A Tough Day at the Office

We’ve all had a bad day at the office, but some days are worse than others. It doesn’t get much worse than having a court – two courts in fact – tell you that not only is your position wrong, but it is so wrong as to justify penalties and, to top things off, reverse the one ruling in your favor. But, that is the fate which recently befell Mutual of Omaha in a lawsuit brought by Daniel Hyatt.

As is the case in most lawsuits, the beginning was routine. Daniel Hyatt applied for an income replacement disability insurance policy which his agent, Larry Perron, acquired from Mutual of Omaha. After being diagnosed with spinal muscular atrophy, Hyatt submitted a claim for disability benefits under his policy in 2006. Mutual of Omaha requested supporting information, which was never sent by Hyatt. In 2008, Hyatt again submitted a claim for disability benefits. This time, in response to information requests from Mutual of Omaha, Hyatt sent in tax returns showing the income he earned as a truck driver while working through his wholly owned company, Hyatt Trucking LLC.

Mutual of Omaha agreed that Hyatt was entitled to disability benefits, but – here lies the source of the dispute – calculated the benefits due using Hyatt’s net income after deducting his business expenses rather than his gross income. This decision was based on Hyatt’s tax returns which showed his taxable income to be his gross income from Hyatt Trucking less business expenses. Mutual of Omaha also requested that Hyatt provide monthly continuation of disability forms to continue his payments past July 1, 2008. Hyatt failed to provide these forms and his file was closed in November 2008. In early 2009, Hyatt filed a claim for disability benefits with the Social Security Administration, which found him to be disabled and entitled to benefits, which he received.

Hyatt subsequently sued both Mutual of Omaha and his agent, Perron. Before the trial ended, Hyatt settled with Perron for $25,000. Following trial, the court issued a judgment that awarded disability benefits to Hyatt under the Mutual of Omaha policy calculated based on his gross income, but reduced the award by the $25,000 settlement with Perron and awarded statutory penalties and attorney’s fees against Mutual of Omaha for acting arbitrarily and capriciously in determining the benefits due to Hyatt.

On appeal, Mutual of Omaha did not fare much better. To the contrary, it ended up in a worse position.

Strike 1

The first issue dealt with by the appellate court was the use of net income to calculate the Hyatt’s disability benefits. The key provision on this issue was the policy’s definition of “earnings” as “salaries, bonuses, commissions, fees and other amounts received for personal services rendered or work performed.”

The Court noted that this definition “clearly” had no language “indicating” whether net or gross income was to be used and had no “requirement” that business expenses be deducted from “earnings.”

However, “complicating matters,” the application, which formed part of the policy, required that Hyatt provide Mutual of Omaha with his “Gross annual earned income from your income (after business expenses).”

The appellate court concluded that the trial court had correctly found that the Mutual of Omaha policy was ambiguous as to whether gross or net income was to be used in calculating disability benefits.

The trial court had decided that the policy should be reformed to reflect the parties’ intent. The appellate court, however, noted that there was no need to reform the policy; rather, the ambiguity was to be construed against Mutual of Omaha and in favor of Hyatt.

Although the bases for the courts’ decisions were slightly different, the result was the same in each: the disability benefits were to be calculated based on Hyatt’s gross income.

Strike 2

Seeking to soften the blow, Mutual of Omaha argued that any disability benefits due under the policy should be reduced by the Social Security disability benefits received by Hyatt. Hyatt argued that Mutual of Omaha had waived this argument by not raising it as an affirmative defense of setoff.

As Mutual of Omaha pointed out, its policy specifically provided that any benefits payable were to be “reduced by other income replacement benefits.” It argued that it had pleaded the terms and condition of its policy in defense of Hyatt’s lawsuit, including the foregoing provision, and that the aforementioned provision was part of the calculation of benefits under the policy and not an exclusion which would constitute an affirmative defense.

Under Louisiana law, an affirmative defense is one which raises a new matter, not raised in the plaintiff’s petition, which, assuming the allegations in the petition are true, constitutes a defense to the plaintiff’s claim. The appellate court held that the reduction of Hyatt’s disability benefits under the Mutual of Omaha policy by his Social Security benefits was an affirmative defense which Mutual of Omaha had failed to raise, stating:

“We find that offset in this case is an affirmative defense because it reduces the full coverage Mr. Hyatt is entitled to under the policy. The fact that it is not defined as an exclusion in the policy makes no difference in the effect it has on the receipt of benefits. In this specific case, Mr. Hyatt never raised any issue of receipt of Social Security disability benefits. While Mutual did make a blanket claim of all provisions in the policy, it was still required to specifically plead the affirmative defense of offset because it was a new matter not raised by Mr. Hyatt.”

This ruling seems particularly tough and potentially sets a trap for unwary insurers. It is not surprising that Hyatt did not make an issue of his receipt of Social Security benefits as it could not benefit him in any way. However, he knew he had received Social Security disability benefits and, under Louisiana law, is presumed to know the terms of his policy, including the fact that his disability payments would be reduced by the Social Security payments.

As plaintiff, he had the burden of proving coverage under the policy and the amount of benefits to which he was entitled, which should include the manner of calculating the benefits. Unlike requiring a plaintiff to guess which of numerous policy exclusions an insurer might argue applies to a claim, it is difficult to see how Hyatt would have been surprised or prejudiced by Mutual of Omaha’s failure to assert an affirmative defense of offset under these circumstances.

The result of this ruling could be that cautious defense lawyers will now plead and copy policy language verbatim in answering any claim for benefits under an insurance policy.

Strike 3

As if the foregoing rulings were not bad enough, the trial court found that Mutual of Omaha had acted arbitrarily and capriciously in its method of calculating Hyatt’s benefits. Any hope of obtaining relief from the appellate court was quickly dashed:

“The insurer assumes the risk of misinterpreting its own policy provisions. The determination of whether or not an insurer has just and reasonable grounds for refusal to pay policy benefits is a question of fact. …

“As previously discussed, Mutual’ s policy does not even come close to defining the use of gross or net income in calculating the amount of benefits Mr. Hyatt is entitled to. … Furthermore, the policy contains no provision which requires an insured to provide monthly updates of his continuing disability. Mr. Hyatt submitted satisfactory proof of his claim, and Mutual simply made a decision based on its internal policies and procedures in making its decision that Mr. Hyatt was not entitled to full benefits under the policy and discounting the benefits it was paying.”

This fairly strong condemnation of Mutual of Omaha’s interpretation of its policy seems at odds with the appellate court’s earlier finding that the policy was ambiguous as to whether gross or net income was to be used in calculating benefits and that the question was “complicated” by the fact that the application, which formed part of the policy, required that Hyatt provide his “Gross annual earned income from your income (after business expenses).”

Nonetheless, the court was satisfied that Mutual of Omaha deserved to pay statutory penalties for its decisions related to Hyatt’s claims.

Strike 4?

As lagniappe, on appeal, Hyatt argued that the reduction of his judgment against Mutual of Omaha by his $25,000 settlement with Perron was improper and should be reversed. The appellate court agreed. The appellate court noted that since Perron was not assessed any fault by the trial court, Mutual of Omaha was 100 percent liable to Hyatt, and, therefore, not entitled to a reduction by the amount of Perron’s settlement. Rubbing salt in the wound, the court awarded Hyatt an additional $5,000 in attorney’s fees for his attorney’s work in getting the reduction of the judgment by the Perron settlement thrown out.

So, you think you had a bad day? Don’t complain to Mutual of Omaha.