Samuel De Dios v. Indemnity Insurance Company of North America and Broadspire Services, Inc.

IN THE SUPREME COURT OF IOWA
No. 18–1227

Filed May 10, 2019

Amended May 14, 2019

SAMUEL DE DIOS,

Appellant,

vs.

INDEMNITY INSURANCE COMPANY OF NORTH AMERICA and
BROADSPIRE SERVICES, INC.,

Appellee.

Certified questions of law from the United States District Court for
the Northern District of Iowa, Mark W. Bennett, Judge.

A federal district court certified a question of Iowa law in a bad-faith
action brought by an injured worker against a workers’ compensation
carrier and a third-party claims administrator. CERTIFIED QUESTION
ANSWERED.

Anthony J. Bribriesco of Bribriesco Law Firm, PLLC, Bettendorf, for
appellant.

Jennifer G. Cooper and Alexander F. Koskey, III of Baker Donelson,
Bearman, Caldwell & Berkowitz, P.C., Atlanta, Georgia, and Jeana
Goosmann and Anthony Osborn of Goosmann Law Firm, PLC, Sioux City,
for appellees.

Keith P. Duffy of Nyemaster Goode, P.C., Des Moines, for amici
curiae Iowa Defense Counsel Association and the American Insurance
Association.
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MANSFIELD, Justice.

A worker was injured on the job when his vehicle was rear-ended.

He filed a claim for benefits with the workers compensation commissioner.

Later, he filed a bad-faith action in the district court against his employer’s

workers’ compensation carrier and its third-party administrator. The

action was removed to federal court.

The federal district court has asked us to answer the following

certified question of Iowa law: “In what circumstances, if any, can an

injured employee hold a third-party claims administrator liable for the tort

of bad faith for failure to pay workers’ compensation benefits?”

In Iowa, the bad-faith cause of action arises from (1) the special

contractual relationship between insurer and insured, (2) the specific

statutory and administrative duties imposed on insurers, or (3) some

combination of the two. In workers’ compensation, we have emphasized

the statutory and administrative duties of workers’ compensation carriers.

As we discuss herein, a third-party administrator does not possess these

attributes that have led to the imposition of bad-faith liability.

Accordingly, we answer the question as follows: under Iowa law, a common

law cause of action for bad-faith failure to pay workers’ compensation

benefits is not available against a third-party claims administrator of a

worker’s compensation insurance carrier.

I. Background Facts and Proceedings.

“When we answer a certified question, we rely upon the facts

provided with the certified question,” and therefore “restate the facts as set

forth by the federal district court.” Baldwin v. City of Estherville, 915

N.W.2d 259, 261 (Iowa 2018). The United States District Court for the

Northern District of Iowa described the facts as follows:
 3
A. Factual Background

1. The parties

[Samuel] De Dios alleges that, at all material times, he has
been a resident of Woodbury County, Iowa, and that he was
employed by Brand Energy & Infrastructure Services. He
alleges that Brand had a workers’ compensation insurance
policy with defendant Indemnity Insurance Company of North
America, but that Indemnity “delegated its authority of
investigating, handling, managing, administering, and paying
benefits under Iowa Workers’ Compensation Laws to
[defendant] Broadspire Services, Incorporated.” Amended
Complaint, ¶ 4.

More specifically, De Dios alleges the following about
Broadspire’s duties and its relationship with Indemnity:

5. At all times material to the Petition,
the INSURANCE COMPANY and BROADSPIRE
were responsible for making timely payment of
workers’ compensation benefits to employees of
the EMPLOYER, including SAMUEL. Plaintiff will
refer to both the INSURANCE COMPANY and
BROADSPIRE collectively as “the Defendants.”

6. BROADSPIRE and the INSURANCE
COMPANY are essentially one and the same entity
for purposes of the instant action.

7. The INSURANCE COMPANY lacked
the necessary support staff to investigate on-the-
job injuries in Iowa, including SAMUEL’s on-the-
job injury.

8. The INSURANCE COMPANY lacked
the necessary support staff that had the
experience or knowledge to make an informed
decision on whether to pay benefits pursuant to
Iowa Workers’ Compensation Laws.

9. The INSURANCE COMPANY
obligated BROADSPIRE to provide actuarial
services for workers’ compensation claims,
including SAMUEL’s workers’ compensation
claim.

10. The INSURANCE COMPANY
obligated BROADSPIRE to provide underwriting
services for workers’ compensation claims,
including SAMUEL’s workers’ compensation
claim.
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11. BROADSPIRE performed the tasks of
a workers’ compensation insurance company in
Iowa.

12. BROADSPIRE received a percentage
of the premiums that the EMPLOYER paid to the
INSURANCE COMPANY.

13. BROADSPIRE’s compensation
package with the INSURANCE COMPANY was
tied to the approval or denial of workers’
compensation claims: BROADSPIRE received
more of the EMPLOYER’s premium as the
payment of workers’ compensation benefits
decreased.

14. BROADSPIRE had a financial risk of
loss for workers’ compensation claims it
administered on behalf of the INSURANCE
COMPANY, including SAMUEL’s workers’
compensation claim.

15. The INSURANCE COMPANY had a
financial risk of loss for workers’ compensation
claims that were administered by BROADSPIRE,
including SAMUEL’s workers’ compensation
claim.

16. The INSURANCE COMPANY entered
into a reinsurance agreement with BROADSPIRE
for payments made on behalf of workers’
compensation claims, including SAMUEL’s
workers’ compensation claim.

Amended Complaint at ¶¶ 5-16.

2. The accident and aftermath

De Dios alleges that, on April 8, 2016, he was assigned
by Brand to work on a construction site located on the private
property of CF Industries. To enter the property, he had to
drive past a security gate and a security guard. He alleges
that, after [he] enter[ed] the property, a vehicle driven by
Jonathan Elizondo crashed into the back of his vehicle,
damaging his vehicle and causing him injuries, including a
lower back injury. The collision was witnessed by the security
guard at the gate, Tina Gregg. De Dios reported the collision
and his work injury to Brand’s safety manager, Ismael Barba.
He alleges that Brand authorized him to choose whatever
medical provider he would like to provide care for the work
injury. De Dios chose to be treated at St. Luke’s Hospital,
 5
where Dr. Jeffrey O’Tool provided him with medical care for
his work injury.

On April 11, 2016, De Dios returned to work with
Brand, but his back pain worsened. On April 14, 2016, Brand
sent De Dios home because of his work injury. On April 14,
2016, Brand authorized De Dios to choose whatever medical
provider he would like to see to care for his work injury. On
April 15, 2016, De Dios’s family doctor, Alisa M. Olson, DO,
treated De Dios for the work injury. De Dios alleges that, from
April 8, 2016, through May 9, 2016, Brand refused to provide
him with “light duty” work. He alleges that, from April 15,
2016, Indemnity and Broadspire knew or should have known
that he had work restrictions as a result of his work injury;
that Brand refused to provide “light duty work” within those
restrictions; and that Indemnity and Broadspire were required
to pay him Temporary Total Disability (“TTD”) Benefits and/or
Healing Period (“HP”) Benefits until a determination of
maximum medical improvement was made by a qualified
medical expert.

3. Denial of the claim

De Dios alleges that Broadspire or, in the alternative,
Indemnity made the decision to deny him workers’
compensation benefits. He alleges that, prior to doing so,
neither Indemnity nor Broadspire interviewed him, or
interviewed or contacted the security guard, Tina Gregg, who
had witnessed the accident, or his treating physicians,
Dr. O’Tool and Dr. Olson. He alleges that the defendants’
failure to contact these people violated an insurance industry
standard of “Three-Point Contact” before denying him
workers’ compensation benefits. On June 9, 2016, De Dios
filed a workers’ compensation claim with the Iowa Workers’
Compensation Commissioner against Indemnity and
Broadspire. On August 23, 2016, Indemnity and Broadspire
filed a joint Answer with the Iowa Workers’ Compensation
Commissioner and denied liability for De Dios’s work injury.
De Dios alleges that Indemnity and Broadspire did not convey
to him the basis for their decision to deny his claim at that
time, that they, in fact, had no reasonable basis for denying
his claim, and that they knew or should have known that no
reasonable basis existed to deny his claim.

II. Standard of Review and Criteria for Answering a Certified
Question.

Regarding this Court’s power to answer certified questions of law,

Iowa Code section 684A.1 provides,
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The supreme court may answer questions of law certified to it
by the supreme court of the United States, a court of appeals
of the United States, a United States district court or the
highest appellate court or the intermediate appellate court of
another state, when requested by the certifying court, if there
are involved in a proceeding before it questions of law of this
state which may be determinative of the cause then pending
in the certifying court and as to which it appears to the
certifying court there is no controlling precedent in the
decisions of the appellate courts of this state.

Iowa Code § 684A.1 (2018).

