Texas Adventures in Ad Hoc Rulemaking: State Office of Risk Management v. Lawton

Texas Adventures in Ad Hoc Rulemaking: State Office of Risk Management v. Lawton

As Albert Einstein once famously said, “The definition of insanity is doing the same thing over and over again and expecting different results." On August 28, 2009, the Texas Supreme Court issued its opinion in State Office of Risk Management v. Lawton.1 In a unanimous opinion, the Court rejected the Appeals Panel’s latest attempts at ad hoc rulemaking and held that the sixty-day waiver period in section 409.021(c) of the Act does not apply to extent of injury disputes whether or not the basis for the dispute could have been discovered by a reasonable investigation within the waiver period.

The Court’ s opinion also overrules several lower courts of appeal decisions which held to the contrary by erroneously relying on the Appeals Panel’s ad hoc rule making. This case is the poster child for separation of powers and explains why we have oversight of agencies by the courts.

In Lawton, the claimant struck her left knee on a steel monitor while at work. The next day, the State Office of Risk Management (SORM) received written notice of the injury and began paying benefits. An MRI report issued during the initial 60 day period diagnosed the claimant with degenerative joint disease. Surgery was subsequently recommended to treat the claimant’s knee. SORM ordered a peer review of this recommendation. The peer review report concluded that the degenerative changes were an ordinary disease of life and not a result of the claimant’s knee contusion. Shortly thereafter, SORM disputed that the claimant’s compensable injury extended to include pre-existing degenerative joint disease. The dispute was filed approximately three months after the end of the statutory sixty-day period for disputing compensability of the claim.

Adventures in Ad Hoc Rulemaking: State Office of Risk Management v. Lawton

A CCH was held and the hearing officer concluded that SORM waived the right to dispute degenerative joint disease because it waited too long to file the dispute after it received notice of the knee contusion. The hearing officer found that SORM could have discovered the extent of the claimant’s alleged injury if it had conducted a reasonable investigation within the sixty day time period established by section 409.021(c). The Appeals Panel affirmed the hearing officer. SORM then filed a petition for judicial review in district court. The trial court affirmed the decision. In a two-to-one opinion, the Waco Court of Appeals affirmed. SORM then filed its petition for review with the Texas Supreme Court.

The History of Lawtons Waiver Rule

TIG Premier Insurance Co. v. Pemberton: Precursor to Lawton

The waiver rule at issue in Lawton arguably begins with the case of TIG Premier Insurance Co. v. Pemberton. That case began as Appeals Panel Decision 991178, decided July 15, 1999. At issue was section 409.021(c) which states, in relevant part, as follows:

If an insurance carrier does not contest the compensability of an injury on or before the 60th day after the date on which the insurance carrier is notified of the injury, the insurance carrier waives its right to contest compensability.

The Appeals Panel decided that the contest period is not limited to the period following a carrier’s initial notice that an employee has been injured, but also applies to extent of injury disputes so that anytime the carrier receives notice of a new body part or condition, it has sixty days to file its contest or waive the right to do so. Therefore, the Appeals Panel held that the carrier waived the right to dispute that the claimant’s injury extended to include deep vein thrombosis, even though the hearing officer found that DVT was not causally related to the compensable injury, because the carrier did not dispute DVT within 60 days of receiving notice of the condition.

However, less than eight months later, in February of 2000, the Commission rejected the Appeals Panel’s interpretation when it adopted rule 124.3(e) which states as follows:

Texas Labor Code, 409.021 and subsection (a) of this section do not apply to disputes of extent of injury.

In its reasoned justification for the rule, the Commission specifically cited and rejected the Appeals Panel’s interpretation that section 409.021(c) applies to extent of injury disputes:

One appeals panel approach has suggested that when a doctor attempts to treat additional body parts/systems, such as in the previous example, Texas Labor Code, §409.021 (regarding Initiation of Benefits; Insurance Carrier's Refusal; Administrative Violation) is invoked and the carrier has 60 days to file a dispute for extent of injury or waive the right to dispute this issue and become liable for this body part/system. This rule does not adopt that interpretation.

