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


DONALD J BAYSINGER, Applicant

LUDWIG SIDING, Employer

INTEGRITY MUTUAL INS CO, Insurer

WORKER'S COMPENSATION DECISION
Claim No. 1996031413


Administrative Law Judge William Phillips, Jr., 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.

The employer and the insurer (collectively, the respondent) conceded jurisdictional facts. The issue before ALJ Phillips, and now before the commission, is whether the employer or insurer were liable for delayed payment penalty under Wis. Stat. 102.22(1) or bad faith under Wis. Stat. 102.18(1)(bp). The procedural posture of the case is described in greater detail below.

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:

FINDINGS OF FACT AND CONCLUSIONS OF LAW

The applicant worked for the employer, Ludwig Siding, as an installer. On April 24, 1996, the applicant sustained an injury to his right knee as he stepped off a ladder. Thereafter, the applicant underwent surgery to his right knee in May 1996. As a result of the surgery, the applicant incurred medical expense from, among other providers, Burlington Memorial Hospital.

A dispute arose between the parties as to whether the anterior cruciate ligament tear discovered at surgery was a new or old injury. That is to say, the applicant and the worker's compensation insurer, Integrity Mutual Insurance Co. (Integrity), disagreed as to whether the applicant's medical condition that was treated by the surgery preexisted the event of April 24, 1996 or instead was caused by his work exposure at Ludwig Siding.

In January 1997, the parties entered into a compromise agreement drafted by the respondent's attorney (Richard J. Ward.) The compromise recited that the applicant claimed a compensable injury on April 24, 1996 in the course of his employment with Ludwig Siding. The compromise also recited that the respondents generally denied the occurrence of the incident which the applicant alleged caused his injury, contended that the applicant's injury was instead caused by a non-work-related aggravation of a pre-existing condition, and denied liability for any compensation or medical expense. Paragraph 6 of the compromise states:

"To settle this disputed claim, the Respondents agree to pay the Applicant as a compromise settlement the sum payment of $15,000.00. Respondents further agree to indemnify the applicant for any unpaid past medical expense for which the applicant is personally liable and which was not covered by health insurance and hold Applicant harmless from claims of health insurance carriers and providers."

The compromise agreement further recited that the payment was not to be construed as an admission of liability by the respondents, but that they continued to deny liability and "merely want to avoid litigation and buy their peace." The compromise was approved by ALJ Randall Kaiser's order on February 18, 1997.

By letter dated March 12, 1997, the applicant's attorney (Thomas B. Hartley) forwarded certain bills related to the applicant's surgery to Integrity's attorney, Mr. Ward. The bills included a $26.25 bill from Racine County Pathology, a $7,378.80 bill from Burlington Memorial Hospital, and a $120.56 bill from Empi, Inc. The bills, documented at Exhibit C, are all for services which had been rendered months before the compromise agreement was entered into. Indeed, the services related to the arthroscopic knee surgery in May 1996 which is at the very center of the dispute between the applicant and the respondent, and from which the compromise arose.

Mr. Ward responded to Mr. Hartley with a March 19, 1997 letter. Attorney Ward objected to the format of the bills, and also stated that the surgery was for the "old" ACL tear for which the respondent had all along denied liability. According to Mr. Ward, the bills should have been submitted to the applicant's group health insurer.

Attorney Hartley evidently sent another letter demanding payment of the bills to Attorney Ward on April 16, 1997. Attorney Ward responded by letter dated April 18, 1997, in which he again asserted there was absolutely no reason why the bills should not have been paid by the applicant's health insurer. Attorney Ward demanded to know whether the bills had been submitted to the health insurer, and, if so, why the health insurer denied the claim.

By letter dated April 30, 1997, Attorney Hartley responded that the bills had been submitted to the applicant's group health insurer (Compcare), had been rejected, and that the providers were now threatening legal action. Attorney Ward responded on May 2, 1997 by demanding to know when the bills had been submitted to the health insurer, when the health insurer rejected the bills, why the bills were rejected, and whether they had been resubmitted. He concluded his letter by stating the bills were for an "old" ACL tear, and that he would not recommend payment of the bills until Mr. Hartley explained to him why Compcare had denied the bills.