We have therefore held,

It is within our discretion to answer certified questions from a
United States district court. We may answer a question
certified to us when (1) a proper court certified the question,
(2) the question involves a matter of Iowa law, (3) the question
“may be determinative of the cause . . . pending in the
certifying court,” and (4) it appears to the certifying court that
there is no controlling Iowa precedent.

Baldwin, 915 N.W.2d at 265 (quoting Roth v. Evangelical Lutheran Good

Samaritan Soc’y, 886 N.W.2d 601, 605 (Iowa 2016) (omission in original)).

In this case, the answer to the certified question will determine

whether De Dios’s claim against Broadspire can proceed, and it does not

appear to us (nor did it appear to the federal district court) that there is

any controlling Iowa precedent. We conclude we should answer the

certified question.

III. Analysis.

In Dolan v. Aid Insurance Company, we first recognized the tort of

first-party insurer bad faith. 431 N.W.2d 790, 790, 794 (Iowa 1988) (en

banc). There, the plaintiff filed suit against his insurer, claiming bad-faith

failure to settle for the underinsured motorist policy limit. Id. at 791. We

found it was “appropriate to recognize the first-party bad faith tort to

provide the insured an adequate remedy for an insurer’s wrongful

conduct” because traditional breach of contract damages would not always
 7

be adequate to compensate for bad faith and the alternative remedy of

intentional infliction of emotional distress was inadequate due to its

limited applicability. Id. at 794.

We also found that recognition of the tort was justified “by the nature

of the contractual relationship between the insurer and insured.” Id. We

explained,

Although we do not believe this relationship involves the same
fiduciary duties as in the third-party situations, . . . we have
frequently noted that insurance policies are contracts of
adhesion. This is due to the inherently unequal bargaining
power between the insurer and insured, which persists
throughout the parties’ relationship and becomes particularly
acute when the insured sustains a physical injury or
economic loss for which coverage is sought. Recognition of
the first-party bad faith tort redresses this inequality.

Id. (citations omitted). We adopted the test for bad faith applied by the

Wisconsin Supreme Court in Anderson v. Continental Insurance Company:

To show a claim for bad faith, a plaintiff must show the
absence of a reasonable basis for denying benefits of the policy
and defendant’s knowledge or reckless disregard of the lack of
a reasonable basis for denying the claim.

Id. (quoting Anderson, 271 N.W.2d 368, 376 (Wis. 1978)). We ultimately

reversed the district court’s order denying the insurer’s motion for

summary judgment, finding as a matter of law that the insured had failed

to show the lack of a reasonable basis for the insurer’s actions under the

Anderson test. Id. at 794–95.

Four years later, we decided that our holding in Dolan logically

extended to workers’ compensation. Boylan v. Am. Motorists Ins., 489

N.W.2d 742, 744 (Iowa 1992). In Boylan v. American Motorists Insurance

Company, we held that injured workers could pursue bad-faith claims

against workers’ compensation carriers. Id. There, we reversed an order

dismissing a bad-faith tort claim brought by an employee against his
 8

employer’s workers’ compensation carrier. Id. at 742, 744. The district

court had found “the relationship between an injured employee and the

employer’s workers’ compensation carrier” was unlike the insurer/insured

relationship in which we had recognized tort liability for bad faith. Id. at

742. The district court relied on our reasoning in Long v. McAllister, which

held,

The insurer has a fiduciary duty to the insured but an
adversary relationship with the victim. The effect of the policy
is to align the insurer’s interests with those of the insured. In
meeting its duty to the insured, the insurer must give as much
consideration to the insured’s interests as it does to its own.

Boylan, 489 N.W.2d at 743 (quoting Long, 319 N.W.2d 256, 262 (Iowa

1982)). The district court had also observed that “an employer or workers’

compensation insurance carrier is not required to pay weekly benefits or

to pay medical service providers prior to the time the industrial

commissioner has determined the employee’s entitlement to benefits.” Id.

We found, however, that Iowa statutes and the Iowa administrative

code placed obligations on insurers. Id. We recognized that Iowa Code

section 86.13 (1991) imposed “an affirmative obligation on the part of the

employer and insurance carrier to act reasonably in regard to benefit
payments . . . .” Id. We also noted section 85.27 established an

“affirmative obligation to furnish medical and hospital supplies to an

injured employee,” and “although [this] statute speaks only of the

obligation of the employer, the commissioner’s regulations consign these

obligations to the employer’s insurance carrier.” Id. 1 The regulations at

issue were Iowa Admin. Code r. 876—2.3 and r. 876—4.10. 2 Id. Rule

876—2.3 states,

1Notably,the present version of Iowa Code section 85.27 more expressly places
obligations on the carrier as well as the employer. See Iowa Code § 85.27(3) (2018).
2Cited as 343 Iowa Admin. Code 2.3, 4.10.
 9
Representative within the state. All licensed insurers,
foreign and domestic, insuring workers’ compensation and all
employers relieved from insurance pursuant to Iowa Code
section 87.11 shall designate one or more persons
geographically located within the borders of this state, which
person or persons shall be knowledgeable of the Iowa Workers’
Compensation Law and Rules and shall be given the authority
and have the responsibility to expedite the handling of all
matters within the scope of Iowa Code chapters 85, 85A, 85B,
86, and 87.

The Iowa workers’ compensation commissioner shall be
advised by letter of the name, address, and telephone number
of each of the persons so designated. Any change in the
identity, address or telephone number of the persons so
designated shall be reported to the Iowa workers’
compensation commissioner within ten days after such
change occurs.

(Emphasis added). Rule 876—4.10 states,

Insurance carrier as a party. Whenever any insurance
carrier shall issue a policy with a clause in substance
providing that jurisdiction of the employer is jurisdiction of
the insurance carrier, the insurance carrier shall be deemed a
party in any action against the insured.

This rule is intended to implement Iowa Code section
87.10.[3]

(Emphasis added).

Under Boylan, the predominant justification for recognizing a bad-

faith tort against workers’ compensation carriers was the existence of
certain “affirmative obligations” placed upon them by our statutory and

3Iowa Code section 87.10 states,
Other policy requirements.
Every policy issued by an insurance corporation, association, or
organization to insure the payment of compensation shall contain a clause
providing that between any employer and the insurer, notice to and
knowledge of the occurrence of injury or death on the part of the insured
shall be notice and knowledge on the part of the insurer; and jurisdiction
of the insured shall be jurisdiction of the insurer, and the insurer shall be
bound by every agreement, adjudication, award or judgment rendered
against the insured.
Iowa Code § 87.10 (2018).
 10

regulatory scheme. See 489 N.W.2d at 743; see also Joel E. Fenton, The

Tort of Bad Faith in Iowa Workers’ Compensation Law, 45 Drake L. Rev.

839, 847 (1997) (“This bundle of statutory and administrative obligations

imposed on the insurance carrier creates a Dolan-like relationship between

claimant and insurance carrier, which brings it into the circle of first-party

relationships.”). We also noted that the exclusive remedy defense found

in Iowa Code section 85.20 (1991) was not available to insurance carriers. 4

See Boylan, 489 N.W.2d at 743–44 (citing Tallman v. Hanssen, 427 N.W.2d

868, 870 (Iowa 1988) (“This court . . . recognized that the exclusive remedy

provision of our workers’ compensation act is applicable only to claims

against the employer and does not extend to the employer’s compensation

insurer.”)).

We extended the workers’ compensation bad-faith tort in Reedy v.

White Consolidated Industries, Incorporated, to include self-insured

employers. 503 N.W.2d 601, 603 (Iowa 1993). We explained,

4Iowa Code section 85.20 currently reads as follows:
85.20 Rights of employee exclusive.
The rights and remedies provided in this chapter, chapter 85A, or
chapter 85B for an employee, or a student participating in a work-based
learning opportunity as provided in section 85.61, on account of injury,
occupational disease, or occupational hearing loss for which benefits
under this chapter, chapter 85A, or chapter 85B are recoverable, shall be
the exclusive and only rights and remedies of the employee or student, the
employee’s or student’s personal or legal representatives, dependents, or
next of kin, at common law or otherwise, on account of such injury,
occupational disease, or occupational hearing loss against any of the
following:
1. Against the employee’s employer.
2. Against any other employee of such employer, provided that
such injury, occupational disease, or occupational hearing loss arises out
of and in the course of such employment and is not caused by the other
employee’s gross negligence amounting to such lack of care as to amount
to wanton neglect for the safety of another.
Iowa Code § 85.20(1), (2) (2018).
 11
A self-insured employer under the Workers’ Compensation Act
is not an employer who fails to secure insurance against
workers’ compensation liability. Without more, an employer
who fails to secure insurance against such claims merely
waives the protection of the act against common-law claims.
Iowa Code § 87.21 (1993). To be a qualified self-insured
employer under the act, it is necessary to voluntarily assume
a recognized status under the workers’ compensation laws as
an insurer. Iowa Code § 87.4 (1987). For purposes of a bad-
faith tort claim, we see no distinction between a workers’
compensation insurance carrier for an employer and an
employer who voluntarily assumes self-insured status under
the act.

Id.

