The South Dakota Supreme Court recently decided Fern Johnson v. United Parcel Service and Liberty Mutual Fire Insurance, 2020 S.D. 39, holding that SDCL 62-7-33 is the exclusive means by which a final decision from the Department of Labor (the “Department”) may be modified. Previously, SDCL 62-7-1 and SDCL 62-1-1(7) were routinely used to revisit and, if appropriate, deny open medical benefits when determining if the work injury remained a major contributing cause of the condition and need for treatment. However, the Court in Fern Johnson determined that this procedure is not appropriate. In a case where benefits remain open following a final decision from the Department, the Court held that ongoing workers’ compensation benefits should not be denied based on additional medical evidence without first obtaining approval from the Department. The Court held that a Petition pursuant to SDCL 62-7-33 should be filed with the Department to determine whether the work injury remains a major contributing cause of the condition and need for treatment and cannot be denied without such a finding.

Johnson prevailed at a workers’ compensation hearing in 2006 and was awarded benefits for future medical care. Liberty Mutual, the workers’ compensation carrier, paid medical benefits for several years thereafter. In 2010, Liberty Mutual sought legal advice regarding its ongoing obligation to pay medical benefits. Liberty Mutual’s attorney recommended a statutorily allowed compulsory medical examination pursuant to SDCL 62-7-1, more commonly known as an IME.  An IME physician examined Johnson and determined that her work injury was no longer a major contributing cause of her condition and need for the recommend medical treatment. Following the IME, Liberty Mutual wrote Johnson a letter advising that further benefits were being terminated based on the IME physician’s opinion.

Johnson filed a Petition for Hearing with the Department arguing that Liberty Mutual did not have authority to deny medical treatment without first seeking approval from the Department for a review pursuant to SDCL 62-7-33.  The Department agreed with Johnson, reinstating her medical benefits, and finding that Liberty Mutual was required to reimburse Johnson for out-of-pocket expenses incurred as a result of the denial.

Liberty Mutual and UPS appealed the Department’s decision to Circuit Court, arguing that SDCL 62-7-1 and SDCL 62-1-1(7) provided the statutory authority to review and determine if Johnson’s work injury remained a major contributing cause of the need for medical treatment without the need for a separate hearing under SDCL 62-7-33. The Circuit Court disagreed, holding that SDCL 62-7-33 was the proper mechanism to review the 2006 order.

In 2014, Johnson commenced a bad faith action against Liberty Mutual in Circuit Court. Johnson alleged bad faith surrounding the denial of benefits in 2010. The case addressed the two-part analysis applicable to a bad faith claim: (1) Absence of a reasonable basis for a denial of benefits and (2) knowledge or reckless disregard of the insurer of the lack of a reasonable basis for the denial. In advance of trial, in a purported attempt to narrow the scope of the issues, the Circuit Court precluded Liberty Mutual from asserting an advice-of-counsel defense and precluded the admission of certain evidence regarding the advice Liberty Mutual received from its attorney.  After a jury trial, a jury returned a verdict in Johnson’s favor that included damages of $500,000 for bad faith and $45,000,000 in punitive damages. Following the trial, the Circuit Court later reduced the punitive damages to $10,000,000, citing constitutional concerns.

Liberty Mutual appealed to the Supreme Court. The Court agreed with the Circuit Court, finding that SDCL 62-7-33 is the exclusive method for modifying a final order of the Department. However, in analyzing the two-part bad faith analysis, the Court agreed that Liberty Mutual lacked a reasonable basis to deny the benefits under the first prong.  However, the Court found that the Circuit Court erred in providing certain jury instructions.  The Court ultimately disagreed with the Circuit Court’s decision to exclude evidence relative to the second prong of the bad faith test relating to Liberty Mutual’s knowledge of the lack of a reasonable basis for the denial.  Due to the Circuit Court’s error, the Court remanded the case for a retrial.

The Court’s analysis of SDCL 62-7-33 as the exclusive means by which workers’ compensation benefits may be denied following a final determination and order from the Department  has a widespread impact on workers’ compensation cases in South Dakota.  A careful investigation, review and analysis of the benefits requested must be performed on a case-by-case basis and consider any prior orders of the Department. Further updates on this case and these issues will be provided as available.  As always, please feel free to contact us for more information.