#27771-r-DG
2016 S.D. 70

                            IN THE SUPREME COURT
                                    OF THE
                           STATE OF SOUTH DAKOTA


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JAMES “JAKE” MORDHORST,                     Appellant,

v.

DAKOTA TRUCK UNDERWRITERS
and RISK ADMINISTRATION SERVICES,           Appellees.


                                    ****

                  APPEAL FROM THE CIRCUIT COURT OF
                    THE SEVENTH JUDICIAL CIRCUIT
                  PENNINGTON COUNTY, SOUTH DAKOTA
                              ****
                  THE HONORABLE JANE WIPF PFEIFLE
                              Judge

                                    ****

MICHAEL J. SIMPSON of
Julius & Simpson, LLP
Rapid City, South Dakota

and

MICHAEL ABOUREZK of
Abourezk Law Firm, PC
Rapid City, South Dakota                    Attorneys for appellant.


WILLIAM C. GARRY
MELISSA R. JELEN of
Cadwell, Sanford, Deibert & Garry LLP
Sioux Falls, South Dakota                   Attorneys for appellees.

                                    ****
                                            CONSIDERED ON BRIEFS
                                            ON AUGUST 29, 2016
                                            OPINION FILED 09/28/16
#27771

GILBERTSON, Chief Justice

[¶1.]          James “Jake” Mordhorst sued Dakota Truck Underwriters and Risk

Administration Services (collectively, “Insurers”), alleging they denied him workers’

compensation benefits in bad faith. Insurers moved to dismiss, arguing Mordhorst

failed to state a claim upon which relief could be granted. The circuit court granted

Insurers’ motion, and Mordhorst appeals. We reverse and remand for further

proceedings.

                           Facts and Procedural History

[¶2.]          Twenty-year-old Mordhorst worked for Fischer Furniture in Rapid

City. While making a delivery on November 10, 2011, a 275-pound sofa fell off the

back of a delivery truck and struck Mordhorst on the head and shoulders. The force

of the impact knocked Mordhorst to the ground, temporarily rendering him

unconscious.

[¶3.]          Mordhorst sought medical treatment the following day. According to

Mordhorst’s amended complaint in this case, two physicians and multiple physical

therapists documented his resulting condition. Mordhorst reported pain in his back

and neck, and an MRI revealed a herniated disk in his back. His medical providers

also noted that he presented with a “head forward” posture, which indicates an

attempt to compensate for back pain.

[¶4.]          On October 11, 2012, at Insurers’ request, Mordhorst met with Dr.

Nolan Segal, an independent medical examiner (“IME”). Dr. Segal concluded that

the only injury Mordhorst sustained from the falling sofa was a “strain” that




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resolved 18 days after the accident. According to Dr. Segal’s report, Mordhorst’s

subjective complaints were not supported by objective findings.

[¶5.]        On October 16, 2012, subsequent to Dr. Segal’s report, Insurers

terminated all workers’ compensation benefits. On March 14, 2014, Mordhorst

requested a hearing before the South Dakota Department of Labor in order to

restore payments for medical treatment and medications. Insurers denied

responsibility for coverage, but the Department disagreed. On May 8, 2015, the

Department ordered Insurers to pay all past medical bills and interest as well as

future medical expenses. Insurers did not appeal the Department’s decision.

[¶6.]        Mordhorst subsequently filed an action in circuit court seeking

punitive damages for what he alleges was a bad-faith denial of workers’

compensation benefits. Insurers moved for dismissal, arguing Mordhorst failed to

state a cause of action upon which relief could be granted, and the circuit court

granted the motion.

[¶7.]        Mordhorst appeals, raising one issue: Whether the circuit court erred

by granting Insurers’ motion to dismiss.

                               Standard of Review

[¶8.]        “A motion to dismiss under SDCL 15-6-12(b) tests the legal sufficiency

of the pleading, not the facts which support it.” Nygaard v. Sioux Valley Hosps. &

Health Sys., 2007 S.D. 34, ¶ 9, 731 N.W.2d 184, 190 (quoting Guthmiller v. Deloitte

& Touche, LLP, 2005 S.D. 77, ¶ 4, 699 N.W.2d 493, 496). Therefore, we review a

circuit court’s decision to grant such a motion de novo. Id. “For purposes of the

pleading, the court must treat as true all facts properly [pleaded] in the complaint


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and resolve all doubts in favor of the pleader.” Id. (quoting Guthmiller, 2005 S.D.

