CESARE BOSCO, Applicant
A T POLISHING INC, Employer
SHELBY INSURANCE COMPANY, Insurer
In January 2000, the applicant, Cesare Bosco, filed an application for hearing seeking imposition of the bad faith penalty set out in Wis. Stat. § 102.18(1)(bp). Administrative Law Judge (ALJ) Thomas J. McSweeney of the Department of Workforce Development, Worker's Compensation Division, heard the matter on January 15, 2002, and issued a decision rejecting the bad faith claim on February 18, 2002. Mr. Bosco appealed to the commission, which modified and affirmed the ALJ's decision by order dated June 28, 2002.
Mr. Bosco sought judicial review and prevailed at each level, ultimately obtaining a decision in his favor from the Supreme Court on June 15, 2004. Accordingly, this matter is back before the commission to take action on the mandate of the Supreme Court.
The commission has considered the positions of the parties, reviewed the evidence submitted to the ALJ and the decisions, and examined the decision and mandate of the Supreme Court. Based on its review, the commission makes the following:
1. Posture
This matter first arose in 1997 when Mr. Bosco filed an application for hearing claiming permanent total disability from pulmonary problems due to occupational exposure to airborne irritants while working for the employer, A.T. Polishing, Inc. (AT Polishing). In its answer, AT Polishing's insurer, Shelby Insurance Company (Shelby Insurance) initially admitted that Mr. Bosco was exposed to irritants, but denied that his disease arose out of his employment with AT Polishing. At the hearing on Mr. Bosco's claim for primary compensation, however, Shelby Insurance conceded that Mr. Bosco did have an occupational disease that arose out of employment, but sought a delay of the hearing to interplead another insurer on the theory that the "date of disability" fixing liability occurred, or may have occurred, before Shelby Insurance came on the risk. The presiding ALJ denied the request for postponement and interpleader, and went ahead with the hearing. Thereafter, the ALJ issued a decision on August 21, 1998, finding Mr. Bosco to be permanently and totally disabled, and holding AT Polishing and Shelby Insurance liable.
The ALJ's decision awarding primary compensation was affirmed by the commission on April 27, 1999. AT Polishing and Shelby Insurance sought judicial review, but Mr. Bosco prevailed through the court of appeals, and on January 16, 2001 the Supreme Court denied further review in the primary compensation case. It was only at that point that Shelby Insurance began paying Mr. Bosco his benefits for permanent total disability.
Meanwhile, however, Mr. Bosco's attorney had three times sent letters to Shelby Insurance's attorney demanding payment during the pendency of judicial review, citing Wis. Stat. § 102.23(5) which provides:
102.23(5) The commencement of action for review shall not relieve the employer from paying compensation as directed, when such action involves only the question of liability as between the employer and one or more insurance companies or as between several insurance companies.
Specifically, Mr. Bosco's attorney sent Shelby Insurance's attorney letters demanding payment on November 9, 1999, December 23, 1999, and January 5, 2000. When no payments were made, Mr. Bosco filed his January 2000 application for hearing seeking imposition of the bad faith penalty set out in Wis. Stat. § 102.18(1)(bp) and Wis. Admin. Code DWD 80.72.
The bad faith claim then went to hearing before ALJ McSweeney. The parties offered testimony from what were essentially expert witnesses on the practices of insurers regarding Wis. Stat. § 102.23(5). Mr. Bosco's expert, John P. Higgins, testified that once Shelby Insurance conceded a compensable work injury either it or AT Polishing had to pay during judicial appeal under the statute, notwithstanding Shelby Insurance's arguments about a different date of disability while another, nonparty insurer was on the risk. Shelby Insurance's expert, Hugh Russell, disagreed, suggesting the statute applied only where there was a conflict between two insurers, or an insurer and a self-insured employer, who were parties to the underlying administrative decision.
ALJ McSweeney concluded Wis. Stat. § 102.23(5) did not apply to Mr. Bosco's situation, and rejected the bad faith claim. The commission affirmed, holding that Wis. Stat. § 102.23(5) was susceptible to more than one reading
-- that is that it was ambiguous. The commission concluded that AT Polishing and Shelby Insurance thus had a reasonable basis for not paying during judicial review of the primary compensation case and therefore did not act in knowing or reckless disregard of the lack of a reasonable basis.
2. The Supreme Court decision and mandate
Mr. Bosco then sought judicial review. The Circuit Court, the Court of Appeals, and the Supreme Court all held that Wis. Stat. § 102.23(5) unambiguously required AT Polishing to pay on judicial appeal. Specifically, the Supreme Court stated that the statute
...is unequivocal: "an employer must make payment of benefits during judicial review when the only question is who will pay benefits".... The facts of this case fall squarely within the statutory language. [Emphasis in original; cited material omitted.]
