Walker v. AIU Insurance Company

1 WO — 2 — — 3 — — 4 — — 5 — 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA — 8 — 9 Donald Walker and Judith Walker, No. CV-23-01641-PHX-JAT 10 Plaintiffs, ORDER 11 v. 12 AIU Insurance Company and Gallagher Bassett Services Incorporated, — 13 — Defendants. — 14 — 15 Pending before the Court is Defendant Gallagher Bassett Services Incorporated’s 16 (“Gallagher”) Motion to Dismiss (Doc. 7) and Defendant AIU Insurance Company’s 17 (“AIU”) Motion to Dismiss (Doc. 9). Plaintiffs Donald and Judith Walker (“the Walkers”) 18 have responded. (Docs. 11, 13). Gallagher and AIU have replied. (Docs. 12, 15). The Court 19 now rules. 20 I. BACKGROUND 21 The following summary of facts is taken from the Complaint and attachments 22 thereto. In deciding a motion to dismiss for failure to state a claim, the Court must construe 23 the facts alleged in the Complaint in the light most favorable to the Plaintiff and the Court 24 must accept all well-pleaded factual allegations as true. See Shwarz v. United States, 234 25 F.3d 428, 435 (9th Cir. 2000). 26 This action was filed in Arizona Superior Court in Maricopa County and removed 27 to federal court based on diversity jurisdiction. Plaintiffs are a cement truck driver, Mr. 28 Walker, who filed for worker’s compensation pursuant to the Arizona Worker’s 1 Compensation Act (the “Act”), A.R.S. § 23-901 et seq., and his wife, Ms. Walker. (Doc. 2 1, Ex. 4). Defendants are the worker’s compensation insurance carrier and the third-party 3 claims administrator (“TPA”) responsible for administering Mr. Walker’s disability 4 benefits after he fell on concrete blocks and fractured his ribs and suffered left shoulder 5 injuries on January 13, 2021. (Doc. 1, Ex. 4 at 3). A worker’s compensation claim was filed 6 on behalf of Mr. Walker with the Industrial Commission of Arizona (“ICA”). (Doc. 1, Ex. 7 4 at 3). The ICA has jurisdiction over worker’s compensation claims in Arizona and helps 8 provide injured workers with limited benefits in exchange for a surrender of their tort rights 9 against the employer. (Doc. 1, Ex. 4 at 3). AIU provides worker’s compensation insurance 10 and may employ agents to administer worker’s compensation claims on its behalf under 11 Arizona law. (Doc. 1, Ex. 4 at 3). AIU contracted with Gallagher as a TPA tasked with 12 administering claims on behalf of AIU. (Doc. 1, Ex. 4 at 3–4). Following the injury, Mr. 13 Walker came under the care of his employer’s designated provider: MBI Industrial 14 Medicine (“MBI”). (Doc. 1, Ex. 4 at 4). He returned to work on light duty status upon 15 obtaining treatment from MBI. (Doc. 1, Ex. 4 at 4). 16 On February 23, 2021, ICA tendered Mr. Walker’s claim to AIG Claim Services, 17 the predecessor of Gallagher (hereinafter referred to as “Gallagher”). (Doc. 1, Ex. 4 at 4). 18 The Act allows Defendants twenty-one days from the date of notification to investigate the 19 claim. Defendants may investigate the claim for longer, but they must commence payment 20 of benefits until such time as they have issued a notice of claim status denying benefits 21 under the claim. (Doc. 1, Ex. 4 at 4). On March 8, 2021, Gallagher and AIU issued a notice 22 of claim status denying the claim for benefits “pending investigation.” (Doc. 1, Ex. 4 at 4). 23 On March 24, 2021, Mr. Walker underwent an MRI that revealed a low-grade laberal tear 24 in his left shoulder. (Doc. 1, Ex. 4 at 4). On May 21, 2021, the ICA notified Gallagher that 25 the denial of the claim “pending investigation” was in violation of the Act and directed 26 Gallagher to either accept or deny the claim. (Doc. 1, Ex. 4 at 5). On August 3, 2021, Mr. 27 Walker’s treating orthopedic surgeon recommended surgery for his left shoulder. (Doc. 1, 28 Ex. 4 at 5). Defendants denied authorization for surgery. (Doc. 1, Ex. 4 at 5). Mr. Walker 1 alleges that the denial was unfounded and without reasonable investigation or evaluation. 2 (Doc. 1, Ex. 4 at 5). 