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McKennee v. Continental Casualty Co.


February 4, 2005


The opinion of the court was delivered by: James Larson United States Magistrate Judge

SUMMARY JUDGMENT (Granting Docket # 16)


The parties asked the Court to determine the amount of Plaintiff's monthly benefit under her employer's group long-term disability policy. They filed letter briefs amounting to cross-motions for summary judgment on this question, the only substantive issue in dispute in the case. The Court hereby finds that Plaintiff's "Monthly Benefit" under the contract between the parties is $3,500.00. The Court also finds that Plaintiff is not entitled to her fees and expenses for bringing this action.

Factual Background

In April 1998 Continental Casualty Company ("CNA") issued a Group Long Term Disability Insurance policy insuring Anacomp Inc.'s ("Anacomp") employees. (Policy number SR 83096460). The policy covers an Anacomp employee from the first day of employment.

From March 20, 2000 to June 30, 2001, Patricia McKennee ("Plaintiff") was insured by the CNA group policy.

There are two phases to CNA's disability coverage. Once an insured establishes permanent disability, CNA pays the insured the equivalent of the salary she received for performing her "own occupation" for 24 months. After the initial period, CNA pays based on an "any occupation" salary calculation.

Plaintiff worked as an account executive. She was hired in March, 2000. Her duties included: managing existing accounts and generating new business, maintaining and achieving sales goals and employing strong interpersonal skills. Her activities included: frequent sitting, constant reaching and using her hands to operate a computer, a telephone and other office equipment. She received a monthly salary plus a commission-based bonus. Plaintiff's salary without bonus was $5,833.33 per month, for the duration of her employment (approximately $70,000 annually).

Plaintiff stopped working in July 2001 due to the alleged permanent disability after approximately 16 months on the job.

Procedural Background

Since approximately July 29, 2001, Plaintiff claims she has been totally disabled from her occupation as an Account Executive for Anacomp. In February 2002, she filed a claim for long term disability benefits with CNA. CNA denied Plaintiff's claim on May 24, 2002. Plaintiff appealed on August 7, 2002. She filed her complaint in this court on July 9, 2003. Defendants were served on July 21. Plaintiff seeks permanent disability benefits as a result of the disability she claims developed while working for Anacomp.

On February 5, 2004, the parties mediated the "matter and reached a partial settlement. The "own occupation" provision was settled for a set amount. The parties agreed to review Plaintiff's disability and determine benefits under the "any occupation" provision of CNA's policy. CNA has agreed to pay Plaintiff in accordance with the language of the contract. The issue before the court is interpreting the language of the contract for purposes of calculating future benefits under the "any occupation" provision.

All parties have consented to the jurisdiction of this Court as provided by Civil Local Rule 73 and 28 U.S.C. §636(c).

Disputed Contractual Provisions

The portion of the CNA contract subject to this Court's interpretation states that Plaintiff's net Monthly Benefit is the lesser of: (1) multiplying Monthly Earnings by 60 percent; or (2) the maximum Monthly Benefit of $25,000, discounted by other sources of income. Monthly Earnings are defined as follows in the contract:


Salary means the Insured Employee's average monthly earnings calculated for the W-2 Form for the calendar year immediately prior to the date the Insured Employee's disability began, including base wages, overtime earnings, shift differential compensation, commissions, bonuses, pre-tax Employee contributions to the Employer's 401(k) policy, pre-tax Employee contributions to other deferred compensation policies sponsored by the Employer, and any pre-tax Employee contributions to other Employee benefit policies sponsored by the Employer, ("the W-2 formula"), or If no full year W-2 was issued to You, the Employer's hourly base rate multiplied by 2080 and then divided by 12. ("the HBR formula").

Plaintiff does not fall squarely under either of these provisions because (1) she does not have a W-2 form for the calendar year immediately prior to the onset of her disability and (2) her salary is not computed based on her employer's HBR; she is paid a bi-weekly salary, plus commission.