Texas Labor Code, §409.021, is intended to apply to the compensability of the injury itself or the carrier's liability for the claim as a whole, not individual aspects of the claim. When a carrier disputes the extent of an injury, it is not denying the compensability of the claim as a whole, it is disputing an aspect of the claim. This is similar to when a carrier accepts a claim but disputes the existence of disability. A dispute of disability is a dispute of the amount of benefits that a person is entitled to. In much the same way, a dispute involving extent of injury is a dispute over the amount or type of benefits, specifically, medical benefits, to which the employee is entitled (i.e. what body areas/systems, injuries, conditions, or symptoms for which the employee is entitled to treatment); it is not a denial of the employee's entitlement to benefits in general. 25 Tex. Reg. 2096, 2097 (2000) (emphasis added).

Appeals Panel Decision 991178 was ultimately reviewed by the Waco Court of Appeals in 2003 in TIG Premier Insurance Co. v. Pemberton, 127 S.W.3d 270 (Tex. App.--Waco 2003, pet. denied). In Pemberton, the Waco Court, like the Commission, rejected the Appeals Panel’s interpretation of section 409.021(c). The Waco Court concluded that section 409.021(c) applies only to the carrier’s initial response to a notice that an employee has been injured and does not apply to extent of injury disputes. The Waco Court relied in part on Division rule 124.3(e) which says just that – “Texas Labor Code, § 409.021 and subsection (a) of this section do not apply to disputes of extent of injury.” 

Appeals Panel Decision 041738-s 3

The Appeals Panel remained sufficiently chastised until September of 2004 when it issued its decision in Appeals Panel Decision 041738-s. In that case, it announced the creation of a new ad hoc waiver rule which became the subject of Lawton:

[T]he injury that becomes compensable by virtue of waiver is not necessarily limited by the information listed on the first written notice of injury. Rather the nature of the injury will be defined by that information that could have been reasonably discovered in the carrier's investigation prior to the expiration of the waiver period.

As already discussed, both the Commission and the Waco Court of Appeals previously declared that section 409.021(c)’s sixty-day waiver period does not apply to extent of injury disputes. However, this did not deter the Appeals Panel from holding otherwise. It circumvented rule 124.3(e) and the Pemberton decision by effectively re-characterizing the nature of the dispute. According to the Appeals Panel, if the condition could have been reasonably discovered within the first sixty days, then it was part of the “injury that becomes compensable by virtue of waiver.” The Appeals Panel’s unstated conclusion appears to be that the dispute of a condition that could have been reasonably discovered within the sixty day period was not an extent of injury dispute but a compensability dispute. However, the Appeals Panel did not come right out and say this in its decision. Whether by accident or design, the Appeals Panel’s decision was vague, to say the least, when it came to its legal underpinnings. There is the barest mention, and no analysis of, rule 124.3(e) which flatly states that section 409.021 does not apply to extent of injury disputes. There is no mention at all of the Pemberton decision or the agency’s own reasoned justification of rule 124.3. Since Appeals Panel Decision 041738-s was decided September 8, 2004, at least 66 Appeals Panel decisions have cited this decision.

Intermediate Appellate Review of the Appeals Panels Ad Hoc Rule

State Office of Risk Management v. Lawton was the first appellate case to consider the waiver rule created by the Appeals Panel in APD No. 041738-s. The Waco Court of Appeals issued its decision in that case on April 16, 2008. In a two-to-one decision, the court affirmed the trial court judgment. In its opinion, the court made three findings. It is the third finding that makes no sense and is not supported by the first two. First, the court correctly held that section 409.021(c)’s sixty-day waiver period does not apply to extent of injury disputes, as it previously held in Pemberton. Next, the court correctly held that SORM’s complaint is an extent of injury dispute. However, the court then holds that SORM waived the right to dispute the extent of the injury under section 409.021(c). What is so remarkable is that the court does not attempt to explain how this holding is consistent with its first two holdings, as it apparently saw no conflict. All that can be said is that the court chose to follow the Appeals Panel’s ad hoc rule and also held that section 409.021(c) and rule 124.3(e) only apply to disputes raised outside the sixty day period where the carrier establishes the existence of information that could not have been reasonably discovered within the applicable time period.2