3 On August 24, 2021, S. P., an agent of Gallagher, issued a notice of claim status 4 accepting compensability of the claim, but stating that no disability benefits would be paid 5 because Mr. Walker had not missed more than seven days of work due to the injury. (Doc. 6 1, Ex. 4 at 5). The Walkers allege that the designation of no time lost (“NTL”) was false, 7 not reasonably investigated, and unfounded. (Doc. 1, Ex. 4 at 5). Mr. Walker filed a request 8 with the ICA for an investigation and hearing. (Doc. 1, Ex. 4 at 5). The investigation and 9 hearing concerned both the wage records to determine if Mr. Walker was owed disability 10 benefits as well as the authorization for surgery denied to him. (Doc. 1, Ex. 4 at 6). On 11 September 22, 2021, Defendants set a periodic medical examination with a different doctor 12 to determine whether Mr. Walker needed surgery. (Doc. 1, Ex. 4 at 6). The doctor 13 confirmed Mr. Walker’s need for the left shoulder surgery. (Doc. 1, Ex. 4 at 6). On 14 December 14, 2021, Mr. Walker underwent closed manipulation under anesthesia to his 15 left shoulder. (Doc. 1, Ex. 4 at 6). 16 Mr. Walker returned to light duty at work on January 10, 2022. (Doc. 1, Ex. 4 at 6). 17 On return to work, he was terminated by his employer for his inability to perform regular 18 duty as a cement truck driver. (Doc. 1, Ex. 4 at 6). He filed a request for investigation and 19 hearings at the ICA on January 14, 2022, regarding his alleged entitlement to temporary 20 partial disability benefits due between January 15, 2021, and December 14, 2021. (Doc. 1, 21 Ex. 4 at 6). Mr. Walker remained symptomatic after surgery and a follow-up MRI revealed 22 that he still had a left-shoulder labral tear. (Doc. 1, Ex. 4 at 6). His doctor requested 23 authorization for a functional capacity evaluation which was denied by Defendants. (Doc. 24 1, Ex. 4 at 6). The Walkers allege that beginning in February 2022 Defendants made four 25 sets of unreasonably late payments. (Doc. 1, Ex. 4 at 6–7). On May 16, 2022, Mr. Walker 26 filed another request for investigation and hearings at the ICA to address Defendants’ 27 failure to pay disability benefits as requested in monthly status reports dated April 11, 2022, 28 and May 11, 2022. (Doc. 1, Ex. 4 at 7). On May 18, 2022, Defendants had their doctor 1 perform another periodic medical exam. (Doc. 1, Ex. 4 at 7). He opined that the ongoing 2 left labral problems were not due to Mr. Walker’s on-the-job injury. (Doc. 1, Ex. 4 at 7). 3 Defendants thus denied authorization for Mr. Walker to receive additional treatment 4 despite Mr. Walker’s doctor recommending surgery in June 2022. (Doc. 1, Ex. 4 at 7). 5 On June 22, 2022, the Defendants agreed to pay disability benefits for the period of 6 January 15, 2021, to December 14, 2021. (Doc. 1, Ex. 4 at 7). On June 28, 2022, Defendants 7 issued payment for temporary disability as requested by Mr. Walker in applications dated 8 April 11, 2022, and May 11, 2022. (Doc. 1, Ex. 4 at 7). On June 30, 2022, Defendants filed 9 a notice of claim status closing Mr. Walker’s claim from active medical care and 10 acknowledging the occurrence of a permanent unscheduled disability. (Doc. 1, Ex. 4 at 7). 11 This closing notice included no provision concerning the payment of estimated permanent 12 disability benefits while the ICA determined the amount due. (Doc. 1, Ex. 4 at 8). The 13 Walkers allege that Defendants did not pay any disability benefits from July 25, 2022 until 14 December 29, 2022. (Doc. 1, Ex. 4 at 8). Mr. Walker found other employment from August 15 2022 onward. (Doc. 1, Ex. 4 at 8). 16 On May 29, 2023, the ICA issued its “Decision Upon Hearing and Findings and 17 Award for Continuing Benefits” which set aside the closure on June 30, 2022, and awarded 18 coverage for treatment to the torn labrum. (Doc. 1, Ex. 4 at 8). On July 27, 2023, Mr. 19 Walker filed a lawsuit in Maricopa County Superior Court alleging in Counts I and II that 20 AIU and Gallagher engaged in bad faith as part of a joint venture or enterprise. (Doc. 1, 21 Ex. 4 at 9–13.) In Count III, he requests punitive damages because he alleges Defendants 22 acted with a deliberate purpose to serve their own interests with the knowledge of the 23 substantial risk of harm to Mr. Walker. (Doc. 1, Ex. 4 at 13–14). Ms. Walker alleges that 24 she suffered a loss of consortium and emotional distress. (Doc. 1, Ex. 4 at 9). Defendants 25 removed the case to this Court on August 14, 2023, (See Doc. 1), and each filed a Motion 26 to Dismiss for failure to state a claim. (Docs. 7, 9). 