KENNETH D COE, Applicant
MCC INC, Employer
ACUITY INS CO, Insurer
In December 2011, the applicant filed a hearing application seeking assessment of the penalty for bad faith under Wis. Stat. 102.18(1)(bp). The employer and its insurer (collectively the respondent) conceded jurisdictional facts and a compensable right knee injury occurring on November 8, 2007.
Issues related to primary compensation and medical expense were heard and decided on an earlier hearing application and are not now at issue. At issue now is the respondent's liability for the bad faith penalty under Wis. Stat. § 102.18(1)(bp).
The matter went before an administrative law judge (ALJ) for the Worker's Compensation Division of the Department of Workforce Development (department) based on briefs and a stipulated record.(1) On February 13, 2013, the ALJ issued his decision assessing a bad faith penalty against the respondent in the sum of $30,000. The respondent filed a timely petition for commission review.
The commission has considered the petition and the positions of the parties, and it has reviewed the evidence submitted to the ALJ. Based on its review, the commission makes the following:
1. Facts and posture.
The applicant was born in 1959. In a hearing application filed in June 2008, he claimed compensation for disability and medical expense for a right knee injury on November 8, 2007. The applicant's claim for additional primary compensation and medical expense was heard by ALJ Mary Lynn Endter. Her January 22, 2010 decision in the applicant's favor was affirmed by the commission on July 27, 2010.
ALJ Endter's findings of fact, adopted by the commission, establish that the applicant had injured his knee in the early 1990's while in the armed services. He treated for his right knee at the Veteran's Hospital beginning in June of 2005 and underwent an MRI in December 2006 which showed degenerative changes, including a partial thickness tear of the anterior cruciate ligament and a small full thickness tear on the posterior horn of the medial meniscus. His most recent treatment at the Veteran's Hospital prior to the November 2007 work injury was on June 15, 2007.
Nonetheless, the applicant was able to work despite his right knee problems until November 8, 2007. On that date, he stepped on a bottle at work and his right foot kicked out to the right causing immediate pain in his right knee. He reported the injury to his foreman, who told him to seek treatment. Accordingly, the applicant drove himself to the hospital for treatment that same day.
The applicant underwent an MRI a few days after the work injury. He underwent surgery shortly thereafter on November 26, 2007. The treating surgeon, Robert Hausserman, M.D., described the surgery as a:
Right knee arthroscopy with a partial lateral meniscectomy, limited partial medial meniscectomy, anterior debridement and plica resection, patellar chondroplasty, and an arthroscopically-assisted cruciate ligament reconstruction.
The parties submitted two expert medical opinions before ALJ Endter. In response to a letter from the applicant's attorney, treating surgeon Hausserman opined that the applicant's November 26, 2007, surgery was necessary as a result of the applicant's November 8, 2007 work incident that precipitated, aggravated, or accelerated his preexisting progressive deteriorating or degenerative knee condition beyond normal progression. (Exhibit A.) In a practitioner's report on form WKC-16-B, Dr. Hausserman indicated that the applicant had stepped on a bottle and twisted his right knee which led to the doctor's surgical recommendation. (Exhibit B.) On the practitioner's report, the doctor indicated that the work incident on November 8, 2007, caused the applicant's disability by precipitating, aggravating, and accelerating beyond normal progression a progressively deteriorating condition.
