Opinion
CIVIL ACTION No. 02-2079-GTV
January 29, 2004
MEMORANDUM AND ORDER
Plaintiff Paul F. Hofer brings this action against Defendant UNUM Life Insurance Company of America, claiming that Defendant breached two insurance policies. One policy is a disability income policy and the other a business overhead policy. Plaintiff claims that he is owed benefits, the refund of premiums under the policies, and prejudgment interest. Whether Plaintiff is entitled to benefits is no longer in dispute because Defendant has now acknowledged that Plaintiff was disabled during the relevant time periods. The remaining issues in this litigation involve calculating the amount of compensation due to Plaintiff.
The parties have agreed that this case may be resolved on the trial briefs. The court has reviewed the briefs and makes the following findings of fact and conclusions of law. Specifically, the court resolves the key issues identified by the parties as follows: (1) Defendant did not breach the insurance contracts when it denied Plaintiff benefits in 1995, but it did breach the contracts in 2001; (2) the disability income insurance policy was unambiguous with respect to the term "prior net income," did not allow charitable contributions to be subtracted from gross revenue to arrive at net income, and prohibited benefit increases during a period of disability; (3) the disability income policy was ambiguous with respect to the terms "CPI-U" and "the last CPI-U index published in the calendar year before the disability begins"; (4) the statute of limitations bars benefits, premium refunds, and/or interest for months preceding October 1996; and (5) Plaintiff is entitled to prejudgment interest on payments Defendant made for months preceding October 2001, on any additional amounts owed after recalculation of benefits using the "not seasonally adjusted" CPI-U index, and on any additional amounts owed for the months of October 1996 through December 1996.
I. Findings of Fact A. Background Facts
1. Plaintiff is making claims for benefits and return of premiums under two policies of insurance issued by Defendant for the period of March 15, 1995 until October 31, 2002. Plaintiff is making a claim for prejudgment interest from March 15, 1995 until judgment is entered.
2. The amount in controversy in this case is greater than $75,000, exclusive of interest and costs.
3. Defendant and Plaintiff are citizens of different states. Plaintiff is a citizen of the state of Kansas and resides in Kansas. Defendant is a Maine corporation with its principal place of business in Maine.
4. On May 11, 1994, Plaintiff, a practicing dentist, applied for a disability income policy and business overhead policy with Defendant. Defendant accepted Plaintiff's applications, and both policies became effective on June 22, 1994 and have been in force at all times relevant to this litigation.
5. On March 15, 1995, Plaintiff had an initial visit with Dr. Lynn Ketchum in regard to pain in his hands and forearms.
6. Dr. Ketchum initially diagnosed Plaintiff as having bilateral flexor tenosynovitis, carpal tunnel syndrome, mild on the right, and overuse syndrome, or cumulative trauma disorder.
7. At the March 15, 1995 visit, Dr. Ketchum advised Plaintiff to reduce his workload at his dental practice by 25% and see if he could get to a level where he was pain-free, then slowly build up until he experienced pain again, so he (Plaintiff) would know his limits of tolerance and adjust his work schedule accordingly.
8. Plaintiff had numerous additional visits with Dr. Ketchum and eventually with other physicians.
B. Policy Provisions and Definitions
9. "Disability" and "disabled" mean "the period while [the insured is] satisfying the Elimination Period, or while the Total Disability Benefit, the Residual Disability Benefit, the Recovery Benefit, or the Loss of Use Benefit is payable."
10. Plaintiff's disability income policy has a 90 day "Elimination Period," which must be satisfied before benefits are payable.
11. As used in the disability income policy, "residual disability" and "residually disabled" have two definitions: one definition applies during the Elimination Period, and the other definition applies once the elimination period has been satisfied.
12. During the Elimination Period, "residual disability" and "residually disabled" in the policy mean the following:
1. injury or sickness does not prevent the insured from engaging in his regular occupation, BUT does restrict the insured's ability to perform the material and substantial duties of his occupation:
a. for as long a time as the insured customarily performed them before the injury or sickness; or
b. as effectively as the insured customarily performed them before the injury or sickness; and
2. the insured is receiving medical care from someone other than himself which is appropriate for the injury or sickness. UNUM will waive this requirement when continued care would be of no benefit to the insured.
13. After the Elimination Period is satisfied, "residual disability" and "residually disabled" in the policy mean that as a result of the same injury or sickness which caused the insured to satisfy the Elimination Period:
1. the insured experiences at least a 20% loss of net income in his regular occupation; and
2. the insured is receiving medical care from someone other than himself which is appropriate for the injury or sickness. UNUM will waive this requirement when continued care would be of no benefit to the insured.
