TEXAS SUPREME COURT REVERSES RUTTINGER: WORKERS COMPENSATION CARRIERS NOT SUBJECT TO UNFAIR SETTLEMENT PRACTICES CLAIMS UNDER THE TEXAS INSURANCE CODE

August 29, 2011

In a ground-breaking decision last Friday, the Texas Supreme Court decided that workers compensation insurers are not subject to statutory "bad faith" claims for unfair claims settlement practices under the Texas Insurance Code. Texas Mut. Ins. Co. v. Ruttinger, No. 08-0751, S.W.3d (Tex. Aug. 26, 2011).  Ruttinger involved an investigation by a carrier that failed to follow what the adjuster admitted was a standard investigation.  At trial, the adjuster admitted that he did not interview the claimant or his doctor, only the employer.  The adjuster also admitted that he should have interviewed all three.  The jury found  that  the  carrier  violated  the  Texas  Insurance  Code  by  failing  to  conduct  a  “reasonable” investigation.  It also found a "knowing" violation, leading to trebling of damages.  Friday’s decision unwound the verdict.

The majority held: "We conclude that (1) claims against workers’ compensation insurers for unfair settlement practices may not be made under the Insurance Code, but (2) claims under the Insurance Code may be made against those insurers for misrepresenting provisions of their policies [at the time of sale], although in this case there was no evidence the insurer did so."  The majority opinion walks through the history and development of the workers compensation statutory scheme in Texas and the proper role of the  Division  of  Workers  Compensation,  holding  that  the  statutorily-created  administrative  process controls.

The court fractured on section 5 of the opinion, receiving 4 votes, 2 concurrences, and 3 dissents.  The other sections received 6 votes and 3 dissents.  In controversial section 5, Justice Johnson, writing for the plurality, would overrule Aranda v. Insurance Co of N. America, 748 S.W.2d 210, 212-213 (Tex. 1988). Aranda allowed claimants to bring a cause of action for common law bad faith -- breach of the duty of good faith and fair dealing -- against workers compensation carriers. He explained: "The [Workers Compensation] Act effectively eliminates the need for a judicially imposed cause of action outside the administrative processes and other remedies in the Act. Recognizing and respecting the Legislature’s prime position in enacting, studying, analyzing, and reforming the system, and its efforts in having done that, I conclude that Aranda should be overruled." The common law bad faith claims were remanded to the trial court with the rest of the final judgment reversed.

[Editor’s Note: This opinion by the Texas Supreme Court will have far-reaching effects in Texas as the success of Ruttinger in both the trial court and lower appellate court resulted in a flood of bad-faith workers-compensation lawsuits in Texas.  We will continue to monitor the case and the trend of new filings in Texas following this significant change in the law.]