’s opinion regarding the same issues that were litigated by the parties ten years earlier.” The Department also concluded that the “Employer/Insurer did not make a request to the Department for a review of the medical services or payments made for Claimant . . . pursuant to
the procedure for an employer or employee to ask the Department to determine whether a changed condition warrants a modification of medical or disability payments).
[¶11.] The Department further concluded that the causal relationship of Johnson’s work-related activities and her groin pain had already been established and that the “Employer/Insurer do not have the authority to approve or deny medical treatment . . . without proper notice to the Department for a review pursuant to
[¶13.] On May 22, 2014, Johnson commenced this action against the Appellants alleging bad faith, barratry, conversion, abuse of process, and requesting punitive damages. In its amended answer, the Appellants raised several affirmative defenses, including claims that the law was fairly debatable at the time of its 2010 denial and that it had relied on the advice of counsel.
[¶14.] The parties sought to narrow or eliminate various claims and defenses through summary judgment. The circuit court granted the Appellants’ motion for summary judgment on the barratry and abuse of process claims, but the court denied the motion as to the conversion claim, finding the evidence could show Johnson met the elements to prevail on the claim.3
[¶15.] The Appellants’ affirmative defenses relating to Johnson’s bad faith claim were also the subjects of summary judgment litigation. In her summary judgment motion seeking to preempt the Appellants’ defense that they relied upon the advice of counsel, Johnson argued that the Appellants could not reasonably rely upon legal advice that contradicted an existing order to pay medical benefits. With regard to its fairly debatable defense, the Appellants claimed that at the time they terminated Johnson’s benefits, utilizing the IME process to disregard orders requiring payment of workers’ compensation benefits was an accepted practice and, at a minimum, rendered their obligation to continue paying benefits fairly debatable. The Appellants acknowledged that their original legal position was foreclosed, but in their view, only by virtue of subsequent case law. They claimed
these decisions resolved an unsettled question by definitively holding that
[¶16.] However, the court later advised the parties that it was reconsidering its decision on the Appellants’ fairly debatable defense. After receiving additional briefs, the court changed its earlier ruling and granted Johnson’s motion for summary judgment, concluding that the law regarding the Appellants’ duty to comply with the 2006 DOL Order was not fairly debatable. As a result, the court ordered that the Appellants were “prohibited from making arguments that they reasonably believed they could be allowed to stop workers compensation payments without seeking review from the Department of Labor under
[¶17.] The circuit court also granted Johnson’s corresponding motions in limine and excluded any evidence, testimony, or argument that the Appellants “misunderstood their legal duty under
[¶18.] Following the court’s decision to grant Johnson’s motion for summary judgment on the Appellants’ fairly debatable defense, Johnson moved for reconsideration of her motion for summary judgment on their advice-of-counsel defense. The court granted Johnson’s motion in part and denied it in part, instructing that the Appellants “can assert the fact of counsel’s advice as a consideration . . . but they are prohibited from making an argument that they reasonably believed they had no legal duty in this case to follow
[¶19.] During the five-day jury trial, the court consistently sustained Johnson’s objections based on its pretrial fairly debatable and advice-of-counsel decisions. Several of the court’s jury instructions also implemented these rulings, while others appear to have been drafted without regard to the rulings. For instance, the court instructed the jury on the two principal elements of bad faith—a lack of a reasonable basis for denial and knowledge or reckless disregard of the absence of a reasonable basis. The court also provided the jury with a statement of legal principles upon which to determine the existence of a reasonable basis, but then instructed the jury as a matter of law that the Appellants had no reasonable basis for terminating Johnson’s medical benefits.
[¶20.] The court also instructed the jury on the legal test to determine whether the Appellants knew that there was no reasonable basis to terminate benefits. However, the court further instructed the jury that it could not consider the only asserted basis for the Appellants’ claim that it lacked the requisite knowledge for bad faith—their reliance on the advice of counsel.