Then in Bremer v. Wallace, we answered the following question in

the negative: “Does Iowa recognize a common-law claim for bad-faith

refusal to pay workers’ compensation benefits by an uninsured employer?”

728 N.W.2d 803, 804, 806 (Iowa 2007). Addressing Dolan, Boylan, and

Reedy, we found,

The common thread in these decisions is the
defendant’s status as an insurer, or in the case of a self-
insured employer, the substantial equivalent of an insurer.
This status reflects and is consistent with the rationale
underlying our decision in Dolan.

Id. at 805. We concluded that an uninsured employer is unlike an insurer

or self-insured employer:

A self-insured employer must meet precise
requirements to acquire that standing. Under section 87.4,
[(2001)] “groups of employers by themselves or in an
association with any or all of their workers, may form
insurance associations,” as provided in that statute “[f]or the
purpose of complying with [chapter 87].” Iowa Code § 87.4.
These “self-insured associations” must submit a plan to the
insurance commissioner for approval. Id. Approval is
conditioned on meeting rigorous financial requirements. See
Iowa Admin Code. r. 191–56.3. Once a certificate of approval
has been issued by the insurance commissioner, “the workers’
compensation self-insurance association” is authorized “to
provide workers’ compensation benefits.” Id. r. 191–56.8(1).
Thereafter, the association is subject to the continuing
supervision of the insurance commissioner. Id. rs. 191–56.9,
191–56.13.
 12

Id. (second alteration in original). We continued,

The defendant in this case stands in a much different
position. He did not purchase workers’ compensation
insurance or join a self-insurance association. Thus, he is not
an insurer, nor is he the substantial equivalent of an insurer.
Consequently, the actual issue in this case is whether bad-
faith tort liability for failing to pay workers’ compensation
benefits should be imposed under circumstances that do not
involve an insurer/insured relationship.

Id. at 806. We held that it should not be. Id.

To summarize, we extended bad-faith liability to workers

compensation carriers because the law imposed certain affirmative

obligations on both employers and insurance carriers, and the employer’s

exclusive remedy defense was not available to carriers. Boylan, 489

N.W.2d at 743–44. We then found that bad-faith liability could extend to

a self-insured employer because the statutory requirements and

administrative oversight exercised over self-insured employers rendered

them the substantial equivalent of insurers. Reedy, 503 N.W.2d at 603.

Thus, we characterized the key inquiry as whether an insurer/insured

relationship existed between the plaintiff and defendant. Bremer, 728

N.W.2d at 806.

In other decisions, we have amplified these points. We have
reemphasized the statutory basis within Iowa Code section 86.13 for the

bad-faith claim based on delayed payment of benefits. See Gibson v. ITT

Hartford Ins., 621 N.W.2d 388, 397 (Iowa 2001) (en banc). We have

explained that workers’ compensation bad-faith claims are considered

“first-party bad faith” claims because of their statutory and regulatory

genesis. McIlravy v. N. River Ins., 653 N.W.2d 323, 329 n.2 (Iowa 2002).

As we put it, “[W]hen first adopting the bad faith cause of action in the

workers’ compensation context, we determined that such a suit is more

accurately considered as one for first-party bad faith given ‘the obligations
 13

that [Iowa Code §§ 86.13, .27] [(1999)] and administrative regulations

place on the insurer.’ ” Id. (first alteration in original) (quoting Boylan, 489

N.W.2d at 743).

We have also held that workers’ compensation bad-faith claims are

subject to the statute of limitations for “other actions,” not personal injury

actions, because of their statutory grounding. See Brown v. Liberty Mut.

Ins., 513 N.W.2d 762, 764–65 (Iowa 1994). “Brown’s bad-faith claim, as

noted in Boylan, rests on Liberty Mutual’s alleged breach of its statutory

good-faith obligation to pay benefits in advance of a specific directive by

the industrial commissioner.” Id.

To sum up: “[O]ur decisions indicate it is the nature of the workers’

compensation insurer’s relationship with the insured employees and

corresponding statutory duties that give rise to bad-faith tort liability.”

Thornton v. Am. Interstate Ins., 897 N.W.2d 445, 463 (Iowa 2017). Thus,

in Thornton, we reversed a finding that an insurer had opposed an

employee’s commutation petition in bad faith, noting, “Commutation is

unlike the payment of weekly benefits in which the statute commands the

employer (or insurer) to take action and, thus, establishes the type of

statutory duty for which a willful and deliberate breach can give rise to

bad-faith liability in the workers’ compensation field.” Id. at 469. 5

When we consider these existing grounds for bad-faith liability in

the workers’ compensation field, it is difficult to see how they would apply

to third-party administrators. A third-party administrator is not in an

insurer/insured relationship with anyone. See Bremer, 728 N.W.2d at

806. And unlike a self-insured employer, a third-party administrator does

5While making this observation, we elected “to decide this case based on the
factual record presented, without foreclosing the possibility that a bad-faith claim may
arise for resisting commutation under different facts.” Thornton, 897 N.W.2d at 468.
 14

not have to meet rigorous financial requirements and is not under the

ongoing supervision of the workers’ compensation commissioner. Id. at

805–06.

Our workers’ compensation statutes also do not impose “affirmative

obligations” on third-party administrators as they do on insurers. Cf.

Boylan, 489 N.W.2d at 743. The Iowa workers’ compensation law refers

to third-party administrators, and thus confirms that the Iowa legislature

was aware of their role. See Iowa Code § 85.65A(3)(e) (2018) (providing

that third-party administrators are not entitled to a commission for

collecting the second injury fund surcharge); id. § 86.45(2)(e), (h) (allowing

third-party administrators access to confidential information); id.

§ 87.11E(2)(c)–(e), (f) (making third-party administrators subject to

penalties for filing false financial information). Yet this law imposes no

obligations on them relative to the handling of workers’ compensation

claims. This shows that our legislature recognized a distinction between

insurers and third-party administrators, and opted to impose “affirmative

obligations” only on the former. See Boylan, 489 N.W.2d at 743. Our

statutes do not define “insurer” as including third-party administrators.

See Iowa Code chs. 85, 86, 87. In sum, under the laws of Iowa and the

facts of this case, the third-party administrator is not an insurer, nor is it

the substantial equivalent of an insurer.

It is true that the exclusive remedy provision in Iowa Code section

85.20 logically would not bar a claim against a third-party administrator,

just as it does not bar a claim against a workers compensation carrier.

See Boylan, 489 N.W.2d at 743–44. But that observation merely clears

away a potential obstacle to such a claim; it does not provide an affirmative

reason for recognizing such a claim when Iowa workers’ compensation law
 15

does not impose any relevant statutory duties on third-party

administrators.

De Dios raises the concern that the workers’ compensation carrier

could “completely delegate its authority to a third-party administrator and

that third-party administrator [could] arbitrarily deny coverage and delay

payment of a claim to an injured worker with minimal consequences . . . .”

Yet any insurer—not just a workers compensation carrier—can delegate

its duties to a third party. This doesn’t give the insurer a free pass for two

reasons. First, if the third party is an agent, then vicarious liability

applies. See Miller v. Hartford Fire Ins., 251 Iowa 665, 672–73, 102 N.W.2d

368, 373 (1960) (“If an act done by an agent is within the apparent scope

of the authority with which he has been clothed, it matters not that it is

directly contrary to the instructions of the principal; the latter will,

nevertheless, be liable, unless the third person with whom the agent dealt

knew that he was exceeding his authority or violating his instructions.”

(quoting 2 Am. Jur. Agency § 348, at 271) (1936)). Second, the

nondelegable duties imposed by Iowa statutes and administrative

regulations remain on the carrier regardless of any attempt to pass them

to a third party. As Couch on Insurance explains,

An insurer cannot delegate its duty of good faith.
Therefore, an agent of the insurer, while acting on the
insurer’s behalf by carrying out the insurer’s contractual
obligations, is under the same duty of good faith as the insurer
itself. Under varying circumstances, the good faith
requirement has been held to also apply to attorneys of the
insured.

This duty, however, only runs so far. While an insurer’s
agent may be subject to the insurer’s duty of good faith, the
agent does not also incur personal liability to the insured. The
lack of contractual privity prevents courts from finding such
liability, even in cases where the agent in question is a
reinsuring subsidiary.
 16

14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 198:17, at

198-38 to 198-39 (3d ed. 2018 Update) (footnotes omitted).

Moving outside Iowa and relying on caselaw from other jurisdictions

can be problematic because many jurisdictions—approximately half—do

not recognize common law bad-faith claims against a workers’

compensation carrier. See Steven Plitt, A Jurisprudential Survey of Bad

Faith Claims in the Workers’ Compensation Context, 18 Conn. Ins. L.J. 451,

452–457 (2012). Not surprisingly, these jurisdictions do not allow third

parties to be sued for bad faith in the workers’ compensation context,

either. See, e.g., Almada v. Wausau Bus. Ins., 876 A.2d 535, 538–40

(Conn. 2005) (holding a bad-faith action against a workers’ compensation

carrier’s third-party administrator was foreclosed by an earlier ruling

barring such an action against carriers themselves); Carpenter v. Sw. Med.