77, ¶ 4, 699 N.W.2d at 496). However, “the court is free to ignore legal conclusions,

unsupported conclusions, unwarranted inferences[,] and sweeping legal conclusions

cast in the form of factual allegations.” Id. (quoting Wiles v. Capitol Indem. Corp.,

280 F.3d 868, 870 (8th Cir. 2002)).

                                Analysis and Decision

[¶9.]         The primary question in this case is whether Mordhorst stated a claim

alleging the necessary elements of a bad-faith denial of workers’ compensation

benefits. Because “[t]he relationship between a workers’ compensation claimant

and an insurer is adversarial and not contractual[,]” Hein v. Acuity, 2007 S.D. 40,

¶ 18, 731 N.W.2d 231, 237, an action alleging bad faith requires more than an

allegation of wrongful conduct, id. ¶ 16, 731 N.W.2d at 237. In South Dakota, such

a claimant must prove two things to be successful: (1) “an absence of a reasonable

basis for denial of policy benefits[,]” and (2) “the [insurer’s] knowledge . . . of [the

lack of] a reasonable basis for denial.” Id. ¶ 18, 731 N.W.2d at 237 (emphasis

omitted) (quoting Champion v. U.S. Fid. & Guar. Co., 399 N.W.2d 320, 324 (S.D.

1987)). 1 “[K]nowledge of the lack of a reasonable basis may be inferred and



1.      Hein and Champion omit the words the lack of from the language of the
        second prong. Thus, as stated in Hein and Champion, a claimant must prove
        the “absence of a reasonable basis for denial of policy benefits” and “the
        insurance carrier’s knowledge . . . of a reasonable basis for denial.” Hein,
        2007 S.D. 40, ¶ 14, 731 N.W.2d at 236 (quoting Champion, 399 N.W.2d
        at 324). Literally read, however, these two prongs cannot be proved
        simultaneously—if no reasonable basis for denial exists, it is impossible to
        prove knowledge of a reasonable basis for denial (and vice versa). Hein and
        Champion took this language directly from the Colorado Supreme Court’s
        decision Travelers Insurance Co. v. Savio, 706 P.2d 1258, 1275 (Colo. 1985)
                                                                     (continued . . .)
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#27771

imputed to an insurance company where there is a . . . reckless indifference to facts

or to proofs submitted by the insured.” Champion, 399 N.W.2d at 324 (quoting

Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1275 (Colo. 1985) (en banc)).

[¶10.]       In this case, the circuit court granted the motion to dismiss because it

concluded “that the insurance company did have a reasonable basis for denial of

policy benefits and that the reliance upon a qualified physician who otherwise met

the requirements of the statute was present[.]” This conclusion, however, overlooks

the procedural posture of this case. This is an appeal from a dismissal under

SDCL 15-6-12(b)(5) for failure to state a claim upon which relief can be granted.

Whether the circuit court was convinced that Insurers’ basis for denying

Mordhorst’s claim was reasonable is immaterial. Rather, the question before the

circuit court is the same as the question on appeal—whether Mordhorst asserted

facts that if true, establish the necessary elements of a bad-faith action. See

Nygaard, 2007 S.D. 34, ¶ 9, 731 N.W.2d at 190. We think that he did.




____________________
(. . . continued)
         (en banc). Savio, in turn, directly quoted the Wisconsin Supreme Court’s
         decision Anderson v. Continental Insurance Co., 271 N.W.2d 368, 377 (Wis.
         1978). However, Anderson states the rule both with and without the words
         the lack of. Compare id. at 376 (“[A] plaintiff must show . . . the defendant’s
         knowledge . . . of the lack of a reasonable basis for denying the claim.”
         (emphasis added)), with id. at 377 (“[W]e have stated above that, for proof of
         bad faith, there must be . . . knowledge . . . of a reasonable basis for a
         denial . . . .” (emphasis added)). Because it is clear that the Wisconsin
         Supreme Court’s later phrasing (omitting the words the lack of) was simply
         intended to be a restatement of its earlier phrasing (including the words the
         lack of), and given the logical impossibility of the later phrasing, we take this
         opportunity to correct our own rule statement going forward.

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[¶11.]       The only basis for denial advanced by Insurers is their reliance on Dr.

Segal’s report. In his complaint, Mordhorst attacked the reasonableness of the

report:

             14. The Segal report was transparently biased. For example,
             Segal’s report stated that Plaintiff’s diagnosis was “subjective
             complaints of diffuse myofascial pain without objective findings
             to substantiate his numerous subjective complaints or
             limitations.” In fact, medical records showed numerous
             objective findings consistent with Plaintiff’s pain complaints,
             including an MRI showing a central disk protrusion at T7-T8,
             muscle spasm, and a head forward posture to compensate for the
             pain, as noted by Dr. Dietrich, Dr. Strain and the physical
             therapists who treated Mordhorst.
             15. The Segal report was also transparently biased because it
             ignored Plaintiff’s pain complaints which were consistently
             present after November 28, 2011, and in the same location of the
             thoracic disk herniation and documented in Plaintiff’s medical
             records.