On July 2, 2008, SORM filed its petition for review with the Texas Supreme Court, seeking to overturn the Waco Court of Appeals’ judgment. While the Lawton case was pending before the Texas Supreme Court, the Dallas Court of Appeals issued three decisions in quick succession in which it simply relied on the Waco Court of Appeals’ interpretation of section 409.021 and rule 124.3(e) without any meaningful analysis of its own. The first case was Sanders v. American Protection Ins. Co., decided August 5, 2008. Sanders v. Am. Prot. Ins. Co., 260 S.W.3d 682 ( Tex. App.--Dallas 2008, no pet.). The next case was Federal Ins. Co. v. Ruiz, decided February 19, 2009, in which the court held that its decision was controlled by its decision in Sanders. Fed. Ins. Co. v. Ruiz, 281 S.W.3d 177 ( Tex. App.--Dallas 2009, no pet.). The third case, issued a week later on February 26, 2009, was Zenith Ins. Co. v. Ayala, in which the court again relied on its Sanders case but this time stated, “We acknowledge the case we relied on in the Sanders case, State Office of Risk Mgmt. v. Lawton, 256 S.W.3d 436 (Tex. App.-Waco 2008, pet. filed), is now before the Texas Supreme Court. Zenith Ins. Co. v. Ayala, 2009 Tex. App. LEXIS 1309 (Tex. App. Dallas Feb. 26, 2009).3

The Texas Supreme Court’s Opinion: Sanity Restored

The Texas Supreme Court rejected the Waco Court of Appeals’ application of the Appeals Panel’s ad hoc waiver rule to hold that SORM had waived the right to dispute the extent of the claimant’s knee injury because SORM did not dispute the extent of the injury within the initial sixty-day period when it could have discovered, through a reasonable investigation, that the claimant was seeking benefits for something more than a contusion. The Texas Supreme Court found that the Waco court’s holding is unsupported by the text of section 409.021, and conflicts with Rule 124.3(c) and the Division’s intent in adopting the rule. The Texas Supreme Court reversed the Waco Court of Appeals’ judgment and rendered judgment that section 409.021(c)’s sixty-day waiver period applies only to compensability and not disputes regarding extent of injury. The Court explained that this interpretation is consistent with rule 124.3(e) and the reasoned justification for that rule as reflected in the Texas Register. The court held that the best evidence of the agency’s intent in adopting rule 124.3(e) is the Texas Register and not the Appeals Panel. The Court held:

Nowhere in the text of the rule, the statute, or the Texas Register, is there a suggestion that the carrier waives the right to dispute the extent of an injury if the basis for the dispute could have been discovered by a reasonable investigation within the waiver period.

The Court explained that implying such a requirement would eliminate the distinction between compensability and extent: a dispute about any injury reasonably discoverable within sixty days of the initial notice would be governed by the deadlines for compensability while information obtained outside that timeframe would fall under the deadlines for disputing extent. The Court further explained that this not only contravenes the statute and rule, but would create an unworkable situation. If a carrier received medical information on the fifty-ninth day, it would have to determine immediately whether to contest the injury’s extent or waive its right to do so. This would require the carrier to investigate all conditions that may be “reasonably discoverable,” leading to increased costs and unnecessary disputes.

The Appeals Panel chose to create its own exception to rule 124.3(e). The rule states unambiguously that section 409.021(c)’s sixty-day waiver period does not apply to extent of injury disputes. However, the Appeals Panel effectively rewrote the rule to say that the sixty-day waiver period does not apply to extent of injury disputes, unless the basis for the dispute could have been discovered by a reasonable investigation within the waiver period. This overreaching has happened before. In Rodriguez v. Service Lloyds Ins. Co, the Supreme Court told the Appeals Panel that it cannot create ad hoc exceptions to the agency’s rules. 997 S.W.2d 248, 254 ( Tex. 1999) (rejecting the Appeals Panel’s judicially created exceptions to the 90 day rule). In rejecting the Appeals Panel’s latest attempts at ad hoc rulemaking, the Supreme Court cited from its opinion in Rodriguez in which it held that while courts normally defer to an agency’s interpretation of its own regulation, they cannot do so if that interpretation is plainly erroneous or inconsistent with the regulation. The Supreme Court held that it was improper for the Waco Court to rely on the Appeals Panel’s decision because the Appeals Panel’s interpretation, i.e., its judicially created exception to rule 124.3, is plainly erroneous or inconsistent with the lawfully adopted rule. 