[¶21.] The jury returned a verdict in favor of Johnson, awarding $500,000 for her bad faith claim, $2,750 for the conversion claim, and $45 million in punitive damages. The jury apportioned the damages between the two Appellants by finding 75% of the damages attributable to Liberty Mutual and 25% attributable to UPS.
[¶22.] Post-trial, the Appellants renewed their motion for judgment as a matter of law, or alternatively a motion for a new trial, arguing Johnson failed to prove bad faith and failed to justify the punitive damages award. The Appellants also moved for remittitur, or alternatively, a new trial. Following a hearing, the circuit court denied all the Appellants’ motions, but reduced punitive damages to $10 million
[¶23.] The Appellants raise several issues on appeal, which we restate as follows:
1. Whether the circuit court erred when it determined that the Appellants lacked a reasonable basis for denying
Johnson’s workers’ compensation benefits because their obligation to pay was not fairly debatable.
2. Whether the circuit court erred when it determined that the Appellants could not use evidence of their attorney’s advice to argue they lacked the requisite knowledge for a finding of bad faith.
3. Whether the circuit court abused its discretion in its evidentiary rulings and jury instructions.
4. Whether the circuit court erred when it allowed Johnson’s bad faith claim to proceed with allegedly insufficient evidence of pecuniary damages.
5. Whether the circuit court erred when it failed to vacate the punitive damages award.
[¶24.] By notice of review, Johnson raises two additional issues:
1. Whether the circuit court abused its discretion when it reduced the jury’s punitive damages award.
2. Whether the circuit court erred when it failed to award post-judgment interest.5
[¶25.] Given our holding, it is necessary to address only the Appellants’ first three issues dealing with bad faith liability.
Standard of Review
[¶26.] “We review a circuit court’s entry of summary judgment under the de novo standard of review.” Zochert v. Protective Life Ins. Co., 2019 S.D. 84, ¶ 18, 921 N.W.2d 479, 486 (quoting Harvieux v. Progressive N. Ins. Co., 2018 S.D. 52, ¶ 9, 915 N.W.2d 697, 700). We also review “a circuit court’s decision to grant or deny a
motion for judgment as a matter of law . . . de novo . . . .” Magner v. Brinkman, 2016 S.D. 50, ¶ 13, 883 N.W.2d 74, 81. “When conducting a de novo review, ‘we give no deference to the circuit court’s decision.’” Zochert, 2018 S.D. 84, ¶ 18, 921 N.W.2d at 486 (quoting Oxton v. Rudland, 2017 S.D. 35, ¶ 12, 897 N.W.2d 356, 360).
[¶27.] Our standard of review for evidentiary rulings “requires a two-step process[:] first, to determine whether the trial court abused its discretion in making an evidentiary ruling; and second, whether this error was a prejudicial error that ‘in all probability’ affected the jury’s conclusion.” Supreme Pork, Inc. v. Master Blaster, Inc., 2009 S.D. 20, ¶ 59, 764 N.W.2d 474, 491. “An abuse of discretion is a fundamental error of judgment, a choice outside the range of permissible choices, a decision, which, on full consideration, is arbitrary or unreasonable.” Andrews v. Ridco, Inc., 2015 S.D. 15, ¶ 14, 863 N.W.2d 540, 546 (quoting In re Jarman, 2015 S.D. 8, ¶ 19, 860 N.W.2d 1, 9).
[¶28.] “A trial court has discretion in the wording and arrangement of its jury instructions, and therefore we generally review a trial court’s decision to grant or deny a particular instruction under the abuse of discretion standard.” Bertelsen v. Allstate Ins. Co. (Bertelsen II), 2011 S.D. 13, ¶ 26, 796 N.W.2d 685, 695 (quoting Wangsness v. Builders Cashway, Inc., 2010 S.D. 14, ¶ 10, 779 N.W.2d 136, 140). “However, no court has discretion to give incorrect, misleading, conflicting, or confusing instructions . . . .” Id. (quoting Wangsness, 2010 S.D. 14, ¶ 10, 779 N.W.2d at 140). We review the circuit court’s denial of a motion for new trial under the abuse of discretion standard. Center of Life Church v. Nelson, 2018 S.D. 42, ¶ 31 n.3, 913 N.W.2d 105, 113 n.3.