The respondent relied on the expert medical opinion of Michael Orth, M.D. Dr. Orth initially did a record review on March 18, 2008 (Exhibit 4) after which he opined that the applicant's need for surgery was "just a continuation of a preexisting condition" noting that the applicant had been complaining of pain in his right knee for over two years. He stated in the March 2008 record review that the applicant slipped and twisted his knee, temporarily aggravating his preexisting condition. He opined further that the surgery was done simply for the preexisting condition. Dr. Orth went on to note that:
The temporary work aggravation was not allowed to end as the claimant underwent conservative treatment. A soft tissue aggravation such as he had would be expected to resolve in two to three months, but it could not occur because surgery was carried out due to the pre-existing findings on the MRI. In spite of receiving conservative treatment for over two years and no mention made in the documentation of any need for surgery, when Dr. Hausserman saw him 11 days after the injury he recommended surgery based on the findings on the MRI. As I pointed out, those findings were present previously. He made no attempt to treat this temporary aggravation conservatively. . . . It should be pointed out that twisting his knee while slipping on a beer bottle would not produce chondromalacia of the patella, an anterior cruciate ligament, a tear of the medial meniscus, and a complex tear of the lateral meniscus. These are clearly preexisting degenerative conditions unrelated to the incident of November 8, 2007. It is my opinion that if he had been treated conservatively as he had done in the past, surgery would not have been required.
Dr. Orth went on to opine that the applicant did not aggravate his preexisting condition beyond its normal progression, noting that the findings on the MRI were essentially the same as the findings noted previously.
Dr. Orth issued a second opinion on November 10, 2008 (Exhibit 3), following an actual examination of the applicant one month earlier. On this occasion, the doctor opined that:
As a result of the injury on November 8, 2007, the examinee sustained a traumatic synovitis (sprain) superimposed on a pre-existing anterior cruciate ligament tear, as well as a lateral and meniscal tear. The sprain did temporarily aggravate these pre-existing conditions. A similar temporary aggravation had occurred on more than one occasion in the past and always responded to conservative treatment with no need for surgery.
Dr. Orth opined further that the work injury on November 8, 2007, directly caused the applicant's sprain of his right knee but did not cause the findings shown on the MRI, only temporarily aggravated them. He again opined that the work injury did not precipitate, aggravate or accelerate the applicant's preexisting progressively deteriorating condition beyond its normal progression. He stated that because the applicant immediately underwent surgery the sprain was not allowed to heal. He opined that the applicant would have been expected to have healed physiologically from the right knee sprain without any permanent disability in two to three months.
In a final supplemental report dated January 26, 2009, Dr. Orth reiterated his opinion that the surgery done in November 2007 "was related to and addressed pre-existing, degenerating conditions and was not related to and did not address any acute injury occurring on November 8, 2007." (Exhibit 2, page 2.) He added that the mechanism of the injury could not have caused the multiple conditions noted on the MRI and at the time of surgery. While he acknowledged that the two reports from the two radiologists who did the two MRIs were not identical, he suggested that different radiologists often gave different diagnoses even when viewing the same MRI. Therefore he did not change his opinion.
ALJ Endter credited Dr. Hausserman's opinion and found that the work injury on November 8, 2007, caused the need for the November 26, 2007 surgery, and any resulting disability therefrom. As set out above, the commission affirmed ALJ Endter's decision, and the commission's decision was not the subject of further appeal. The commission now addresses the applicant's claim for the bad faith penalty under Wis. Stat. § 102.18(1)(bp), raised in his hearing application filed in December 2011.
The applicant contends that given the opinions of Dr. Orth, the respondent had no basis to refuse to pay for the November 26, 2007 surgery and attendant disability and medical expense, even before ALJ Endter issued her decision. The applicant argues that he underwent the surgery in good faith to treat the work injury, and that therefore the respondent would have been liable for the treatment under Wis. Stat. § 102.42(1m), even if the department or the commission had subsequently accepted Dr. Orth's opinion that the work injury caused only a "temporary aggravation" which did not require surgical treatment.
The respondent argues that it reasonably refused to pay the surgical expense and resulting disability until ordered to do so by ALJ Endter. The respondent asserts its refusal to pay was supported by the opinions of Dr. Orth, who believed the November 26, 2007 knee surgery was not actually done to treat the work injury, but rather a preexisting condition.