Examination Servs., Inc., 381 S.W.3d 583, 588 (Tex. App. 2012) (holding

that a bad-faith claim against an administrative services firm was barred

by Texas precedent disallowing bad-faith claims against workers’

compensation carriers themselves).

De Dios asks us to follow the approach of Colorado, the only

jurisdiction that to our knowledge has allowed bad-faith claims against

third-party administrators or other entities retained by workers

compensation carriers. In Scott Wetzel Services, Inc. v. Johnson, the

Colorado Supreme Court held the bad-faith tort was available against

independent claims adjusters. 821 P.2d 804, 811 (Colo. 1991). The court

explained,

[A]n independent claims adjusting company . . . acting on
behalf of a self-insured employer owes a duty of good faith and
fair dealing to an injured employee in investigating and
processing a workers’ compensation claim even in the absence
of contractual privity with the employee.
 17

Id. at 813. Yet the court was very clear that this duty derived from

Colorado’s statutory and regulatory scheme governing workers’

compensation:

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. . . . [The] . . . regulations . . . require that
“[e]ach permit holder [i.e., self-insured employer] shall have
within its own organization ample facilities and competent
personnel to service its own program with respect to claims
and administration or shall contract with a service company to
provide the services.”

The self-insurer regulatory scheme therefore specifically
envisions the use of independent claims administration
services to provide benefits. . . . 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.

Id. at 811–12 (second and third alteration in original) (emphasis in original)

(citations omitted) (quoting 7 Colo. Code Regs. § 1101-4:3 (1990)). The

court further elaborated in a footnote:

For the purpose of our analysis it is not significant
whether the claims adjusting service is an independent
contractor or an agent of the employer. It is the statutory and
regulatory structure and the adjuster’s participation in the
investigation and processing of claims that give rise to the
duty and not the contract between the employer and claims
adjusting service, or the law of principal and agent.

Id. at 812 n.10. Iowa does not have the same statutory and regulatory

scheme.

In any event, Colorado is one of the relatively few jurisdictions that

allow claims against third-party administrators generally, i.e., outside the

workers compensation realm. See Farr v. Transamerica Occidental Life Ins.

Co. of Cal., 699 P.2d 376, 385–86 (Ariz. Ct. App. 1984) (finding that an
 18

entity that collected premiums, handled claims according to the insurer’s

guidelines, and received a commission on premiums collected could be

sued in bad faith notwithstanding a lack of privity with the insured); Cary

v. United of Omaha Life Ins., 68 P.3d 462, 469 (Colo. 2003) (en banc), as

modified on denial of reh’g (May 19, 2003) (“When a third-party

administrator performs many of the tasks of an insurance company and

bears some of the financial risk of loss for the claim, the administrator has

a duty of good faith and fair dealing to the insured . . . .”); Wathor v. Mut.

Assur. Adm’rs, Inc., 87 P.3d 559, 563 (Okla. 2004) (“In a situation where a

plan administrator performs many of the tasks of an insurance company,

has a compensation package that is contingent on the approval or denial

of claims, and bears some of the financial risk of loss for the claims, the

administrator has a duty of good faith and fair dealing to the insured.”);

Merriman v. Am. Guarantee & Liab. Ins., 396 P.3d 351, 360 (Wash. Ct. App.

2017) (finding that an independent claims administrator can be sued for

bad faith because it is subject to the same relevant statutory duties as an

insurer); but see Meineke v. GAB Bus. Servs., Inc., 991 P.2d 267, 270–71

(Ariz. Ct. App. 1999) (“Creating a separate duty from the adjuster to the

insured would thrust the adjuster into what could be an irreconcilable

conflict between such duty and the adjuster’s contractual duty to follow

the instructions of its client, the insurer.”); Riccatone v. Colo. Choice Health

Plans, 315 P.3d 203, 207 (Colo. App. 2013) (“[A]bsent a financial incentive

to deny an insured’s claims or coerce a reduced settlement, a third party

that investigates and processes an insurance claim does not owe a duty of

good faith and fair dealing to the insured.”); Trinity Baptist Church v. Bhd.

Mut. Ins., 341 P.3d 75, 81 (Okla. 2014) (“[T]his Court will only apply the

duty of good faith and fair dealing to a third party stranger to the insurance
 19

contract when the third party acts so like an insurer that it develops a

special relationship with the insured . . . .”).

Iowa has not taken that step. And most jurisdictions to have

considered the issue have declined to recognize bad-faith claims against

third-party administrators and other entities that are not in privity with

the insured. See Lodholtz v. York Risk Servs. Grp., Inc., 778 F.3d 635, 640–

41, 641 n.11 (7th Cir. 2015) (finding that Indiana law does not impose a

duty running from a claims adjuster to an insured and that this is “the

rule adopted by the majority of American jurisdictions”); The William

Powell Co. v. Nat’l Indem. Co., 141 F. Supp. 3d 773, 782–83 (S.D. Ohio

2015) (“Ohio law most strongly points to the conclusion that, absent

privity, an insured may not sue a third-party claims administrator for

adjusting its claim in bad faith.”); McLaren v. AIG Domestic Claims, Inc.,

853 F. Supp. 2d 499, 511 (E.D. Pa. 2012) (noting that Pennsylvania does

not allow bad-faith claims against third-party administrators); Simmons v.

Cong. Life Ins., 791 So.2d 360, 365–66 (Ala. Civ. App. 1998) (affirming

summary judgment in favor of a third-party administrator on a bad-faith

claim based on lack of privity), aff’d in part, vacated in part, rev’d in part

on other grounds, Ex Parte Simmons, 791 So.2d 371 (Ala. 2000); Sanchez

v. Lindsey Morden Claims Servs., Inc., 84 Cal. Rptr. 2d 799, 803 (Ct. App.

1999) (“Our decision is consistent with the majority of cases in other

states, which hold that an independent adjuster hired by the insurer owes

no duty of care to the insured.”); Charleston Dry Cleaners & Laundry, Inc.

v. Zurich Am. Ins., 586 S.E.2d 586, 588 (S.C. 2003) (holding that “no bad

faith claim can be brought against an independent adjuster or

independent adjusting company” due to the lack of privity); Natividad v.

Alexsis, Inc., 875 S.W.2d 695, 697–98 (Tex. 1994) (finding that a claims

adjustment firm could not be sued in bad faith by the injured employee
 20

because it was not part of the special relationship among the employee,

the employer, and the insurer); Carpenter, 381 S.W.3d at 588–89

(summarizing Texas authority that forecloses actions against adjusting

and administrative services firms for bad faith because of a lack of privity);

Hamill v. Pawtucket Mut. Ins., 892 A.2d 226, 230 (Vt. 2005) (“We concur

with the majority view that public policy considerations do not favor

creating a separate duty on the part of independent adjusters that would

subject them to common-law tort actions by insureds who have suffered

economic loss as the result of allegedly mishandled claims.”).

Various policy reasons have been given for this majority rule. “An

adjuster owes a duty to the insurer who engaged him. A new duty to the

insured would conflict with that duty and interfere with its faithful

performance. This is poor policy.” Sanchez, 84 Cal. Rptr. 2d at 802. Also,

“in most cases this [new duty] would be redundant, since the insurer also

would be liable for unreasonable investigation or claims handling.” Id. We

have already noted this latter point.

In the workers compensation field, our precedent holding the

compensation carrier to a duty of good faith and fair dealing vis-à-vis the

injured worker rests upon statutes and regulations directed specifically at

the carrier. See Thornton, 897 N.W.2d at 463; McIlravy, 653 N.W.2d at

329 n.2; Gibson, 621 N.W.2d at 397; Brown, 513 N.W.2d at 764–65;

Boylan, 489 N.W.2d at 743. These statutes and regulations do not apply

to third-party administrators. Thus, if we were going to begin recognizing

bad-faith claims against insurance intermediaries, as opposed to insurers

themselves, workers compensation would be an unusual place to start.

De Dios asks us to follow the Colorado approach. That is, he urges

us to hold that when a third-party administrator “acts sufficiently like an

insurer,” that administrator can be sued for bad faith as if it were an
 21

insurer. But this area of law already has a workable bright line in our

view—a line established by the legislature. Iowa Code sections 87.1, 87.4,

and 87.11 delineate the entities that act as insurers under our workers

compensation system. 6

IV. Conclusion.

For the foregoing reasons, we have answered the certified question

as stated above. We therefore return the case to the United States District

Court for the Northern District of Iowa for further proceedings consistent

with this opinion.

CERTIFIED QUESTION ANSWERED.

All justices concur except Appel and Wiggins, JJ., who dissent.