Parties' Legal Arguments

I. Plaintiff

Plaintiff notes that CNA's contract uses italicized lettering to identify words which are "listed and defined in the glossary or within the certificate itself." Plaintiff argues that "Monthly Benefit" is not clearly defined either in the glossary or within the certificate itself.

Plaintiff contends that because the CNA contract includes "salary, wages, partnership or proprietorship draw, commissions, bonuses, or similar pay, and any other income [an insured] receives or is entitled to receive" for purposes of calculating whether Plaintiff is earning more than 80% of her Monthly Earnings, Plaintiff's commissions should also be considered in calculating her Monthly Benefit.

Plaintiff further argues that applying the hourly base rate formula is unreasonable because (1) there is nothing in the contract which specifies Anacomp's HBR, and (2) Plaintiff is not paid by the hour. Plaintiff argues the Monthly Benefit provision is at best ambiguous and the rule of contra proferendum should apply, i.e., that the Monthly Benefit calculation should be interpreted in the light most favorable to Plaintiff. The doctrine interprets a contract against the drafter, in this case her employer, citing Kunin v. Benefit Trust Life Insurance Company, 910 F. 2d 534, 535 (9th Cir. 1990) (exclusion of certain medical conditions in group policy was ambiguous and court interpreted ERISA contract in favor of insured).

Even if contra proferendum does not apply, Plaintiff argues that the doctrine of reasonable expectations should govern because it "appropriately serves the federal policies underlying ERISA." Saltarelli v. Bob Baker Group Medical Trust No. 92-56252, 35 F.3d 382, 386-387 (9th Cir. 1994). Plaintiff notes that the Ninth Circuit has adopted "the doctrine of reasonable expectations as a principle of the uniform federal common law informing interpretation of ERISA-governed insurance contracts." Id. at 387.

Plaintiff also asks this court to disregard the Doris Gloss Declaration attached to Defendants' letter brief because Defendants waived their right to augment the administrative record. Kearney v. Standard Insurance, 175 F.3d 1084 (9th Cir. 1999) (district court generally limits review to administrative record in denial of benefits cases). Plaintiff also believes that the declaration lacks foundation, is conclusory, speculative, and contains inadmissible hearsay. Even if this Court considers the declaration, Plaintiff argues it is internally inconsistent, because it specifies that Plaintiff's salary is around $70,000 but also that Plaintiff's "earnings are determined according to reported information on the W-2 form."

Plaintiff therefore disagrees with the W-2 formula requirement and with the HBR formula. Plaintiff would calculate her Monthly Benefit as $4,710.52 as follows:

· Monthly Salary ($5,833.33) Average Monthly Commissions ($2, 017.54) x 60% = $4,710.52. The Average Monthly Commissions is the average of all commissions Plaintiff earned from July 2000 through July 2001.

Plaintiff also seeks to recover post-settlement attorney's fees she has incurred to bring this action if this Court agrees with her position. 29 U.S.C. 1132(g).

II. Defendant

Defendants argue that the insurance policy must be interpreted with a three-part test.

Bank of the West v. Superior Court, 2 Cal. 4th 1254 (1992). First, the Court should determine what the policy says in plain ordinary language. Second, the Court should construe the contract with the insured's objectively reasonable expectation in mind. Third, if the Court finds the contract is ambiguous, it must construe the contract in favor of Plaintiff.

Defendants assert that because the language of the CNA contract is unambiguous this Court should follow its express terms. Citing Hackenthal v. National Casualty Company, 189 Cal. App. 3d 1102 (1987) (courts have the duty to enforce contracts when the terms are plain and unambiguous). Plaintiff did not complete a full W-2 calendar year with Anacomp, so Plaintiff does not have W-2 forms to calculate her average Monthly Benefit as required by the CNA policy. Defendants argue that the term "calendar year" is far from ambiguous because it is defined in Black's Law Dictionary as "the period from January 1 to December 31 inclusive." Therefore, Plaintiff's desire to calculate benefits based on a different 12-month period is not objectively reasonable.