2. The statutes at issue.
a. Liability for unnecessary treatment under Wis. Stat. § 102.42(1m)
Wisconsin Stat. § 102.42(1m) provides as follows:
(1m) LIABILITY FOR UNNECESSARY TREATMENT. If an employee who has sustained a compensable injury undertakes in good faith invasive treatment that is generally medically acceptable, but that is unnecessary, the employer shall pay disability indemnity for all disability incurred as a result of that treatment. An employer is not liable for disability indemnity for any disability incurred as a result of any unnecessary treatment undertaken in good faith that is noninvasive or not medically acceptable.180 This subsection applies to all findings that an employee has sustained a compensable injury, whether the finding results from a hearing, the default of a party, or a compromise or stipulation confirmed by the department.
The department has appended a footnote to Wis. Stat. § 102.42(1m) stating:
180 This subsection was created by 2001 Wis. Act 37, effective January 1, 2002. The intent is to modify the holding in Spencer v. DILHR, 55 Wis.2d 525 (1972), in response to the decision in Honthaners Restaurants Inc. v. LIRC, 240 Wis.2d 234 (Ct. App. 2000). The intent is to permit insurance carriers and self-insured employers to use examining practitioner's opinions to defeat liability for compensation for indemnity in an otherwise conceded case that is a consequence of non-invasive unnecessary treatment even if the employee underwent the unnecessary treatment in good faith. It was not intended that this subsection modify the holding in City of Wauwatosa v. LIRC, 110 Wis.2d 298 (1982).
DWD, Worker's Compensation Act of Wisconsin with Amendments to April 2011 (WKC-1-P (R.04/2011).(2)
In Spencer v. DILHR, the supreme court stated:
In setting aside the findings of fact and order of the department, the circuit court held as a matter of law that where an employee, in good faith, accepts the recommendation of treatment of one doctor, with whom another doctor disagrees, the department cannot disregard the consequences of treatment (increased period of temporary total disability, increased permanent partial disability and the expense of the arthrodesis) because it finds the treatment was either unnecessary or unreasonable. This conclusion is evidently based on the court's earlier finding of an absolute right to consult a second panel physician without first tendering notice to the employer.
As we see it, the conflict here is not with the amount of disability ultimately resulting, but whether the judgment of one or the other doctor was correct or incorrect with respect to the necessity of the arthrodesis. Assuming Dr. Braun was correct, is Spencer [the injured worker] to be faulted because he chose to follow erroneous medical advice? We do not think so, as long as he did so in good faith. There is no evidence to show that in accepting arthrodesis Spencer did so other than in good faith. The employer is responsible for the consequences not only of the injury, but the treatment. . .
Spencer, at 55 Wis. 2d 531-32.
Several years after Spencer was decided, the court of appeals revisited the issue in City of Wauwatosa v. LIRC, 110 Wis. 2d 298 (Ct. App. 1992). The court of appeals said that the Spencer holding did not apply to the facts at issue in that case because:
In Spencer, the Wisconsin Supreme Court held that, where an employee, in good faith, accepts the recommendation of treatment of one doctor, with whom another doctor disagrees, the commission cannot disregard the consequences of the treatment because it finds the treatment either unnecessary or unreasonable. ... In Spencer, it was undisputed that the injury was a compensable industrial injury. ... Here, however, there was a dispute in the medical testimony whether Tebo's [the injured worker's] condition for which surgery was performed was even related to the compensable industrial injury. The hearing examiner found that the compensable industrial injury did not necessitate surgery. We conclude that the Spencer rationale applies only to cases involving treatment for an undisputed compensable industrial injury. It thus does not apply to the facts of this case. [Citations omitted.]
City of Wauwatosa, 110 Wis. 2d at 300-01.
The next reported case on the issue was Honthaners Restaurants Inc. v. LIRC, 2000 WI App 73, 240 Wis. 2d 234. In Honthaners, the court of appeals described the Spencer holding as follows:
15 We agree that the statute ordinarily permits compensation only when medical treatment and expenses are reasonably required and necessary. However, Spencer creates an exception to the general rule. In Spencer, the supreme court allowed recovery for medical treatment and expenses that were incurred when the injured employee followed what, in hindsight, appeared to be erroneous medical advice. See Spencer, 55 Wis. 2d at 530-32. Spencer teaches that as long as the claimant engaged in the unnecessary and unreasonable treatment in good faith, the employer is responsible for payment. See Spencer, 55 Wis. 2d at 532. Thus, we must look at the facts to see if Spencer applies.
