Arizona Court of Appeals Division One Orders A New Trial on an Employee’s Compensatory and Punitive Damages Claims Arising out of McDonald’s Bad Faith Handling of Her Workers’ Compensation Claim.

Maria Mendoza (“ Mendoza”) injured her arm while working at a McDonald’s restaurant.  Although McDonald’s initially placed Mendoza on temporary total disability benefits, it delayed in authorizing carpal tunnel surgery and for a time terminated her disability benefits.  Eventually, an administrative law judge found that Mendoza was entitled to total disability benefits and awarded her psychological and pain management treatment.  Mendoza thereafter filed a lawsuit against McDonald’s, claiming that McDonald’s acted in bad faith in handling her workers’ compensation claim.  Following trial, a jury awarded Mendoza $250,000 in compensatory damages, but did not award her punitive damages.  This appeal followed.

The Arizona Appeals Court ordered a new trial on compensatory and punitive damages (McDonald’s did not contest liability).  First, the Court held that the trial court should have instructed the jury that Mendoza is entitled to any damages for pain and suffering, past and future medical expenses, and lost earnings proximately caused by McDonald’s bad faith, as opposed to the injury itself.  Next, the Court concluded that the trial court should not have allowed McDonald’s to withhold certain portions of its claims adjuster’s files as privileged because McDonald’s had affirmatively alleged that its actions were subjectively reasonable.  Thus, McDonald’s had raised a defense that implicitly incorporated the advice of counsel and could not deny Mendoza the opportunity to explore the foundation for McDonald’s assertions.  Third, the Court explained that the trial court should have instructed the jury that “punitive damages may be assessed against an insurer for the actions of its attorney if those actions were taken in furtherance of the insurer’s business and within the scope of the attorney’s agency.”  Lastly, the Court held that the trial court should have given preclusive effect to the compensability determinations of the administrative law judge.

Judge Norris authored the opinion; Judges Johnsen and Winthrop concurred.