                    United States Court of Appeals
                          FOR THE EIGHTH CIRCUIT
                                  ___________

                                  No. 01-3147
                                  ___________

James Arp; Candace Arp,                *
                                       *
               Plaintiff - Appellants, *
                                       *
      v.                               *
                                       *
AON/Combined Insurance Company; * Appeal from the United States
Continental Casualty Company,          * District Court for the
                                       * District of South Dakota.
             Defendants - Appellees, *
                                       *
GAB Robins North America, Inc.,        *
                                       *
   Third Party Defendant - Appellee. *
                                  ___________

                            Submitted: May 17, 2002

                                 Filed: August 20, 2002
                                  ___________

Before LOKEN, HEANEY and MURPHY, Circuit Judges.
                          ___________

HEANEY, Circuit Judge.

       Candace and James Arp appeal a final order entered by the United States
District Court for the District of South Dakota granting summary judgment in favor
of AON/Combined Insurance Company (“AON”), Continental Casualty Company
(“Continental”), and GAB Robins of North America, Inc. (“GAB”) (collectively “the
appellees”). The Arps allege that AON acted in bad faith when it refused to pay
reasonable medical expenses and when it failed to concede that James Arp is
permanently and totally disabled. For the reasons stated below, we reverse in part.

I.    BACKGROUND

       James was employed as a salesman by Combined, which is owned by AON.1
On January 9, 1997, James was driving from Rapid City, South Dakota to
Minneapolis, Minnesota to attend a training course when he encountered frost on the
roadway and rolled his vehicle. He was ejected from his vehicle and fractured his
skull on the concrete road, causing a severe brain injury. After a lengthy hospital
stay, James returned home to his wife Candace. It is undisputed that James’s head
injury rendered him permanently disabled.2 He requires 24-hour supportive care, and
cannot perform household tasks without close supervision and instruction.


      1
        AON is self-insured for workers’ compensation up to $500,000.00. Claims
exceeding $500,000.00 are paid by Continental. At the time of James’s accident, the
administration of AON’s workers’ compensation program was managed by GAB, a
third party administrator. In May of 1999, AON’s contract with GAB was cancelled
and James’s claim was transferred to Cambridge, a new third party administrator.
      2
        On December 9, 1999, Dr. Brian Tschida, a Board Certified Neurologist, filed
an affidavit, which stated as follows:

      On January 19, 1997, [James] Arp suffered a severe closed head injury
      which rendered him permanently and totally disabled and in constant
      need of 24 hour supervision. This is not a subtle case as Mr. Arp’s
      disability is clearly permanent and it has been obvious since the
      beginning of my treatment of Mr. Arp that he would never be able to
      manage or function on his own, and it is obvious that he is
      unemployable.

Appellant’s Appendix, at 186.

                                        -2-
      Following the accident, Candace filed a workers’ compensation claim on behalf
of her husband. The claim was accepted by AON and James began receiving
temporary total disability benefits.3 His medical bills were also paid. Although there
have been delays in the payment of medical bills, Candace admits that the delinquent
payments were unintentional.

       After his release from the hospital, James was enrolled in a program called the
“Adult Day Center,” which enabled Candace to continue working during the day.
James was then placed in a Community Transition Program until he “plateaued” in
early 1999. Beginning in early 1999, the nurse at the Community Transition Program
requested that James be transferred to the Black Hills Workshop, a facility for the
mentally disabled. James’s medical providers felt that he was not receiving enough
mental stimulation either at home or at the Community Transition Program. This
caused his cognitive ability and functioning to deteriorate. The Black Hills
Workshop was a facility that provided daily activities which would have been
beneficial for James. Because the Workshop did not employ enough attendants to
constantly supervise James, his nurse also requested funding for a companion to
monitor him at the Workshop. Both requests were denied by AON. During the
spring and summer of 1999, James’s nurse submitted approximately twenty additional
requests for funding to AON. Each was denied until September of 1999, when
funding for James’s placement at the Black Hills Workshop was finally approved.