14. The term "sickness" means "a mental or physical illness or condition which has been diagnosed or treated."
15. The term "loss of net income" means "[the insured's] indexed prior net income minus the net income [the insured] earned for the month to which the payment relates."
16. "Gross revenue" means "any income earned by [the insured] or [his] business for personal services performed by [the insured] in [his] regular occupation. It does not include dividends, interest, rent, royalties, annuities, sick pay or benefits received for disability under a formal wage or salary continuation plan, or other forms of unearned income."
17. "Net income" means:
gross revenue minus [the insured's] share of the usual and customary business expenses which [the insured] or [his] company incurs on a regular basis and are essential to [the insured's] established business operation. Expenses which are not usual and customary business expenses include salaries, drawing accounts, profits, benefits and other forms of remuneration which are payable to [the insured] or any member of [the insured's] immediate family who was not a full-time paid employee of the business during the last 60 days before disability began.
18. "Prior net income" means:
the largest of (1) [the insured's] average monthly net income for the last 12 months before the Elimination Period began; (2) [the insured's] average monthly net income for the 12-month period immediately before those 12 months; or (3) the highest average monthly net income for any two consecutive years of the last 5 years before the Elimination Period began. On each anniversary of the first day of a period of disability, UNUM will calculate a CPI-U Factor. UNUM will multiply the prior net income by that Factor. Then UNUM will use that amount to calculate the Residual Disability Benefit or the Recovery Benefit.
19. The formula for calculating residual disability benefits under the terms of the policy is as follows: Loss of Net Income ×
Maximum Disability Benefit = Residual Disability Benefit Prior Net Income 20. If the insured's loss of net income is 75% or greater, the insurer will pay the Maximum Disability Benefit for that month.21. During the first six months that the insurer pays the residual disability benefit, the insurer will pay the greater of (1) one-half of the Maximum Disability Benefit, or (2) the amount determined under the residual disability benefit formula.
22. The Waiver of Premium Benefit provides that after the disability has lasted for ninety days while the policy is in effect, UNUM will waive the premium as long as the insured is unable to return to work full time in his regular occupation as a result of the injury or sickness which causes the disability. UNUM will refund premiums already paid for that period on a pro rata basis.
23. `To work full-time in the insured's regular occupation" means the insured works "approximately the same number of hours in the same regular occupation as [he was] working before disability began."
24. Plaintiff's "regular occupation" is General Dentistry or Dentist-General Practice.
25. The disability income policy has a Benefit Indexing Provision which provides as follows:
On each annual review date until the policy anniversary when the insured's age is 55, the insured will automatically have the opportunity to increase the Maximum Disability Benefit by the Indexed Amount provided that the insured is not then disabled and the insured has not refused the opportunity to increase the insured's coverage in two consecutive years. . . .
26. The overhead and disability income policies provide as follows with regard to how to file a claim:
To make a claim under this policy, the following steps must be taken: 1. give Notice of Claim (someone must notify UNUM that disability has started as defined in this policy); 2. file Proof of Loss (the insured, or someone acting on the insured's behalf, and the insured's attending physician must complete and return the claim form provided by us); 3. promptly complete and return any other forms UNUM requires; and 4. the insured undergoes a medical examination by a specialist appropriate for the condition or a personal interview as often as UNUM reasonably requests while the claim is pending. UNUM reserves the right to select the examiner. UNUM will pay for the examination.
We (UNUM) will evaluate the claim and either: 1. pay the benefits specified in the policy; or 2. notify the insured and any Loss Payee that benefits are not payable and why. If UNUM needs more information, UNUM will tell the insured and any Loss Payee what UNUM needs.
27. The disability income and overhead policies also provide:
4. We (UNUM) must be given the information which we need to determine if a benefit is payable and how much that benefit should be. We (UNUM) may require relevant portions of income tax returns for you or your business, income statements, vouchers for overhead expenses, and other statements or reports of receipts and payments. UNUM may also require evidence that you were liable for an overhead expense before disability began.
How and When We (UNUM) Pay Benefits. UNUM will pay benefits due under this policy in United States dollars. We will not pay any benefit until we have sufficient Proof of Loss. When UNUM has determined that the claim is payable, UNUM will pay according to the Benefits provision. If any amount is accrued and unpaid when our liability terminates, UNUM will pay it immediately.