Thereafter, on June 16, 1997, Attorney Ward wrote to Burlington Memorial Hospital's billing service about a bill sent to him for service on May 24, 1996 (which would have been for the applicant's ACL repair surgery). Attorney Ward suggested that Burlington Memorial Hospital submit the bill to the applicant's health insurer, Compcare. Applicant's Attorney Hartley responded by letter to Burlington Memorial Hospital dated July 14, 1997 in which he trusted the bill had been forwarded again to Compcare. Mr. Hartley told Burlington Memorial Hospital that, if Compcare denied the claim, the bill should be resubmitted to Integrity for payment pursuant to the compromise.

In October 1997, the applicant, through his counsel, filed an application for hearing, alleging delayed payment and bad faith for Integrity's failure to pay outstanding medical bills pursuant to paragraph 6 of the compromise agreement indicated above. In October 1997 the unpaid medical bills totaled $7,524.81.

On December 9, 1997, the applicant's group health insurer (Compcare) wrote to Integrity in response to an inquiry from Integrity several days earlier. Compcare explained that it had denied the Burlington Memorial Hospital bill for services from May 24-26, 1996, because the services were for a worker's compensation injury. Compcare also indicated it had paid part of a bill under mistake of fact in July 1996. Compcare inquired as to the basis for Integrity's contrary opinion.

By letter dated January 7, 1998, Integrity responded to Compcare's letter. Integrity explained that it did not regard the May 1996 surgery as related to the work injury, and so the bill was Compcare's responsibility. Integrity provided a copy of a doctor's report to that effect.

By letter dated February 20, 1998, Compcare essentially restated the substance of its December 1997 letter: It regarded the injury as a worker's compensation injury. Compcare added that it had initially rejected the hospital bill as work related back in August 1996. (1) Exhibit A. Compare also reported that the applicant had contacted Compcare about the bill in October 1997, and indicated his belief the bill was Integrity's responsibility.

Meanwhile, on February 5, 1998, Integrity paid the Racine County Pathology bill and the Empi, Inc., bill. The total of these payments was $146.81. The Burlington Memorial Hospital bill, however, remained outstanding. By the time of the hearing of February 24, 1998, then, the balance had been reduced from $7,524.81 to $7,378.80.

Hearing was held on February 24, 1998. Thereafter, on March 16, 1998, ALJ Phillips issued a decision in favor of the applicant and against Integrity. The ALJ awarded a ten percent payment under Wis. Stat. 102.22(1) for unreasonable delay ($752.48) and a one hundred percent penalty under Wis. Stat. 102.18(1)(bp) for bad faith ($7,524.81). Integrity appealed, requesting a briefing schedule.

On June 30, 1998, without allowing the submission of briefs, the commission modified and affirmed the ALJ's decision.  Integrity appealed to Dane County Circuit Court. Pursuant to stipulation of the parties, the court set aside the commission's order and remanded the case to the commission to permit reconsideration of the case after the parties filed briefs. Both parties have now filed briefs, which the commission has carefully considered.

As noted above, at issue is whether Integrity is liable for delayed payment penalty under Wis. Stat. 102.22(1) or bad faith under Wis. Stat. 102.18(1)(bp). Wis. Stat. 102.22(1) provides for a 10 percent penalty for inexcusable delay in making payments. 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 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. Recently, the court of appeals noted the interplay between the "inexcusable delay" penalty under Wis. Stat. 102.22(1), and the "bad faith" penalty under Wis. Stat. 102.18(1)(bp):

"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, Inc., v. LIRC, 157 Wis. 2d, 801, 808-10 (Ct. App., 1990).

