#27771-r-DG
2016 S.D. 70
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
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JAMES “JAKE” MORDHORST, Appellant,
v.
DAKOTA TRUCK UNDERWRITERS
and RISK ADMINISTRATION SERVICES, Appellees.
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APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA
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THE HONORABLE JANE WIPF PFEIFLE
Judge
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MICHAEL J. SIMPSON of
Julius & Simpson, LLP
Rapid City, South Dakota
and
MICHAEL ABOUREZK of
Abourezk Law Firm, PC
Rapid City, South Dakota Attorneys for appellant.
WILLIAM C. GARRY
MELISSA R. JELEN of
Cadwell, Sanford, Deibert & Garry LLP
Sioux Falls, South Dakota Attorneys for appellees.
****
CONSIDERED ON BRIEFS
ON AUGUST 29, 2016
OPINION FILED 09/28/16
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GILBERTSON, Chief Justice
[¶1.] James “Jake” Mordhorst sued Dakota Truck Underwriters and Risk
Administration Services (collectively, “Insurers”), alleging they denied him workers’
compensation benefits in bad faith. Insurers moved to dismiss, arguing Mordhorst
failed to state a claim upon which relief could be granted. The circuit court granted
Insurers’ motion, and Mordhorst appeals. We reverse and remand for further
proceedings.
Facts and Procedural History
[¶2.] Twenty-year-old Mordhorst worked for Fischer Furniture in Rapid
City. While making a delivery on November 10, 2011, a 275-pound sofa fell off the
back of a delivery truck and struck Mordhorst on the head and shoulders. The force
of the impact knocked Mordhorst to the ground, temporarily rendering him
unconscious.
[¶3.] Mordhorst sought medical treatment the following day. According to
Mordhorst’s amended complaint in this case, two physicians and multiple physical
therapists documented his resulting condition. Mordhorst reported pain in his back
and neck, and an MRI revealed a herniated disk in his back. His medical providers
also noted that he presented with a “head forward” posture, which indicates an
attempt to compensate for back pain.
[¶4.] On October 11, 2012, at Insurers’ request, Mordhorst met with Dr.
Nolan Segal, an independent medical examiner (“IME”). Dr. Segal concluded that
the only injury Mordhorst sustained from the falling sofa was a “strain” that
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resolved 18 days after the accident. According to Dr. Segal’s report, Mordhorst’s
subjective complaints were not supported by objective findings.
[¶5.] On October 16, 2012, subsequent to Dr. Segal’s report, Insurers
terminated all workers’ compensation benefits. On March 14, 2014, Mordhorst
requested a hearing before the South Dakota Department of Labor in order to
restore payments for medical treatment and medications. Insurers denied
responsibility for coverage, but the Department disagreed. On May 8, 2015, the
Department ordered Insurers to pay all past medical bills and interest as well as
future medical expenses. Insurers did not appeal the Department’s decision.
[¶6.] Mordhorst subsequently filed an action in circuit court seeking
punitive damages for what he alleges was a bad-faith denial of workers’
compensation benefits. Insurers moved for dismissal, arguing Mordhorst failed to
state a cause of action upon which relief could be granted, and the circuit court
granted the motion.
[¶7.] Mordhorst appeals, raising one issue: Whether the circuit court erred
by granting Insurers’ motion to dismiss.
Standard of Review
[¶8.] “A motion to dismiss under SDCL 15-6-12(b) tests the legal sufficiency
of the pleading, not the facts which support it.” Nygaard v. Sioux Valley Hosps. &
Health Sys., 2007 S.D. 34, ¶ 9, 731 N.W.2d 184, 190 (quoting Guthmiller v. Deloitte
& Touche, LLP, 2005 S.D. 77, ¶ 4, 699 N.W.2d 493, 496). Therefore, we review a
circuit court’s decision to grant such a motion de novo. Id. “For purposes of the
pleading, the court must treat as true all facts properly [pleaded] in the complaint
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and resolve all doubts in favor of the pleader.” Id. (quoting Guthmiller, 2005 S.D.