       On May 3, 1999, GAB made an offer to pay James’s permanent partial
disability benefits in the amount of $12,151.16.4 Candace testified that she was not


      3
          James continues to receive temporary total disability benefits to this day.
      4
       As early as July of 1997, GAB representatives set the amount to be reserved
for James’s claim at $565,779.81. In January of 1999, this amount was changed to
$732,707.27. Both figures included allocations for future permanent disability
benefits in excess of $200,000.00. On January 17, 2000, Cambridge concluded that

                                           -3-
sure whether this offer was intended to release AON from its obligation to pay future
benefits. Nevertheless, this offer was rejected and a workers’ compensation
proceeding before the South Dakota Department of Labor commenced on May 29,
1999. Initially, in its answer to James’s complaint, AON denied that James was
permanently and totally disabled, even though there was no medical evidence to
support this assertion. On March 14, 2000, just days before the hearing on James’s
claim, the parties entered into a stipulation whereby AON stipulated that James was
permanently and totally disabled.5

       Several months later, the Arps filed suit against AON and Continental. GAB
was made a third party defendant. In their complaint, the Arps alleged the following
causes of action: (1) breach of a duty to pay workers’ compensation benefits; (2)
negligent infliction of emotional distress; (3) intentional infliction of emotional
distress; (4) loss of consortium; and (5) bad faith. The Arps also sought punitive
damages and attorneys fees. On August 13, 2001, the district court granted the
appellees’ motion for summary judgment. The Arps appeal the district court’s
decision to grant summary judgment in favor of AON, Continental, and GAB on their
bad faith claim.




James would require a payment of approximately $1,900,000.00 in disability benefits
and medical expenses over the course of his lifetime.
      5
       According to AON, this delay was attributable to several factors. First, GAB
had no authorization to make commitments in excess of $25,000.00 without AON’s
approval. Also, AON contends that it was required to give notice to Continental
when paying claims in excess of $125,000.00. Finally, the transfer of James’s claim
to Cambridge in May of 1999 led to administrative delays.

                                         -4-
II.   DISCUSSION

      South Dakota recognizes a cause of action for bad faith in failing to pay a
workers’ compensation claim. See In re Certification of a Question of Law
(Champion v. U.S. Fidelity & Guar. Co.), 399 N.W.2d 320, 322 (S.D. 1987). To
prove bad faith on the part of an insurer, a plaintiff must prove: (1) that a claim was
denied or benefits withheld without a reasonable basis; and, (2) the knowledge or
reckless disregard of the lack of a reasonable basis for the denial. Stene v. State Farm
Mut. Auto Ins. Co., 583 N.W.2d 399, 403 (S.D. 1998); Walz v. Fireman’s Fund Ins.
Co., 556 N.W.2d 68, 70 (S.D. 1996). It is entirely permissible for insurance
companies to challenge claims which are “fairly debatable.” Stene, 583 N.W.2d at
403. Moreover, “[b]eing dilatory or even slow . . . doesn’t in and of itself amount to
bad faith.” Ulrich v. St. Paul Fire & Marine Ins. Co., 718 F. Supp. 759, 763-64
(D.S.D. 1989).

       The sole issue on appeal is the propriety of the district court’s grant of
summary judgment in favor of the appellees. We review a district court’s grant of
summary judgment de novo. Jacob-Mua v. Veneman, 289 F.3d 517, 520 (8th Cir.
2002) (citations omitted). Summary judgment is appropriate when the evidence,
viewed in the light most favorable to the nonmoving party, demonstrates that there
is no genuine issue of material fact, and the moving party is entitled to judgment as
a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23
(1986); Freyermuth v. Credit Bureau Services, Inc., 248 F.3d 767, 770 (8th Cir.
2001).