Analysis
Bad Faith in Workers’ Compensation Cases
[¶29.] Traditionally, bad faith claims against insurers have arisen in either a third-party or a first-party context. Third-party bad faith is “based on principles of negligence and arises when an insurer wrongfully refuses to settle a case brought against its insured by a third-party.” Hein v. Acuity, 2007 S.D. 40, ¶ 9, 731 N.W.2d 231, 235. First-party bad faith, by contrast, is an intentional tort that most often occurs when an insurer violates the contract with its insured and “consciously engages in wrongdoing during its processing or paying of policy benefits . . . .” Id. ¶ 10.
[¶30.] We have explained that bad faith in a workers’ compensation context is unique:
Wrongful conduct toward an employee claimant by the employer’s insurer in a workers’ compensation case does not fit the traditional definition of either first- or third-party bad faith. A bad faith claim related to workers’ compensation is not based on an insurer’s refusal to settle its own insured’s suit as in third-party cases, but exists when an insurer breaches its duty to deal in good faith and fairly when processing a workers’ compensation claim. And, unlike first-party bad faith, the claimant, not the insured employer, brings the action against the insurer. Nonetheless, it is within the first-party bad faith context that multiple jurisdictions, including South Dakota, recognize a bad faith cause of action based on an insurer’s conduct in a workers’ compensation case.
Id. (citing Champion v. U.S. Fid. & Guar. Co., 399 N.W.2d 320, 324 (S.D. 1987)).
[¶31.] “[W]orkers’ compensation bad faith will not arise whenever an insurer’s conduct toward a claimant is unreasonable.” Id. ¶ 18. Instead, an
employee alleging a bad faith denial of workers’ compensation benefits must satisfy the specific requirements of a two-part test:
(1) There was an absence of a reasonable basis for denial of policy benefits; and
(2) The insurer knew or recklessly disregarded the lack of a reasonable basis for denial.
Id. ¶ 14 (quoting Champion, 399 N.W.2d at 324).
[¶32.] The insurer, however, is permitted to “challenge claims which are fairly debatable” and, thus, “will be found liable only where it has intentionally denied . . . a claim without a reasonable basis.” Id. (quoting Champion, 399 N.W.2d at 324). As we held in Dakota, Minnesota & Eastern Railroad Corp. v. Acuity (DM&E):
If an insured’s claim is fairly debatable either in fact or law, an insurer cannot be said to have denied the claim in bad faith. The fact that the insurer’s position is ultimately found to lack merit is not sufficient by itself to establish that the insurer had a reasonable basis to deny the claim. The focus is on the existence of a debatable issue, not on which party was correct.
2009 S.D. 69, ¶ 20, 771 N.W.2d 623, 630 (quoting 46A C.J.S. Insurance § 1873 (2008)). In evaluating a bad faith claim, “we must look to ‘the facts and the law available to the insurer at the time it made the decision to deny [benefits].’” Bertelsen v. Allstate Ins. Co., (Bertelsen III), 2013 S.D. 44, ¶ 17, 833 N.W.2d 545, 554 (quoting DM&E, 2009 S.D. 69, ¶ 19, 771 N.W.2d at 629) (abrogated on other grounds by Magner, 2016 S.D. 50, 883 N.W.2d 74).6
Reasonable Basis for Denial if Law is Fairly Debatable
[¶33.] Before discussing
[¶34.] This idea of giving effect to valid orders is the premise underlying our law of civil contempt. Indeed, the first requirement in an effort to invoke a court’s civil contempt power is the existence of a valid order. See DeHaven v. Hall, 2008 S.D. 57, ¶ 29, 753 N.W.2d 429, 439 (expired order was no longer a valid order capable of enforcement through contempt).
