Justice LOHR delivered the Opinion of the Court.
The petitioner, Scott Wetzel Services, Inc. (Wetzel), seeks reversal of two court of appeals decisions, Johnson v. Scott Wetzel Services, Inc., 797 P.2d 786 (Colo.App. 1990), and Tozer v. Scott Wetzel Services, Inc., No. 88CA1723 (Colo.App. April 19, 1990) (unpublished). In each case, the Colorado Court of Appeals held that an independent claims adjusting company acting on behalf of a self-insured employer owes a duty of good faith to an injured employee in investigating and processing a workers' compensation claim even in the absence of contractual privity with the employee. We granted certiorari and consolidated the cases for the purposes of briefing and argument. We affirm the judgments of the court of appeals.
A summary of the factual and procedural history of the two cases will facilitate an understanding of the common legal issue that we must resolve. We derive the facts principally from the record in the Johnson case, for it proceeded through a full evidentiary presentation, whereas the Tozer case was resolved on summary judgment. James H. Johnson and Edward Tozer filed workers' compensation claims with their employer, Safeway Stores, Incorporated (Safeway). The Workers' Compensation Act (the Act)
Wetzel is a company that primarily performs claims administration work for large, self-insured clients throughout the country. As a claims adjuster for Safeway, Wetzel's duties encompassed the investigation of claims and the initial determination of whether a claim is compensable. Wetzel received the first report of the injuries from the employer, set up the files,
Johnson worked as an order selector at a distribution center for Safeway. Johnson's job required him to lift boxes of frozen food with a total daily weight averaging about 30,000 pounds. He was assigned a quota necessitating that he lift 123 pieces for each 20 minute interval in a day. He would take boxes weighing from 5 to 100 pounds from the floor and lift them as high as 6 feet; thus, the job entailed much lifting and bending. Johnson was engaged in this work from 1974 to 1981, eight hours a day. The working environment was harsh with temperatures ranging from 8 to 20 degrees below zero.
In February 1981, Johnson suffered a groin injury while lifting two boxes of orange juice. Due to the injury, he initially missed two days of work. With Safeway's approval, Wetzel issued a check to Johnson in an appropriate amount in compensation for temporary disability. The claim file was then closed. Despite continuing pain, Johnson worked until December 1981 when the pain forced him to discontinue his work. He reported the injury to his supervisor, and Safeway referred him to a company physician, Dr. Derebury.
On January 21, 1982, Dr. Pelander wrote a letter to Johnson's attorney, and Wetzel later received a copy. The letter stated:
Wetzel continued to refuse to pay benefits to Johnson. Mary Speed, the claims adjuster, interpreted this report from a noncompany doctor as relating nothing definitive. She did not investigate the claim any further; she simply reviewed Johnson's medical
In May of 1982, Johnson filed a petition to reopen his February 1981 workers' compensation case.
In March 1984, the ALJ held a medical hearing to determine whether Safeway owed benefits to Johnson for the period after July 25, 1982. At Safeway's request, the ALJ agreed to adjourn the hearing and withhold a decision on the merits to enable Safeway to take the deposition of Dr. Grossman. Safeway did not depose Dr. Grossman until December 1984. One full year after the original hearing, in March of 1985, the ALJ issued an order requiring Safeway to pay temporary total disability benefits for various periods of time following July 25, 1982. Safeway appealed the ruling, including once again among its assertions of error that the injury was not work-related. Finally, in April 1986 the Panel affirmed the ALJ's decision. Wetzel issued a check in May 1986 to Johnson for benefits owed for temporary total disability during various periods after July 25, 1982.
During the pendency of the appeals, Johnson received no money from Safeway or Wetzel in addition to the $8,283.15 ordered by the ALJ. Temporary total disability benefits are suspended during the pendency of an appeal on the issue of whether an injury is work-related. See § 8-43-301(12), 3B C.R.S. (1991 Supp.). Johnson suffered severe financial difficulties as a result of the delays in receiving benefits. He testified that he had problems paying even his basic living expenses. He stated,
Johnson testified that he had to sell his van, motorcycle, and car. His savings evaporated. In addition, he had to borrow approximately $5,000 to $6,000 over a period of time from his daughter.