       In order to withstand the motion for summary judgment, the Arps were required
to create an issue of material fact concerning whether AON had a reasonable basis for
denying their claims. Ulrich, 912 F.2d at 963. First, the Arps allege that AON acted
in bad faith between April and September of 1999 when it refused to approve requests
from James’s medical providers to fund his transfer to the Black Hills Workshop.

                                          -5-
The record demonstrates that AON had a legitimate reason to question the propriety
of this funding request. In April of 1999, James’s nurse submitted a funding request
to fund James’s transfer to the Workshop. This request was approved on September
7, 1999. In her deposition, Candace admitted that there were problems with James’s
transfer because the Workshop “did not have enough supervisors in the area . . . to
watch him close enough.” Appellees’ App. at 28-29. Moreover, the record
demonstrates that, on May 18, 1999, Workshop personnel indicated that they could
not employ James without additional staffing because he needed someone to work
with him individually. Appellant’s App. at 138. The record also indicates that, at that
time, Dr. Tschida felt that James could function “in a group of 4-5 individuals with
a supervisor without any difficulty.” Id. Our review of the record leads us to
conclude that the delay in approving the nurse’s funding requests could not have been
in bad faith because the dispute regarding whether the Workshop was an appropriate
facility for James created a reasonable basis for challenging the requests. Therefore,
the district court correctly granted summary judgment on this issue. 6

       Next, the Arps allege that AON acted in bad faith when it denied to the South
Dakota Department of Labor that James was permanently and totally disabled from
July 1999 to March 2000. The district court held that AON had a reasonable basis
to refuse to admit that James was permanently and totally disabled because the
admission would have created a monetary commitment exceeding its authority. The


      6
       The Arps also allege that AON and GAB acted in bad faith because they did
not compensate Candace for the time she spent caring for James. However, even if
we assume that Candace is entitled to be compensated for the time she has spent
caring for James, the record fails to contain any evidence to demonstrate that she has
requested compensation for her services. As such, there is no evidence that AON and
GAB failed to pay a claim for benefits, and AON and GAB are entitled to summary
judgment on this issue. See Ulrich, 912 F.2d at 963 (noting that an insurance
company may only be held liable if it intentionally denies a claim without a
reasonable basis).

                                         -6-
district court also concluded that it was reasonable for AON to investigate the claim
before admitting that James was permanently and totally disabled, and that there was
no evidence to show that AON’s denial was intentional. We disagree.

       AON’s contractual relationships did not provide a reasonable basis to deny that
James was permanently and totally disabled. The contractual obligations of AON,
Cambridge, GAB, and Continental were simply not relevant to whether there was a
factual basis to deny that James was permanently and totally disabled.7 The medical
evidence in this case conclusively demonstrates that James has been permanently and
totally disabled since the date of his accident. By denying James’s status as
permanently and totally disabled, AON forced the Arps to hire attorneys to litigate
this issue before the South Dakota Department of Labor, when this was completely
unnecessary.

       Moreover, the district court erred when it summarily concluded that there was
no evidence to suggest that AON’s denial was intentional and that it was reasonable
for AON to continue to investigate James’s disability status before admitting that he
was totally and permanently disabled. The record does not contain any medical
evidence to suggest that James was not permanently and totally disabled by his
injuries. Furthermore, the record contains a plethora of evidentiary submissions
which suggest that AON and GAB’s own agents knew that James was permanently
and totally disabled before they took the contrary position before the South Dakota
Department of Labor. For example, in March of 1999, a GAB representative noted
that James would “never be able to support his wife [or] himself.” Appellant’s App.
at 154. Also, Paulette Trenien of GAB testified that it was clear to her during the
eighteen months she handled James’s claim that he was totally disabled. Id. at 30.
Because the evidence in this case is sufficient to allow a jury to conclude that AON


      7
       Even if this authorization was required before AON could admit that James
was permanently and totally disabled, this would not account for a nine-month delay.