Why the Courts Reject Ad Hoc Rulemaking

As the Texas Supreme Court explained in Rodriguez, ad hoc rulemaking undercuts the Administrative Procedure Act. The legislature enacted the APA to avoid the problems that ad hoc rulemaking creates. Under the APA, an agency must provide notice, publication, and invite public comment, among other things. The APA assures that the public and affected persons are heard on matters that affect them and receive notice of new rules. However, when the Appeals Panel engages in ad hoc rulemaking through its decisions, there is no opportunity for notice or public comment. In addition, a person reading rule 124.3(e) would not have notice of the Appeals Panel’s exception because it is not found in the printed rules. As the Court explained in Rodriguez, informally amending a rule through a contested case hearing or appeals panel decision results in the “issuance of a private opinion that will never be known by anyone except those few persons who take the time to research the files of an agency.” Under the most basic concepts of due process, persons are entitled to know what the law is so that they can conduct their affairs accordingly. For those astute enough to look for exceptions to the rule in the Appeals Panel’s decisions, they should not have to guess at the meaning because the decisions are so poorly worded and to try and hit a moving target because the Appeals Panel’s exception keeps evolving.

If the Appeals Panel’s judicially created exception to rule 124.3(e) had been proposed under the APA’s formal rulemaking procedures, there would have been an opportunity for public comment. At that point, the question likely would have arisen as to whether the agency even has the statutory authority to create a waiver rule for extent of injury disputes given that section 409.021(c) only applies to compensability disputes. However, this discussion never took place because the APA was not followed. As a result, for approximately five years, and at enormous expense to carriers, the Appeals Panel imposed an illegal rule of its own creation. These costs came from cases in which it was held that the carrier had waived the right to dispute an ordinary disease of life, in some instances where there was not even an allegation linking the condition to the compensable injury. Following the Supreme Court’s decision in Lawton, ten years after its decision in Rodriguez, the hope is that the Appeals Panel will come to a better understanding of what constitutes ad hoc rulemaking and that it will in the future resist the urge to try and implement its own policy preferences through ad hoc rulemaking. Its past adventures in ad hoc rulemaking have only resulted in uncertainty, unpredictability, and increased system costs.

Future Implications

The Texas Supreme Court’s decision in Lawton may be misinterpreted by some to hold that the decision established a new waiver deadline for disputing the extent of an injury: 45 days from the date the carrier receives a bill that involves treatment(s) or service(s) that the carrier believes is not related to the compensable injury. However, the Court did not so hold. The Court merely acknowledged the applicability of rule 124.3(e) under the facts of that case. The erroneous conclusion by some that the Court established a new waiver deadline for extent of injury disputes appears to result from a misunderstanding as to the requirements of rule 124.3(e). Rule 124.3(e) provides a deadline to file a notice of dispute of extent of injury when disputing a medical bill based on extent of injury. However, rule 124.3 does not contain a waiver provision and one cannot be implied from the text of the rule.

This is confirmed by the Division in its reasoned justification for the rule published in the Texas Register: “Though the rule gives a carrier a time frame to file the dispute of extent of injury, failure to do so timely is a compliance issue. It does not create liability.” 25 Tex. Reg. 2096, 2097 (2000). As held by the Court in Lawton, the best evidence of the Division’s intent is the Texas Register. Therefore, a carrier does not waive the right to dispute the extent of an injury if it does not timely file a notice of dispute within 45 days from the date the carrier received a medical bill that involves treatment or services for the disputed body part or condition. Rather, the carrier has potentially committed an administrative violation.

In the Division’s 2009 Self-Evaluation Report submitted to the Sunset Advisory Commission on September 4, 2009, the Division explained Lawton as follows:

One recent case from the Texas Supreme Court, State Office of Risk Management v. Lawton, addresses the issue of whether the waiver provision in Texas Labor Code, Section 409.021 applies only to general disputes over the existence of a work-related injury or whether it also applies to disputes regarding the extent of the compensable injury. The question before the court was whether the standard currently applied by the Division’s Appeals Panel in these cases (i.e., if a diagnosis that could have been reasonably discovered during the insurance carrier’s initial investigation of the claim was not disputed at the conclusion of the 60th day, then the insurance carrier has waived its right to dispute the compensability of that particular diagnosis) should be upheld or whether an insurance carrier’s responsibility during the first 60 days of the claim is simply to determine whether a work-related injury has occurred or not. On August 28, 2009, the Court ruled the latter.