In July 1987, Johnson filed a lawsuit against Safeway, Wetzel, and Home Insurance Company for breach of contract and bad faith processing of Johnson's workers' compensation claim, among other things. Johnson's wife also asserted a claim for loss of consortium.
Johnson v. Scott Wetzel Services, Inc., 797 P.2d 786, 787 (Colo.App.1990). The court of appeals remanded the case to the trial court with directions to reinstate the Johnsons' complaint. Id. at 787-88.
Tozer suffered a work-related injury in September 1982. Safeway admitted liability for the injury, and paid compensation for temporary total disability for various periods after September 1982. Tozer subsequently submitted a supplemental workers' compensation claim alleging additional periods of temporary total disability, and Safeway contested this claim. After a hearing, an ALJ entered an order awarding Tozer further compensation. Safeway appealed, and the Panel affirmed the ALJ's decision.
In July 1987, Tozer and his wife, represented by the same attorney representing the Johnsons, filed a lawsuit against Safeway, Wetzel, and Home Insurance Company setting forth essentially the same types of claims for relief as the Johnsons did in their complaint. Like the Johnsons, the Tozers later stipulated to dismissing Safeway and Home Insurance Company from the lawsuit. In August of 1988, the trial court granted Wetzel's motion for summary judgment. In October 1988 the trial court denied reconsideration of that ruling and explained that the ground for summary judgment was that Wetzel lacked a duty to Tozer to act in good faith in processing Tozer's workers' compensation claim. The Tozers appealed. The court of appeals reversed the trial court's judgment in reliance on its decision in Johnson and directed reinstatement of the Tozers' bad faith and unfair settlement practices claims. Tozer v. Scott Wetzel Services, Inc., No. 88CA1723 (Colo.App. April 19, 1990) (unpublished).
Johnson and Tozer contend that Wetzel did not act in good faith or deal fairly when processing their claims for workers' compensation benefits. Johnson asserts that Wetzel did not competently investigate the medical basis of his claim in order to determine whether the injuries actually were job-related. He argues that a proper investigation would have demonstrated that he was entitled to workers' compensation benefits. Instead, Wetzel only collected those facts that would support denial of workers' compensation benefits. Tozer contends that Wetzel appealed the administrative law judge's order awarding compensation simply to delay the payment of benefits. Both claimants argue that Wetzel, knowing that the claimants were experiencing extreme
The dispositive issue in this case is whether an independent claims adjusting firm owes a duty of good faith and fair dealing to an injured claimant in investigating and processing a workers' compensation claim in the absence of contractual privity with the claimant. In order to resolve this issue, we first must determine whether the duty of good faith and fair dealing that providers of workers' compensation insurance owe to claimants of workers' compensation benefits applies as well to self-insured employers. Then, we must decide whether such a duty also applies to an independent claims adjusting service. We conclude that the duty of good faith and fair dealing applies in both instances.
Although this case presents an issue of first impression in Colorado, we have previously considered the nature of an insurance company's duties in processing claims in other contexts. These cases provide useful guidance in resolving the issue now before us.
The tort of "bad faith breach of an insurance contract" was first recognized in Colorado by the Colorado Court of Appeals in 1982. See Farmers Group, Inc. v. Trimble ("Trimble I"), 658 P.2d 1370, 1375-76 (Colo.App.1982). That case involved the assertion of a claim by an insured that his liability insurer had acted in bad faith in defending against claims asserted against the insured by a third party. In Farmers Group, Inc. v. Trimble ("Trimble II"), 691 P.2d 1138, 1141 (Colo.1984), we affirmed Trimble I on certiorari review and explained our rationale for recognizing the tort:
(Brackets in Trimble II.) We noted that insurance serves to protect individuals against financial calamity. In essence, the insured purchases financial and emotional security. "The refusal of the insurer to pay valid claims without justification, however, defeats the expectations of the insured and the purpose of the insurance contract." Trimble II, 691 P.2d at 1141. We therefore held that an insurer has a legal duty to deal with its insured in good faith. Id.