(. . . continued)
there are no genuine issues of material fact and the legal questions have been correctly decided. DM&E, 2009 S.D. 69, ¶ 14, 771 N.W.2d at 628-29.
[¶35.] We have not distinguished between judicial orders and valid final administrative orders on issues of enforceability and preclusive effect. “An unappealed administrative decision becomes final and should be accorded res judicata effect.” Jundt v. Fuller, 2007 S.D. 62, ¶ 12, 736 N.W.2d 508, 513. In the specific context of workers’ compensation, we have recognized the res judicata effect of a final Department decision. Call v. Benevolent & Protective Order of Elks, 307 N.W.2d 138, 140 (S.D. 1981).7
[¶37.] As it was, the 2006 DOL Order resolved the question of Johnson’s medical benefits, stating unequivocally that Johnson was “entitled . . . to necessary, suitable, and proper medical expenses causally related to her work-related groin condition.” The Appellants do not dispute the validity of the order, or its text, or its
finality.8 Indeed, they complied with it, at least until the point they elected to disregard it in favor of Dr. Norback’s IME. Any obligation to read the 2006 DOL Order as authoritative and binding was, in their view, only revealed by our decisions issued in other cases after their decision to terminate benefits. However, we cannot accept this argument because it does not align with plain statutory requirements or the historical development of our decisional law.
[¶38.] As to the former, the unremarkable fact that
An employee entitled to receive disability payments shall, if requested by the employer, submit himself or herself at the expense of the employer for examination to a duly qualified medical practitioner or surgeon selected by the employer, at a time and place reasonably convenient for the employee . . . . The examination shall be for the purpose of determining the nature, extent, and probable duration of the injury . . . and for the purpose of ascertaining the amount of compensation which may be due the employee from time to time for disability according to the provisions of this title . . . .
[¶39.] Nor does the additional consideration of
Any payment, including medical payments . . . made or to be made under this title may be reviewed by the Department of Labor and Regulation . . . at the written request of the employer or of the employee and on such review payments may be ended, diminished, increased,
or awarded subject to the maximum or minimum amounts provided for in this title, if the department finds that a change in the condition of the employee warrants such action.
[¶40.] The provenance of our cases identifying this statutory procedure as the correct method for modifying a final Department order dates back nearly thirty years before the Appellants’ decision to terminate Johnson’s benefits. In our 1981 decision in Call, we observed that the Department’s final decision regarding benefits could “be modified only upon a showing of change of condition pursuant to
(“By virtue of
[¶41.] Against this historical backdrop, the Appellants’ argument that we first recognized
[¶42.] Our subsequent decision in Hayes v. Rosenbaum Signs & Outdoor Advertising, Inc. directly rejected an employer’s effort to use a compulsory IME to unilaterally terminate workers’ compensation benefits, but it did so under previously established legal principles, including SDCL 62-7-33. 2014 S.D. 64, ¶ 29, 834 N.W.2d 878, 886 (citing Kasuske v. Farwell, Ozmun, Kirk & Co., 2006 S.D. 14, ¶ 12, 710 N.W.2d 451, 455). If Hayes was novel in any way, it was because it involved an employer’s continuing obligation to pay benefits following an order dismissing—
not granting—a claimant’s request for workers’ compensation benefits. Id. ¶ 3. However, any imprecision turning on that distinction would have no impact here because the 2006 DOL Order was a final order to pay benefits.
[¶43.] In an attempt to harbor their position within Hayes’ holding, the Appellants claim that prior to Hayes, no case had held that
[¶44.] Simply put, there was no change in the law occasioned by our decisions in Stuckey and Hayes. It may well be that the prevailing currents of workers’ compensation practice had, temporarily, discounted our precedent and the text of
But that does not make the practice right, or reasonable, or render the underlying legal premise fairly debatable. See Larsen, 509 N.W.2d at 707-08 (noting that we were “at a loss to explain Department’s former practice” of treating a “Form 111 agreement” as a non-final award, considering its text and our prior decisions). Even after a concerted effort to offset any distorting effects from the passage of time, we cannot conceive of a reasonable basis to justify the Appellants’ decision to terminate Johnson’s medical benefits.