Irrespective of Plaintiff's earned commissions while working at Anacomp, Defendants argue that the clear and unambiguous policy language excluding commissions in her case must control. Defendants contend that Plaintiff's Monthly Benefit must be calculated using the HBR formula.

Defendants would calculate Plaintiff's Monthly Benefit at $3,500 as follows:

· Hourly Rate ($33.65) x 2080 hours per year / 12 months x 60% = $3,500. The hourly rate is calculated by breaking down Plaintiff's annual salary as follows: $70,0000 per year / 52 weeks = $1,346.15 per week / 40 hours = $33.65 per hour.

Defendants also reject Plaintiff's attorney fee request as (1) unsupportable and (2) unfounded on any prior agreement.

Legal Analysis

I. Standard of Review

This Court's interpretation of an ERISA insurance policy is governed by a uniform body of federal law. Evans v. Safeco Life Ins. Co., 916 F.2d 1437, 1441 (9th Cir. 1990). Denial of disability benefits is generally limited to the administrative record, but it is ultimately the District Court's discretion whether to consider other relevant evidence. Kearny v. Standard Ins. Co., 175 F.3d 1084, 1090-1091 (9th Cir. 1999). Terms in ERISA insurance policies are interpreted "in an ordinary and popular sense" as they would be by a "person of average intelligence and experience." Evans, supra, 916 F.2d at 1441. The policy (or "contract") is examined as a whole and if, "on the face of the contract, two reasonable and fair interpretations are possible, an ambiguity exists." Evanston Ins. Co. v. Fred A. Tucker & Co. Inc., 872 F.2d 278, 279 (9th Cir. 1989). The Court may not artificially create ambiguity where none exists, Evans, supra, 916 F.2d at 1441, or under the guise of construing a policy. Evanston, supra, 872 F.2d at 279. However, if an ambiguity does exist, the Court must resolve it in favor of Plaintiff, the insured. Kunin, supra, 910 F.2d at 539-541.

II. Interpreting the CNA Policy

a. The CNA Policy Language Defining "Monthly Benefit" is Not Ambiguous

The plain language of the CNA policy defines "Benefit" and sets forth how it is calculated in lay terms. The policy lists two formulas to calculate the "Monthly Benefit": 1) a W-2 formula that considers "Monthly Earnings" and 2) an HBR formula that considers the employer's HBR and ignores "Monthly Earnings." Because there is no ambiguity, Plaintiff's reliance on Saltarelli and Kunin is misplaced.

In Saltarelli, Plaintiff the insured was denied coverage, because the policy expressly excluded pre-existing conditions. Saltarelli, supra, 35 F.3d at 386. The court found that the insurer had concealed one of the policy's most significant provisions in the definitions portion. Id. at 385. The insurer should have forthrightly stated that pre-existing conditions were excluded from coverage. Saltarelli, supra, 35 F.3d at 386. The court held that because the insurer's exclusion was not clear, plain, and conspicuous enough to negate the claimant's "objectively reasonable expectations of coverage," it was unenforceable and the insurer was liable for the coverage at issue. Id. at 387.

In Kunin, the insured sought coverage for his child's medical costs for treatment of autism. Kunin, supra, 910 F. 2d at 535. The insurance company denied coverage, on grounds that the policy's mental illness limitation precluded coverage for treatment of autism. Id. Because the insurer made "no attempt whatsoever to describe the scope of [mental illness,] a term that has no precise or generally accepted definition," the court held that the term was ambiguous and construed it favor of the insured. Id. at 541.

Here, CNA has explicitly listed two alternative formulas to determine "Monthly Benefits." The formulas can be calculated by a lay person and Plaintiff's argument in fact buttresses this assertion. As Plaintiff notes, CNA defines "Monthly Earnings" as "salary, wages, partnership or proprietorship draw, commissions, bonuses, or similar pay, and any other income [Plaintiff] receives or is entitled to receive." Thus, there is no ambiguity.

