Dorfmeister v. Zurich American Insurance Company

1 WO — 2 — — 3 — — 4 — — 5 — 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA — 8 — 9 Bridgett Dorfmeister, No. CV-20-00057-PHX-DWL 10 Plaintiff, ORDER 11 v. 12 Zurich American Insurance Company, 13 Defendant. — 14 — 15 Pending before the Court is Defendant Zurich American Insurance Company’s 16 (“Zurich”) motion to dismiss. (Doc. 10.) Zurich argues that Plaintiff Bridgett 17 Dorfmeister’s claim for bad-faith denial of workers’ compensation benefits is barred by 18 the statute of limitations. For the following reasons, the Court agrees and will grant the 19 motion. 20 BACKGROUND 21 I. Factual Background 22 The facts alleged in the complaint are as follows. In November 2016, Dorfmeister 23 injured her back in the course of her employment at Toys R Us. (Doc. 1-3 at 5-10 24 [complaint] ¶¶ 4-5.) She filed a workers’ compensation claim with Zurich, Toys R Us’s 25 insurance provider. (Id. ¶ 8.) Zurich accepted the claim and paid for several months of 26 physical therapy and other treatments. (Id. ¶¶ 8-9.) 27 This coverage continued until May 2017, when Zurich revoked its authorization for 28 further treatment pending the results of a medical exam. (Id. ¶ 12.) That same month, the 1 examining physicians concluded that the injuries for which Dorfmeister had been receiving 2 treatment were unrelated to the injury she sustained at work. (Id. ¶¶ 13-16.) As a result, 3 Zurich closed Dorfmeister’s case and discontinued further payment. (Id. ¶ 17.) 4 Afterward, Dorfmeister was required to return to work with none of her past 5 restrictions on physical activity. (Id. ¶¶ 10, 22.) The return to full duty exacerbated her 6 symptoms, so she sought further medical treatment under her private insurance. (Id. ¶¶ 227 23.) 8 In October 2017, Dorfmeister’s new doctor recommended surgery, which Zurich 9 refused to pay for. (Id ¶¶ 24-25.) Dorfmeister nonetheless had surgery in February 2018. 10 (Id. ¶ 28.) 11 Around the same time, Dorfmeister filed an objection with the Arizona Industrial 12 Commission (“Commission”) concerning Zurich’s closure of her claim. (Id. ¶ 26.) In May 13 2018, the Commission ruled in Dorfmeister’s favor, rescinding the closure and requiring 14 Zurich to pay for continued treatment and disability benefits. (Id. ¶ 27.) Dorfmeister was 15 subsequently assessed with a 4% permanent disability rating. (Id. ¶ 29.) 16 Even though her claim had been reopened, Zurich continued to refuse to pay some 17 of Dorfmeister’s medical bills. (Id. ¶ 31.) These bills are beginning to negatively impact 18 Dorfmeister’s credit, her living situation, and her marriage. (Id. ¶ 32.) 19 II. Procedural History 20 On December 9, 2019, Dorfmeister filed this action against Zurich in Maricopa 21 County Superior Court. (Id. at 5.) The complaint alleges a single claim of insurer bad 22 faith. (Id. ¶¶ 33-39.) Specifically, it alleges that Zurich denied Dorfmeister’s claim in bad 23 faith by relying on incomplete evidence, doctor shopping, delaying medical care, first 24 accepting and then denying her claim, and other acts and omissions. (Id. ¶ 36.) 25 On January 9, 2020, Zurich removed this action to this Court. (Doc. 1.) Then, on 26 January 15, 2020, Zurich filed a motion to dismiss. (Doc. 10.) The motion thereafter 27 became fully briefed. (Docs. 11, 12.) 28 On July 21, 2020, the Court issued a tentative order granting the motion. (Doc. 14.) 1 On July 28, 2020, the Court heard oral argument. (Doc. 15.) 2 On August 7, 2020, Dorfmeister filed a supplemental brief. (Doc. 16.) 3 ANALYSIS 4 I. Legal Standard 5 To survive a motion to dismiss under Rule 12(b)(6), “a party must allege ‘sufficient 6 factual matter, accepted as true, to state a claim to relief that is plausible on its face.’” In 7 re Fitness Holdings Int’l, Inc., 714 F.3d 1141, 1144 (9th Cir. 2013) (quoting Ashcroft v. 8 Iqbal, 556 U.S. 662, 678 (2009)). “A claim has facial plausibility when the plaintiff pleads 9 factual content that allows the court to draw the reasonable inference that the defendant is 10 liable for the misconduct alleged.” Id. (quoting Iqbal, 556 U.S. at 678 ). “[A]ll well11 pleaded allegations of material fact in the complaint are accepted as true and are construed 12 in the light most favorable to the non-moving party.” Id. at 1144-45 (citation omitted). 