The U.S. Court of Appeals for the Second Circuit, applying Pennsylvania law, has reversed a district court’s decision dismissing a case against an insurance company. The circuit court found that the insureds under a supplemental disability insurance policy were entitled to have their policy reformed based on their “reasonable expectations” of the policy’s provisions, even though they had not read the policy after they had received it.

The Case

Ronald Nunn and Donald Vaden, former National Basketball Association (“NBA”) referees, contended that they participated in a referee training camp in New Jersey and attended a union meeting hosted by the National Basketball Referees Association at which Steven Lucas had made a presentation. They contended that Mr. Lucas, a sales representative for Sun Life of Canada, the company Massachusetts Casualty Insurance Company (“MCIC”) had designated as its administrator for disability income products, had discussed supplemental disability insurance offered by MCIC, and that he had described a supplemental disability policy he had implemented for umpires with Major League Baseball.

See also: Disability insurance: the 60% myth

Mr. Lucas also allegedly explained to Messrs. Nunn and Vaden that their current insurance coverage might be insufficient if they became unable to work, but that he could offer supplemental disability insurance that “changes the taxable benefit to a tax free benefit. It changes the benefit period from 10 years to age 65. It covers you in your own occupation. If you can’t do your job you’re disabled.” Messrs. Nunn and Vaden contended that Mr. Lucas detailed how the supplemental insurance worked, specifically describing the “own occupation” aspect of the arrangement:

[T]his program is a function of you being covered in your occupation at the time disability starts. If you can’t be an official but you can work in a store some place you go ahead and work there. I mean, you are totally disabled from being an NBA official that is what the disability is based on.

(Emphasis added.)

They said that he stressed repeatedly that one of the supplemental insurance’s key advantages was that it covered policyholders unable to perform their “own occupation” – here, NBA referee – until they were 65 years old, regardless of the extent of disability.

Messrs. Nunn and Vaden contended that, within weeks of his presentation, Mr. Lucas sent each of them an application for supplemental coverage, that they each completed the application with Mr. Lucas’ assistance over the phone, that they each submitted applications through Mr. Lucas for the supplemental disability insurance policy he had described, that neither of them had read the description of coverage prior to submitting their respective application, and that they received their copies of MCIC’s supplemental disability insurance policy, but that neither read the policy.

They contended that, had they examined their policies, they would have discovered that the policies’ definition of “total disability” was at odds with Mr. Lucas’ description; in particular, that the definition for “total disability” in the policies began as Mr. Lucas had promised – providing coverage when the insured could not work in his or her occupation – but changed after 60 months of paid benefits to provide that:

[total disability] shall then mean the Insured’s substantial inability to perform the material duties of any gainful occupation for which he/she is suited….

(Emphasis added.) 

Messrs. Nunn and Vaden alleged that they subsequently suffered career-ending injuries and that they began receiving monthly payments pursuant to their supplemental insurance policies. They contended, however, that after 60 months, when Mr. Nunn was 58 and Mr. Vaden was 55, the payments stopped because they were able to work at other jobs (in fact, they both had continued working for the NBA in other capacities).

Both Messrs. Nunn and Vaden claimed that, based on Mr. Lucas’ presentation, they had expected to receive payments until age 65.

They sued MCIC in the U.S. District Court for the District of Connecticut, alleging breach of contract and/or seeking reformation with respect to each policy. MCIC moved for summary judgment, asserting that their claims were barred by Connecticut’s six year statute of limitations, and that the insurance policies contained unambiguous language limiting Messrs. Nunn and Vaden to 60 months of supplemental disability insurance payments if they were able to perform any gainful occupation thereafter. After concluding that the law of the contract state, Pennsylvania, governed the substance of the policy, the district court granted MCIC’s motion for summary judgment. Messrs. Nunn and Vaden appealed.

The Second Circuit’s Decision

The Second Circuit reversed.

In its decision, the circuit court explained that applicable Pennsylvania law was somewhat unique in that it employed the “reasonable expectations of the insured” in some situations to govern contract interpretation. Thus, the circuit court continued, even a clear and unambiguous policy would not bind the insured “where the insurer or its agent [gave] the insured a reasonable expectation that coverage [was] different than that stated in the written policy.”

In other words, the Second Circuit stated, under Pennsylvania law, when an insurer’s agent made a representation with regard to coverage that was inconsistent with the later delivered policy, that inconsistency created an ambiguity in that regard notwithstanding the clarity of the policy’s provisions and entitled the insured to rely on the agent’s representation.

The Second Circuit then stated that Pennsylvania’s reasonable expectations cases fell into two camps. In one, where an insured applied for a specific type of coverage and the insurer unilaterally limited that coverage, resulting in a policy quite different from what the insured requested, the insured’s expectations were “reasonable” and therefore governed the contract. In the other, where the insured received precisely the coverage that the insured requested but failed to read the policy to discover clauses that were the usual incident of the coverage applied for, any other expectations were unreasonable.

In this case, the circuit court continued, Mr. Lucas’ alleged representations to Messrs. Nunn and Vaden with regard to specific provisions of the policy he subsequently sold to them established the reasonable expectations of the parties. The circuit court noted that the insureds never read their policies, instead assuming that each reiterated the terms Mr. Lucas had previously described to them. It added that when they were subsequently injured and unable to work as NBA referees, they anticipated that, as Mr. Lucas had promised, they would receive payments until age 65.

Moreover, the circuit court continued, the failure of the insureds to read their policies did “not defeat their reasonable expectations.” The Second Circuit held that, under the circumstances of this case, “it [was not] unreasonable [for Messrs. Nunn and Vaden] not to read [their policies],” and that, therefore, they were entitled to reformation of their policies in line with their reasonable expectations.

In conclusion, the circuit court said that nothing in Pennsylvania precedent suggested that Messrs. Vaden and Nunn had to allege fraud or misrepresentation before the reasonable expectations of the insured could be applied.

The case is Nunn v. Massachusetts Cas. Ins. Co., No. 12–3712–cv (2d Cir. Feb. 24, 2014). Attorneys involved include: David M. Bernard, Koskoff Koskoff & Bieder, P.C., Bridgeport, CT, for Plaintiffs–Appellants; Patrick M. Fahey, (Mark K. Ostrowski, on the brief), Shipman & Goodwin LLP, Hartford, CT, for Defendant–Appellee.

FC&S Legal Comment

The Connecticut lawsuit by Messrs. Nunn and Vaden may have been filed too late for purposes of Connecticut’s statute of limitations, but the Second Circuit refused to affirm the district court’s decision on that ground. Rather, the appellate court explained, although Connecticut law decided the length of the statute of limitations, “in this unusual confluence of competing and contrary policies, it would eviscerate the very heart of Pennsylvania’s reasonable expectations doctrine to give force to Connecticut law as to when the claim accrued.” In the circuit court’s opinion, it “would be a hollow victory indeed” for Messrs. Nunn and Vaden to succeed on their claim that the contract as written was not the contract to which they agreed “only to be told that the contract as written should have triggered their breach of contract claims when the law of the contract state absolved them from knowing that fact.”

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