Bosco v. LIRC, 2004 WI 77, ¶45, 272 Wis. 2d 586, 616. The Supreme Court thus held that Wis. Stat. § 102.23(5) unambiguously required AT Polishing to pay Bosco his compensation while the primary compensation case was on judicial review. Bosco, 272 Wis. 2d at 619, ¶50.
The Supreme Court also discussed the bad faith statute, Wis. Stat. § 102.18(1)(bp), stating:
¶17 Section 102.18(1)(bp) provides, in relevant part, that the Department of Workforce Development (DWD) may include a penalty in an award to an employee if the department determines that "the employer's or insurance carrier's . . . failure to make payments . . . resulted from malice or bad faith." Wis. Stat. § 102.18(1)(bp). A claimant seeking to impose penalties for bad faith failure to make payments under § 102.18(1)(bp) must prove two elements: 1) the employer or insurer did not have a reasonable basis for denying benefits; and 2) the employer or insurer knew it lacked a reasonable basis for denying benefits or recklessly disregarded a lack of a reasonable basis for denying payment. [Citation omitted.]
Bosco, 272 Wis. 2d at 601, ¶17.
Returning the facts of this case particularly, the court stated:
¶52 We emphasize that we do not hold that the failure to comply with the dictates of § 102.23(5) in this instance constitutes bad faith. Rather, like the court of appeals, we merely hold that Shelby's interpretation of § 102.23(5) is not reasonable or fairly debatable as a matter of law because Shelby's original appeal did not contest A.T. Polishing's liability and involved only the question of whether Shelby was liable to pay benefits. In other words, it was not fairly debatable that A.T. Polishing, either directly or through Shelby, was required to make payments under § 102.23(5). On remand, LIRC will be able to consider all of the relevant factors that go into a bad faith determination. However, LIRC cannot use Shelby's interpretation of § 102.23(5) to conclude that there was a reasonable basis for denying benefits.
Bosco, 272 Wis. 2d at 620-21, ¶52.
The court also addressed the question of whether the commission should or could impose penalties against Shelby Insurance (the insurer), AT Polishing (the employer), or both. Shelby Insurance argued that AT Polishing was not subject to bad faith penalties, separate from Shelby Insurance, for failing to pay under Wis. Stat. § 102.23(5), and that Mr. Bosco did not even have the right to demand payment under Wis. Stat. § 102.23(5) from AT Polishing directly. Bosco, 272 Wis. 2d at 621, ¶54. The court rejected that argument, and held that AT Polishing could be held separately liable for a penalty, id., 272 Wis. 2d at 625-26, ¶60.
However, the court also noted that the commission does not have to hold AT Polishing liable. On this point, the court noted that the insurer, not the employer, has the right to control the defense and pay or settle a claim. Bosco, at 272 Wis. 2d 626, ¶61. This is a significant question because Wis. Stat. § 102.23(5) quite clearly directs payment by the employer -- AT Polishing -- not the insurer -- Shelby Insurance. The Supreme Court addressed that question in a footnote:
12 Because § 102.23(5) unambiguously required A.T. Polishing to make payments to Bosco on appeal and Shelby was in control of A.T. Polishing's defense, it had a duty to either make payment on A.T. Polishing's behalf, if its policy so provided, or, if not, to instruct A.T. Polishing that it (A.T. Polishing) was required to make payments less it be subject to bad faith penalties.
"When, as here, the insurer undertakes and controls the defense of a claim against its insured, it has a duty not only to protect itself to the extent of its liability but it must act in good faith to protect the interest of its insured. If it fails to do so it is liable to its insured for the amount the insured required over and above the policy limits. [Citations omitted.]"
Bosco, 272 Wis. 2d at 619-20, ¶50, note 12.
The Supreme Court then concluded:
¶62 ...§ 102.23(5) unambiguously requires an employer to make payment to a disabled employee pending appeal of a date of injury defense in an occupational disease case when the employer's liability is not disputed on appeal and the only question is who will pay benefits. Therefore, we hold that Shelby's interpretation of § 102.23(5) is not reasonable or fairly debatable as a matter of law because Shelby's appeal did not contest A.T. Polishing's liability and involved only the question of whether Shelby was liable to pay benefits. Further, because § 102.18(1)(bp) specifically allows for the imposition of bad faith penalties on an employer for failure to pay benefits and because § 102.23(5) specifically directs the employer to pay benefits pending an appeal when the only issue is who will pay benefits, we hold that an employer may be subject to bad faith penalties under § 102.18(1)(bp), independent from its insurer, when it fails to pay benefits in accordance with § 102.23(5).