13 However, the court need not accept legal conclusions couched as factual allegations. Iqbal, — 14 — 556 U.S. at 679-80 . The court also may dismiss due to “a lack of a cognizable legal theory.” 15 Mollett v. Netflix, Inc., 795 F.3d 1062, 1065 (9th Cir. 2015) (citation omitted). 16 II. Discussion 17 Under Arizona law, “[t]he tort of bad faith arises when the insurance company 18 intentionally denies, fails to process[,] or [fails to] pay a claim without a reasonable basis 19 for such action.” Noble v. Nat’l Am. Life Ins. Co., 624 P.2d 866, 868 (Ariz. 1981). To 20 prove bad-faith denial of a workers’ compensation claim, a plaintiff must show: 21 (1) the carrier and the injured worker had an insurer-insured relationship . . . ; (2) the absence of a reasonable basis for denying benefits . . . ; (3) the carrier’s — 22 — knowledge or reckless disregard of the lack of a reasonable basis for denying 23 the claim . . . ; and (4) traditional tort damages proximately caused by the denial of workers’ compensation benefits rather than damages resulting from — 24 — the workplace injury . . . . 25 Merkens v. Fed. Ins. Co., 349 P.3d 1111, 1114-15 (Ariz. Ct. App. 2015) (quotation 26 omitted). 27 In Arizona, bad faith is an intentional tort subject to a two-year statute of limitations. 28 Taylor v. State Farm Mut. Ins. Co., 913 P.2d 1092, 1095 (Ariz. 1996) (citing A.R.S. § 121 542). As with other torts, a claim for bad faith accrues “when a plaintiff knows, or through 2 the exercise of reasonable diligence should know, of the defendant’s wrongful act.” Id. at 3 1095. “The cause of action does not accrue until the insurer breaches, and the insurer does 4 not breach until it denies the claim.” Ness v. W. Sec. Life Ins. Co., 851 P.2d 122, 126 (Ariz. 5 Ct. App. 1992). 6 In the ordinary case, the inquiry would end here. Zurich denied Dorfmeister’s claim 7 in May 2017, more than two years before she filed her complaint. Nevertheless, this case 8 presents a potential wrinkle because Dorfmeister’s claim arises in the workers’ 9 compensation context. Under Arizona law, only the Commission may determine whether 10 a worker is entitled to such benefits. Merkens, 349 P.3d at 1115 . This is potentially 11 important because whether an insurer unreasonably denied benefits, a necessary element 12 of a bad-faith claim, can only be made in reference to whether an employee suffered a 13 compensable injury. Id. Dorfmeister argues that, because the resolution of her claim 14 depends on a Commission determination, her claim did not accrue until May 2018, which 15 is when the Commission determined she was entitled to benefits, and her initiation of this 16 lawsuit in December 2019 was therefore timely. (Doc. 11 at 2.) Zurich disagrees, arguing 17 that, under Merkens, the existence of a pending proceeding before the Commission “does 18 not toll the statute of limitations for the alleged bad faith denial of benefits.” (Doc. 10 at 19 4-5; see also Doc. 12 at 3-6, 9-11.) 20 In Merkens, a worker was injured when she inhaled toxic fumes. 349 P.3d at 1112 . 21 She filed a workers’ compensation claim, which her employer’s insurer initially accepted. — 22 — Id. Later, after three rounds of independent medical examinations, the insurer terminated 23 the claim and stopped making payments. Id. Rather than contest the termination with the 24 Commission, the worker filed a bad-faith lawsuit against the insurer. Id. The Arizona 25 Court of Appeals rejected this claim because the plaintiff failed to receive a compensability 26 determination from the Commission. Id. at 1115 . “The reason [was] simple—once an 27 injured worker makes a claim for workers’ compensation, the . . . Commission has the 28 exclusive jurisdiction to determine