This is significant because the Division properly acknowledged the sole question before the court and does not attempt to assert that the case created a new 45-day waiver period. It is also interesting to note the clarity with which the author(s) of the report were able to describe the Appeals Panel’s ad hoc rule compared with the tortured phrasing in the Appeals Panel’s own decisions.

On September 10, 2009, the Appeals Panel decided its first case following the Supreme Court’s decision in Lawton. In Appeals Panel Decision 090991, the Appeals Panel applied the Court’s holding in Lawton that section 409.021(c)’s sixty-day waiver period does not apply to extent of injury disputes. Accordingly, it reversed the hearing officer’s decision that the carrier waived the right to dispute the extent of the claimant’s injury. The Appeals Panel did not attempt to apply a new 45-day waiver deadline in this case and made no mention of it. Because the reasoned justification for rule 124.3 unambiguously states that the failure to file a notice of dispute within 45 days from the date the carrier received a medical bill does not create liability, it would be surprising if it were to now try and hold otherwise. Once the Court’s opinion in Lawton becomes final, the Division may issue a TDI Commissioner Bulletin advising the system participants how it intends to apply Lawton but it is not required to do so.

While it is unlikely the Appeals Panel will now try and hold that a carrier is liable for a disputed body part or condition if the carrier does not file a notice of dispute within 45 days from the date it receives a medical bill that involves treatment or services for that body part or condition, there is the possibility that it could attempt to adopt a waiver rule for extent of injury disputes through the formal rulemaking process. However, the Division does not have the statutory authority to do so. The Appeals Panel claimed the authority for its ad hoc waiver rule was section 409.021(c) but the Supreme Court has now declared that statute applies only to compensability disputes and not extent of injury disputes.

If a case in which the carrier was held to have waived the right to dispute the extent of injury based on the Appeals Panel’s ad hoc rule has become final, the Court’s decision in Lawton is cold comfort since those cases likely cannot be re-opened. However, carriers should continue to monitor those claims to see whether the condition has resolved and to ensure that only reasonable and necessary medical care is provided. For those cases involving waiver which are still pending, either at the Division or in court, the carrier should raise the Court’s holding in Lawton. The lesson here is to not allow a decision to become final if there is a pending declaratory judgment suit which could alter the law to be applied in your case. Finally, carriers should consider continuing to file PLN-11s describing what injuries are being accepted and expressly disputing any other injuries.

Footnotes

1. On September 14, 2009, the claimant filed a motion for rehearing with the Court. (Author's Note: On November 20, 2009, the motion for rehearing of cause was denied.)

2. In the Ruiz case discussed below, the Dallas court speculated as to the Waco court’s unstated conclusions:

Although not expressly stated in Lawton, two conclusions are implicit from the Waco court's opinion. First, the court had to have concluded that, following the issuance of Appeals Panel Decision No. 041738-s, its decision in Pemberton did not apply to medical conditions that could have been reasonably discovered in the carrier's investigation prior to the expiration of the sixty-day waiver period. Then, the court had to have concluded that the employee's internal knee damage was such a medical condition.

Sanders. Fed. Ins. Co. v. Ruiz, 281 S.W.3d 177, 182-83 ( Tex. App.--Dallas 2009, no pet.)

3. The Ayala case is currently pending before the Texas Supreme Court. Given the similarity between Ayala and Lawton, there is a strong likelihood the Supreme Court will reverse the Dallas Court’s opinion in this case.

Editor’s Note: The author of this article, James M. Loughlin, is a partner with the Austin-based law firm of Stone Loughlin & Swanson, LLP. Loughlin earned a Bachelor of Science degree from Texas A & M University in 1992 and a law degree from Baylor University in 1996. He is board certified in Workers’ Compensation Law by the Texas Board of Legal Specialization.

The opinions contained in this article are solely those of the author and should not be considered legal advice. Receipt of this information does not create an attorney-client relationship.

Any advice or information provided in this article is not a substitute for legal counsel and should not be acted upon without first consulting a competent attorney.

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 © Copyright 2009 James M. Loughlin. All rights reserved. This article first appeared in the Texas Workers’ Compensation Update (Nov. 2, 2009) published by the Insurance Council of Texas, and is reprinted with permission of the author and the Insurance Council of Texas.