We also held in Trimble II that general principles of negligence will govern the standard by which the adherence of an insured to its duty of good faith will be assessed. Id. at 1142. In arriving at this conclusion, we observed,
[t]he standard of conduct on the part of the insurer when dealing with claims arising under an insurance policy is shaped by, and must reflect, the quasifiduciary relationship that exists between the insurer and the insured by virtue of the insurance contract. Particularly when handling claims of third persons that are brought against the insured, an
Id. at 1141. We noted that the quasi-fiduciary nature of the insurer-insured relationship stemmed from the insurer's ability under its policy of insurance to control the handling of a third party claim and the defense against it. Id.
In Travelers Insurance Co. v. Savio, 706 P.2d 1258, 1273 (Colo.1985), we decided that an insurance company providing workers' compensation insurance for the benefit of an employer owes a duty of good faith to an employee asserting a claim for workers' compensation benefits. We noted that under the Act the insurance contract must provide that the insurer is directly and primarily liable to the employee. See § 8-44-105, 3B C.R.S. (1991 Supp.). Thus, the employee can be viewed either as an insured or as a third party beneficiary with the right to sue on the insurance contract. Savio, 706 P.2d at 1272. The rationale of Trimble II, therefore, "demands that the provider of [workers'] compensation deal fairly and in good faith with an employee asserting a compensable injury." Id. at 1273.
In Savio we emphasized that the Act was adopted to protect workers from the economic calamity of disabling injuries. Id. at 1272. Once a calamity has befallen an employee covered by workers' compensation or an insured covered under a private insurance contract, the injured party is particularly vulnerable because of the injury or loss. Id. at 1273. We noted that the Supreme Court of Rhode Island once commented as follows:
Id. at 1273 (quoting Bibeault v. Hanover Ins. Co., 417 A.2d 313, 318 (R.I.1980)).
In Savio, however, we held that the negligence standard by which the breach of an insurer's duty of good faith is to be determined in the context of a claim by a third party against the insured is not applicable when a claim is asserted by a worker against the workers' compensation insurer. When a claim is asserted by a third party, as in Trimble II, the insured has ceded control of defense of the action to the insurer, thus giving rise to a quasi-fiduciary relationship of the insurer to the insured. In a first-party claim for workers' compensation benefits, however, the claimant retains control, and the insurer "must be accorded wide latitude in its ability to investigate claims and to resist false or unfounded efforts to obtain funds not available under the contract of insurance." Savio, 706 P.2d at 1274. Accordingly, we held that in order to establish breach of the insurance carrier's duty of good faith to one asserting a claim for workers' compensation, the claimant must show that the insurer's conduct was unreasonable and that the insurer knew it was unreasonable or acted in reckless disregard of whether it was unreasonable. Id. at 1276.
The present case involves the assertion of a workers' compensation claim against a self-insured employer who has contracted out its claims adjusting responsibilities. The first question we must decide, therefore, is whether such an employer owes the same duty of good faith and fair dealing to an employee asserting a workers' compensation claim as does an independent insurance company providing coverage for such claims. We conclude that it does. For this purpose, we can discern no principled difference between self-insured employers and insurance companies in the context of workers' compensation law. The concerns we have identified with respect to greater financial assets and superior bargaining power are still present.