In addition, once the department orders payment, the "fairly debatable" question has already been answered, so the "knowledge" test of Anderson would not be applicable under that circumstance. Wenz Foods, Inc. v. LIRC, Case no. 89- 1108, (Wis. Ct. App., January 18, 1990), slip. op., at 3-4. Thus, the court of appeals held in Wenz Foods that the circuit court should not have reversed LIRC's bad faith award on the excuse of "an administrative mix-up." Id., at 4. Second, the penalties apply, and have consistently been applied by the commission, to denial of payment of medical expense as well as disability payments. See Wis. Admin. Code 80.70, AMC v. LIRC and Michael Chamblee, Case no. 94-2274 (LIRC, July 19, 1995), and Hicks v. Stoughton Trailers, WC Case no. 90043598 (LIRC, November 18, 1996.)

According to the terms of the compromise, which was approved by department order, Integrity agreed to indemnify the applicant for any unpaid past medical expense for which the applicant was personally liable and which was not covered by health insurance, and to hold the applicant harmless from claims of health insurers or providers. Upon receipt of Mr. Hartley's April 30, 1997 letter, Integrity's attorney Ward was aware that health insurer Compcare had refused to pay certain items of past medical expense for services provided to the applicant, and that the providers were looking to the applicant for payment.

At that point, Integrity had the obligation under the compromise, if not to immediately pay the bills, to act in good faith on its agreement to indemnify and hold harmless the applicant. Instead, Integrity's attorney simply demanded more information from the applicant, requiring essentially that Mr. Hartley explain why Compcare denied coverage of the bills. Indeed, after that explanation was provided to Integrity by Compcare's letter of December 9, 1997, Integrity continued to refuse to pay the bills.

The compromise does not require the applicant to provide Integrity with any explanation, satisfactory or otherwise, as to why Compcare denied payment of the disputed bills. As the commission reads the compromise drafted by Integrity, the only preconditions to Integrity's duty to indemnify or hold harmless the applicant from the claims of Burlington Memorial Hospital or the other providers are (a) that the applicant be personally liable for the bills and (b) that the expense not be covered by health insurers.

Those conditions were met by April 30, 1997 at the latest, at least as the commission construes the compromise agreement which was drafted by Integrity. As of that date, Integrity was required to hold the applicant harmless for the bills, it was aware of that duty, and its duty to do so was no longer "fairly debatable." The record also establishes that, upon Integrity's receipt of Attorney Hartley's April 30, 1997 letter, Integrity knew it had no reasonable basis to refuse to act on its indemnity/hold harmless promise under the compromise agreement. Instead, Integrity's actions thereafter establish it was trying to evade that duty.

On this record, the commission concludes that Integrity inexcusably delayed paying or holding the applicant harmless for medical bills in the amount of $7,525.61 as it was obligated to do under the compromise. A penalty of 10 percent is imposed under Wis. Stat. . 102.22(1), yielding $752.56. The commission further finds that Integrity Mutual has acted in bad faith for not paying or holding the applicant harmless for the medical bills in the amount of $7,525.61. Given Integrity's conduct, a penalty of 100 percent of $7,525.61, yielding $7,525.61 is assessed.

The applicant agreed to a twenty percent attorney fee under Wis. Stat. 102.26. The fee is thus $1,655.63; that amount shall be deducted from the award and paid to the applicant's attorney within 30 days. The remainder, $6,622.54, 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.
Within 30 days from the date of this decision, the insurer shall pay all of the following:

1. To the applicant pursuant to Wis. Stat. 102.22(1) and Wis. Stat. 102.18(1)(bp), the sum of Six thousand six hundred twenty-two dollars and fifty-four cents ($6,622.54).

2. To the applicant's attorney, Thomas Hartley, One thousand six hundred fifty-five dollars and sixty-three cents ($1,655.63) in fees.