...
22 As in Spencer, here we have two conflicting medical opinions concerning a claimant's injury. Dr. Bogunovic believed Stanislowski [the injured worker] suffered a permanent injury and needed prolonged treatment. On the other hand, Dr. McCabe felt the injury had healed and that Stanislowski was exaggerating her medical condition. Although, admittedly, Stanislowski's credibility played a large part in Dr. McCabe's diagnosis and treatment, the pertinent issues here and in Spencer are identical. Both cases involve no dispute that the claimants suffered a compensable injury. Both deal with differing medical opinions on diagnosis and treatment. Both cases have a claimant who continued the unnecessary treatment in good faith. Thus, we conclude the Commission properly relied on Spencer and Stanislowski is entitled to additional benefits.
The Honthaners court also described the distinction between the City of Wauwatosa case and Spencer as follows:
21 The cases reveal one important factual difference. In City of Wauwatosa, the parties disputed the actual cause of the injury, with the court of appeals adopting the hearing examiner's finding that the surgery was not the result of the work-related injury-it was required by the preexisting congenital condition. In Spencer, the parties disputed medical treatment, not cause. Here, the Commission found that Stanislowski suffered an undisputed compensable injury; as in Spencer, there is no dispute that she had a work-related injury. In Spencer, the court permitted compensation, even though the treatment was unnecessary and unreasonable, because the claimant obtained treatment in good faith. In the present case, the Commission found that Stanislowski, acting in good faith, obtained treatment after having been "overdiagnosed and over-treated." Thus, the Commission correctly observed that the facts of this case fall squarely within the Spencer holding.
b. Liability for bad faith under Wis. Stat. § 102.18(1)(bp)
Of course, this case is not solely about the meaning and extent of Wis. Stat. § 102.42(1m), but about whether the respondent's refusal to pay for the applicant's knee surgery and resulting temporary disability until ordered by ALJ Endter was bad faith in light of that statute. The bad faith penalty is provided for in Wis. Stat. § 102.18(1)(bp) which provides:
102.18(1)(bp) If the department determines that the employer or insurance carrier suspended, terminated, or failed to make payments or failed to report an injury as a result of malice or bad faith, the department may include a penalty in an award to an employee for each event or occurrence of malice or bad faith. This penalty is the exclusive remedy against an employer or insurance carrier for malice or bad faith. If this penalty is imposed for an event or occurrence of malice or bad faith that causes a payment that is due an injured employee to be delayed in violation of s. 102.22 (1) or overdue in violation of s. 628.46 (1), the department may not also order an increased payment under s. 102.22 (1) or the payment of interest under s. 628.46 (1). The department may award an amount that it considers just, not to exceed the lesser of 200 percent of total compensation due or $30,000 for each event or occurrence of malice or bad faith. The department may assess the penalty against the employer, the insurance carrier or both. Neither the employer nor the insurance carrier is liable to reimburse the other for the penalty amount. The department may, by rule, define actions which demonstrate malice or bad faith.
and by Wis. Admin. Code § DWD 80.70, which provides:
DWD 80.70 Malice or bad faith. (1) An employer who unreasonably refuses or unreasonably fails to report an alleged injury to its insurance company providing worker's compensation coverage, shall be deemed to have acted with malice or bad faith.
(2) An insurance company or self-insured employer who, without credible evidence which demonstrates that the claim for the payments is fairly debatable, unreasonably fails to make payment of compensation or reasonable and necessary medical expenses, or after having commenced those payments, unreasonably suspends or terminates them, shall be deemed to have acted with malice or in bad faith.