77, ¶ 4, 699 N.W.2d at 496). However, “the court is free to ignore legal conclusions,
unsupported conclusions, unwarranted inferences[,] and sweeping legal conclusions
cast in the form of factual allegations.” Id. (quoting Wiles v. Capitol Indem. Corp.,
280 F.3d 868, 870 (8th Cir. 2002)).
Analysis and Decision
[¶9.] The primary question in this case is whether Mordhorst stated a claim
alleging the necessary elements of a bad-faith denial of workers’ compensation
benefits. Because “[t]he relationship between a workers’ compensation claimant
and an insurer is adversarial and not contractual[,]” Hein v. Acuity, 2007 S.D. 40,
¶ 18, 731 N.W.2d 231, 237, an action alleging bad faith requires more than an
allegation of wrongful conduct, id. ¶ 16, 731 N.W.2d at 237. In South Dakota, such
a claimant must prove two things to be successful: (1) “an absence of a reasonable
basis for denial of policy benefits[,]” and (2) “the [insurer’s] knowledge . . . of [the
lack of] a reasonable basis for denial.” Id. ¶ 18, 731 N.W.2d at 237 (emphasis
omitted) (quoting Champion v. U.S. Fid. & Guar. Co., 399 N.W.2d 320, 324 (S.D.
1987)). 1 “[K]nowledge of the lack of a reasonable basis may be inferred and
1. Hein and Champion omit the words the lack of from the language of the
second prong. Thus, as stated in Hein and Champion, a claimant must prove
the “absence of a reasonable basis for denial of policy benefits” and “the
insurance carrier’s knowledge . . . of a reasonable basis for denial.” Hein,
2007 S.D. 40, ¶ 14, 731 N.W.2d at 236 (quoting Champion, 399 N.W.2d
at 324). Literally read, however, these two prongs cannot be proved
simultaneously—if no reasonable basis for denial exists, it is impossible to
prove knowledge of a reasonable basis for denial (and vice versa). Hein and
Champion took this language directly from the Colorado Supreme Court’s
decision Travelers Insurance Co. v. Savio, 706 P.2d 1258, 1275 (Colo. 1985)
(continued . . .)
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imputed to an insurance company where there is a . . . reckless indifference to facts
or to proofs submitted by the insured.” Champion, 399 N.W.2d at 324 (quoting
Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1275 (Colo. 1985) (en banc)).
[¶10.] In this case, the circuit court granted the motion to dismiss because it
concluded “that the insurance company did have a reasonable basis for denial of
policy benefits and that the reliance upon a qualified physician who otherwise met
the requirements of the statute was present[.]” This conclusion, however, overlooks
the procedural posture of this case. This is an appeal from a dismissal under
SDCL 15-6-12(b)(5) for failure to state a claim upon which relief can be granted.
Whether the circuit court was convinced that Insurers’ basis for denying
Mordhorst’s claim was reasonable is immaterial. Rather, the question before the
circuit court is the same as the question on appeal—whether Mordhorst asserted
facts that if true, establish the necessary elements of a bad-faith action. See
Nygaard, 2007 S.D. 34, ¶ 9, 731 N.W.2d at 190. We think that he did.
____________________
(. . . continued)
(en banc). Savio, in turn, directly quoted the Wisconsin Supreme Court’s
decision Anderson v. Continental Insurance Co., 271 N.W.2d 368, 377 (Wis.
1978). However, Anderson states the rule both with and without the words
the lack of. Compare id. at 376 (“[A] plaintiff must show . . . the defendant’s
knowledge . . . of the lack of a reasonable basis for denying the claim.”
(emphasis added)), with id. at 377 (“[W]e have stated above that, for proof of
bad faith, there must be . . . knowledge . . . of a reasonable basis for a
denial . . . .” (emphasis added)). Because it is clear that the Wisconsin
Supreme Court’s later phrasing (omitting the words the lack of) was simply
intended to be a restatement of its earlier phrasing (including the words the
lack of), and given the logical impossibility of the later phrasing, we take this
opportunity to correct our own rule statement going forward.
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[¶11.] The only basis for denial advanced by Insurers is their reliance on Dr.
Segal’s report. In his complaint, Mordhorst attacked the reasonableness of the
report:
14. The Segal report was transparently biased. For example,
Segal’s report stated that Plaintiff’s diagnosis was “subjective
complaints of diffuse myofascial pain without objective findings
to substantiate his numerous subjective complaints or
limitations.” In fact, medical records showed numerous
objective findings consistent with Plaintiff’s pain complaints,
including an MRI showing a central disk protrusion at T7-T8,
muscle spasm, and a head forward posture to compensate for the
pain, as noted by Dr. Dietrich, Dr. Strain and the physical
therapists who treated Mordhorst.
15. The Segal report was also transparently biased because it
ignored Plaintiff’s pain complaints which were consistently
present after November 28, 2011, and in the same location of the
thoracic disk herniation and documented in Plaintiff’s medical
records.