The Code of Colorado Regulations sets forth strict conditions for an employer to
In view of our recognition that insurance companies and self-insured employers occupy similar positions with respect to workers' compensation claimants, we conclude that a self-insured employer, like a workers' compensation insurance carrier, owes a duty of good faith and fair dealing to its employees who seek benefits under the Act. These employee-claimants, no less than the disabled insured who sought benefits under a disability insurance policy in Bibeault, are "often pursued by creditors and devoid of bargaining power, [and] may easily be persuaded to settle for an amount substantially lower than that provided for" under the Act. 417 A.2d at 318. The rationale of our decision in Savio is as applicable to self-insured employers as it is to insurance companies providing workers' compensation benefits.
We now turn to the issue of whether an independent claims adjusting service such as Wetzel also owes a duty of good faith and fair dealing to a claimant asserting a right to benefits under the Act. We conclude that it does.
We recognize that Safeway, as a self-insured employer, cannot relieve itself of its obligation of good faith and fair dealing by contracting out its responsibilities. See Denny's Restaurant, Inc. v. Husson, 746 P.2d 63, 65 (Colo.App.1987). This, however, does not resolve the question of whether Wetzel also had such a duty independent of and in addition to the duty imposed on Safeway.
The duty of good faith and fair dealing owed by insurers and self-insurers to workers' compensation claimants is rooted in the Act. The regulations promulgated under the Act specifically contemplate the use of claims administration services by self-insured employers as an important part of the scheme for delivery of workers' compensation benefits by self-insured employers. When the employer acts as a self-insurer, the claims administration service plays an integral role in the provision of benefits. As previously noted, the executive director of the department of labor and employment may permit employers to act as their own workers' compensation insurance carriers. § 8-44-109, 3B C.R.S. (1986) (now codified at § 8-44-201, 3B C.R.S. (1991 Supp.)). Such self-insurers must satisfy the executive director's regulatory requirements. Id. See also § 8-46-108, 3B C.R.S. (1986) (now codified at § 8-47-107, 3B C.R.S. (1991 Supp.)) (director's power to adopt regulations to administer the workers' compensation system). These
The self-insurer regulatory scheme therefore specifically envisions the use of independent claims administration services to provide benefits. The executive director's annual review of the self-insurer's permit must include an evaluation of the efficiency and effectiveness of the self-insurer's claims administration. See id. at Part V(A)(2)(k). These requirements demonstrate the regulatory concern that workers' compensation claimants receive effective and efficient claims processing. The role of a claims adjusting service, therefore, derives not solely from its contract with the self-insured employer, but is based on statute and regulation as part of the benefit-delivery process.
Wetzel, the claims administration service acting under contract with the employer, Safeway, provided the claims administration contemplated by regulation. Wetzel processed the paperwork, investigated the claims, obtained medical reports, made initial determinations of a claimant's eligibility for benefits, and paid medical bills with checks written on its own account.
Furthermore, because of the structure of the Act, Wetzel was aware that it was instrumental in carrying out Safeway's duties to workers' compensation claimants. Under these circumstances, Wetzel had a duty of good faith and fair dealing to Safeway's workers' compensation claimants. Cf. Morvay v. Hanover Ins. Cos., 127 N.H. 723, 506 A.2d 333, 335 (1986) (one who investigates insurance claim under contract with insurer owes a duty of reasonable care to insured as well as to insurer because insured is a foreseeably affected party); Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 287-88 (Alaska 1980) (insurance adjuster owes duty of ordinary care to insured even though adjuster's contract is with insurance company only).
