STATE OF WISCONSIN
LABOR AND INDUSTRY REVIEW COMMISSION
P O BOX 8126, MADISON, WI 53708-8126 (608/266-9850)


WILLIE SMITH JR, Applicant

LONGVIEW FIBRE CO, Employer

AETNA CASUALTY & SURETY CO, Insurer

WORKER'S COMPENSATION DECISION
Claim No. 1990024253


On April 13, 1998, Administrative Law Judge John Clarke of the Worker's Compensation Division of the Department of Workforce Development issued a decision in this matter. A timely petition for review was filed.

At issue before ALJ Clarke, and now before the commission, is whether the employer or its insurer are liable for a penalty under Wis. Stat. § 102.18(1)(bp) or for an increased payment under Wis. Stat. § 102.22(1). The commission has considered the petition and the positions of the parties, and it has reviewed the evidence submitted to the ALJ. Based on the applicable law, records and evidence in this case, the commission makes the following:

FINDINGS OF FACT AND CONCLUSIONS OF LAW

1. Facts and procedural posture.

The applicant, a foreman employed by the employer, sustained a conceded work injury on March 29, 1989. The injury occurred when the applicant had reached down on his left side while holding a sheet of corrugated paper, and experienced an "explosion" in his low back and a "light flash of pain." Shortly after his injury occurred, the applicant noted a deterioration in his motor function of his legs, and was taken from the employer's premises to a hospital emergency room. He treated with a chiropractor and was released, with restrictions, to his sedentary job as a foreman.

The applicant began treating with a chiropractor, Glen Murphy, D.C., in 1994. In September 1995, apparently after an item of medical expense was denied, the applicant filed an application for hearing, claming medical expense and five percent permanent partial disability. The application evidently included a report from treating chiropractor Murphy who rated permanent partial disability at five percent. See exhibit H, last few pages; see also, exhibit 3, pages 3-5.

The insurer scheduled an independent medical examination before David R. Zeman who issued his report on February 9, 1996. Dr. Zeman diagnosed herniated nucleus pulposus syndrome at L4-5 with L5 radiculopathy. He concluded that the March 29, 1990 work injury caused the applicant's condition, by aggravating, accelerating and precipitating a pre-existing degenerative condition beyond normal progression. He determined that the applicant had reached a maximum medical improvement, or a healing plateau, within one month of the injury, that is, by April 24, 1990. He went on to state that the applicant thereafter was left with permanent partial disability at five percent, and imposed permanent work restrictions against lifting more than 40 pounds.

On February 28, 1996, shortly after requesting and receiving the report from independent medical examiner Zeman, the applicant's attorney wrote to the insurer's attorney, and demanded payment of the five percent permanent partial disability rated by Dr. Zeman and Dr. Murphy. The insurer the did not pay the permanent partial disability, nor did it respond to this letter.

On March 12, 1996, the applicant's attorney wrote to the department, with a copy to the insurer's attorney, inquiring whether payment of chiropractor Murphy's outstanding treatment balance could be regarded as a conceded issue. The applicant's attorney's again noted in this letter Dr. Zeman's concession of a five percent permanent partial disability, and requested a response from the insurer.

The insurer responded by sending a letter from a claims adjuster Carol Wichman to Dr. Zeman, with copies to both attorneys. Exhibit H, Wichman letter dated April 1, 1996. The letter notes that Dr. Zeman had fixed an end of healing on April 24, 1990, had rated permanent partial disability at five percent, and had fixed a forty pound lifting restriction. The letter then inquires whether medical care after April 6, 1994 was related to the work injury. In other words, Ms. Wichman's letter asked about liability for medical expense; it did not ask for an explanation of the permanent partial disability rating.

To this point, the insurer still had not paid the five percent permanent partial disability rated by its own independent medical examiner, Dr. Zeman. Consequently, on May 1, 1996, the applicant's attorney amended the application for hearing to add a request for bad faith and inexcusable delay penalties against the insurer. The applicant's attorney also added another practitioner's report rating permanent partial disability at five percent, this one from Dr. Gorelick, and reiterated the applicant's request for medical expenses.

Apparently on May 9, 1996, (1) Ms. Wichman again wrote to Dr. Zeman asking about his February 9, 1996 report. She inquired, among other things, "why the lifting restriction and permanent partial disability would be related to any injury that would have healed in a month." Exhibit 1, supplemental report of Zeman, page 1.

Next, on May 29, 1996, the insurer's attorney sent a letter denying the claim for inexcusable delay and bad faith. The insurer's attorney went on to state that the insurer had requested clarification from Dr. Zeman because he "appears to indicate that the claimed injury would have healed within one month but then makes findings about the nature of the overall disability to the body as a whole." Exhibit H, Roitburd letter dated May 29, 1996.