This narrative stands in stark contrast to Dr. Segal’s conclusion that Mordhorst
merely suffered an 18-day “strain.” If Mordhorst’s assertion that his medical
records exhibited numerous, objective findings to substantiate his complaint is true,
then a jury could easily conclude that Dr. Segal’s report did not provide a
reasonable basis for denying Mordhorst’s claim.
[¶12.] Even so, the circuit court rejected the notion that it is ever
unreasonable for an insurer to act in accordance with an opinion given by an IME.
According to the court, Insurers were not required “to second guess a physician who
is qualified to offer an opinion[.]” In essence, the court held that an insurer’s
reliance on an IME’s report to deny workers’ compensation benefits is per se
reasonable. In reaching this conclusion, the court relied on SDCL 62-7-1, which
permits an employer to require an employee–claimant to submit “for examination to
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a duly qualified medical practitioner or surgeon selected by the employer[.]”
However, on its face, SDCL 62-7-1 has no direct applicability to the question in this
case. 2 Moreover, juries are routinely called upon to evaluate the opinions of
experts—including medical practitioners—and to weigh those opinions against
countervailing evidence. See Magner v. Brinkman, 2016 S.D. 50, ¶ 16, 883 N.W.2d
74, 82 (“Fact finders are free to reasonably accept or reject all, part, or none of an
expert’s opinion.” (quoting O’Neill v. O’Neill, 2016 S.D. 15, ¶ 17, 876 N.W.2d 486,
494)). We see no reason to conclude that a workers’ compensation insurer—whose
chosen business deals in such matters—is incapable of the same. Therefore, an
insurer’s basis for denial is not necessarily reasonable simply because the insurer
relies on the opinion of a medical practitioner.
[¶13.] Regarding the second prong of a bad-faith action—i.e., whether
Insurers knew that there was a lack of a reasonable basis for denying Mordhorst’s
claim—the circuit court focused solely on Mordhorst’s claim that Dr. Segal’s report
was biased and that Insurers knew it would be biased. However, while Mordhorst’s
2. SDCL 62-7-1 states in full:
An employee entitled to receive disability payments shall, if
requested by the employer, submit himself or herself at the
expense of the employer for examination to a duly qualified
medical practitioner or surgeon selected by the employer, at a
time and place reasonably convenient for the employee, as soon
as practicable after the injury, and also one week after the first
examination, and thereafter at intervals not oftener than once
every four weeks. The examination shall be for the purpose of
determining the nature, extent, and probable duration of the
injury received by the employee, and for the purpose of
ascertaining the amount of compensation which may be due the
employee from time to time for disability according to the
provisions of this title.
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complaint does allege Dr. Segal’s report was biased, that is not the only assertion
relevant to the second prong. In his complaint, Mordhorst asserted:
16. If Defendants had merely discussed the discrepancies in Dr.
Segal’s report with Dr. Segal, it would have revealed that his
opinions were unsupportable and contradicted by the medical
records. This is evidenced by the fact that Dr. Segal abandoned
his opinion that the work injury only caused an 18 day
strain/sprain when asked questions in his deposition on cross-
examination.
(Emphasis added.) This assertion, along with those quoted above in paragraph 11,
necessarily implies that Insurers were aware of Mordhorst’s medical records
including the MRI that revealed he suffered from a herniated disk. Accepting this
fact as true, a jury could also conclude that Insurers recklessly disregarded this
evidence in favor of Dr. Segal’s contrary report. See Champion, 399 N.W.2d at 324.
Thus, treating Mordhorst’s assertions as true and viewing them “in the light most
favorable to the plaintiff,” Wojewski v. Rapid City Reg’l Hosp., Inc., 2007 S.D. 33,
¶ 11, 730 N.W.2d 626, 631 (quoting Osloond v. Farrier, 2003 S.D. 28, ¶ 4,
659 N.W.2d 20, 22 (per curiam)), he stated a claim upon which relief can be granted.
Conclusion
[¶14.] It is not necessary to determine whether Dr. Segal’s report was lacking
or whether Insurers’ reliance thereon was actually unreasonable. Because the
present case is an appeal from a Rule 12(b)(5) motion for dismissal, such issues are
not properly before us. We decide only that Mordhorst asserted facts that if true,
state a claim for bad-faith denial of a workers’ compensation claim and that
Insurers’ reliance on Dr. Segal’s report to deny benefits was not per se reasonable.
Therefore, the circuit court erred by granting Insurers’ motion to dismiss.
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[¶15.] We reverse and remand for further proceedings.
[¶16.] ZINTER, SEVERSON, WILBUR, and KERN, Justices, concur.
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