Reinsurance Law Blog : Oklahoma Insurance Lawyer & Attorney : Stauffer & Nathan Law Firm

Payless was sued in California for making hourly employees work "off the clock."  It asked its insurer, Travelers, to defend and indemnify, but Travelers declined, saying that the claim was not covered.  Payless settled the claims and then went after Travelers for reimbursement of the settlement and defense expenses.  Travelers got summary judgment and the Tenth Circuit affirmed.

See, Payless v. The Travelers. 

The Tenth Circuit found that this was a case of a misplaced modifier.  The clause at issue excluded certain statutory claims against employers and stated: 

The Insurer shall not be liable for Loss on account of any Claim made
against any Insured . . . for an actual or alleged violation of the Fair
Labor Standards Act (except the Equal Pay Act), the National Labor
Relations Act, the Worker Adjustment and Retraining Notification Act,
the Consolidated Omnibus Budget Reconciliation Act of 1985, the
Occupational Safety and Health Act, the Employee Retirement Security
Act of 1974, any workers’ compensation, unemployment insurance,
social security, or disability benefits law, other similar provisions of
any federal, state, or local statutory or common law or any
amendments, rules or regulations promulgated under any of the
foregoing; provided, however, this exclusion shall not apply to any
Claim for any actual or alleged retaliatory treatment on account of the
exercise of rights pursuant to any such law, rule or regulation.

emphasis added. 

The question was whether "other similar provisions" modified all the listed exclusions, or just the underlined exclusions.  The court found that even though bad grammar was used, the clause excluded all claims arising out of the Fair Labor Standards Act or other similar state law. 

The court held that bad grammar did not make the clause ambiguous and even quoted Groucho Marx: 

The opinion states:

All this underscores that, while the rules of English grammar often afford a valuable starting point to understanding a speaker’s meaning, they are violated so often by so many of us that they can hardly be safely relied upon as the end point of any analysis of the parties’ plain meaning. So it is that Groucho Marx could joke in Animal Crackers, “One morning I shot an elephant in my pajamas. How he got into my pajamas I’ll never know,” leaving his audience at once amused by the image of a pachyderm stealing into his night clothes and yet certain that Marx meant something very different. In the more mundane task of contract interpretation, we must be no less entitled to acknowledge the parties’ plain meaning without being straight-jacketed by a grammatical rule into reaching a patently unintended result.

Grammar and Groucho in an insurance policy interpretation case. Doesn’t get much better than that!

 

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In Rasenack vs. AIG Life Insurance Company, the Tenth Circuit ruled that AIG’s delays in deciding Rasenack’s claim for benefits under an accidental death and dismemberment policy (ADD policy) were substantial enough to result in a de novo review of the claim by the trial court.  Generally, under ERISA, claims decisions by administrators such as AIG are reviewed by the courts under an arbitrary and capricious standard.  Under the arbitrary and capricious standard, so long as the decision is supported by evidence, it will be upheld, while under a de novo standard, no weight is given to the claims administrator’s decision.  Summary judgment for AIG was reversed, and the case was remanded.

Mr. Rasenack was severely injured as a pedestrian by a hit and run vehicle.  He was in a coma for three weeks and remained hospitalized for months.  He claimed he was entitled to paralysis benefits under the AIG policy because he lost the use of both legs and his left arm.  The plan says that claims will be determined in 90 days, or under special circumstances, within 180 days; AIG took 16 months to deny the claim.  Rasenack appealed.  Appeals were to be decided in 60 days.  Seven months later, with no decision by AIG on the appeal, Rasenack sued.  AIG then denied the appeal.

First the court held that the claims administrator’s decision was entitled to no deference where the decision was made by operation of law, rather than the use of discretion.  Then the court found that the policy was ambiguous.  The policy’s definition of hemiplegia as “complete and irreversible paralysis” is wholly dependent on the meaning of “paralysis,” which the policy does not define. AIG claimed that the definition of hemiplegia carries a plain meaning, i.e., that the entire arm and leg of one side of the body must be “completely paralyzed,” and that “anything less than ‘no movement at all’ would not be ‘complete’ paralysis.”  While complete absence of movement may be a reasonable interpretation of ‘paralysis’, it was not the only interpretation, as found in various medical texts.  And the summary plan description defined hemiplegia as the loss of “use of both upper and lower limb on same side of body.”  The language was strictly construed against AIG, the drafter of the policy.

The court then reviewed the record, finding that there was evidence which supported the claim.  This was important because AIG stated in its denial that there was no evidence to support the claim.  The failure of AIG to consider evidence in support of the claim made the decision fatally one sided: 

Comparing AIG’s explanations of its decision to deny the claim to the information contained in the administrative record, it appears that AIG cherry-picked the information helpful to its decision to deny Mr. Rasenack’s claim and disregarded the contrary opinions of the medical professionals who examined, treated, and interviewed Mr. Rasenack. 

Thus, the Tenth Circuit reversed and remanded the case back to the district court for a de novo review.  It declined to remand the case back to the plan administrator, finding that AIG’s delays made such an option inappropriate.

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The Tenth Circuit has affirmed a summary judgment in favor of State Farm, which held that the earth movement exclusion is not ambiguous.  In Davis-Travis v. State Farm Fire & Casualty Co, a pipe in the bathroom had burst and flooded the house.  An inspection revealed damage to the flooring and baseboards as well settlement damage to the residence.  The settlement damage was determined to have been caused by movement of the clay under the foundation.  State Farm covered the portion of the claim related to interior water damage but denied the portion related to the foundation movements caused by settlement. The denial was based on the policy’s earth movement exclusion, which the court called the lead-in clause. The homeowners sued for breach of contract and bad faith, claiming the policy covered the settlement damages.  The trial court found that neither the lead-in clause nor the term earth movement was ambiguous, and granted summary judgment to State Farm, which was affirmed by the Tenth Circuit.

The court notes that in Duensing v. State Farm Fire and Casualty Company, 2006 OK CIV APP 15, 131 P.3d 127, the Oklahoma Court of Civil Appeals construed the identical provisions and found the lead-in clause unambiguous, but found the earth movement clause was ambiguous. The trial court found both clauses unambiguous. The Tenth Circuit noted that the opinion of the Oklahoma Court of Civil Appeals is not precedential. On appeal, the homeowners claimed that the earth movement clause was ambiguous, not the lead-in clause, even though the lead-in clause had triple negatives and other courts had found it ambiguous.

The homeowners claimed the earth movement clause was ambiguous because the term “earth” is not defined in the policy and “earth” could be interpreted to mean many different things, citing Duensing. The court disagreed, stating that “A word in an insurance policy is not ambiguous simply because it is undefined.” When read in context, the word “earth” was not ambiguous. The court states:

The evidence in this case shows that water leaked through the slab of the home to the sub-grade, causing it to swell and then shrink. The policy states, “Earth movement [means] the sinking, rising, shifting, expanding or contracting of the earth, all whether combined with water or not.”

       The record is clear that the earth supporting the slab expanded and contracted, as a result of water, from whatever the source, and caused settlement damage. Coverage for this damage was unambiguously excluded by the earth movement clause.

Further, because the term “earth movement” is not ambiguous in context, the court did not reach the issue of bad faith, noting that a determination of liability under the contract is a prerequisite to a recovery for bad faith breach on an  insurance contract.

 

 

 

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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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