6Citing to Bremer, De Dios argues that any entity that is “the substantial

equivalent of an insurer” should be liable in bad faith. See Bremer, 728 N.W.2d at 805.
But this language needs to be read in context. Bremer was making the point that under
the workers compensation law, a self-insured employer is the substantial equivalent of
an insurer in terms of its statutory and regulatory duties. See id. That is not true of a
third-party administrator.
 22

#18–1227, DeDios v. Indem. Ins. Co.

APPEL, Justice (dissenting).

In this case, a federal court has asked us to decide whether a third-

party administrator may be subject to liability for the tort of bad faith in

the handling of a workers’ compensation claim. The majority believes

there is no basis in Iowa law for extending bad-faith liability to third-party

administrators in the workers’ compensation setting. I disagree.

I. The Nature of the Problem: Outsourcing the Insurance
Function.

Although resisted fiercely for decades, it is now widely accepted that

first and third parties may bring bad-faith claims against insurers. These

bad-faith claims arise even though there is no privity of contract in third-

party claims and even though there is no express statutory authorization

of such claims. Bad-faith claims are particularly important in the

administration of workers’ compensation systems, where injured workers

seek prompt and efficient adjustment of claims related to workplace

injuries.

No one can seriously doubt that the potential of a bad-faith claim is

a powerful deterrent that tends to prevent an insurance company from
taking advantage of its position of power in the claims handling process.

Bad-faith claims can affect an insurance company’s bottom line, and no

insurance company employee wants to be a decision-maker on a claim

that exposes the employer to potentially substantial liability. Liability for

bad-faith claims is an essential component of the effective control of

insurance practices and protection of the insureds’ interests.

In recent years, however, insurance companies are increasingly

“outsourcing” insurance operations to third parties. Through such

“outsourcing,” the real functions of insurance may be performed by these
 23

third parties. But the third parties are not subject to insurance regulation,

and according to traditional rules related to lack of privity as well as

narrow views of agency, other courts in the past have held that insurance

intermediaries such as third-party administrators are not liable to the

insured for bad-faith claims.

Some courts and scholars have regarded this situation as simply

untenable. As noted by one insurance commentator,

with reduced incentive to discharge their duties well, the other
intermediaries frequently act negligently, recklessly, or even
in bad faith, needlessly creating claims imbroglios that could
be avoided, minimized, or streamlined.

Jeffrey W. Stempel, The “Other” Intermediaries: The Increasingly

Anachronistic Immunity of Managing General Agents and Independent

Claims Adjusters, 15 Conn. Ins. L.J. 599, 603 (2009) [hereinafter Stempel].

I think anyone who has fussed with a third-party administrator in an

insurance context will know exactly what the commentator is talking

about.

Depending on the method used to compensate the third-party
administrator, the need for accountability for bad-faith conduct may

increase. For instance, a compensation scheme that provides greater

compensation to a third-party administrator as the claims paid decrease

provides a powerful incentive to act in a fashion against the interests of

the insured.

In recent years, a body of caselaw has developed addressing the

question of whether third-party administrators should be liable to an

insured for poor claims handling. Although some cases adhere to the

traditional view affording immunity to third-party administrators and

other intermediaries, a growing body of caselaw has come to a contrary

result.
 24

As will be seen below, no Iowa case has yet directly addressed the

question of whether a third-party administrator may be held accountable

for bad-faith torts by an insured. We thus have a choice in our common

law development: should Iowa continue to adhere to traditional notions of

privity or agency notwithstanding the growth of insurance intermediaries

that have assumed many of the functions of an insurer? Or, instead,

should Iowa follow the path of the cases that hold, in light of changed

circumstances, that traditional approaches should give way to a more

modern conception of the tort of bad faith? For the reasons expressed

below, I would choose the latter course.

II. Evolving Caselaw on Third-Party Administrators’ Liability in
the Insurance Context.

A. Introduction. As Stempel has noted, the traditional view of

some courts has been that a bad-faith claim could not be brought against

a third party if there was no privity of contract. See, e.g., Gruenberg v.

Aetna Ins., 510 P.2d 1032, 1038–39 (Cal. 1973) (en banc); see also

Stempel, 15 Conn. Ins. L.J. at 615 (discussing Gruenberg). In order to

satisfy the privity requirement in bad-faith tort cases involving workers’

compensation insurance, the courts engaged in a legal fiction, namely,
that the employee should be considered a party to the contract between

the insured and the insurer.

Privity notions have also sometimes been asserted in an effort to

defeat a bad-faith claim against an intermediary insurance service

provider. The argument is that as an agent of the insurer, the agent is

liable only to its principal for potential shortcomings in the claims process.

Increasingly, however, just as privity was eliminated as an obstacle

to first- and third-party bad-faith actions against an insurer, the

traditional view that an agent of the insurer performing insurance
 25

functions for the insurer cannot be held liable for bad faith has been

challenged in a number of states. These case developments were well

summarized by Professor Jeffrey W. Stempel in his presentation to the

Association of American Law Schools Insurance Law Section’s meeting in

2008, which was devoted to the examination of the role of insurance

intermediaries. Stempel, 15 Conn. Ins. L.J. at 604–13; see also Hazel Beh

& Amanda M. Willis, Insurance Intermediaries, 15 Conn. Ins. L.J. 571,

583–84 (2009). According to Stempel, “the greater near-autonomous role

now shouldered by . . . [third-party administrators] and independent

adjusters demands that they be treated under the law on a par with the

insurers they represent.” Stempel, 15 Conn. Ins. L.J. at 603.

B. Negligence Claims Against Third-Party Insurance Providers.

The first challenge to the application of privity in the context of insurance

adjusters arose in a series of cases where insureds claimed that the

insurance adjusters were negligent in the handling of claims. As noted by

Stempel, three cases illustrate the nature of the common law development.

Stempel, 15 Conn. Ins. L.J. at 630–37.

In Continental Insurance v. Bayless and Roberts, Inc., 608 P.2d 281,

286–87 (Alaska 1980), the Alaska Supreme Court considered a case where

a subsidiary of the insurance company functioned as a claims department

and was sued for its failing to adequately investigate a claim and keep its

insured informed regarding case developments. The Bayless court held

that because of the lack of a contract with the insured, no contractual

claim could be brought. Id. at 287. The court held, however, that the

adjuster “could be held liable for negligence arising out of a breach of the

general tort duty of ordinary care.” Id.

The New Hampshire Supreme Court came to a similar conclusion in

Morvay v. Hanover Insurance, 506 A.2d 333, 334–35 (N.H. 1986). See
 26

Stempel at 15 Conn. Ins. L.J. at 632–35. In this property damage case,

an independent investigator hired to examine the cause of the fire

determined it had a suspicious origin, leading to denial of the claim. See

506 A.2d at 333–34. The district court dismissed the policyholder’s claim

against the third-party investigator on grounds of lack of privity. Id. at

334. The Morvay court reversed, noting among other things that

“investigators are under a general duty to use due care in the performance

of their work.” Id. at 334. The scope of the duty in Morvay, however, could

be limited by limitations set by the contract with the insurer. Id. at 335.

If the contract called for a $200 investigation, for example, the

investigator’s obligation was to use reasonable care in performing the work

within the limits set by the insurer and advise the insurer if the

investigator believed the scope of the investigation was too limited to come

with a reliable result. Id.

The Mississippi Supreme Court considered the question of whether

a third-party adjuster could be liable for negligence in Bass v. California

Life Insurance, 581 So. 2d 1087, 1088 (Miss. 1991). See Stempel, 15

Conn. Ins. L.J. at 635. In Bass, the Mississippi Supreme Court rejected

the contention that the adjuster could be liable for negligence to the policy

holder. 581 So. 2d at 1090. But the Mississippi Supreme Court held that

the adjuster could be held liable for gross negligence, malice, or reckless

disregard of the rights of the policyholder if the adjuster had sufficient

independent authority to rule on claims without insurer approval. Id.

These cases generally stand for the proposition that tort liability is

distinguishable from contract liability and that agency principles do not

provide complete immunity where an independent insurance service

provider has wide autonomy in the determination of claims decisions. Of
 27

course, in all these cases, the insured had no direct contract with the

insurer or with the insurer’s agent.

C. Application of Bad-Faith Tort to Third-Party Insurance

Administrators. I now turn to consider cases that deal with a narrower

proposition than negligence, namely, whether third-party administrators

may be subject to bad-faith claims.

The development of the law in Oklahoma begins with the case of

Wolf v. Prudential Insurance Co. of America, 50 F.3d 793 (10th Cir. 1995).

In Wolf, the United States Court of Appeals for the Tenth Circuit

considered whether a third-party administrator could be liable for bad-

faith administration of claims under Oklahoma law. Id. at 797. The Wolf

court noted under the facts of the case that plan administrator had

primary control over administering the plan and received a percentage of

the premiums paid for participant coverage. Id. at 797–98. The Wolf court

concluded that although the plan administrator was a stranger to the

contract between the insured and the insurer, that was not the end of the

matter. Id. at 798. According to the Wolf court, the analysis “should focus

more on the factual question of whether the administrator acts like an

insurer such that there is a ‘special relationship’ between the

administrator and insured that could give rise to a duty of good faith.” Id.

at 797.