28. The disability income and overhead policies provide that "[n]o one may start legal action to recover on this policy until 60 days after written Proof of Loss has been given to us. Legal action must be started within five years after the written Proof of Loss is required to be furnished."
29. The policies state that written Proof of Loss "must be furnished to us within 90 days after each month for which a benefit is payable. . . ."
30. The policies do not provide for an interest rate or for payments of interest on benefits or premiums payable under the policies.
C. Contacts between Parties
31. On May 3, 1995, Defendant sent Plaintiff a letter informing him that the benefit indexing provision of the overhead policy allowed him to increase his coverage under the overhead policy without medical requirements. The letter informed Plaintiff that if he did not want the increased coverage, he should call a 1-800 number. Plaintiff never called the 1-800 number to inform Defendant that he did not want the 1995 increase in coverage under the overhead policy.32. Plaintiff received similar letters in subsequent years for both the overhead and disability income policies. Plaintiff never declined the coverage increases.
33. At a date on or prior to May 12, 1995, Plaintiff contacted Defendant and requested claim forms for the purpose of submitting a claim. Defendant sent Plaintiff the forms on May 12, 1995.
34. On June 12, 1995, Claims Assistant Mary Margaret Cummings, an agent of Defendant, sent Plaintiff a letter advising him that Defendant had not received completed claim forms, and that Plaintiff must return the forms within fifteen days of the date of the letter.
35. On June 21, 1995, Plaintiff submitted a claim for residual disability benefits, not total disability benefits, under the disability income policy and a claim under the overhead policy.
36. Sometime on or after June 22, 1995, Dr. Ketchum submitted an Attending Physician's Statement to Defendant in regard to Plaintiff's disability claim.
37. On June 23, 1995, Defendant sent Plaintiff a letter informing him of the increased monthly benefit amount under the overhead policy and enclosing a new policy schedule for that policy.
38. On August 21, 1995, Dr. Nancy Ball, an agent of Defendant, contacted Dr. Ketchum in regard to Plaintiff's claim.
39. Defendant denied Plaintiff's 1995 claims under the policies on August 28, 1995, by a letter sent by Senior Claims Consultant Sally Quinn Dodge, an agent of Defendant. The denial letter states in part, "According to UNUM's review and based on the lack of objective medical documentation, it is UNUM's determination the insured's condition does not preclude the insured from performing the material and substantial duties of the insured's occupation. Additionally, our Medical Director spoke with your attending physician, Dr. Ketchum, regarding your claim and concurs with UNUM's conclusion."
40. The denial letter also alerted Plaintiff that he could notify Defendant if he had any additional information pertaining to his claim, and that he could seek review of the denial if he disagreed with Defendant's determination.
41. Plaintiff sent certain medical records to Defendant prior to August 25, 1995. No additional medical records were sent to Defendant by Plaintiff until September 21, 2001.
42. On September 21, 2001, Plaintiff submitted a Notice of Claim for benefits under both insurance policies.
43. Dr. Lanny Harris submitted an Attending Physician's Statement that accompanied the 2001 Notice of Claim.
44. On September 21, 2001, Richard Merker, attorney for Plaintiff, submitted medical and financial records to Defendant, including the financial and medical records for the years 1995 through 2000, to support Plaintiff's claim.
45. On October 1, 2001, Defendant confirmed receipt of the Notice of Claim.
46. On October 18, 2001, Defendant sent a letter confirming that a medical consultant had reviewed the medical records and requesting that Plaintiff supply additional financial documentation which included tax returns for 1990, 1991, and 1994, and Financial Statements beginning January 2001.
47. On November 12, 2001, Defendant sent to and requested from Mr. Merker a "Supplemental Statement" to be completed by Plaintiff and his doctor.
48. The additional requested documentation, including the Financial Statements for January through September 2001 and the tax returns, were sent by Mr. Merker to Defendant on December 20, 2001.
49. On December 31, 2001, Customer Care Specialist Linda Downing, an agent of Defendant, sent Plaintiff a letter denying his claim for benefits under both the disability income policy and the overhead policy.
50. On January 10, 2002, Mr. Merker sent a letter to Linda Downing acknowledging receipt of the December 31, 2001 letter, advising that Plaintiff did not intend to appeal the denial, and stating that Plaintiff would file a lawsuit.
51. On January 15, 2002, Plaintiff filed suit against Defendant in Leavenworth County, Kansas District Court. The case was subsequently removed to the United States District Court for the District of Kansas.
