For the next 14 months, Mr. Ball received treatment from various medical providers. Then, on September 30, 2014, Federal Insurance sent Mr. Ball a letter stating that it would deny all of his treatments after that date. Additionally, Federal Insurance informed Mr. Ball that payment of temporary total disability benefits would cease at the end of the month.

Mr. Ball filed a petition with the South Dakota Department of Labor and requested a hearing for additional workers' compensation benefits. Federal Insurance answered, denying that Mr. Ball was entitled to any additional benefits.

In November 2017, Mr. Ball, EMP, and Federal Insurance entered into a voluntary settlement agreement that resolved Mr. Ball's workers' compensation claim.

Under the settlement agreement, Mr. Ball received a lump sum of $135,000 in exchange for his agreement to waive his hearing before the Department of Labor and to resolve his workers' compensation permanent total liability claim.

The settlement agreement also contained clauses that the settlement was a "compromise of doubtful and disputed claims" and "not an . . . admission of liability," and that Mr. Ball acknowledged "that there [were] bona fide disputed questions regarding his entitlement to any additional benefits."

As to a potential bad faith claim, the settlement agreement stated, "Insurer acknowledges that Claimant alleges a 'bad faith' handling claim which claim Insurer denies. Insurer acknowledges that this settlement does not resolve that claim."

The Department of Labor approved the settlement agreement and dismissed Mr. Ball's workers' compensation claim with prejudice.

On January 22, 2018, Mr. Ball sued Federal Insurance for bad faith.

Federal Insurance moved for summary judgment.

First, Federal Insurance contended that Mr. Ball could not overcome the threshold requirement of exhausting his administrative remedies because there was no administrative ruling that Mr. Ball was entitled to benefits.

Second, Federal Insurance contended that Mr. Ball could not satisfy the first element of his bad faith claim because it was undisputed that there was no determination by the Department of Labor that Federal Insurance's denial of benefits had been "wrongful."

The insurer also contended that Mr. Ball's claim was barred by res judicata.

The District Court's Decision

The district court denied the motion.

In its decision, the district court first ruled that the settlement agreement, which was approved by the Department of Labor and which stated that its purpose was to resolve Mr. Ball's disputed workers' compensation claim, carried the "same force and effect as an adjudicated award."

The district court added that the parties' settlement agreement and its approval by the Department of Labor exhausted the administrative remedies (and reflected South Dakota's "historical preference for settlement of disputes").

The district court then decided that Mr. Ball could show the absence of a reasonable basis for denying benefits by Federal Insurance. It pointed out that the Department of Labor had approved the settlement agreement and, the district court reasoned, that amounted to an award from the Department of Labor in favor of Mr. Ball.

The settlement agreement was not an adverse decision to Mr. Ball and did not mean that he was not entitled to benefits or that Federal Insurance had a reasonable basis for its denial of benefits, the district court said.

Therefore, viewing the evidence in the light most favorable to Mr. Ball, the district court concluded that he could establish the two elements Federal Insurance challenged in its motion for summary judgment.

Finally, the district court rejected Federal Insurance's argument that Mr. Ball's workers' compensation bad faith claim failed as a matter of law due to the doctrine of res judicata. Among other things, the district court pointed out that the settlement agreement and the dismissal of Mr. Ball's workers' compensation claim "did not, and could not, resolve [his] bad faith claim." In fact, it concluded, the settlement agreement left open the opportunity for Mr. Ball to bring a bad faith claim, stating, "Insurer acknowledges that Claimant alleges a 'bad faith' handling claim which claim Insurer denies. Insurer acknowledges that this settlement does not resolve that claim."

The case is Ball v. Federal Ins. Co., No. 4:18-CV-04008-KES (D.S.D. Oct. 15, 2019).