The “reasonable expectations of the insured” doctrine has been around for decades in California. The state Supreme Court started toying with rules that became its foundation after the turn of the century. See Pac. Heating & Ventilating Co. v. Williamsburgh City Fire Ins. Co., 158 Cal. 367, 370 (1910) (“any ambiguity … must be resolved in favor of the insured”).
In the early 1990s, the California Supreme Court first articulated the modern version of the rule in cases like AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 822 (1990), and Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1265 (1992). Bank of the West explained that courts must interpret ambiguous policy provisions as the insurance company reasonably believed that the insured understood them when making the contract or, stated another way, in accord with “the objectively reasonable expectations of the insured” about what the policy covered.
Federal courts borrowed this insurance policy interpretation principle, highly favorable to policyholders, from state law, and also directly from federal common law. They have applied the doctrine in cases involving group insurance policies governed by ERISA, a federal law pertaining to employee benefits. Kunin v. Benefit Trust Life Ins. Co., 910 F.2d 534, 539-40 (9th Cir. 1990). That is very good news to claimants seeking benefits under their group disability, life or health insurance policies offered through their employers. Crafty ERISA lawyers are skilled at uncovering ambiguities in policy language that may help them win their claim.
The Ninth Circuit recently relied on this rule to award an ERISA policy claimant all of her disability benefits in Anderson v. Sun Life Assurance of Canada, et al., No. 13-17594 (9th Cir. Apr. 6, 2016) (unpublished). The appellate court reversed the district court’s finding that the claimant, registered nurse Diana Anderson, was not entitled to long-term disability insurance benefits. The Ninth Circuit quoted the rule that “ambiguous terms in an insurance policy governed by ERISA are interpreted in the insured’s favor.” It explained that because the policy was “fairly susceptible” to more than one interpretation, it was ambiguous and, therefore, the less restrictive interpretation favoring coverage must be adopted. It found that, although the insurer’s and district court’s interpretation of the “Partial Disability,” “Material and Substantial Duties” and “Own Occupation” definitions in the policy was a reasonable one, Ms. Anderson’s less restrictive interpretation was also reasonable and thus trumped.
Ms. Anderson became unable to perform her duties as a nurse in 2008, but she did not actually lose any income until 2009. The hospital that employed her allowed her to do other, easier jobs which she could perform at her full nurse’s salary, until 2009.
The insurer argued that the policy definitions required Ms. Anderson’s loss of income to occur simultaneously with the onset of her inability to perform the duties of her own occupation as a nurse in order to qualify for partial disability benefits. The Ninth Circuit disagreed. It found the policy definitions were ambiguous noting an “equally reasonable construction of the policy terms allows an employee to make a claim for long-term partial disability benefits even if the loss of income occurs after the onset of the inability to perform,” as in Ms. Anderson’s case. It held, “Because the Policy was ‘fairly susceptible’ of this interpretation, under which Anderson was eligible for benefits, the district court erred in adopting the more restrictive interpretation.” While the lower court awarded zero benefits, the Ninth Circuit identified an ambiguity in the policy which turned the entire case. It reversed and remanded with instructions to the district court to calculate and award Ms. Anderson all of her past and future disability benefits given that the ambiguous policy terms had to be interpreted in the insured’s favor.
If you are looking for more information on this policy interpretation doctrine, we discussed it in our September 22, 2015 article appearing in the Los Angeles Daily Journal entitled, “Examine the ‘reasonable expectations of the insured.” The article is re-published on our website at https://mslawllp.com/robert-mckennon-and-joe-mcmillen-publish-article-examine-the-reasonable-expectations-of-the-insured-2/.
The Anderson case illustrates why it is critical that an employee/insured plan participant who has a short-term disability claim or a long-term disability claim retain an experienced ERISA insurance coverage lawyer before battling his or her insurance company. While the insurer may quote seemingly insurmountable exclusionary language from its policy, federal courts may have interpreted the language differently in favor of policyholders or, as in the case of Anderson, held the policy provision is ambiguous and must be interpreted against the insurer and in favor of the insured.
If you are an employee covered under your employer’s group short-term disability, long-term disability, life insurance or health insurance policy and had your claim denied, do not give up. Insurance companies count on their policyholders doing just that, even for legitimate claims. You should immediately contact the McKennon Law Group PC, a law firm specializing in ERISA insurance and employee benefits litigation. Let us decide whether your claim was wrongfully denied and let us see if we can assist you.