52. On June 26, 2002, Plaintiff sent Defendant Plaintiff's financial records relating to the period of October 2001 through April of 2002.
53. On November 6, 2002, Plaintiff sent Defendant such financial records for May through August of 2002.
54. On November 12, 2002, Plaintiff sent Defendant such financial records for September and October of 2002.
55. Plaintiff sent Defendant an additional medical report on October 8, 2002. Between September 2002 and February 2003, Plaintiff was examined by several physicians at the request of Defendant and underwent an MRI. Shortly after the MRI, Defendant withdrew a reservation of rights it made with respect to certain payments, which is referenced below.
D. Payments/Refunds Made by Defendant A. Overhead Policy
56. Defendant has paid all overhead policy benefits, but has not paid interest on the benefits or refunded premiums that were paid by Plaintiff prior to January 15, 1997.
57. Defendant has tendered the following amounts on the following dates with respect to benefits payable under the overhead policy:
Check No. Amount Date Tendered Benefit Month(s) 6564123 $5,796.00 08/06/02 04/02 6916986 $38,057.00 12/19/02 08,09, 10/02 6923583 $4,562.00 12/20/02 01 04/01 TOTAL $48,415.00 58. Defendant has tendered the following amounts on the following dates with respect to premiums refunded under the overhead policy, resulting in an overpayment of $274.39 for these time periods: Check No. Amount Date Tendered Premium Month(s) 6777954 $5,857.85 10/28/02 01/01/98 to 10/31/02 6780285 $19,150.37 10/29/02 01/01/98 to 10/31/02 7100262 $4,800.42 02/27/03 01/01/97 to 01/01/98 TOTAL $29,808.6459. The $274.39 overpayment may be applied as an offset or credit to any amounts due to Plaintiff.
60. On the 22nd of each month, Plaintiff paid overhead policy premiums at the rate of $392.21 per month for October through December 1996. Defendant has not refunded those premiums.
61. Payments made by Defendant to Plaintiff for premiums and benefits under the overhead policy referable to the period of October 1, 2001 until October 31, 2002, were made by Defendant under reservation of rights pending a decision by Defendant as to Plaintiff's disability during that period. That reservation has been withdrawn by Defendant, and the issue of Plaintiff's disability is no longer an issue for that period.
62. Plaintiff has accepted and negotiated all checks with respect to overhead benefits and premiums.
B. Disability Income Policy
63. The Defendant has tendered the following amounts on the following dates with respect to residual disability benefits payable under the disability income policy:
Check No. Amount Date Tendered Month(s) Stated on Checks 6478398 $66,031.20 07/19/02 01/00 to 10/00 6478371 $51,916.80 07/19/02 01/98 to 12/98 6478389 $69,480.00 07/19/02 01/99 to 12/99 6482763 $62,082.00 07/19/02 01/01 to 09/01 6493779 $10,176.00 07/19/02 01/98 to 06/98 6564105 $21,775.20 08/06/02 10/01 to 12/01 6564114 $32,152.80 08/06/02 01/02 to 04/02 6923556 $1,213.20 12/20/02 01/98 to 12/98 6923574 $23,834.40 12/20/02 12/99 to 12/00 7207398 $58,102.29 04/07/03 01/98 to 12/00 TOTAL $396,763.89 64. On the 22nd of each month, Plaintiff paid disability income policy premiums at the rate of $448.24 per month for October through December 1996. Defendant has not refunded those premiums.65. Plaintiff paid $34,993.85 in premiums for the disability income policy between January 22, 1997 and August 22, 2002. Since that time, Defendant has tendered the following amounts on the following dates with respect to premiums refunded under the disability income policy:
Check No. Amount Date Tendered Month(s) Premium paid 6634467 $6,233.29 09/05/02 10/01 to 09/02 6644052 $23,506.25 09/07/02 01/98 to 10/01 7100271 $5,578.01 02/27/02 01/01/97 to 01/01/98 7666884 $255.85 10/13/03 06/22/96 to 01/15/97 TOTAL $35,573.40 66. As of February 28, 2003, Defendant had paid all premium refunds payable under the disability income policy for the period subsequent to January 1, 1997, and had overpaid for that period the amount of $323.70. This amount may be applied as an offset or credit to any amounts due to Plaintiff.67. Payments made by Defendant to Plaintiff for premiums and benefits under the disability income policy referable to the period of October 1, 2001 until October 31, 2002, were made by Defendant under reservation of rights pending a decision by Defendant as to Plaintiff's disability during that period. That reservation has been withdrawn by Defendant, and the issue of Plaintiff's disability is no longer an issue for that period.