27 II. STANDARD OF REVIEW 28 The Court may dismiss a complaint for failure to state a claim under Federal Rule 1 of Civil Procedure 12(b)(6) for two reasons: (1) lack of a cognizable legal theory or (2) 2 insufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police 3 Dep't, 901 F.2d 696, 699 (9th Cir. 1990). To survive a 12(b)(6) motion to dismiss for failure 4 to state a claim, a complaint must meet the requirements of Federal Rule of Civil Procedure 5 8(a)(2). Rule 8(a)(2) requires a “short and plain statement of the claim showing that the 6 pleader is entitled to relief,” so that the defendant has “fair notice of what the . . . claim is 7 and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544 , 555 8 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). 9 In reviewing a complaint for failure to state a claim, the Court “must construe the 10 complaint in the light most favorable to the plaintiff and must accept all well-pleaded 11 factual allegations as true,” Schwarz v. United States, 234 F.3d 428, 435 (9th Cir. 2000), 12 but “[c]onclusory allegations and unreasonable inferences . . . are insufficient to defeat a 13 motion to dismiss,” Sanders v. Brown, 504 F.3d 903, 910 (9th Cir. 2007). 14 When “interpreting state law, federal courts are bound by decisions of the state’s 15 highest court. In the absence of such a decision, a federal court must predict how the highest 16 state court would decide the issue . . . .” Vestar Dev. II, LLC v. Gen. Dynamics Corp., — 17 — 249 F.3d 958, 960 (9th Cir. 2001) (citation omitted). But “where there is no convincing 18 evidence that the state supreme court would decide differently, a federal court is obligated 19 to follow the decisions of the state’s intermediate appellate courts.” Id. 20 III. ANALYSIS 21 Gallagher and AIU argue that each of the Walkers’ claims must be dismissed 22 because they fail to state a claim under Federal Rule of Civil Procedure 12(b)(6). The Court 23 will address each count in turn. 24 A. Bad Faith 25 In the Complaint, the Walkers allege that Defendants operated in bad faith by 26 unreasonably denying and delaying Mr. Walker’s benefits under the Act. (Doc. 1, Ex. 4 27 at 9–11). The Walkers claim that Defendants engaged in denials and delays with 28 knowledge that it was unreasonable, or alternatively, without an adequate investigation to 1 determine whether Defendants’ conduct was reasonable or not. (Doc. 1, Ex. 4 at 9). AIU 2 and Gallagher each argue that the bad faith claim is time-barred because they allege the 3 Walkers did not file the Complaint within two years of Defendants’ conduct at issue in the 4 Complaint. (Doc. 7 at 6; Doc. 9 at 3). 5 In the insurance context, the tort of bad faith occurs in Arizona when, without a 6 reasonable basis, an insurer intentionally denies, fails to process, or fails to pay a claim. 7 Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276, 279 (Ariz. 2000). Because it is a 8 personal injury done to another, bad faith must be “commenced and prosecuted within two 9 years after the cause of action accrues.” A.R.S. § 12-542; see also Ness v. W. Sec. Life Ins. 10 Co., 851 P.2d 122, 125 (Ariz. Ct. App. 1992). “A limitations period starts when the cause 11 of action arises.” Ness, 851 P.2d at 125 . Therefore, the Walkers’ cause of action did not 12 arise, and their limitations period did not begin to run until Defendants had intentionally 13 denied, failed to process, or failed to pay the Walkers’ claim without reasonable basis. 