This narrative stands in stark contrast to Dr. Segal’s conclusion that Mordhorst

merely suffered an 18-day “strain.” If Mordhorst’s assertion that his medical

records exhibited numerous, objective findings to substantiate his complaint is true,

then a jury could easily conclude that Dr. Segal’s report did not provide a

reasonable basis for denying Mordhorst’s claim.

[¶12.]       Even so, the circuit court rejected the notion that it is ever

unreasonable for an insurer to act in accordance with an opinion given by an IME.

According to the court, Insurers were not required “to second guess a physician who

is qualified to offer an opinion[.]” In essence, the court held that an insurer’s

reliance on an IME’s report to deny workers’ compensation benefits is per se

reasonable. In reaching this conclusion, the court relied on SDCL 62-7-1, which

permits an employer to require an employee–claimant to submit “for examination to


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a duly qualified medical practitioner or surgeon selected by the employer[.]”

However, on its face, SDCL 62-7-1 has no direct applicability to the question in this

case. 2 Moreover, juries are routinely called upon to evaluate the opinions of

experts—including medical practitioners—and to weigh those opinions against

countervailing evidence. See Magner v. Brinkman, 2016 S.D. 50, ¶ 16, 883 N.W.2d

74, 82 (“Fact finders are free to reasonably accept or reject all, part, or none of an

expert’s opinion.” (quoting O’Neill v. O’Neill, 2016 S.D. 15, ¶ 17, 876 N.W.2d 486,

494)). We see no reason to conclude that a workers’ compensation insurer—whose

chosen business deals in such matters—is incapable of the same. Therefore, an

insurer’s basis for denial is not necessarily reasonable simply because the insurer

relies on the opinion of a medical practitioner.

[¶13.]         Regarding the second prong of a bad-faith action—i.e., whether

Insurers knew that there was a lack of a reasonable basis for denying Mordhorst’s

claim—the circuit court focused solely on Mordhorst’s claim that Dr. Segal’s report

was biased and that Insurers knew it would be biased. However, while Mordhorst’s



2.       SDCL 62-7-1 states in full:
               An employee entitled to receive disability payments shall, if
               requested by the employer, submit himself or herself at the
               expense of the employer for examination to a duly qualified
               medical practitioner or surgeon selected by the employer, at a
               time and place reasonably convenient for the employee, as soon
               as practicable after the injury, and also one week after the first
               examination, and thereafter at intervals not oftener than once
               every four weeks. The examination shall be for the purpose of
               determining the nature, extent, and probable duration of the
               injury received by the employee, and for the purpose of
               ascertaining the amount of compensation which may be due the
               employee from time to time for disability according to the
               provisions of this title.

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#27771

complaint does allege Dr. Segal’s report was biased, that is not the only assertion

relevant to the second prong. In his complaint, Mordhorst asserted:

             16. If Defendants had merely discussed the discrepancies in Dr.
             Segal’s report with Dr. Segal, it would have revealed that his
             opinions were unsupportable and contradicted by the medical
             records. This is evidenced by the fact that Dr. Segal abandoned
             his opinion that the work injury only caused an 18 day
             strain/sprain when asked questions in his deposition on cross-
             examination.

(Emphasis added.) This assertion, along with those quoted above in paragraph 11,

necessarily implies that Insurers were aware of Mordhorst’s medical records

including the MRI that revealed he suffered from a herniated disk. Accepting this

fact as true, a jury could also conclude that Insurers recklessly disregarded this

evidence in favor of Dr. Segal’s contrary report. See Champion, 399 N.W.2d at 324.

Thus, treating Mordhorst’s assertions as true and viewing them “in the light most

favorable to the plaintiff,” Wojewski v. Rapid City Reg’l Hosp., Inc., 2007 S.D. 33,

¶ 11, 730 N.W.2d 626, 631 (quoting Osloond v. Farrier, 2003 S.D. 28, ¶ 4,

659 N.W.2d 20, 22 (per curiam)), he stated a claim upon which relief can be granted.

                                     Conclusion

[¶14.]       It is not necessary to determine whether Dr. Segal’s report was lacking

or whether Insurers’ reliance thereon was actually unreasonable. Because the

present case is an appeal from a Rule 12(b)(5) motion for dismissal, such issues are

not properly before us. We decide only that Mordhorst asserted facts that if true,

state a claim for bad-faith denial of a workers’ compensation claim and that

Insurers’ reliance on Dr. Segal’s report to deny benefits was not per se reasonable.

Therefore, the circuit court erred by granting Insurers’ motion to dismiss.


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[¶15.]   We reverse and remand for further proceedings.

[¶16.]   ZINTER, SEVERSON, WILBUR, and KERN, Justices, concur.




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