Those provisions are discussed at length by the supreme court in Brown v. LIRC, 2003 WI 142, 267 Wis. 2d 31:
23 The court of appeals concluded in Kimberly-Clark that Anderson v. Continental Insurance Co., 85 Wis. 2d 675, 271 N.W.2d 368 (1978), recognizing the tort of bad faith, applies to bad faith claims under Wis. Stat. § 102.18(1)(bp) and the accompanying administrative code provision, Wis. Admin. Code § DWD 80.70(2). The Anderson case adopted a two-part test for bad faith. To demonstrate bad faith, a claimant must show that the insurer had no reasonable basis for denying benefits and knew or recklessly disregarded that there was no reasonable basis for denying benefits.
24 The claimant, here the employee, must first show that the insurance company did not have a reasonable basis to suspend payment on the claim. In other words, the insurer did not possess information that would lead a reasonable insurer to conclude that an employee's claim is fairly debatable and that therefore payment need not be made on the claim. The "fairly debatable" test is an objective test. It asks whether a reasonable insurer under similar circumstances would have denied, suspended, or delayed payment on the claim.
25 The test for determining that an insurer has a reasonable basis to suspend payment on the claim is whether the insurer properly investigated the claim and whether the results of the investigation were subject to a reasonable evaluation and review. The reasonable or unreasonable character of the insurer's conduct is gauged by examining the circumstances existing when the insurer made its decision to deny benefits.
26 The second element the claimant must show to demonstrate bad faith is that the insurer knew or recklessly disregarded that there was no reasonable basis for denying benefits. The Anderson court explained that the nature of the tort of bad faith is intentional and that implicit in the two-part test is "our conclusion that the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless disregard of a lack of a reasonable basis for denial or a reckless indifference to facts or to proofs, submitted by the insured." The focus for determining whether an insurer is liable for bad faith is the sufficiency or strength of its reasoning.
27 The state of mind required for a bad faith penalty may be better understood upon examination of Wis. Stat. § 102.22(1), which imposes a penalty for inexcusable neglect. As the court of appeals explained in North American Mechanical v. LIRC, 157 Wis. 2d 801, 808-809, 460 N.W.2d 835 (Ct. App. 1990), chapter 102 contemplates three types of conduct resulting in a delay in payments: (1) excusable neglect; (2) inexcusable neglect; and (3) bad faith delay. The legislature apparently contemplated that some delay could be excusable. When the delay is inexcusable, the delayed payments shall be increased by 10% under § 102.22(1).
28 The potential 200% penalty provided in Wis. Stat. § 102.18(1)(bp) is reserved for cases of bad faith. Not all inexcusable delays rise to the level of bad faith. "[A] finding of the 'knowledge' element of the Anderson test is a prerequisite to imposition of 'bad faith' penalties under sec. 102.18(1)(bp), Stats."
29 If an insurance company exercises ordinary care in investigating the facts and law and reasonably concludes that the claim is fairly debatable, the company's actions will not constitute bad faith. [Footnotes omitted.]
The Brown court included the following footnote in its decision:
34 Anderson, 85 Wis. 2d at 693. See John W. Thornton & Milton S. Blaut, Bad Faith and Insurers: Compensatory and Punitive Damages, 12 Forum 699, 719 (1977) ("An insurer should have the right to litigate a claim when it feels there is a question of law or fact which needs to be decided before it in good faith is required to pay the claimant.").
Brown v. LIRC, 267 Wis. 2d 31, 29, footnote 34.
3. Discussion.
The respondent contends that Wis. Stat. § 102.42(1m) did not compel the payment of compensation attendant to the November 2007 knee surgery before ALJ Endter issued her decision. The respondent notes that, as noted above, that statute subsection was not intended to modify the holding in the City of Wauwatosa case. The respondent argues that, as in City of Wauwatosa, ALJ Endter could have "found that the compensable industrial injury did not necessitate surgery" based on Dr. Orth's expert medical opinion that the surgery was done to address the applicant's preexisting degenerative condition in his knee, and was not related to and did not address any acute injury on November 8, 2007. Under the respondent's argument, the Honthaners decision--to the extent it remains viable--would not require otherwise because that case involved continuing overtreatment of a compensable injury that had healed, not the treatment of a condition separate from the work injury.