It turns out that the Tenth Circuit’s prediction of how the Oklahoma

courts would decide the issue of potential liability of third-party

administrators was accurate. In Wathor v. Mutual Assurance

Administrators, Inc., 87 P.3d 559, 561 (Okla. 2004), the Oklahoma

Supreme Court considered a case where the employer offered employees

access to health insurance through a self-funded insurance program, the

Oklahoma County Health and Dental Plan. The Oklahoma County Health
 28

and Dental Plan contracted with Mutual Assurance Administrators (MAA)

to administer the plan. Id. The plaintiff claimed that the MAA, as third-

party administrator, breached its duty of good faith in the administration

of benefits. Id.

The Wathor court noted that the special relationship between an

insurance company and the insured gave rise to a special relationship that

created a nondelegable duty of good faith and fair dealing on the part of

the insurer. Id. at 561–62. Thus, Oklahoma County Health and Dental

Plan was potentially on the hook for bad faith. Id. at 562.

The Wathor court emphasized, however, that “the imposition of a

nondelegable duty on the insurer does not necessarily preclude an action

by an insured against a plan administrator for breach of an insurer’s duty

of good faith.” Id. The Wathor court favorably cited Wolf, 50 F.3d at 797,

for the proposition that the focus should be on the factual question of

whether the plan administrator acted sufficiently like an insurer to give

rise to a duty of good faith. 87 P.3d at 562. The Wathor court declared,

In a situation where a plan administrator performs many of
the tasks of an insurance company, has a compensation
package that is contingent on the approval or denial of claims,
and bears some of the financial risk of loss for the claims, the
administrator has a duty of good faith and fair dealing to the
insured.

Id. at 563. Notably, the holding in Wathor did not turn on substantive

support from the Oklahoma’s workers’ compensation scheme. See id.;

Stempel, 15 Conn. Ins. L.J. at 641 (discussing Wathor).

The Colorado Supreme Court considered whether a third-party

administrator could be liable to a bad-faith claim from an insured in a

health insurance context in Cary v. United of Omaha Life Insurance, 68

P.3d 462, 463 (Colo. 2003) (en banc). In Cary, the court considered a claim

against a third-party administrator working for a health insurance
 29

company. Id. The Cary court noted that it had decided several cases

holding a third-party administrator potentially liable for bad-faith claims

under workers’ compensation laws. Id. at 466–67. But the Cary court

noted that the court had also extended potential bad-faith exposure of

third-party liability claims in settings other than workers’ compensation.

Id. at 467–68. For example, in Transamerica Premier Insurance v. Brighton

School District 27J, 940 P.2d 348, 349 (Colo. 1997) (en banc), the Colorado

Supreme Court concluded that a third-party administrator could be liable

for bad faith in the context of suretyship. So, the Cary court reasoned,

the notion of bad-faith liability was not limited to workers’ compensation

setting. See 68 P.3d at 468.

The Cary court recognized that an insurer had nondelegable duties.

Id. at 466. But, the Cary court declared,

[T]he existence of this non-delegable duty does not mean that
a third-party claims administrator never has an independent
duty to investigate and process the insured’s claim in good
faith. When the actions of a defendant are similar enough to
those typically performed by an insurance company in claim
administration and disposition, we have found the existence
of a special relationship sufficient for imposition of a duty of
good faith and tort liability for its breach—even when there is
no contractual privity between the defendant and the plaintiff.

Id.

The Cary court recognized that a prior case, Scott Wetzel Services,

Inc. v. Johnson, 821 P.2d 804, 805 (Colo. 1991) (en banc), was based in

part on Colorado’s workers’ compensation statute and that those

considerations were not present in the health insurance context of Cary.

See 68 P.3d at 467. Yet, the Cary court concluded that the special

relationship between an insured and a third-party administrator was

sufficient to support a claim of bad faith. Id. at 468; see Stempel, 15 Conn.

Ins. L.J. at 644–47 (discussing Cary).
 30

A New Mexico appellate court considered the question of bad-faith

liability for a third-party administrator in Dellaira v. Farmers Insurance

Exchange, 102 P.3d 111, 112 (N.M. Ct. App. 2004). In Dellaira, an

insurance company issued an automobile policy to an insured. Id.

Another company “directed, handled, administered, and adjusted all

claims.” Id. When the claimant was dissatisfied with a property damage

claim, she sought to join the management company as a defendant,

employing a breach of good-faith theory. Id. at 113. The management

company defended on the ground that there was no contract of insurance

between the insured and the management company. Id.

According to the Dellaira court, “An entity that controls the claim

determination process may have an incentive similar to that of an

unscrupulous insurer to delay payment or coerce an insured into a

diminished settlement.” Id. at 115. Under these circumstances, the

management company “acts as an insurer and is therefore bound within

the special relationship created through the insurance contract.” Id. The

Dellaira court saw no reason why to limit bad-faith liability where “an

entity related to or pursuant to agreement with the insurer issuing the

policy has control over and makes the ultimate determination regarding

the merits of an insured’s claim.” Id. The Dellaira court cited Cary, 68

P.3d at 478, for the proposition that an entity that controls the claim

determination process may have an incentive similar to that of an

unscrupulous insurer to delay payment or deny it altogether. Id.; see

Stempel, 15 Conn. Ins. L.J. at 637 n.79.

At least one case in California supports the notion that a third-party

administrator may be liable for bad-faith torts. In Delos v. Farmers Group,

Inc., 155 Cal. Rptr. 843, 846 (Ct. App. 1979), an insured sought to recover

from a management company for bad-faith denial of a claim. The
 31

management company did not have a direct contract with the insured. Id.

at 848. But the Delos court concluded that a bad-faith claim would lie

against the management company. Id. at 849. According to the Delos

court, a contrary rule, among other things, would “deprive a plaintiff from

redress against the party primarily responsible for damages.” Id.; see

Stempel, 15 Conn. Ins. L.J. at 647 n.104.

Finally, the Arizona Supreme Court considered the question of bad-

faith liability of third-party administrators in Sparks v. Republic National

Life Insurance, 647 P.2d 1127, 1137–38 (Ariz. 1982) (en banc). In this

case, the Arizona Supreme Court considered the viability of a bad-faith

claim against a company that was not in privity with the insured but

provided insurance services. Id. The Sparks court concluded that lack of

privity was not a bar to the claim and that the parties were jointly and

severally liable for bad faith. Id. The Sparks court suggested it proceeded

on a joint venture theory, but the traditional elements of a joint venture

such as sharing profit and loss were not present in the case. 7 Id. at 1138.

A later Arizona case relied on Sparks in finding a third-party administrator

could be liable for a bad-faith claim even though there was no direct

contract with the insured. Farr v. Transamerica Occidental Life Ins. Co. of
Cal., 699 P.2d 376, 386 (Ariz. Ct. App. 1984); see Stempel, 15 Conn. Ins.

L.J. at 647 n.103.

7Similar loose language about a “joint venture” was utilized in Albert H. Wohlers
& Co. v. Bartgis, 969 P.2d 949, 959 (Nev. 1998) (per curiam). Like Sparks, the case does
not appear to apply traditional joint venture requirements. See id. As noted by Professor
Stempel, when the language is peeled back, the Nevada Supreme Court
appears to be saying that where an intermediary acting within its authority
makes a key coverage decision in place of the insurer, the intermediary
should be liable like an insurer, particularly if the intermediary has
economic incentives adverse to coverage and is involved in significant
administrative operations for the insurer.
Stempel, 15 Conn. Ins. L.J. at 643 n.94.
 32

There have, of course, been cases to the contrary. For instance, in

Natividad v. Alexsis, Inc., 875 S.W.2d 695, 696 (Tex. 1994), a narrow

majority of the Supreme Court of Texas declined to permit a claim that an

adjusting firm and claims adjuster breached the duty of good faith and fair

dealing in a workers’ compensation context. The five-member Natividad

majority stated that “the duty of good faith and fair dealing has only been

applied to protect parties who have a special relationship based on trust

or unequal bargaining power.” Id. at 697 (emphasis added). The Natividad

majority said that without a contract, there can be no special relationship

and no duty of good faith and fair dealing. Id. at 698.

Four members of the Texas Supreme Court dissented. Id. at 700

(Gammage, J., concurring in part and dissenting in part). While the

dissenters recognized there was no contract between the third-party

administrator and the insured, there was a contract between the insurer

and the third-party administrator to handle the claims of the insured’s

employees according to the terms of the insurance policy. Id. The

Natividad minority noted that “[a] special relationship is one ‘marked by

shared trust or an imbalance in bargaining power.’ ” Id. at 701 (quoting

Fed. Deposit Ins. Corp. v. Coleman, 795 S.W.2d 706, 708–09 (Tex. 1990)).

The time for measuring the imbalance giving rise to a duty of good faith,

according to the Natividad minority, was not at the time of contract

formation but at the time of alleged denial or delay in payment. Id. at 700–

01.