Dated and mailed October 6, 1999
baysing.wrr : 101 : 7 ND 7.24

/s/ David B. Falstad, Chairman

/s/ Pamela I. Anderson, Commissioner

/s/ James A. Rutkowski, Commissioner

 

MEMORANDUM OPINION

In its brief in support of its petition for review, Integrity points out that it did not simply agree to pay the past medical bills. Integrity also asserts: that it was justified in assuming that Compcare had paid the bills (after the initial exchange of correspondence), that the applicant failed to provide specific information about why Compcare had not paid the bills, that whether the disputed expenses were for treatment of the work injury was "fairly debatable," and that it learned why Compcare denied coverage only four days before the hearing. Integrity also challenges the amount of the penalty, and contends that the ALJ improperly concluded that Integrity waived its right to argue the disputed treatment expenses were not work-related. Integrity further argues that it has not failed to indemnify the applicant, in part because its actions have indemnified him as a matter of law under Wis. Stat. 102.16(2m)(b). Finally, Integrity asserts the ALJ's order was procured by fraud, claiming the applicant lied under oath, his attorney failed to honor an agreement made during settlement negotiations, and that the applicant advised Compcare not to pay the bill.

The commission finds none of Integrity's arguments persuasive. The commission acknowledges that Integrity did not agree to pay all the past bills, which of course would have required Indemnity to pay even if Compcare did not object to the bills and deny coverage. Compcare did object, however, and refused to cover the disputed expense. This left the applicant liable to the providers of the services.

The commission does not construe the words "not covered by health insurance" in paragraph 6 of the compromise agreement to mean that the applicant had to prove to Integrity's satisfaction that the disputed expenses were not covered by Compcare's insurance policy or contract. Under the facts of this case, the most obvious reason a health insurer would have for asserting non-coverage of the past medical expense referred to in the compromise agreement would be that the expenses were incurred to treat a work injury. (2) If the compromise required the applicant to persuade Integrity that the treatment expenses were in fact caused by a work injury before Integrity would hold the applicant harmless, the parties would have "compromised" an issue about which there could be no valid dispute: Integrity would have been liable under Wis. Stat., ch. 102 anyway. In this case, the commission concludes that, once Compcare denied the claim, the disputed expenses were "not covered by health insurance" within the meaning of paragraph 6 of the compromise agreement drafted by Integrity.

Nor may words "for which the Applicant is personally liable" be construed to mean that the providers had actually sued the applicant on the disputed expense or secured a judgment against him on the debt from the medical expense. Ordinarily, a person who receives medical treatment is liable for the expense of the treatment; that is the reason a person obtains medical insurance. The commission is satisfied that the applicant was personally liable for the disputed medical expense.

As noted in the body of the decision, these two conditions (denial of coverage and personal liability) were satisfied at some point before April 30, 1997. Integrity was provided adequate notice of the occurrence of the conditions by May 2, 1997. Its duty to indemnify and hold harmless the applicant arose at that point. Indemnity could not in good faith evade that duty by demanding additional explanation or re- submissions of bills.

The commission also finds no merit to Integrity's assertion it justifiably assumed the bills had been paid after July 1997. During much of the time Integrity failed to act, the October 1997 application for a hearing on the penalty was outstanding: this should have put Integrity on notice that the bills had not been paid. (3) Further, on December 9, 1997, Compcare clearly notified Integrity why it had not paid the bills. Yet Integrity continued to take no action to indemnify or hold harmless the applicant.

Further, Integrity cannot avoid liability by asserting that the question of whether the disputed treatment expense was made necessary by a work injury was "fairly debatable." Once the parties entered into the compromise agreement, Integrity's duty to the applicant was set by the terms of that document. In other words, the relevant question was no longer whether Integrity was liable for the expense of treatment of a work injury under Wis. Stats., Ch. 102, but whether it had the duty to indemnify and hold harmless the applicant under the compromise agreement. As the commission stated above, that duty arose when Mr. Hartley informed Mr. Ward that Compcare denied coverage of the disputed medical expenses. Under the facts of this case, the triggering of Integrity's duty to the applicant under the terms of the compromise was not "fairly debatable."

Along the same lines, there is no merit to Integrity's claim that the ALJ erred by finding that Integrity waived the right to assert that the treatment expenses were unrelated to work. Had Integrity acted to hold the applicant harmless as it agreed in the compromise agreement and paid the providers, it could have sought reimbursement from Compcare by asserting the expense was not work-related and therefore should have been covered by Compcare. However, the work-relatedness of the expense is not relevant under the compromise agreement; Integrity did not promise to pay only work-related treatment expenses, rather it agreed to hold the applicant harmless from claims of providers and health insurers if the applicant was liable for the expenses and they were not covered by health insurance.