14 Ness answered the question of when a claim arises—and limitations period begins 15 to run—in the event of a questionable denial of a claim by an insurer. In that case, the 16 Arizona Court of Appeals stated that the limitations period does not begin to run until an 17 insurer provides an “unequivocal written denial” of a claim. Id.; see also Seltzer v. Paul 18 Revere Life Ins. Co., 688 F.3d 966, 970 (9th Cir. 2012) (confirming that “Ness supports the 19 proposition that a claim accrues only upon the insurer’s ‘unequivocal written denial of the 20 claim’” (quoting Ness, 851 P.2d at 125 )). 21 Here, the Walkers filed their claim on July 27, 2023, making the limitations period 22 any conduct occurring after July 27, 2021. On May 21, 2021, Defendants issued the 23 Walkers a notice of denial “pending investigation.” A notice of denial with a qualification 24 like “pending investigation” is not an unequivocal written denial. Instead, Gallagher’s 25 issuance of a notice of claim on August 24, 2021, accepting compensability but refusing to 26 pay disability benefits is far more akin to an unequivocal determination. Like in Ness, a 27 statement like “pending investigation” “holds out some hope to [the Walkers] that 28 additional benefits might be paid.” Ness, 851 P.2d at 126 . Accordingly, the statute of 1 limitations did not begin to run on May 21, 2021, and at most began to run on August 24, 2 2021. Therefore, the bad faith claim is timely. Thus, the Court denies Defendants’ Motions 3 to Dismiss the Walkers’ First Claim for Relief: Bad Faith. 4 B. Joint Venture 5 In the Complaint, the Walkers allege that Gallagher may be held liable for bad faith 6 because it was involved in a joint venture with AIU. (Doc. 1, Ex. 4 at 9, 11). In support of 7 their joint-venture claim, the Walkers point to the fact that Gallagher was in a unique 8 position to prevent harm when they undertook the claim administration process. (Doc. 1, 9 Ex. 4 at 11–12). The Walkers argue that a duty for a TPA can arise as a special relationship 10 and uses the concepts developed by Arizona Supreme Court in Stanley v. McCarver, 92 11 P.3d 849 (Ariz. 2004), as support for this notion. (Doc. 14 at 3–5). Conversely, Gallagher 12 contends that because it does not have a contractual relationship with Mr. Walker, it does 13 not owe any duty of good faith and fair dealing. (Doc. 12 at 2). Gallagher states that “no 14 Arizona case has recognized that a third party administrator has a special relationship to a 15 workers’ compensation claimant and no case has imposed a duty on a third party 16 administrator.” (Doc. 12 at 3). Gallagher is correct insofar as the special relationship found 17 in Stanley between a doctor and patient where no doctor-patient relationship otherwise 18 existed has not been extended to the insurance context in Arizona. However, it also has not 19 been expressly rejected in the insurance context either. 20 The duty of good faith and fair dealing arises through a contractual relationship, 21 Rawlings v. Apodaca, 726 P.2d 565, 569 (Ariz. 1986), and is non-delegable, Walter v. F.J. 22 Simmons and Others, 818 P.2d 214, 223 (Ariz. Ct. App. 1991). “A joint venture requires a 23 contract, a common purpose, a community of interest, an equal right to control, and 24 participation in the profits and losses.” Ingram v. Great American Ins. Co., No. CV-1325 02265-PHX-SPL, 2016 WL 11782439 at *2 (D. Ariz. 2016) (citing Tanner Co. v. Superior 26 Court, 696 P.2d 693, 695 (Ariz. 1985)). “Where a joint venture exists, each of the parties 27 is the agent of the others and each is likewise a principal so that the act of one is the act of 28 all.” Sparks v. Republic Nat'l Life Ins. Co., 647 P.2d 1127, 1138 (Ariz. 1982). In general, 1 a TPA, like Gallagher, has no contractual duty to the claimant and is not liable for the 2 breach of a contractual duty of good faith and fair dealing. See Walter, 818 P.2d at 222 3 (dismissing TPA because he “owed no contractual duty to act in good faith or deal fairly 4 with [plaintiff]”); see also Centeno v. American Liberty Ins. Co., No. CV-18-01059-PHX5 SMB, 2019 WL 568926 at *2 (D. Ariz. 2019) (same); Ingram, 2016 WL 11782439 at *3 6 (dismissing TPA because it did not have contractual relationship with plaintiff and did not 7 meet Sparks/Farr joint venture factual scenario). 