The Natividad minority noted prior caselaw where the Texas

Supreme Court had noted that “ ‘[a]n insurance company has exclusive

control over the evaluation, processing and denial of claims’ and can use

that control in such a way that would subject the insured to ‘economic

calamity.’ ” Id. at 701 (alteration in original) (quoting Aranda v. Ins. Co. of
 33

N. Am., 748 S.W.2d 210, 212 (Tex. 1988), overruled on other grounds by

Tex. Mut. Ins. v. Ruttiger, 381 S.W.3d 430, 433 (Tex. 2012); Arnold v. Nat’l

Cty. Mut. Fire Ins., 725 S.W.2d 165, 167 (Tex. 1987)). Here, the Natividad

minority observed, the exclusive control that is so threatening is held not

by the carrier, but by its agent. Id. The Natividad minority concluded that

the reasoning for recognizing the duty to the covered employee’s carrier

extends as well to the carrier’s agent. Id.

Another leading case cited by opponents of application of a bad-faith

tort to insurance intermediaries is Sanchez v. Lindsey Morden Claims

Services, Inc., 84 Cal. Rptr. 2d 799 (Ct. App. 1999). In Sanchez, the failure

of an independent adjuster to timely pay a valid $15,000 claim related to

repair of an urgently needed dryer ordered by a customer of the insured

led to a judgment against the insured for $1.325 million. Id. at 800.

Remarkably, this case does not cite the usual privity and limitations of

agency theories but instead fashions its approach based upon perceived

public policy. Id. at 801–03; see Stempel, 15 Conn. Ins. L.J. at 657. The

Sanchez court reasoned that if auditors in California have immunity, then

third-party administrators should have immunity. Id. at 801–02. The

Sanchez court warned that a third-party intermediary could face liability

in excess of that faced by the principal. Id. at 802. See generally Stempel,

15 Conn. Ins. L.J. at 656–75 (discussing Sanchez and potential mischief

of intermediary immunity).

III. Iowa Caselaw on Bad-Faith Torts.

There have been a number of Iowa cases dealing with the question

of bad-faith torts in the insurance context. A review of these cases

demonstrates that the issue before us is one of first impression and that

our precedent does not prevent us from choosing to join the evolving
 34

caselaw extending potential liability, at least under some circumstances,

to third-party administrators.

The first case of interest involving a first party bad-faith claim is

Dolan v. Aid Insurance, 431 N.W.2d 790, 790 (Iowa 1988) (en banc). In

this case, we recognized that an insured could bring an action in tort

against an insurer for bad-faith conduct related to a claim made by its

insured. Id. In a brief opinion, we distilled the arguments for and against

the first party bad-faith tort as posing the question of

whether the contractual relationship between the insurer and
insured is sufficiently special to warrant providing the insured
with additional protection and, relatedly, by determining
whether the insured’s remedies for the insurer’s wrongful
conduct are adequate without resort to the tort of bad faith.

Id. at 792. We noted in prior cases we were not required “to closely

scrutinize the contractual relationship between the insurer and insured,

or to evaluate the adequacy of the insured’s remedies were the insurer to

engage in wrongful conduct.” Id. at 793.

We then went on to state that we were “convinced traditional

damages for breach of contract will not always adequately compensate an

insured for an insurer’s bad faith conduct.” Id. at 794. We then concluded
that a bad-faith tort in the first-party setting was appropriate “to provide

the insured an adequate remedy for an insurer’s wrongful conduct.” Id.

We added that we “also” thought recognition of the tort was justified by

the contractual relationship between the insurer and insured, noting that

contracts of insurance are contracts of adhesion. Id.

The next case of interest is Boylan v. American Motorists Insurance,

489 N.W.2d 742, 742 (Iowa 1992). The question in this case was whether

a first party tort of bad faith applied in the workers’ compensation setting.

Id. We noted that Iowa’s workers’ compensation statute imposes an
 35

affirmative obligation to furnish medical and hospital supplies to an

injured employee and that administrative regulations place the obligation

on the insurer. Id. at 743. We also concluded that the penalty provisions

of the workers’ compensation statute were not designed by the legislature

to provide an exclusive remedy for wrongful conduct by carriers with

respect to the administration of workers’ compensation benefit. Id. at 744.

In finding that the tort of bad faith did apply, we cited a number of

“well-reasoned decisions” from other courts. Id. at 743. Some of the well-

reasoned decisions found first-party bad faith supported not by the

language of the workers’ compensation statute but by independent duties

owed to the claimants. See id. For instance, in one of the well-reasoned

decisions, Kaluza v. Home Insurance, 403 N.W.2d 230, 236 (Minn. 1987)

(en banc), the Minnesota Supreme Court found that the claim was an

“independent tort” that was “not within the scope of the workers’

compensation system.” In another well-reasoned case, the Montana

Supreme Court emphasized that “courts have upheld the right to bring an

action for independent intentional torts because the tortious conduct,

which gives rise to the action, does not arise out of the original employment

relationship.” Hayes v. Aetna Fire Underwriters, 609 P.2d 257, 261 (Mont.

1980). In the well-reasoned case of Coleman v. American Universal

Insurance, 273 N.W.2d 220, 223 (Wis. 1979), superseded by statute as

stated in Aslakson v. Gallagher Bassett Services, Inc., 729 N.W.2d 712, 725

(Wis. 2007), the Wisconsin Supreme Court approved a bad-faith claim,

noting that when the “claimed injury was distinct in time and place from

the original on-the-job physical injury which was subject to the

Compensation Act. . . . The Act does not cover the alleged injury.” Thus,

three of the well-reasoned cases endorsed by the Boylan court did not rely

on statutory provisions in a workers’ compensation statute to support a
 36

bad-faith claim. Given the Boylan court’s warm citation to these cases,

there is no reason to think that statutory support is necessary for a valid

bad-faith claim in the workers’ compensation setting.

The next case in the line of authority is Reedy v. White Consolidated

Industries, Inc., 503 N.W.2d 601, 602 (Iowa 1993). In this case, we held

that the tort of bad faith applied where the employer was self-insured. Id.

at 602–03. We noted that in order to be self-insured under the Iowa

workers’ compensation act, the employer has to assume the status of an

insurer. Id. at 603. For the purpose of bad-faith tort claims, there was no

difference between an employer acting as an insurer and an employer’s

insurance company. Id. Although unstated in Reedy, the reason for the

equivalence is that when an entity assumes the functions of an insurer, it

has tremendous power over the claims of the insured regardless of its legal

classification. See id. The Reedy holding embraces a functional rather

than a formalistic approach to the tort of bad faith. See id. at 602–03.

The final Iowa bad faith case is Bremer v. Wallace, 728 N.W.2d 803,

804 (Iowa 2007). In Bremer, we considered a case where a workers’

compensation claimant asserted a bad-faith claim against an employer

who did not have a workers’ compensation carrier and was not self-insured

under Iowa’s workers’ compensation statute. Id. at 803–04. Here, the

employer was not acting as an insurance company in evaluating and

adjusting claims. Id. at 805–06. It was a naked entity with no insurance

dimension. Id. The company plainly was not acting as the functional

equivalent of an insurer, and for that reason, the tort of bad faith was not

available. Id.

In Bremer, we took a functional approach. Id. We explained that in

Boylan we recognized the tort of bad faith because the self-insured

employer was “the substantial equivalent of an insurer.” Id. at 805. Yet
 37

in Bremer the adhesive nature of an insurance contract was not involved.

Id. at 806. Further, we observed that the claimant could have foregone

workers’ compensation entirely and brought an ordinary civil action for

damages against the employer. Id.

IV. Discussion.

In order to resolve the question before us, we must consider whether

the notion of privity should be a bar to bad-faith claims against third-party

administrators. We must also determine whether bad-faith claims against

a third-party administrator can arise only expressly or by implication from

a statute. If the answer to these preliminary questions is no, we must then

determine whether the tort of bad faith applies to third-party

administrators, and if so, in what settings.

It is clear to me that the question of privity is no bar to the bad-faith

claim asserted in this case. In the workers’ compensation context, the

claim that privity exists between an employee and the employer’s

insurance carrier has always been a legal fiction. What is important in a

bad-faith claim is the functional relationships that arise from insurance

relationships, not privity of contract. See, e.g., Cary, 68 P.3d at 466–68;

Wolf, 50 F.3d at 797–98; Wathor, 87 P.3d at 562–63; Dellaira, 102 P.3d at

115. Where third-party intermediaries have the power to affect the

insurance interests of the claimant, they should be answerable in tort for

their bad-faith actions.

We have seen this movie before. The “ ‘citadel’ of privity” was

vigorously defended in products liability cases even though the formal

structure of the law did not comport with reality. Stempel, 15 Conn. Ins.

L.J. at 605. In MacPherson v. Buick Motor Co., 111 N.E. 1050, 1051–55

(N.Y. 1916), Justice Cardozo cut through the privity doctrine to allow

injured parties to directly attack the underlying tortfeasor in a product
 38

liability case, namely, the product manufacturer. Cardozo teaches us to

see through the formalism of privity and address the realities on the

ground to establish direct claims against those responsible for foreseeable

injuries to innocent third parties. See id.