[¶45.] Therefore, the circuit court correctly determined that Schulte’s advice unreasonably deviated from existing law and the obligations imposed by the 2006 DOL Order.10
(. . . continued)
the finality of the 2006 DOL Order, our established body of decisional law, and the clear and unambiguous text of
There are no disputed issues of material fact, and the Appellants lacked a reasonable basis for terminating Johnson’s medical benefits because their obligation to pay was not fairly debatable. Under the circumstances, the court properly determined as a matter of law the first requirement of the bad faith test was met. See Champion, 399 N.W.2d at 324. However, we must further consider whether the circuit court incorrectly extended this initial ruling beyond its limit into the second distinct bad faith element—concerning the Appellants’ knowledge—through its additional summary judgment ruling, jury instructions, and evidentiary rulings.
Knowledge of a Lack of Reasonable Basis for Denial
[¶46.] In addition to establishing the absence of a reasonable basis for denying workers’ compensation benefits, a plaintiff alleging bad faith must also prove an employer’s and insurer’s “knowledge or reckless disregard of the lack of a reasonable basis for denial.” See Bertelsen III, 2013 S.D. 44, ¶ 52, 833 N.W.2d at 563 (quoting DM&E, 2009 S.D. 69, ¶ 17, 771 N.W.2d at 629). Even where a court can determine an obligation to pay was not fairly debatable as a matter of law, we emphasized in Bertelsen III that the knowledge inquiry is a
[¶47.] Our effort in Bertelsen III to formulate a list of knowledge considerations such as “negligence in processing the claim, an inadequate proof of loss, or an agreement by the insured to delay payment” was illustrative, not exhaustive. Id. Indeed, long before our decision in Bertelsen III, we recognized that an insurer’s reliance on the advice of counsel is among the factors that may be considered when a jury is determining a question of bad faith:
[W]e do not agree that reliance on counsel is the sole decisive test of good faith in the present action. It is merely one factor to be considered. An insurer cannot discharge its entire responsibility to an insured “by simply employing a competent attorney and abiding by his decision concerning advisability of settlement.”
Crabb v. Nat’l Indem. Co., 87 S.D. 222, 228, 205 N.W.2d 633, 636 (1973) (internal citation omitted).
[¶48.] Here, the circuit court erred when it expanded its decision that the Appellants lacked a reasonable basis for their denial into the separate issue of their knowledge. Despite the court’s effort to apply our decision in Bertelsen III, it overlooked the critical fact that the insurer in that case did not obtain the advice of counsel concerning its obligation to pay.
[¶49.] In Bertelsen III, we accepted the argument that the Plaintiff’s auto insurer lacked a reasonable basis for denying benefits following the initial denial by the Plaintiff’s workers’ compensation insurer. We focused our review of the jury’s bad faith verdict on the insurer’s knowledge, and framed the corresponding issue as “whether there was sufficient evidence for the jury to find that [the auto insurer] delayed payment with knowledge of the absence of a reasonable basis to delay payment or in reckless disregard of the absence of a reasonable basis to delay payment.” Bertelsen III, 2013 S.D. 44, ¶ 18, 833 N.W.2d at 555. However, we observed the insurer made no effort to learn or clarify the extent of its clear statutory obligation to pay benefits and “could have contacted legal counsel” to ascertain the controlling law. Id., 2013 S.D. 44, ¶ 20, 833 N.W.2d at 555 (quoting Walz v. Fireman’s Fund Ins. Co., 1996 S.D. 135, ¶ 13, 556 N.W.2d 68, 72). Under the circumstances, knowledge of the duty to pay the insured’s claim could be directly imputed to the insurer which was, therefore, prohibited from arguing that it “reasonably believed it had no statutory duty to pay upon [the workers’ compensation insurer’s] denial of . . . coverage.”