whether the injured worker is entitled to benefits and 1 the amount of those benefits.” Id. “Even if” a court found the insurer had otherwise acted 2 in bad faith, “the finder of fact would have to make a compensability determination to find 3 that [the insurer] unreasonably terminated . . . benefits.” Id. After all, “without a 4 compensability determination, the finder of fact could not award as damages any unpaid 5 policy benefits due from the industrial injury because only the . . . Commission can 6 determine whether benefits are due and order payment.” Id. At bottom, “to allow a 7 plaintiff to seek damages based on a denial of benefits from the carrier . . . would be akin 8 to ordering that the benefits be paid for, thereby circumventing the . . . Commission’s 9 exclusive jurisdiction to decide the issue.” Id. So, because the worker failed to pursue her 10 case in the Commission, her bad-faith claim failed as a matter of law. Id. at 1115-16 . 11 Although Merkens supports Zurich’s position, it is not necessarily dispositive. This 12 is because Merkens addressed a jurisdictional issue (i.e., whether a plaintiff asserting a 13 claim for bad-faith denial of workers’ compensation benefits must also obtain a 14 compensability determination from the Commission), not the issue of when such a bad15 faith claim accrues. To be sure, Merkens states that a plaintiff need not wait for the 16 Commission’s decision before filing a bad-faith claim,1 but this isn’t necessarily the same 17 thing as a holding that such a claim accrues, for statute-of-limitations purposes, at the 18 moment the insurer denies benefits. Similarly, although Merkens observes that “bad faith 19 is separate and not a direct or natural consequence of the compensable industrial injury,”2 20 this uncontroversial observation isn’t the same thing as a holding that a bad-faith claim 21 accrues at the moment of benefit denial. The issue of accrual simply wasn’t before the 22 Merkens court. 23 Were Merkens the only Arizona decision touching upon these issues, this might be 24 a closer case. However, a different decision—Manterola v. Farmers Ins. Exch., 30 P.3d 25 — 1 — Id. at 1115 & n.6 (noting that “an injured worker may file a suit alleging bad faith handling of the claim before a final award,” which may result in “simultaneous proceedings 26 in both the . . . Commission and superior court,” and holding that courts should address this circumstance by “wait[ing] to resolve any dispositive motions, or allow[ing] the case 27 to proceed to a jury, until after the . . . Commission has resolved the challenges to the denial or termination of benefits”). — 28 — 2 Id. at 1113. 1 639 (Ariz. Ct. App. 2001)—provides more clarity.3 There, the plaintiff (Manterola) sued 2 her psychologist, as well as her psychologist’s spouse, after the psychologist engaged in 3 sexual relations with her while she was undergoing treatment. Id. at 641. The defendants 4 were insured by Farmers, which defended the tort action but reserved its right to contest 5 whether Manterola’s claims were covered by the insurance policy. Id. Farmers also 6 instituted a separate action seeking declaratory relief that it owed no coverage. Id. 7 Rather than litigate the tort action, the defendants agreed to the entry of a $2 million 8 judgment and assigned their rights, including the right to bring a bad-faith claim against 9 Farmers, to Manterola. Id. In exchange, Manterola agreed to seek satisfaction of the 10 judgment only against Farmers. Id. Three years later, Farmers’ declaratory relief action 11 was finalized. Id. at 641-42. Ultimately, Manterola’s claims against the psychologist were 12 deemed to fall outside the insurance policy but her claims against the psychologist’s spouse 13 were deemed covered. Id. 14 A few months after the coverage determination, Manterola (as an assignee) initiated 15 a bad-faith action against Farmers, arguing that Farmers had improperly denied coverage 16 as to her claim against the psychologist’s spouse. Id. at 642. Farmers