Because it is based on power relationships and the foreseeability of

harm to the insureds, a claim of bad faith sounds in tort, not in contract.

There are ample reasons to impose tort liability for bad-faith performance

by a third-party insurance administrator. The power imbalance is just as

great, and perhaps greater, as between an insurance company and the

insured. Surely it is reasonably foreseeable that the insured will suffer

potentially significant injury as a result of poor handling of a claim. If the

third-party administrator performs the critical functions of an insurer—

adjustment of claims with a financial incentive to delay or deny

payments—a bad-faith claim should lie regardless of a web of formal

documentation attempting to create artificial barriers between the insured

and the people actually deciding their fate. It is “the logic of tort law,” not

contract, that gives rise to the bad-faith tort against insurance

intermediaries. Stempel, 15 Conn. Ins. L.J. at 695.

An insurance intermediary “in essence stepped into the shoes of the

insurer for these claims and thus logically should be held to the same legal

standards governing the insurer.” Id. at 624. Further, there is ample

authority to hold the agent liable for its torts. The Restatement (Third) of

Agency section 7.01 (2006) provides,

An agent is subject to liability to a third party harmed by the
agent’s tortious conduct. Unless an applicable statute
provides otherwise, an actor remains subject to liability
although the actor acts as an agent or an employee, with
actual or apparent authority, or within the scope of
employment.
 39

It seems to me there is ample reason to recognize a bad-faith tort where

an insurance intermediary has the broad discretion to handle an

insurance claim, where the harm to the insured from a bad-faith treatment

of the claim is foreseeable, and where the intermediary acts with Professor

Stempel’s list of bad-faith practices: misrepresentation, dishonesty, deceit,

gross negligence, recklessness, or sharp practices. Stempel, 15 Conn. Ins.

L.J. at 715.

Another factor that drives me toward the conclusion that the tort of

bad faith liability for insurance intermediaries should be recognized is the

perverse incentives that can arise from the relationship between the

insurer and the intermediary. The insurance company hires an

intermediary to save money, of course. The intermediary will desire to

maintain or strengthen its business, and that can be done by limiting

claims payouts. Further, in order to be competitive, the insurance

intermediary may resist proper claims handling and instead choose to

arbitrarily limit its staff, thereby encouraging shortcuts in the claims

process. Further, through use of a third-party intermediary, an insurer

may maintain a warm public relations posture while intentionally

employing a third-party administrator with the expectation that its agent

will limit payouts through whatever means the agent might consider

effective. These risks are further enhanced when compensation

arrangements contain incentives that increase payouts as claims liability

lessens. The interests of the insured do not figure into the financial

equation, or at least not in a positive way.

There is nothing in our caselaw that precludes recognizing a bad-

faith tort where an insurance intermediary is the functional equivalent of

the insurer. None of our caselaw addresses the issue, and the mere fact

that a tort was found under the facts presented in Dolan, Boylan, or Reedy
 40

does not preclude the finding of a bad-faith tort in a somewhat different

context. We employed a functional approach in Bremer, where we declared

that because a naked employer was not “the substantial equivalent of an

insurer,” the bad-faith tort would not lie. 728 N.W.2d at 805. The

converse should also be true, namely, that where a third-party

administrator is the substantial equivalent of an insurer, a bad-faith tort

should lie. See 1 Jeffrey W. Stempel, Stempel on Insurance Contracts

§ 10.02[A], at 10–17 (3d ed. 2006) (“The key determinant is whether the

third party administrator is both acting like an insurer and subject to the

danger that it will, like an insurer acting in bad faith, place its own

economic interest ahead of the interests of the policyholder.”), as cited in

Robertson Stephens, Inc. v. Chubb Corp., 473 F. Supp. 2d 265, 275 (D.R.I.

2007) (adopting functional approach in predicting Rhode Island law).

And, I do not think our caselaw somehow limits potential third-party

claims to cases where obligations arise under workers’ compensation

statutes. In Boylan, the court cited affirmative duties under the statute of

employers and insurers to provide medical benefits. 489 N.W.2d at 743.

But the reference does not mean that bad-faith torts arise only when

statutes support them. Indeed, the first party bad-faith claim in Dolan

was not based on statutes. 431 N.W.2d at 794. Further, the Boylan

court’s citation of “well-reasoned cases” where bad-faith claims were found

independent of the workers’ compensation statutes cuts dead against

reading some kind of statutory requirement into Boylan. 489 N.W.2d at

743. We should not assume that the references to “well-reasoned cases”

in Boylan were that negligent. In any event, it has been the duty of

common law courts to develop the scope of tort law and apply it in new

contexts as circumstances change, not fossilize it as if the goal were

placement in a legal history museum.
 41

The majority stresses that an insurance company cannot delegate

its duty to act in good faith and that the insurance company remains liable

for the bad-faith actions of its agent. But tort law functions better if the

person directly responsible for bad-faith acts is financial responsible for

resulting damage.

It is consistent with encouraging responsible conduct by
individuals to impose individual liability on an agent for the
agent’s torts although the agent’s conduct may also subject
the principal to liability. Moreover, an individual agent, when
liable to a third party, may be available as a source of recovery
when the principal on whose behalf the agent acted is not.

Restatement (Third) of Agency § 7.01 cmt. b (2006). As noted by Professor

Stempel, “It is discordant for the law to impose substantial obligations and

potential liability on insurers as principals but then to simultaneously

prohibit actions against their agents, agents who often have independent,

almost unsupervised authority over the claims process.” Stempel, 15

Conn. Ins. L.J. at 705. Further, a fact finder might find the degree of

culpability for punitive damages to be greater against a third-party

administrator who directly caused the problem rather than for an

insurance carrier who is simply inattentive to the claims adjustment

process performed by its agent.

I recognize, of course, that there is tired authority to the contrary.

Much of it reflects older law that simply repeats legal formulas. Some of

it seems oblivious to the basic tort principle that persons who are closest

to wrongful conduct should be accountable to the wronged party for

maximum deterrence.

Among the weakest cases rejecting a bad faith claim against third-

party administrators is Sanchez. The Sanchez court compared liability of

insurance intermediaries to auditors, 84 Cal. Rptr. 2d at 801–02, but the

analogy is off the mark. Here, we are not dealing with endless liability to
 42

unknown persons, but only liability to claimants or policy holders who are

well known to the insurance intermediary.

Further, the claim of conflicting loyalties has been subject to

criticism. The Sanchez court stated that since “[a]n adjuster owes a duty

to the insurer who engaged him[,] [a] new duty to the insured would

conflict with that duty, and interfere with its faithful performance. This is

poor policy.” Id. at 802. According to Professor Stempel:

Actually, it is poor analysis by the court. The claims adjuster
represents the insurer. By law, the insurer cannot give regard
only to its own interests; it must not only consider the
interests of the policyholder but give them at least “equal”
consideration, a legal rule internalized in the custom and
practice of insurance (where adjusters frequently describe
their role as being required to “look for coverage” rather than
“look for reasons to deny coverage”). The adjuster, like the
insurer, therefore already has obligations to the policyholder.
By immunizing the adjuster from a damages action, the
Sanchez Court merely deprived the policyholder of a legal right
that it already possessed, i.e., a right to have the adjuster act
in the same manner as the insurer is required to act.

Stempel, 15 Conn. Ins. L.J. at 665–66.

In conclusion, one of the features of life in the 21st century is the
increased bureaucratization and compartmentalization of business

practices that, if accepted as legal barriers, tend to prevent direct

accountability for wrongful conduct. Layers upon layers of bureaucracy

impair responsiveness. In the workers’ compensation arena, the employer

hires an insurer and now the insurer in turn may hire a third-party

administrator.

But where there is no direct accountability, service may deteriorate.

We all know the potential scenario. The phone rings and no one answers.

One is put on hold for hours. The right hand knows not what the left hand

is doing. No one is familiar with the file. A person with decision-making

authority cannot be found. Delay. Delay. Delay. This type of behavior
 43

could lead to bad-faith exposure of an insurance company. The exact

same type of behavior should lead to bad-faith exposure when a third-

party administrator assumes the functions of the insurer.

I can think of no other area where it is more critical to have direct

accountability than in insurance—where issues of extraordinary

importance and urgency to the insured are increasingly handled by

faceless and insulated third-party bureaucracies. To me, one of the

essential functions of our tort system is to ensure that parties responsible

for the foreseeable injuries that they cause through their misconduct,

particularly those done in bad faith, are held directly accountable.

V. Conclusion.

For the above reasons, we should recognize a potential bad-faith

claim against third-party administrators in the insurance context when

they, in essence, undertake the essential functions of an insurance

company as alleged in this case. This ordinarily requires a fact-based

determination. I would so answer the certified question in this case.

Wiggins, J., joins this dissent.