The next day, on May 30, 1996, Dr. Zeman responded by explaining that that he had ended the healing period after only a month based on what the applicant told him, but that more complete medical documentation might support a longer healing period. He also explained that the permanent partial disability rating and permanent work restrictions were not necessarily related to the length of the healing period. In other words, Dr. Zeman essentially responded that he meant what he said in his February 9, 1996 report.

Two weeks later, on June 12, 1996, the insurer's attorney wrote the applicant's attorney reporting that arrangements had been made to pay the permanent partial disability as rated by Dr. Zeman. The parties could not agree on medical expense, however. That issue went before ALJ Donald Doody who ordered the expenses paid by order dated January 24, 1997.

As noted above, the issue before ALJ Clarke, and now before the commission, is whether the employer or its insurer inexcusably delayed paying the permanent partial disability under Wis. Stat. § 102.22 (1) or refused to pay it in bad faith under Wis. Stats. § 102.18(1)(bp), or both. ALJ Clarke answered both questions affirmatively, and assessed a total of $13,100 in penalties against the insurer.

Both sides appeal. The applicant questions the calculation of the award. The employer and insurer contend that the insurer did not act in bad faith, and that also ALJ Clarke miscalculated the increased payment for inexcusable delay.

2. Legal issues.

Wisconsin Statute § 102.22 (1) provides for a 10 percent increased payment for inexcusable delay in making payments due to an injured worker. Wis. Stat. § 102.18(1)(bp) provides for a penalty of up to 200 percent for a malicious or bad faith suspension, termination, or failure to make payments. Wis. Admin. Code § DWD 80.70(2) defines bad faith as a denial without credible evidence that the claim is "fairly debatable."

These sections have been discussed at length by the court of appeals in a number of recent decisions. On the question of what is "fairly debatable" for the purpose of bad faith, the court of appeals has written:

"Whether payment is `fairly debatable' has been interpreted in both insurance and worker's compensation `bad faith' cases. See Anderson [v. Continental Ins. Co.], 85 Wis. 2d [675] at 690-93, 271 N.W.2d at 376-77 [(1978)]; Kimberly-Clark [v. LIRC], 138 Wis. 2d 58, at 65-66, 405 N.W.2d at 687-88 [(Ct. App. 1987)]. In Anderson, the court concluded that an insured may assert a cause of action in tort against an insurer for bad faith refusal to honor a claim. Id. at 690, 271 N.W.2d at 376. The court said that, in order to show a claim for bad faith, a plaintiff must show `the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.' Id. at 691, 271 N.W.2d at 376 (emphasis added).

"In Kimberly-Clark, the court applied the Anderson test to the determination of whether a claim was `fairly debatable' under sec. (1)(bp), Stats., and Wis. Adm. Code sec. Ind 80.70 (2). Kimberly-Clark, 138 Wis. 2d at 65, 405 N.W.2d at 688. The test is an objective one: would a reasonable employer or insurer under like circumstances have denied or delayed payment on the claim. Id; Anderson, 85 Wis. 2d at 692, 271 N.W.2d at 377. The issue is whether the Anderson test is also applicable to the determination of whether a delay in payment resulted from bad faith. See sec. (1)(bp), Stats., and Wis. Adm. Code sec. Ind 80.70(2). We conclude that it is and that in order to show bad faith a claimant must make a showing that the employer acted with: (1) a lack of a reasonable basis for the delay which occurred and (2) knowledge or a reckless disregard of the lack of a reasonable basis for the delay."

North American Mechanical, Inc., v. LIRC, 157 Wis. 2d 801, 807-08 (Ct. App., 1990).

The court went on discuss the interplay between the "inexcusable delay" penalty under Wis. Stat. § 102.22(1), Stats., and the "bad faith" penalty under Wis. Stat. § 102.18(1)(bp), Stats.:

". . . Chapter 102 contemplates three types of conduct stemming from a delay in payments: (1) excusable delay; (2) inexcusable delay, though not in bad faith; and (3) bad faith delay.

"Section 102.22(1), Stats., provides that `[w]here the employer or his or her insurer is guilty of inexcusable delay in making payments, the payments as to which the delay is found shall be increased by 10 percent.' (Emphasis added.) The fact that only `inexcusable' delay is subject to the 10 percent penalty indicates that the legislature contemplated that some delay could be excusable. See Coleman v. American Universal Ins. Co., 86 Wis. 2d 615, 625-26, 273 N.W.2d 220, 224 (1979).