Integrity also argues that its duty to indemnify the applicant did not require immediate payment of the disputed expenses in any event. However, in addition to agreeing to indemnify the applicant, Integrity agreed to hold him harmless from claims of providers and health insurers. One way of doing this might have been to pay the providers immediately, and then seek reimbursement from Compcare. Another might have been to contact the providers and assure them that their bills would ultimately be paid either by Compcare or by Integrity. Or Integrity could have simply assured the applicant that, the conditions of the compromise agreement having been met, it would make good on its hold harmless agreement after attempting to resolve its dispute with Compcare. Integrity, however, did none of those things. Instead, it unilaterally imposed additional conditions to its promise to hold the applicant harmless, with a series of correspondence to the applicant that reasserted the "old injury" defense and strongly suggested Integrity would never agree to pay the bills.

The commission also rejects Integrity's argument that the applicant was shielded from personal liability under Wis. Stat. 102.16(2m), (4) presumably based on the fact Integrity notified Burlington Memorial Hospital that the bill was not work-related. Wisconsin Statute 102.16(2m)(b) does not shield an injured worker from liability when a worker's compensation insurer claims that treatment expense was not work-related, but rather when the worker's compensation insurer asserts that the treatment was unnecessary. It cannot be said the ACL surgery in this case was unnecessary; rather, Integrity's repeated assertion here was that something other than a work injury made it necessary.

The commission also rejects the assertion that the ALJ's order was procured by fraud. The commission does not base its decision on the applicant's testimony about when he received or resubmitted the treatment bills, and so disregards Integrity's bare assertion he lied on this point. The record is clear that Compcare denied coverage, that Integrity was informed of this well before the application for hearing was filed, and that Integrity evaded its promise to hold the applicant harmless. Nor is the commission inclined to reverse the ALJ's decision or order further hearing based on one party's claim that the other party violated an unwritten agreement following pre-hearing settlement negotiations. Lastly, based on the record before it, the commission sees nothing even approaching "bad faith" in the applicant's statements to Compcare about Compcare's liability vis--vis Integrity.

Finally, Integrity asserts that the penalty imposed is absurdly out of proportion with the asserted bad faith and would result in unjust enrichment. However, unjust enrichment is an equitable doctrine applied mainly in contract cases. Further, a penalty by its nature is not based on actual damages, nor does Wis. Stat. 102.18(1)(bp) require the ALJ or the commission to limit the amount of the penalty imposed to the actual loss caused by the bad faith. In sum, the 100 percent penalty (which is squarely in the middle of the 1 to 200 percent range authorized under the Wis. Stat. 102.18(1)(bp)) is reasonable and just on this record.

cc: ATTORNEY CARL D HOLBORN
GUTTORMSEN HARTLEY & GUTTORMSEN

ATTORNEY RICHARD J WARD
STERN SKILES & WARD


This decision was  issued following an appeal of an earlier commission decision and a remand to the commission on stipulation of the parties. The decision was re-submitted to the court by the respondent insurer. Affirmed, June 14, 2000.  Appealed to Court of Appeals. Affirmed per curiam August 30, 2001.

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Footnotes:

(1)( Back ) The applicant did not appeal the August 1996 rejection with Compcare. Of course, in August 1996 the parties had not yet signed the compromise, and there is little reason to expect the applicant to have raised the respondent's defense against his own interest.

(2)( Back ) Indeed, Mr. Ward acknowledged this; he stated in his April 18, 1997 letter that, assuming the hospital expenses were for a non-work injury, there would no reason they would not be covered by Compcare.

(3)( Back ) Or Integrity had the duty under its hold harmless agreement to inquire whether the bills had been paid.

(4)( Back ) This is the alternative dispute resolution procedure which allows insurers to dispute the reasonableness of charges and necessity of treatment rendered by medical providers.