We act with an eye towards serving the purposes behind the workers' compensation system. The Act has the humanitarian purpose of assisting injured workers and their families, Claimants in Matter of Death of Garner v. Vanadium Corp., 194 Colo. 358, 360, 572 P.2d 1205, 1207 (1977), by giving them a reliable source of compensation, Engelbrecht v. Hartford Accident & Indem. Co., 680 P.2d 231, 233 (Colo. 1984). One of the purposes of the Act is to provide a method whereby claims arising out of employment-related accidents may be speedily resolved. Industrial Comm'n v. Globe Indem. Co., 145 Colo. 453, 456, 358 P.2d 885, 886 (1961). "The Workmen's Compensation Act was intended to supply every employee within its protection with a more or less summary and speedy procedure... to recover compensation for any injury from an industrial accident occurring in the course of his employment and arising out of it." Industrial Comm'n v. Schaefer Realty Co., 98 Colo. 445, 446, 56 P.2d 51, 51 (1936). In the absence of an obligation to deal in good faith and fairly, self-insured employers and claims adjusting services may create obstacles to payment. This kind of delaying tactic runs counter to the goals of workers' compensation. Accordingly,
Therefore, we affirm the judgments of the Colorado Court of Appeals remanding for reinstatement of the claims for Wetzel's alleged breaches of its duties of good faith and fair dealing and for further proceedings consistent with the views expressed in this opinion.
ROVIRA, C.J., concurs in part and dissents in part.
VOLLACK, J., joins in the concurrence and dissent.
Chief Justice ROVIRA concurring in part and dissenting in part:
While I agree that a self-insured employer owes a duty of good faith and fair dealing to its employees who seek benefits under the Workers' Compensation Act (the Act) and that this duty cannot be delegated to a claims adjusting service, I do not agree that such a duty is owed by a claims adjusting service such as Wetzel that provides no benefits to the employee. Therefore, because the majority improperly expands the category of persons or entities potentially liable for the tort of bad-faith processing of a compensation claim, I respectfully dissent.
We have often recognized that certain duties, whether defined by statute or common law, are nondelegable. The Act imposes an obligation on an employer to secure compensation for its employees for injuries suffered in the course of employment. § 8-44-101(1), 3B C.R.S. (1986). Recognizing that "workers compensation serves the same purpose as insurance in general," we have previously held that there is a duty on the part of the provider of such compensation to "deal fairly and in good faith with an employee asserting a compensable injury." Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1273 (Colo.1985). The Act does not permit an employer "to appoint an agent, other than an insurer, and unilaterally vest it with the rights and responsibilities assigned either to employers or insurers by the Workmen's Compensation Act." Denny's Restaurant, Inc. v. Husson, 746 P.2d 63, 65 (Colo.App.1987) (emphasis added). Therefore, since in Savio, we found that the responsibility to deal fairly and in good faith arises from the underlying purpose of the Act, I agree with the majority's conclusion (see maj. op. at 811) that Safeway cannot relieve itself of its obligation of good faith by contracting out its responsibilities.
I disagree, however, with the majority's conclusion that, based on the statutory and regulatory structure of the Act, a claims adjusting company hired by and acting on behalf of a self-insured employer, owes an independent duty of good faith and fair dealing to an employee in the investigation and processing of a workers' compensation claim. I believe, conversely, that neither the decisions of this court, the statutory and regulatory structure of the Act, nor the laws of agency support an extension of such a duty to independent claims adjusting companies.
The imposition of the duty to claims adjusting companies cannot be said to arise from our holding in Savio. In Savio, we adopted the rationale of Farmer's Group,
The regulatory structure of the Act, while demonstrating concern that workers' compensation claimants receive efficient claims processing (see maj. op. at 811-812), establishes that the entity obligated to provide efficient claims administration is the self-insured employer. See 7 Colo.Code Regs. §§ 1101-04 at Part V(A)(2)(k) (1990) (Whether the self-insured employer services its own program with respect to claims and administration or contracts with a service company to provide the services, the self-insured employer is subject to annual review of its permit. The review must include an evaluation of the efficiency and effectiveness of the self-insurer's claims administration.). So, while recognizing the use of independent claims administration services (see id. at Part III(A)(5)), the regulatory scheme holds only the self-insurer responsible. It has no provision regulating the independent claims adjusting company, thus indicating that the regulatory scheme envisioned an independent obligation on the part of insurance adjusting companies directly to the insured employees.