"The potential 200 percent penalty of sec. 102.18(1)(bp), Stats., is reserved only for cases where the employer or insurer acted in `bad faith.' Thus, the legislature contemplated that there could be a delay in payment that, while inexcusable, did not rise to the level of `bad faith.' We conclude that 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.
. . .
"LIRC should determine first if there was a reasonable basis for delay. See Anderson, 85 Wis. 2d at 691, 271 N.W.2d at 376. If LIRC concludes there was not a reasonable basis for the delay, it should next determine whether the employer had knowledge of the lack of a reasonable basis for delaying payments or if there was a reckless disregard of the lack of a reasonable basis. See Id. If LIRC determines from the record, after finding no reasonable basis for the delay, that the `knowledge' element is satisfied, it may then conclude that the employer's delay of payments was in bad faith."

North American Mechanical, supra, 157 Wis. 2d at 808-10.

In short, the legal analysis in this case turns on two questions:

First, was there a reasonable basis for delaying payment of the claim (i.e., was the claim "fairly debatable)? If not, then the insurer is liable for the ten percent inexcusable delay penalty.

Second, assuming there is no reasonable basis for the delay, does the record show the insurer either knew of the lack of a reasonable basis for the delay, or recklessly disregarded the lack of a reasonable basis for the delay? If either actual knowledge or reckless disregard is found, a bad faith penalty is appropriate.

3. Discussion.

Did the insurer here have a reasonable basis for delaying payment of the claim? In other words, was the claim fairly debatable so that a reasonable insurer would have denied payment. Like ALJ Clarke, the commission concludes that the insurer lacked a reasonable basis for denying the permanent partial disability claim, particularly for three months.

The insurer's explanation for delaying payment, its concerns with the report of independent medical examiner Zeman, seems to arise from similar assertions. Adjuster Wichman's May 9, 1996 letter to Dr. Zeman suggests that the insurer felt that because the applicant reached a healing plateau so quickly after the injury, he could not have had permanent disability, or at least a five percent permanent partial disability, from a herniated disc. The insurer's answer to the bad faith claim suggests a slightly different problem, that Dr. Zeman had inconsistently opined that the applicant had completely recovered and that he had permanent disability.

Neither position is defensible. Dr. Zeman never indicated in any fashion that the applicant had completely recovered when he reached a healing plateau or the point of maximum medical improvement. In fact, the only reasonable reading of Dr. Zeman's February 9, 1996 report is exactly the opposite, that Dr. Zeman expressly concluded that when the applicant's condition stopped improving, he was still left with residual disability.

The commission acknowledges that a layman might wonder how someone could so quickly reach an end of healing from an injury serious enough to cause five percent permanent partial disability from a herniated disc. However, the insurer's own medical expert, Dr. Zeman, clearly gave that opinion. In essence, the insurer's basis for not paying the permanent partial disability claim upon receipt of Dr. Zeman's report was the lay view of its adjuster that its independent medical examiner and two of the treating doctors were wrong about the extent of permanent partial disability.

The commission has previously declined to give much credence to the lay opinion of an insurer's claims adjuster who disagrees with the clearly-expressed opinion of an insurer's independent medical examiner. Linda Starkl v. JC Penney, WC claim no. 90065879 (LIRC, June 13, 1996.) But even if adjuster Wichman thought that Dr. Zeman's opinion was in fact unclear or erroneous, she should have sought clarification immediately. Instead, she waited for three months, essentially ignoring the applicant's two demands for payment and acting only after the applicant filed a bad faith claim.

Finally, the commission notes that the only witness who testified was an expert insurance adjuster offered by the applicant. He testified the claim was not fairly debatable and the insurer had no basis for denying the claim. Transcript, page 21.

In sum, this might have been a different case if the insurer had sought "clarification" or explanation of Dr. Zeman's February 9 report immediately, and delayed paying for a week or two. (2) However, given the relatively weak reason for questioning the disability ratings of Drs. Zeman and Murphy and the length of time it took the insurer to seek clarification of its lay concerns with those opinions, the commission concludes that the insurer had no reasonable basis or fairly debatable reason for delaying payments. The insurer is thus liable for the 10 percent increased payment for inexcusable delay under Wis. Stat. § 102.22(1) at a minimum.

The next question, necessary to resolve the issue of whether the insurer is additionally liable for a bad faith penalty, is whether the insurer acted with knowledge of the lack of a reasonable basis, or in reckless disregard of the lack of reasonable basis, for delaying payment here.

The insurer correctly points out that the applicant's expert adjuster cannot definitely state whether the insurer acted with knowledge of the lack of reasonable basis for failing to pay the applicant's claim. Ms. Wichman did not testify, and there is no firsthand evidence either way about the extent of her actual knowledge of the lack of a reasonable basis for denying or delaying the payment. However, the commission concludes that the only reasonable inference from the record is that Ms. Wichman at the very least acted in reckless disregard of the lack of a reasonable basis for delaying or denying payment of the permanent partial disability in this case.