                                         -7-
intentionally and unreasonably denied that James was permanently and totally
disabled, the district court erred when it granted summary judgment on this issue.
See Carroll v. Gulf Ins. Co., 886 F.2d 1071, 1074 (8th Cir. 1989) (“[A] trial court errs
when, in deciding a summary judgment motion, it takes it upon itself to weigh
conflicting evidence and to resolve the issue based on the evidence.”).

      Finally, the Arps contend that GAB and AON acted in bad faith by offering the
Arps $12,151.16 to settle James’s permanent partial disability benefits claim. In our
view, a jury could reasonably conclude that this offer was further evidence that GAB
and AON were not acting in good faith.

       In Kirchoff v. Am. Cas. Co., 997 F.2d 401, 405 (8th Cir. 1993), an injured
plaintiff sued her insurer for handling her insurance claim in bad faith after she was
offered $8,000.00 dollars to settle a claim valued at over $300,000.00. After the jury
returned a verdict in favor of the plaintiff, the insurer appealed, arguing that it was
entitled to judgment as a matter of law on the bad faith claim because the evidence
was insufficient to support a finding of liability. Id. at 404. This court affirmed the
jury’s award, stating:

      Denial of benefits may be inferred from the insurer’s failure to process
      or pay a claim, and the requisite knowledge (or reckless disregard) on
      the part of the insurer may be inferred when the insurer has exhibited “a
      reckless indifference to facts or to proofs submitted by the insured.”

                                          ...

      [The insurer] claims it never denied payment to [the plaintiff], as
      evidenced by its . . . offer of $8000. But [the plaintiff] testified that she
      believed [the insurer’s] offer to pay its estimated defense costs was
      effectively a denial of her claim . . . . [This] could be the conclusion of
      a reasonable person . . . .”



                                          -8-
Id. at 405. The court also held that the jury’s conclusion that the insurer’s offer of
$8,000.00 was made in bad faith was sufficiently supported by evidence which
conclusively demonstrated the insurer’s liability, and the serious nature of the
plaintiff’s injuries. Id.8

       The Kirchoff case is similar to the one before us in several respects. In the
present case, AON never refused to settle with Candace, nor did it refuse to pay
James’s claim after the $12,151.16 offer was rejected. However, AON’s obligation
to pay James’s claim was undisputed, and the severity of his injuries was not
challenged. In fact, the record indicates that AON’s internal documents valued
James’s claim at well over $1,000,000.00. See Appellant’s App. at 176. Under these
circumstances, a jury could reasonably conclude that AON and GAB’s offer was
further evidence of bad faith, because they exhibited “a reckless indifference to facts
or to proofs submitted by the insured.” Kirchoff, 997 F.2d at 405 (citation omitted);
see also Am. States Ins. Co. v. State Farm Mut. Ins. Co., 6 F.3d 549, 553 (8th Cir.
1993) (upholding jury verdict against insurer that failed to settle a claim for a
reasonable value when its liability and the extent of the claimant’s injuries were
unchallenged).




      8
       AON and GAB argue that Kirchoff is inapplicable because Candace admitted
that she understood that she would not have waived the right to pursue additional
benefits by accepting the offer. However, Candace’s testimony is contradictory.
Candace testified that after reading the offer, she understood that she and James
would have the right to pursue more benefits in the future if they accepted it.
Appellee’s App. at 52. However, Candace also testified that at the time the offer was
made, she thought AON “wanted to do a one-time final settlement.” Id. at 49.
Moreover, the GAB representative who made the offer testified during her deposition
that James would not have received additional benefits if the Arps had accepted the
offer unless he demonstrated that he was permanently disabled. Appellant’s App. at
40.

                                         -9-
III. CONCLUSION

      The judgment of the district court is reversed, as outlined in the text of this
opinion.

      A true copy.

             Attest:

                CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.




                                        -10-