Furthermore, while the majority declines to examine the law of principal and agent, I find that well settled agency principles support a conclusion that Wetzel did not independently owe a duty of good faith and fair dealing to Johnson and Tozer. Under agency law, obligations arise and are imposed based on the nature of the relationship between the parties. I begin, therefore, by examining the nature of Safeway and Wetzel's relationship.
An agent is one who acts for or in the place of another by authority from him, or who is entrusted with the business of the other. Pouppirt v. Greenwood, 48 Colo. 405, 407, 110 P. 195, 196 (1910); Governor's Ranch Professional Center, Ltd. v. Mercy of Colorado, Inc., 793 P.2d 648, 651 (Colo.App.1990). An independent contractor is one who engages to perform services for another, according to his own methods and manner, free from the direction and control of the employer in all matters relating to performance of the work. Continental Bus System, Inc. v. N.L.R.B., 325 F.2d 267, 271 (D.Colo.1963); Restatement (Second) of Agency § 2(3) cmt. b (1958).
In the Johnson case, the trial court, in its order finding that Wetzel was legally capable of committing a tort despite the absence of privity of contract, characterized Wetzel as an independent contractor adjusting company. I agree. As the majority points out, Johnson's counsel agreed that Wetzel is an adjusting service totally independent of Safeway, that Wetzel contracted with Safeway to provide adjusting services for Safeway on workers' compensation claims, and that Wetzel did not contract with either Safeway or Johnson to provide insurance. As noted above, Wetzel was performing the administrative work in adjusting workers' compensation claims, a
An independent contractor may or may not be an agent. Restatement (Second) of Agency § 2(3) (1958). "An agent ... is ... an independent contractor when he contracts to act on account of the principal." Id. at cmt. b. Yet, an independent contractor is not an agent where he is not a fiduciary, has no power to make the one employing him a party to a transaction, and is subject to no control over his conduct. Id. Since the regulatory scheme places the burden for administration of claims on the self-insured party, an independent claims adjusting company which the self-insured entity authorizes to administer claims on its behalf is acting as an agent for the self-insurer.
Just as "[a]n insurance adjuster ... represents his employer, to whom he owes faithful work, and for whose acts in the employer's interest the employer is responsible so long as the acts are done while the agent is acting within the scope of his employment," 16A J. Appleman & J. Appleman, Insurance Law & Practice § 8890.35 at 541 (1981) (emphasis added), an independent claims adjusting company represents the self-insurer and the self-insured entity is responsible for acts done by the agent within the scope of its employment. See State ex rel. Ranni Assoc. v. Hartenbach, 742 S.W.2d 134, 140 (Mo.1987) (principal, and not agent, liable for economic loss suffered by beneficiaries of life insurance policy for acts performed by agent within scope of its authority). Whether that also relieves the claims adjustment company of liability hinges on the nature of the duty.
Liability for an agent's breach of a non-delegable duty remains with the principal. See Restatement (Second) of Agency § 216 (1958). Here, the majority determined that Safeway's duty of fair dealing and good faith is nondelegable. See maj. op. at 811. Consequently, agency principles do not support a finding that Wetzel owed an independent duty of good faith and fair dealing to compensation claimants.
Finally, the majority states that Wetzel owes a duty to employees because, based on the structure of the Act, Wetzel was aware of the importance of its role in carrying out Safeway's duties to workers' compensation claimants and by imposing a duty of fair dealing and good faith on claim adjusting companies, the humanitarian purpose of the Act is served. I believe that the humanitarian purpose of the Act evidenced by the statutory and regulatory structure is equally served without extending liability for the tort of bad faith to independent claims adjusting companies. If, as asserted, Wetzel improperly processed Johnson's and Tozer's claims, the
Accordingly, I respectfully dissent and would reverse the judgments of the court of appeals.
I am authorized to state that Justice VOLLACK joins in this concurrence and dissent.
The Johnsons' attorney stated that he had "no problem" with these facts, which the Johnsons have not contested on appeal.