The applicant argues that the City of Wauwatosa holding does not apply in this case because Dr. Orth's opinion does not--in the words of the court of appeals in that case--create "a dispute in the medical testimony whether [the applicant's] condition for which surgery was performed was even related to the compensable industrial injury." Id., 110 Wis. 2d at 301. The ALJ's decision more fully explains this position: Assuming Dr. Orth correctly opined that the work injury "temporarily aggravated" the applicant's underlying degenerative condition, the symptoms from that temporary aggravation led to the surgery, and so the condition for which the surgery was performed would be related to the temporary aggravation caused by the work injury. The ALJ explained that work injuries that "temporarily aggravate" a pre-existing condition are a subset of compensable injuries under the rule that:
If the work activity precipitates, aggravates and accelerates beyond normal progression, a progressively deteriorating or degenerative condition, it is an accident causing injury or disease and the employee should recover even if there is no definite "breakage."
Lewellyn v. DILHR, 38 Wis. 2d 43, 59 (1968).
Stated another way, the applicant suggests that Dr. Orth's medical opinion upon which the respondent primarily relies--that the applicant's November 26, 2007 knee surgery "was related to and addressed pre-existing, degenerating conditions and was not related to and did not address any acute injury occurring on November 8, 2007"--is unsupportable on a legal basis. Under Lewellyn, the applicant contends, a work injury that causes a "temporary aggravation" of a pre-existing condition necessarily accelerates, precipitates and accelerates the pre-existing degenerative condition beyond its normal progression, if only temporarily. Unnecessary surgical treatment for that condition as aggravated must therefore be related to the work injury--even if the temporarily-aggravated condition following the work injury would have returned to baseline if left untreated.
The applicant's position, as developed and explained by the ALJ who adopted it, is a reasonable and perhaps even persuasive analysis of the interaction of the Spencer doctrine as codified in Wis. Stat. § 102.42(1m) and the Lewellyn rule. However, the commission cannot conclude that the applicant's position so plainly follows from the statute and case law that the respondent acted in bad faith simply by challenging its liability for the applicant's knee surgery.
Or stated more directly, the commission cannot conclude that the two-part test for bad faith set out in Brown--that the insurer had no reasonable basis for denying benefits and knew or recklessly disregarded that there was no reasonable basis for denying benefits--is met with respect to this legal issue. As the court of appeals [Ed. note to online version this language is from the supreme court decision] has observed
An insurer should have the right to litigate a claim when it feels there is a question of law or fact which needs to be decided before it in good faith is required to pay the claimant.
Brown v. LIRC, 267 Wis. 2d 31, 29, footnote 34.
In sum, the respondent did not act in bad faith on this record. The December 2011 hearing application seeking the bad faith penalty under Wis. Stat. § 102.18(1)(bp) must be dismissed.
NOW, THEREFORE, the Labor and Industry Review Commission makes this
The findings and order of the administrative law judge are reversed.
The December 2011 hearing application seeking assessment of the bad faith penalty is dismissed.
Dated and mailed
September 30, 2013
coeke_wrr . doc : 101 ND6 8.21; 8.22; 8.24
BY THE COMMISSION:
/s/ Laurie R. McCallum, Chairperson
/s/ C. William Jordahl, Commissioner
/s/ David B. Falstad, Commissioner
The commission did not consult with the presiding ALJ regarding witness credibility. No witnesses testified before the ALJ, as the matter was submitted on briefs and a stipulated record. The commission reversed his decision based on different conclusions regarding the applicable law, not on a different assessment of the witness credibility.
cc:
Attorney Jeffrey Strande
Attorney Stuart Spaude
Appealed to Circuit Court. Affirmed May 7, 2014. Appealed to Court of Appeals. Affirmed per curiam June 30, 2015.
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