moved to dismiss, 17 arguing that the bad-faith claim was time barred. Id. The trial court agreed, dismissing the 18 case, and the Arizona Court of Appeals affirmed. Id. at 641. Noting that a bad-faith claim 19 arises when “an actionable wrong exists, that is, a tort that results in appreciable, non20 speculative harm to the plaintiff,” the court emphasized that Manterola’s settlement 21 agreement with the defendants made clear that Farmers had denied coverage and that the 22 defendants (and by assignment, Manterola) had suffered a resulting injury. Id. at 643-44 23 (internal alterations and citations omitted). The agreement stated that the defendants 24 believed the insurance policies should have covered the claims and that Farmers had 25 wrongfully failed to provide coverage. Id. at 644. Thus, the court held that by the time — 26 — 27 3 Manterola was not cited in the parties’ initial briefs but was discussed in the Court’s tentative ruling. During oral argument, Dorfmeister’s counsel requested leave to file a 28 supplemental brief addressing Manterola. That request was granted and the Court has now reviewed and considered Dorfmeister’s supplemental arguments. 1 this agreement became final, the defendants had all of the information they needed to 2 initiate a bad-faith claim against Farmers—coverage had been wrongly denied and they 3 were aware of that denial. Id. at 644-45. 4 Nevertheless, Manterola argued that the bad-faith claim didn’t accrue until the 5 declaratory relief action concluded, because it was only then that a final determination 6 arose as to Farmers’ coverage obligations. Id. at 644-45. The Manterola court disagreed, 7 holding that Manterola’s argument “conflict[ed] with well-established Arizona law that 8 recognizes a bad faith claim’s independent standing, irrespective of coverage.” Id. at 645. 9 Put another way, the outcome of the coverage action “did not control when Manterola’s 10 bad faith claim accrued.” Id. at 645. Thus, the court rejected the argument that bad-faith 11 claim “did not accrue until the [declaratory relief action’s] coverage determination became 12 final.” Id. at 645-46. 13 In reaching this conclusion, the court acknowledged that “a bad faith claim based 14 solely on a carrier’s denial of coverage will fail on the merits if a final determination of 15 noncoverage ultimately is made.” Id. at 646. The court also acknowledged that 16 “Manterola’s ability to prove one element of her bad faith denial of coverage claim— 17 unreasonableness—depended on the outcome of the [coverage determination].” Id. 18 Manterola’s argument failed, though, because nothing in the coverage proceeding 19 “necessarily render[ed] frivolous any bad faith claim that depended solely on coverage.” 20 Id. Such a claim “would have stood or fallen with the resolution of the coverage issue,” 21 but that was not a bar to filing the suit in the first place. Id. Put simply, the “resolution of 22 the merits of a bad faith claim presents different issues than determination of the accrual 23 of that claim for statute of limitations purposes.” Id. “[E]ven if the final [coverage 24 determination] may have been determinative of [the bad-faith claim], . . . that does not 25 control when the cause of action accrues and when the limitations period begins to run.” 26 Id. (internal quotation marks and citations omitted). 27 Finally, the Manterola court was unconcerned that its conclusion meant bad-faith 28 claims would often go forward with a key element—coverage—still in dispute. Id. at 648. 