8 However, Arizona courts have found liability for a TPA when it engaged with an 9 insurer in a joint venture, as alleged here. In Sparks, Republic underwrote an insurance 10 policy and ALPHA marketed and administered the policy. 647 P.2d at 1137 . ALPHA also 11 issued certificates of coverage, billed and collected premiums, and prepared the sale 12 brochure that convinced the employer to enroll in the insurance program. Id. Likewise, in 13 Farr v. Occidental Life Ins. Co. of California, 699 P.2d 376 (Ariz. Ct. App. 1984), the TPA 14 marketed the policy, collected premiums, received a commission on the collected 15 premiums, and received a percentage of the renewal commissions. Id. at 386 . Farr allowed 16 some elements of a traditional joint venture to be lacking in the insurance context—such 17 as profit and loss sharing and joint right to control. Id. Thus far, the Arizona courts have 18 found a joint venture between an insurer and TPA only in these aforementioned cases. As 19 the court stated in Ingram, “it is clear that Arizona law requires something beyond the 20 traditional role of a third-party administrator in order to find a joint venture between an 21 insurer and the third-party administrator.” 2016 WL 11782439 at *2. 22 The Walkers allege that “AIU shared a financial interest in the claim handling by 23 Gallagher Bassett, through cumulative and aggregate reduction of claim expense, resulting 24 from Gallagher Bassett’s claim-handling methods, and ongoing premium revenue from the 25 employer.” (Doc. 1, Ex. 4 at 13). They also state that “Gallagher Bassett shared a financial 26 interest in the reduction of claim expenses for AIU, for purposes of generating good will 27 and TPA renewals with AIU and the employer, and potentially for incentive compensation 28 related to increased revenue savings on claims.” (Doc. 1, Ex. 4 at 13). Construed in a light 1 most favorable to the Walkers, these factual allegations and reasonable inferences drawn 2 therefore are sufficient to survive a motion to dismiss on the issue of whether Defendants 3 were engaged in a joint venture; and whether both Defendants can, therefore, be liable for 4 bad faith. Thus, the Court denies both Defendants’ Motions to Dismiss on the Walkers’ 5 Second Claim for Relief: Joint and Several Liability. Because the Court is denying 6 Gallagher’s Motion to Dismiss in all respects because of Plaintiffs’ joint venture theory of 7 liability, the Court need not reach the issue of whether Gallagher might also be found liable 8 under a “special relationship” theory at this time. Because the Court need not reach this 9 theory at this time, the Court denies the Walkers’ request to certify a question to the 10 Arizona Supreme Court on the issue of a “special relationship” in this context. 11 C. Punitive Damages 12 Defendants’ motions request dismissal of the punitive damages claim “should the 13 Court find the claims of bad faith and joint venture are subject [to] dismissal.” (Doc. 15 14 at 7). However, neither Defendant develops its arguments beyond stating the legal standard 15 for when a punitive damages claim can survive a motion to dismiss. The Walkers have 16 alleged evidence that Defendants were aware of and consciously disregarded a substantial 17 and unjustified risk that significant harm would occur as a result of their conduct. The Court 18 has not found that the claims of bad faith and joint venture are subject to dismissal, and the 19 Walkers’ factual allegations are sufficient to survive a motion to dismiss. Thus, the Court 20 denies both Defendants’ Motions to Dismiss on the Walkers’ Third Claim for Relief: 21 Punitive Damages. 22 IV. CONCLUSION 23 For the foregoing reasons, 24 / / / 25 / / / 26 / / / 27 / / / 28 / / / 1 IT IS ORDERED that Defendant Gallagher and Defendant AIU’s Motions to 2|| Dismiss (Docs. 7, 9) the Walkers’ Complaint (Doc. 1, Ex. 4) are DENIED. 3 Dated this 11th day of December, 2023. — 4 — 5 ' ° James A, CO 7 Senior United States District Judge — 8 — — 9 — — 10 — — 11 — — 12 — — 13 — — 14 — — 15 — — 16 — — 17 — — 18 — — 19 — — 20 — — 21 — — 22 — — 23 — — 24 — — 25 — — 26 — — 27 — — 28 — -10-