Bosco, 272 Wis. 2d at 627, ¶62.
3. Discussion.
a. The briefs
When the case came back from the Supreme Court, the commission asked the parties to submit briefs. In his brief, Mr. Bosco pointed out that the test for bad faith involves two steps. The first is to determine whether the employer or insurer did not have a reasonable basis for denying benefits. The second step is to determine whether the employer or insurer knew it lacked a reasonable basis for denying benefits or recklessly disregarded a lack of a reasonable basis for denying payment. Bosco, 272 Wis. 2d at 601, ¶17.
Mr. Bosco asserted the Supreme Court already has answered step one by finding as a matter of law that Shelby Insurance and AT Polishing lacked a reasonable basis for denying Bosco's claim under Wis. Stat. § 102.23(5). Regarding the second step, Mr. Bosco asserted Shelby Insurance or AT Polishing knew or should have known of the lack of a reasonable basis for denying payment to Mr. Bosco. On this point, Mr. Bosco cited testimony of its expert, Mr. Higgins, and asserted that the repeated demands for payment from his attorney put Shelby Insurance and AT Polishing on notice of the unambiguous terms of Wis. Stat. § 102.23(5). Mr. Bosco concludes by asking the commission to assess a $15,000 penalty for bad faith.
Shelby Insurance and AT Polishing argue the commission should award nothing for bad faith. They assert that all the Supreme Court did was hold that Shelby Insurance and AT Polishing acted unreasonably, but did not hold they did so intentionally or in reckless disregard of the lack of reasonable basis for their action. Shelby Insurance and AT Polishing go on to say that until the question of AT Polishing's liability under Wis. Stat. § 102.23(5) was finally answered by the courts, they cannot be said to have had knowledge of a lack of reasonable basis for denying payment.
b. Knowledge of lack of a reasonable basis
The supreme court said in two separate instances, Bosco, 272 Wis. 2d at 620, ¶52, 626, ¶60, that it was not directing the commission to find bad faith based on the failure to comply with Wis. Stat. § 102.23(5). Rather, the court merely held that the commission could not use Shelby Insurance's interpretation of the statute as a basis for concluding there was a reasonable basis for denying payment. Bosco, 272 Wis. 2d at 620-21, ¶52. The commission also realizes that where, as here, a statute is "both penal and remedial, courts ... giv[e] the provisions establishing penalties strict construction while giving the remainder of the act a liberal construction." Madison v. Hyland, Hall & Co., 73 Wis. 2d 364, 373 (1976). As the parties recognize, simply because a statutory interpretation is unreasonable does not necessarily compel the finding that the party relying on the unreasonable interpretation knows it lacks a reasonable basis for its action or recklessly disregards the lack of a reasonable basis.
However, in this case the Supreme Court held that Shelby's interpretation of Wis. Stat. § 102.23(5), in addition to being unreasonable, was "not fairly debatable as a matter of law." Bosco, 272 Wis. 2d at 621, ¶52. Under Wis. Admin. Code § DWD 80.70(2), an insurer who, without credible evidence which demonstrates that the claim for the payments is fairly debatable, unreasonably fails to make payment of compensation ... shall be deemed to have acted with malice or in bad faith." Apart from their rejected interpretation of Wis. Stat. § 102.23(5), Shelby Insurance and AT Polishing identify no evidence that makes Mr. Bosco's claim for primary compensation during judicial review fairly debatable.(1)
Shelby Insurance and AT Polishing do not deny that their attorney received the letters from Mr. Bosco's attorney demanding payment under Wis. Stat. § 102.23(5). Thus, Shelby Insurance and AT Polishing cannot be said to have acted in ignorance of the statute. Also relevant is the testimony of Mr. Higgins at the hearing before ALJ McSweeney regarding the insurance industry practice in connection with Wis. Stat. § 102.23(5). In particular, Mr. Higgins testified that
... the normal operation of the insurance company is that the claim personnel handing the files know the Statute. They know about 102.23(5). They know there's an obligation under the statute to make payments.