Again, the commission points out that Dr. Zeman's report is clear. Dr. Zeman found a one month healing period after which the applicant had a five percent permanent partial disability. The applicant had previously provided a report from a treating doctor setting out the same rating, and offered a similar rating from a third doctor thereafter. Further, setting aside the length of the healing period, a five percent permanent disability rating is hardly unusual based on Dr. Zeman's diagnosis of a non- operative herniated disc causing radicular symptoms.

The insurer argues that a claims adjuster like Ms. Wichman must be provided the opportunity to seek a clarification from an independent medical examiner. Even conceding the applicability of that general proposition in this case, however, Ms. Wichman should have acted more quickly than she did. Dr. Zeman's report assessing permanent partial disability was issued on February 9, and the applicant demanded payment on February 28 and March 12. When Ms. Wichman initially wrote to Dr. Zeman on April 1, it was about medical expense, not the permanent partial disability rating. It was not until May 9, eight days after the applicant filed his May 1 bad faith hearing application, that Ms. Wichman contacted Dr. Zeman about the permanent partial disability rating. By this point three months had passed.

This chronology establishes that the insurer delayed the payments in reckless disregard of the lack of reasonable basis for doing so. Thus, the insurer is liable for a bad faith failure to make payments under Wis. Stat. § 102.18(1)(bp).

The last question is the amount of the bad faith penalty. The applicant, of course, seeks the maximum 200 percent penalty for the bad faith delay. However, the 200 percent is the maximum bad faith penalty, not the mandatory penalty; an ALJ or the commission may award a lesser penalty under Wis. Stat. § 102.18(1)(bp). The question, then, is whether the 100 percent bad faith penalty set by ALJ Clarke is appropriate on this record. The commission is satisfied that, considering the length of time the insurer delayed the payment of the permanent partial disability in bad faith, a 100 percent penalty is appropriate.

The maximum weekly rate for permanent partial disability for an injury in 1990 is $131. Thus, the amount of permanent partial disability at issue here equaled $6,550. A one hundred percent bad faith penalty would therefore be $6,550. A ten percent inexcusable delay penalty would be $655. (3)

In sum, the insurer is liable for an additional payment of $7,205. The applicant agreed to a 20 percent attorney fee under Wis. Stat. § 102.26; the fee is thus $1,441 and shall be paid to the applicant's attorney within 30 days. The remainder, $5,764, shall be paid to the applicant within 30 days.

NOW, THEREFORE, the Labor and Industry Review Commission makes this

ORDER

The findings and order of the administrative law judge are modified to conform to the foregoing and, as modified, are affirmed in part and reversed in part.

Within 30 days, the insurer shall pay all of the following:

1. To the applicant, Willie Smith, Five thousand seven hundred sixty-four dollars ($5,764) for a penalty for bad faith and an increased payment for inexcusable delay.

2. To the applicant's attorney, Stuart Roitburd, One thousand four hundred forty-one dollars ($1,441) in attorney fees.

Dated and mailed: October 29, 1998
smithwi . wrr : 101 : 5 § 7.24, 7.22, 7.23

/s/ David B. Falstad, Chairman

/s/ Pamela I. Anderson, Commissioner

James A. Rutkowski, Commissioner

NOTE: The commission essentially affirmed ALJ Clarke's decision, except with respect to the calculation of the amount due. Consequently, no credibility conference was required.

cc: ATTORNEY STUART F ROITBURD
SPINDLER ROITBURD SCHWEMER & MUNSON

ATTORNEY HANS A BUEHLER
LAW OFFICES OF HANS A BUEHLER


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Footnotes:

(1)( Back ) Dr. Zeman begins "Thank you for your letter of May 9, 1996, requesting another supplemental report..." It is evident from the content of Dr. Zeman's report that it does not refer to the Wichman's April 1, 1996 letter asking about medical expense.

(2)( Back ) The commission notes that the administrative rules specifically require an insurer provide immediate notification of the reasons for denial of claim, and provide notice within seven days of the reason for stopping payment on a claim. Wis. Admin. Code § DWD 80.02(2). An insurer also faces a penalty for inexcusably delaying a penalty for more than 14 days after the first day of lost work. Wis. Stat.  § 102.22(1).

(3)( Back ) There is no temporal aspect to either penalty. That is, neither the bad faith penalty nor the unreasonable delay penalty grow large with time. Indeed, Wis. Stat.  § 108.22(1) specifically provides for a 10% penalty for a delay of any length of time. (Failure to comply with an order of the department, by contrast, results in an additional interest charge at 10% per annum rather than the customary seven percent charged during appeal. See Wis. Stat.  § 102.22(2) and (3).)