Oklahoma Insurance Lawyer & Attorney : Stauffer Graves & Nathan Law Firm

In Miller v. Monumental Life, the Tenth Circuit found that an ERISA plan requirement that an insured “present proof of a Social Security Disability Award” was ambiguous.  After an accident, the insured had applied for Social Security disability under both Title II (insurance)  and Title XVI (welfare).  The court explains: 

Although the Social Security Administration (SSA) administers both programs, the Supreme Court has outlined their distinctions: “Title II is an insurance program. Enacted in 1935, it provides old-age, survivor and disability benefits to insured individuals irrespective of financial need. Title XVI is a welfare program. Enacted in 1972, it provides [Social Security Insurance] benefits to financially needy individuals who are blind, or disabled regardless of their insured status.”

www.ca10.uscourts.gov/opinions/05/05-2247.pdf

Title II disability benefits were denied because Miller did not have sufficient quarters of coverage to confer disability insured status.  Miller was granted disability under Title XVI.  Monumental denied payment on the grounds that it was not a Social Security Disability Award.  The trial court affirmed, but the Tenth Circuit reversed.  First, the Tenth Circuit notes that the case must be decided under federal common law, not under New Mexico law. 

The district court found that the “phrase [Social Security Disability Award] has a technical meaning that does not include [Social Security Income] payments” and refused to “go beyond the technical meaning of Social Security Disability Award.”  The court emphasized “that the language in each of these places means what Monumental meant it to say when it wrote [the] definition.”  The Tenth Circuit notes the definition of disability is the same under either Title II or Title XVI, and that a reasonable person could conclude that a finding of disability under either title was sufficient.  The court rejected Monumental’s claim that since the Title XVI benefits would cease when Monumental  began paying Miller, that such payments were not sufficient under the policy, finding that the argument placed Miller in a classic Catch 22.  The court found the term ambiguous.  It also found that any extrinsic evidence should have been presented in the summary judgment motions, but was not.  The Court adopted the rule of contra proferentem in cases of ambiguous language with a de novo standard of review, which means that terms are construed against the drafter. The court then held that Miller’s receipt of Title XVI benefits satisfied the plan requirements.  It remanded the case, however, to rule on an issue the trial court did not reach – whether Mr. Miller’s accident was the “sole cause” of his disability.

The decision is remarkable in several respects.  First, it reverses a trial court’s ruling on summary judgment on a plan determination.  It should be noted that the plan did not give the administrator the authority to interpret ambiguous provisions, therefore, the court had de novo review.  Second, it finds that the term social security disability is ambiguous, as it could apply to any finding of disability under the social security laws. Third, it specifically adopts the contra proferentem rule in ERISA cases in the Tenth Circuit, joining the majority of courts which have considered the issue.  Finally, the court notes that it has never construed a term against an ERISA beneficiary, which would be against the policies of ERISA. 

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Yaffe v. Great American, Case No. 06-7057 (10th Cir. 8/27/07);
http://www.ca10.uscourts.gov/opinions/06/06-7057.pdf

After an explosion at the insured's plant, the insured's total liability was $1,785,000. Because the underlying CGL policy had a $10,000 per claim deductible (rather than a per occurrence deductible), the primary carrier paid only about half of its million dollar limits.  The insured wanted its excess carrier to pay the amounts over its primary carriers' million dollar limits, but the excess carrier said it was not required to pay because the primary carrier had not paid its limits.  The trial court sided with the excess carrier on summary judgment, but the Tenth Circuit reversed, finding that excess carrier's loss payable clause was ambiguous. 

This case involved a dispute between an insured, Yaffe, and its excess carrier, Great American.  As a result of an explosion at Yaffe’s scrapyard in Muskogee, Oklahoma. Yaffe incurred  $1,785,986.89 in liability on claims by numerous parties. Yaffe had two insurance policies – a  commercial general-liability policy issued by ACE with limits of $1,000,000 per occurrence; and a commercial umbrella policy issued by Great American with limits of $25,000,000.  The ACE policy, however, had a per claim deductible, rather than a per occurrence deductible.  Since most of the claims were under $10,000, ACE paid just under $500,000 of Yaffe’s total liability of over $1,785,000.  Yaffe wanted Great American to pay the difference between what Yaffe paid out in claims and the ACE policy limits – about $785,000.  Great American claimed it had no liability because the ACE policy had not been exhausted.  The trial court granted summary judgment to Great American, holding that the Great American policy was unambiguous and that Great American is only liable after the ACE policy is exhausted. The Tenth Circuit reversed, finding that the Great American policy was ambiguous.  The Tenth Circuit refused, however, to grant summary judgment to Yaffe, since Great American had not had an opportunity to respond to Yaffe’s motion for summary judgment in the trial court. 

The Tenth Circuit discussed three different clauses of the Great American policy: the loss payable clause and the retained limit definition; the other insurance clause and the defense clause.  Under the loss payable clause, the Great American policy applied to damages in excess of the retained limit–  defined as the total amounts stated as the applicable limits of the underlying policies (e.g., the $1 million dollar limit of the ACE policy).  Great American claimed that it had no duty to pay until the underlying ACE policy limits were exhausted.  But the Tenth Circuit said that under the policy terms, Great American was obligated to pay once Yaffe incurred liabilities exceeding $1,000,000. 
Under the loss payable clause, the policy states: 

Coverage under this policy will not apply unless and until [Yaffe] or [Yaffe’s] underlying insurer is obligated to pay the “[R]etained [L]imit.”

 The court discussed three reasonable constructions of this clause: 1.  When the loss payable clause refers to what Yaffe “is obligated to pay,” it refers to Yaffe’s legal liability, regardless of whether Yaffe is protected by insurance coverage for that liability. Since Yaffe had to pay more than $1 M, there could be coverage, but the reference to Yaffe’s “underlying insurer” becomes superfluous.  2.  Since umbrella policies are designed to fill gaps in coverage, the loss payable clause could mean that Great American only pays when either Yaffe (in the case of an event not covered by insurance) or Yaffe’s underlying insurer (in the case of a covered event) is obligated to pay the retained limit.  Since the accident was covered in part by insurance, this would mean that Great American was not required to pay until the ACE policy limits were exhausted.   3.  The reference to Yaffe in the loss payable clause is merely to protect Yaffe in the event of a default by its primary insurer, ACE. 

The Tenth Circuit also found that other clauses were open to more than one reasonable interpretation, including the “other insurance” clause and the “defense” clause.  The court found there could be a reasonable expectation of coverage under the other insurance clause.  And, while defense was not an issue in the case, Yaffe argued successfully that the defense clause showed that the drafters of the policy could unambiguously require exhaustion of coverage when they wanted to.

This case is interesting on several levels.  First, it provides practitioners with a guide on how to successfully argue ambiguity in one clause by showing that another clause is more clear.  Second, it shows that an appellate practitioner might have success in arguing that a policy is ambiguous on appeal, since whether a contract is ambiguous is a question of law for the court, and therefore, the appellate court will review the matter de novo.  Finally, it shows the importance of consistency in language for policies; defined terms should be used in the same way for the same thing throughout the policy – the failure to do so might cause the policy to be considered ambiguous.  

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