1 The court noted the “common practice” of asserting a bad-faith counterclaim in declaratory 2 relief actions and also acknowledged that the two proceedings could be completely 3 separate. Id. In either case, “if the bad faith claim . . . hinges solely on the outcome of a 4 coverage issue . . . the parties may stipulate to, or the court on proper motion may order, a 5 stay of the bad faith claim, pending final resolution of the coverage issue.” Id. Regardless, 6 “the filing and litigation of [the coverage determination] do not delay or directly affect the 7 accrual of a bad faith claim.” Id. 8 Manterola makes clear what Merkens merely hinted at—a bad-faith claim premised 9 on the failure to provide coverage may accrue, for statute-of-limitations purposes, before a 10 final coverage determination has been made.4 The similarities between this case and 11 Manterola are instructive. There, as here, coverage was determined in a proceeding 12 separate from the bad-faith proceeding. There, as here, the plaintiff sought to rely on the 13 coverage decision as the accrual date. But, there, as here, that reliance was misplaced. 14 In her supplemental brief, Dorfmeister asserts that, under Taylor, the Court must 15 apply the “final judgment accrual rule,” which would delay the accrual of her bad-faith 16 claim until the completion of the Commission proceeding in May 2018. (Doc. 16 at 5.) 17 But Taylor expressly limited the application of this rule to “third-party bad faith failure to 18 settle claim[s].” 913 P.2d at 1097 (emphasis added). “The policy underlying the final 19 judgment rule is clear” in such cases—whether a plaintiff has suffered an injury in the 20 failure-to-settle context only becomes clear after judgment becomes final. Id. This is so 21 because an appeal may obviate any damages suffered by the plaintiff. Id. It also avoids 22 the untenable situation of forcing a plaintiff to sue an insurer while that same insurer is 23 representing the plaintiff in ongoing litigation. Id. But this isn’t a failure-to-settle case. 24 Instead, Zurich’s alleged bad faith stems from its denial of coverage. Bad-faith denial of 25 coverage claims accrue when coverage is denied. Ness, 851 P.2d at 126 ; Manterola, 30 — 26 — 4 The Commission makes “compensability” determinations, rather than “coverage” 27 determinations, but this distinction is immaterial. Indeed, Dorfmeister equates the two. (Doc. 11 at 2.) Cf. Keovorabouth v. Ariz. Indus. Comm’n, 214 P.3d 1019, 1021-22 (Ariz. 28 Ct. App. 2009) (indicating that compensability determinations depend, in part, on an employee proving coverage under the workers’ compensation statute). 1 P.3d at 647 n.5 (suggesting that failure-to-settle cases premised on Taylor are inapplicable 2 when determining the accrual of bad-faith claims premised on the denial of coverage). This 3 is because denial-of-coverage claims are governed by different policy concerns than 4 failure-to-settle claims. Although the injury from a failure to settle is uncertain until an 5 insured loses and exhausts all appeals, the injury from a denial of coverage becomes certain 6 when coverage is denied because “at that point . . . the nature and extent of the insurer’s 7 breach of the covenant of good faith and fair dealing and of the damages that were 8 proximately caused by this breach can be determined.” Ness, 851 P.2d at 126 (citation 9 omitted). In other words, the injury in a denial-of-coverage case is the denial of coverage 10 itself. Similarly, the concern that an insured would be represented by an insurance 11 company that it is in the process of suing is not present in the denial-of-coverage context— 12 the insured and the insurer become adversarial the moment coverage is denied. 13 Dorfmeister also contends in her supplemental brief that bad-faith claims premised 14 on the denial of workers’ compensation benefits should not be considered “conventional 15 first party bad faith coverage claims” and instead should be subject to the same accrual 16 rules as third-party bad-faith actions. (Doc. 16 at 4.) This argument lacks merit. “A bad 17 faith claim by an injured employee against his or her employer’s workers’ compensation 18 carrier is considered a first-party claim.” Mendoza v. McDonald’s Corp, 213 P.3d 288 , 19 298 (Ariz. Ct. App. 2009). Put simply, Arizona courts have already determined that the 20 law governing first-party bad-faith claims applies in the workers’ compensation context.5 21 In a related vein, Dorfmeister asks the Court to conclude, as