The South Dakota Supreme Court recently ruled in favor of an insurance company, marking an important and significant clarification in bad faith litigation in workers’ compensation cases.  A recent decision by the South Dakota Supreme Court in Blanchard v. Mid-Century Ins. Co., 2019 S.D. 54, refused to extend the scope of bad faith liability for insurance companies to actions surrounding procedural errors made by defense counsel after litigation was commenced. This case clarifies the facts that may be presented as evidence of bad faith, offering insight into the extent an insurer can be held responsible for attorney conduct after litigation has commenced.

The plaintiff, Christina Blanchard (“Blanchard”), developed back pain at work in 2010 and filed a workers’ compensation claim. Blanchard was paid workers’ compensation benefits by Mid-Century Insurance until further benefit payments were denied in 2011. As a result of the denial, Blanchard filed a Petition for workers’ compensation benefits with the Department of Labor. After a hearing in 2014, the Department awarded Blanchard benefits, based in part on the opinions of Blanchard’s medical expert.

The facts establish that when counsel for Mid-Century received the unfavorable decision, he advised Mid-Century that while the Department’s decision to adopt one medical expert’s testimony over another was not likely to be overturned, there were deficiencies with the opposing expert’s opinion that counsel believed justified an appeal. Based on this advice, Mid-Century instructed its attorney to proceed with the appeal.

After the Department rendered its decision, but before issuing a final order, the Department instructed the parties to submit proposed findings of fact and conclusions of law. Counsel for Mid-Century submitted proposed findings and conclusions that comported with the Department’s decision, thereby agreeing that Blanchard’s injury was compensable. Additionally, Counsel for Mid-Century failed to object to Blanchard’s proposed findings of fact and conclusions of law. After receiving each parties’ proposed findings and conclusions, the Department entered its final order granting benefits. Mid-Century appealed. Within one month of filing the appeal, counsel for Mid-Century was advised that his proposed findings of fact and conclusions of law had failed to preserve any issues for appeal. Counsel for Mid-Century did not share this information with his client nor engage in any discussion with his client. Blanchard moved to dismiss the appeal for Mid-Century’s failure to preserve any issue for appeal and the motion was granted.

Blanchard later filed a bad faith claim, arguing that Mid-Century pursued a “baseless and meritless appeal in an attempt delay or avoid payment of that claim or settle that claim in an amount less than that indisputably due to [Blanchard]”. Agreeing with the Second Judicial Circuit, the Court, recognized that, “[t]he essence of Blanchard’s bad faith claim arose after Mid-Century decided to appeal the Department’s decision.” For instance, Blanchard argued that the actions taken by Mid-Century’s attorney after deciding to appeal the case – such as opposing Blanchard’s motion to dismiss and attempting to engage in settlement negotiations prior to dismissal – was done in bad faith. Blanchard went on to argue that the findings of fact and conclusions of law drafted by Mid-Century’s attorney, which failed to preserve any issue for appeal, was evidence that Mid-Century knew it had no basis to appeal and that the appeal was frivolous.

In considering these arguments, the Court explained that the litigation conduct rule prevents a court from considering evidence of an insurer’s conduct in subsequent litigation as evidence of bad faith. In this case, the Court determined that the entirety of Blanchard’s evidence in support of her claim for bad faith was litigation conduct. The conduct with which Blanchard took issue occurred after Mid-Century decided to appeal the Department’s decision. The Court’s opinion explains that bad faith is determined at the time a claim is denied, and thus, litigation conduct occurring after the denial is not relevant to assess an insurer’s alleged bad faith. On a general level, the Court emphasized that “it would be a rare case where the insurer’s decisions and conduct in the underlying litigation would be admissible in a first-party bad faith claim.”

Blanchard also argued that an insurer may have a duty to reassess a decision denying coverage based upon subsequently obtained information. However, the Court remarked that case law addressing this issue does not discuss whether this duty exists after litigation commences and the Court was unwilling to extend the insurer’s liability to that extent. Blanchard further argued that Mid-Century’s attorney’s conduct should be imputed onto Mid-Century for purposes of bad faith. However, the Court explained their refusal to add a layer of liability to bad faith in South Dakota, providing that an insurer’s duty of good faith does not require an insurance carrier to reassess a claim because of procedural errors by the carrier’s defense counsel conceding the validity of the claim during the litigation.

In sum, the evidence Blanchard sought to introduce in support of her claims of bad faith against Mid-Century was insufficient.  The Supreme Court acknowledged that to rule otherwise would overly extend the scope of bad faith and expose insurers to liability for procedural errors by their defense counsel, requiring insurers to become legal experts capable of recognizing procedural missteps by counsel during the litigation.

Blanchard v. Mid-Century is a unanimous refusal by the Court to expand bad faith liability with respect to an insurer’s liability for its attorney’s procedural errors and post-litigation conduct, further defining the scope of bad faith in South Dakota.