[¶50.] In this case, however, the Appellants did seek the assistance of counsel. Though we agree with the circuit court that Schulte’s advice did not
provide a reasonable basis for denying Johnson’s benefits, it does not automatically follow that the Appellants knew the degree to which his advice was improvident. The circuit court’s determination that the absence of a fairly debatable reason for terminating Johnson’s benefits necessarily meant that the Appellants “understood [their] legal duties” marks the critical point at which the court incorrectly transferred its ruling from the first bad faith element to the second. By reconsidering and granting Johnson’s summary judgment motion to preclude the Appellants’ advice-of-counsel defense, the court collapsed the two distinct elements of bad faith into one. There were, to be sure, genuine issues of disputed material fact regarding the Appellants’ knowledge that should have prevented the circuit court’s grant of partial summary judgment.
[¶52.] Whether the jury would have accepted the Appellants’ argument that they lacked knowledge of a reasonable basis for terminating Johnson’s benefits is a separate inquiry, but one the jury was not allowed to meaningfully undertake. The
circuit court excluded the specific evidence of Schulte’s advice and foreclosed the jury’s consideration of the Appellants’ knowledge with the formulation of its jury instructions. Absent this testimony, the jury could not properly determine whether the Appellants knew they had no reasonable basis or had acted with reckless disregard to terminate Johnson’s medical benefits.
[¶53.] Based upon its summary judgment ruling on the Appellants’ advice-of-counsel defense, the circuit court’s jury instructions had a profound impact on the bad faith verdict for Johnson. For example, Instruction 25 detailed an employer’s liability for an employee’s work-related injury and the legal process an employer must follow to modify or terminate a claimant’s benefits through the Department before concluding, “You are instructed that the [Appellants] may not argue, and you may not conclude that the [Appellants] misunderstood these legal duties.” In addition to holding the Appellants to the same standard as an experienced attorney, Instruction 25 ended the jury’s inquiry into the Appellants’ knowledge concerning the absence of a reasonable basis to terminate Johnson’s benefits.
[¶54.] Further, Instruction 27 expressly advised the jury that it could not consider Schulte’s advice “when determining whether [the Appellants] knew there was no reasonable basis . . .” for denying benefits. The circuit court allowed limited use of only the bare fact that Schulte advised the Appellants to obtain an IME, but this evidence was incomplete and of little utility if the purported significance of the IME and its context are excluded. The court could have instructed the jury that evidence relating to Schulte’s advice could be used only for a limited purpose, i.e., it could not be used to consider whether a reasonable basis existed to terminate
Johnson’s medical benefits, but the jury could consider it solely to determine the Appellants’ knowledge. Evidence of Schulte’s advice was surely relevant to this determination, and it should not have been excluded.
[¶55.] The circuit court abused its discretion in excluding this evidence as it related to the question of the Appellants’ knowledge. Likewise, the circuit court abused its discretion by giving the jury instructions that effectively directed a verdict in favor of Johnson on the question whether the Appellants knew of or recklessly disregarded the lack of a reasonable basis for denial of the medical benefits. We believe these errors impacted the outcome of the case and require a retrial on the Appellants’ liability for bad faith.
[¶56.] Additionally, the details of Schulte’s advice were relevant to the question
Conclusion
[¶57.] The circuit court correctly determined that the Appellants lacked a reasonable basis for terminating Johnson’s medical benefits because her claim to continued benefits was not fairly debatable. However, the court’s subsequent decision to extend its fairly debatable ruling into a broader prohibition of any argument or evidence suggesting that the Appellants knew they lacked a reasonable basis for terminating Johnson’s benefits was erroneous. The error led to the exclusion of relevant evidence and incorrect jury instructions that impacted the jury’s verdict. Under the circumstances, the Appellants were prejudiced. The judgment for Johnson is reversed, and the case is remanded to the circuit court for retrial.
[¶58.] GILBERTSON, Chief Justice, and KERN and JENSEN, Justices, and MEANS, Circuit Court Judge, concur.
[¶59.] MEANS, Circuit Court Judge, sitting for vacancy.