If Plaintiff had worked for Anacomp for a complete W-2 calendar year, she would be able to calculate her "Monthly Earnings" and calculate her "Monthly [disability] Benefit" using the W-2 formula. Plaintiff's earned commissions would be included in her "Monthly [disability] Benefit." However, Plaintiff worked for Anacomp during parts of 2000 and 2001, and she did not complete a full W-2 calendar year. Plaintiff must therefore use the HBR formula to calculate her "Monthly Benefit." The HBR formula does not consider "Monthly Earnings," it is a straight hourly calculation based on the employer's HBR.

Unlike the hidden pre-existing condition exclusion in the Saltarelli case, CNA's "Monthly Earnings" formulas appear several times throughout the policy. In fact, Plaintiff does not contend that they are inconspicuous; she argues that the formulas are ambiguous. However, unlike the ill-defined mental conditions in the Kunin case, CNA's policy is not ambiguous because it does include two possible formulas to calculate a claimants' "Monthly Earnings." Therefore, the doctrines of contra proferendum and reasonable expectations applied in Saltarelli and in Kunin do not apply in the case at bar.

b. Plaintiff did Not Work a Full W-2 Calendar Year

The W-2 formula does not apply to Plaintiff because she did not work a full calendar year. Her total period of employment exceeded twelve (12) months, but it fell between March 2000 and July 2001. This Court finds that a lay person is more likely to define "calendar year" as January through December of the same year rather than any other 12 month period. The HBR formula reasonably applies without regard to the specific time period the Plaintiff worked for Anacomp.

The HBR formula does not include Plaintiff's monthly commission-based earnings. As an Account Executive in sales, a substantial part of Plaintiffs' earnings while at Anacomp were based on sales commissions. However, this Court cannot artificially create ambiguity in the CNA contract where none exists, to include commissioned-based earnings in CNA's disability benefit calculations. Evans, supra, 916 F.2d at 1441. Plaintiff may believe that it is unfair not to consider her commissions for purposes of calculating her "Monthly [disability] Benefit," but this Court cannot create a "new" formula to accommodate her circumstances, in order to construe the policy more favorably to her. Evanston, supra, 872 F.2d at 279.

III. Defendants' Calculation Is Based On Objective Expectations

Defendants have applied the HBR formula according to its ordinary sense to determine what Plaintiff's "Monthly Benefit" should be. Defendants state that Plaintiff had 40 regularly scheduled hours per week. (DGEx2). Neither Plaintiff nor Defendants have submitted Plaintiff's employment contract and other than DGEx2, there is no documentation before the Court that describes Plaintiff's hourly requirements. For most employees a 40-hour work week is base full-time employment. Accordingly, the Court finds that Defendants reasonably calculated the HBR for Plaintiff based on a 40-hour work week.

IV. Plaintiff Is Not Entitled To Recover Attorney's Fees In this Action

Regardless of the terms of the contract between Plaintiff and Defendants, this Court has discretion to award reasonable attorney's fees and costs to either party in an action under ERISA. 29 U.S.C. § 1132(g)(1) (West 2004). This judicial arbitration proceeding could be considered an action pursuant to ERISA. See Consolidated Labor Union Trust v. Clark, 498 So.2d 547 (3d Dist.1986) (arbitration proceeding in ERISA case is an "action" and prevailing party may be entitled to recover attorney's fees). Plaintiff is not the prevailing party in this action because her interpretation of the CNA policy is not objectively reasonable, and the CNA policy is unambiguous despite Plaintiff's attempt to construe it otherwise. Plaintiff should not recover attorney's fees.

Conclusion and Order

Under the common language of the contract, Defendants need not consider Plaintiff's earned commissions to calculate Plaintiff's "Monthly Benefit." This Court therefore upholds Defendants' "Monthly Benefit" calculation because it is based on conspicuous and clear language in the CNA policy. Defendants performed a simple and reasonably objective arithmetic calculation to determine Anacomp's HBR pay for Plaintiff. The Court finds that Plaintiff's Monthly Benefit is $3,500.


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