January 15, 2002, transcript, pages 25-26. The commission credits Mr. Higgins' testimony on this point, which is also stated in documentary form in exhibit H. (Indeed, the Supreme Court's decision suggests that the legal assumption underlying Mr. Russell's contrary opinion as stated in direct examination at the hearing -- that Wis. Stat. § 102.23(5) did not apply to Mr. Bosco's case -- is incredible as a matter of law.) While it may not establish the precise state of mind of Shelby Insurance's personnel in this case, Mr. Higgins' testimony is at least probative of whether the insurer acted recklessly. In short, the commission, its prior decision notwithstanding, now concludes that the refusal to pay under Wis. Stat. § 102.23(5) under the facts of this case was done in reckless disregard of its lack of a reasonable basis for denying payment.
c. How much and against whom?
The next issue is the amount of the penalty, and against whom it should be assessed. Wisconsin Stat. § 102.18(1)(bp) provides in relevant part:
102.18(1)(bp)...The department may include a penalty in an award to an employee if it determines that the employer's or insurance carrier's suspension of, termination of or failure to make payments or failure to report injury resulted from malice or bad faith... The department may award an amount which it considers just, not to exceed the lesser of 200% of total compensation due or $15,000. The department may assess the penalty against the employer, the insurance carrier or both...
In this case, the commission issued its decision on the primary compensation claim on April 29, 1999 and Shelby Insurance did not begin to pay primary compensation until after the Supreme Court denied its petition for review in the primary compensation case on January 16, 2001. During those 90 weeks, Bosco made repeated demands for payment of the permanent total disability compensation that the commission had ordered paid. Based on the calculations attached to the January 5, 2000 letter from Mr. Bosco's attorney, it appears that $12,928.05 had accrued as of December 31, 1999, with the sum of $119.38 per week ($99.48 in compensation to Mr. Bosco and $19.90 to his attorney) accruing thereafter. As of January 16, 2001, then, more than $19,374.57 had accrued. In sum, the record establishes a refusal to pay a substantial amount of money over a long period of time despite repeated requests. Mr. Bosco seeks a penalty of $15,000, and it is warranted in this case.
The bad faith statute generally permits the assessment of a penalty against an employer, its insurer, or both, as the facts warrant. As set out above, the Supreme Court has indicated that the facts in this case particularly do not necessarily foreclose an award against either AT Polishing or Shelby Insurance. The commission assesses the entire $15,000 penalty against Shelby Insurance.
It was Shelby Insurance's last minute "date of disability defense" that precipitated much of the delay in payment. With respect to the refusal to pay under Wis. Stat. § 102.23(5) specifically, the commission concludes that Shelby Insurance was also primarily at fault. Before the ALJ (January 15, 2002 transcript, pages 28 to 29), as before the Supreme Court, Shelby Insurance argued that its interest and AT Polishing's interest were identical, and that AT Polishing could not be held separately liable. While that argument did not prevail, the commission regards it as acknowledging that Shelby Insurance was directing the defense. Moreover, Mr. Higgins testified that normally an insurer's personnel are aware of Wis. Stat § 102.23(5), and would notify the employer that somebody has to pay pending appeal. January 15, 2002 transcript, page 25. Further, in worker's compensation cases, the insurer normally hires the legal representation; nothing in the record indicates that practice was not followed here. Finally, the supreme court itself suggested that when bad faith penalties are sought directly against an insured employer (like AT Polishing) for acts occurring after the insurer began handling the claim (as occurred here), the right of the insurer to control the defense and direct the actions of the insured employer should be taken into consideration to determine whether the insured employer acts reasonably or with knowledge or recklessly.
Bosco, 272 Wis. 2d at 626-27,
¶61.
4. Award.
Mr. Bosco's award for bad faith under Wis. Stat. § 102.18(1)(bp) is $15,000. He agreed to an attorney fee, set under Wis. Stat. s 102.26 at 20 percent, or $3,000. Within 30 days, Shelby Insurance shall pay that amount to Mr. Bosco's attorney and the remainder, $12,000, to Mr. Bosco.
NOW, THEREFORE, the Labor and Industry Review Commission makes this
Within thirty days, Shelby Insurance Company shall pay all of the following:
1. To the applicant, Cesare Bosco, twelve thousand dollars ($12,000.00) as a penalty under Wis. Stat. § 102.18(1)(bp).
2. To the applicant's attorney, James A. Pitts, Three thousand dollars ($3,000.00) in attorney fees.
Dated and mailed January 11, 2005
boscoce . wpr : 101 : 4 ND § 7.21
/s/ James T. Flynn, Chairman
/s/ David B. Falstad, Commissioner
/s/ Robert Glaser, Commissioner
cc:
Attorney James A Pitts
Attorney Michael C Frohman
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