a matter of public 22 policy, that bad-faith claims premised on the denial of workers’ compensation benefits do 23 not accrue until a final determination of coverage has been made. The difficulty with this 24 argument is that this Court—a federal court, sitting in diversity, in a case involving a state25 law claim—is not at liberty to override policy judgments that have already been made by — 26 — 27 5 Dorfmeister incorrectly contends that Merkens altered this conclusion. In fact, Merkens cited, with approval, both Mendoza (which applies first-party bad-faith law to 28 workers’ compensation claims) and Noble (which states that a first-party bad-faith claim arises at the time an insurer denies benefits). Merkens, 349 P.3d at 1113, 1115 . 1 the Arizona state courts. And as Manterola and Merkens make clear, addressing 2 compensability and bad faith in separate proceedings is a well-established feature of 3 Arizona law—in Arizona, a bad-faith claim may accrue before coverage is determined. It 4 is not this Court’s place to second-guess the wisdom of that approach, even though it may 5 lead to the filing of some bad-faith claims that later prove untenable. 6 The bottom line is that a bad-faith claim accrues once there are “appreciable, 7 nonspeculative damages.” Manterola, 30 P.3d at 647 . In first-party bad-faith actions, that 8 occurs on the date an insurer denies a claim. Ness, 851 P.2d at 125 (“The cause of action 9 does not accrue until the insurer breaches, and the insurer does not breach until it denies 10 the claim.”). Thus, Dorfmeister’s claim accrued no later than June 5, 2017. (Doc. 10 at 3 11 n.2.) The two-year statute of limitation expired in June 2019. Because Dorfmeister didn’t 12 initiate this action until December 2019, it is time barred. 13 In addition to her Merkens-based argument, Dorfmeister asserts that her claim didn’t 14 accrue until damages were set and causation was established. (Doc. 11 at 7-9.) These 15 arguments are unpersuasive. Her damages argument focuses on the fact that “[a] cause of 16 action does not accrue until damages are irrevocable.” (Id. at 8.) That proposition is 17 unremarkable, and Dorfmeister misapplies it here. The cases on which she relies involved 18 legal malpractice claims. In that context, damages become appreciable and non19 speculative only when “the plaintiff’s damages are certain and not contingent upon the 20 outcome of an appeal.” Amfac Distrib. Corp. v. Miller, 673 P.2d 795, 796 (Ariz. Ct. App. 21 1983). Importantly, Amfac and related cases gave rise to the rule in Taylor. Taylor, 913 22 P.2d at 1096-97. Accordingly, those cases are inapplicable here for the same reason the 23 rule in Taylor is inapplicable. See also Thompson v. Prop. & Cas. Ins. Co. of Hartford, — 24 — 2015 WL 1442795 , *4 (D. Ariz. 2015) (“Because Hartford unequivocally denied coverage 25 under the Policy in its May 3, 2011 letter, Hartford’s alleged breach of the Policy began on 26 that date, and Plaintiff's cause of action for bad faith accrued on that date.”). 27 Dorfmeister’s argument that causation must be established before her claim accrues 28 fares no better. This argument relies on a misreading of Merkens the Court has already rejected. Cf Manterola, 30 P.3d at 647-48 (rejecting an argument that establishing 2|| coverage was necessary before a claim accrued because “[i]f the rule were otherwise, it 3|| could be argued that any cause of action, regardless of its basis, does not accrue for statute 4|| of limitations purposes unless and until all elements of the claim are provable or some || determination of fault or liability has been made’’). 6 Accordingly, IT IS ORDERED that Zurich’s motion to dismiss (Doc. 10) is 7|| granted. The Clerk of the Court shall enter judgment accordingly and terminate this 8 || action. 9 Dated this 13th day of August, 2020. — 10 — 11 Lom ee” 12 f CC —— Dominic W. Lanza 13 United States District Judge — 14 — — 15 — — 16 — — 17 — — 18 — — 19 — — 20 — — 21 — — 22 — — 23 — — 24 — — 25 — — 26 — — 27 — — 28 — -ll-