68. Plaintiff has accepted and negotiated all checks with respect to disability income policy benefits and premiums except check number 7666884, in the amount of $255.85.
II. Conclusions of Law
As an initial matter, the court assures the parties that it has considered all of their arguments. In the interest of brevity, however, some arguments have been generally summarized or not discussed in this Memorandum and Order.
A. Jurisdiction and Governing Law
The court has subject-matter jurisdiction over this case pursuant to 28 U.S.C. § 1332(a)(1) because the amount in controversy exceeds $75,000, exclusive of interest and costs, and Plaintiff and Defendant are citizens of different States. The court has personal jurisdiction over Defendant. Venue is proper in the District of Kansas pursuant to 28 U.S.C. § 1391(a)(2) because a substantial part of the events giving rise to the claims occurred in Kansas. The issues in this case are governed by Kansas law.
B. Breaches of Contract 1. August 28, 1995 Denial of Benefits
Plaintiff first argues that Defendant's denial of benefits in August 1995 was a breach of both insurance contracts. For the following reasons, the court determines that Plaintiff has not met his burden of proving that Defendant breached the contracts.
Both insurance policies provide the following definition of "residual disability" or "residually disabled" during the Elimination Period:
1. injury or sickness does not prevent the insured from engaging in his regular occupation, BUT does restrict the insured's ability to perform the material and substantial duties of his occupation:
a. for as long a time as the insured customarily performed them before the injury or sickness; or b. as effectively as the insured customarily performed them before the injury or sickness; and
2. the insured is receiving medical care from someone other than himself which is appropriate for the injury or sickness. UNUM will waive this requirement when continued care would be of no benefit to the insured.
Plaintiff claims that Defendant's denial was inconsistent with this provision because at the time, Plaintiff was (1) unable to perform the material and substantial duties of his occupation "for as long a time as [he] customarily performed them," and (2) receiving medical care from a physician. Plaintiff claims that there is no question whether he met the definition of "residually disabled" during the Elimination Period.
Plaintiff may be correct. But the critical issue in this case is whether Defendant was aware in August 1995 that Plaintiff was unable to perform his duties for as long as he customarily performed them before his injury or sickness. The policy states, "We will not pay any benefit until we have sufficient Proof of Loss." It is immaterial whether Plaintiff actually was restricted in his activities; if Plaintiff did not provide this information to Defendant, then Defendant could not be in breach when it denied Plaintiff's claim. It is axiomatic that Plaintiff has the burden of proof on this issue, and Plaintiff has failed to produce evidence showing that he gave Defendant sufficient Proof of Loss. The record does not reveal exactly what information Defendant possessed when it denied Plaintiff's claim; in fact, one stipulated fact jointly submitted by the parties vaguely states, "Plaintiff sent certain medical records to Defendant prior to August 25, 1995."
The record indicates that Plaintiff's physician, Dr. Ketchum, told him to reduce his workload — the parties have stipulated as follows: "At the March 15, 1995 visit, Dr. Ketchum advised Plaintiff to reduce his workload at his dental practice by 25% and see if he could get to a level where he was pain-free, then slowly build up until he gets into trouble again, so he (Plaintiff) would know his limits of tolerance and adjust his work schedule accordingly." But the record does not indicate that Defendant was aware of this restriction when it denied Plaintiff benefits. To the contrary, Defendant's medical director, Dr. Nancy Ball, drafted a memorandum to Plaintiff's file memorializing a conversation with Dr. Ketchum. According to the memorandum, Dr. Ketchum informed Dr. Ball that Plaintiff should only work forty hours a week. Dr. Ball stated that Dr. Ketchum "did not support loss of work capacity." Moreover, when Defendant's agent, Sally Quinn Dodge, denied Plaintiff's claim, she stated that Dr. Ball had spoken with Dr. Ketchum and that Dr. Ball concurred with Defendant's decision.
The record does not reveal how many hours a week Plaintiff worked before he developed pain.
These statements constitute the only evidence before the court indicating what information Defendant possessed when it denied Plaintiff's claim. In one of Plaintiff's briefs, he states, "We know that [Dr. Ketchum] submitted an Attending Physician Statement recommending that Dr. Hofer cut back to three days a week." This statement is not a stipulated fact, and Plaintiff has not provided the Attending Physician Statement to the court. There simply is no evidence in the record from which the court can conclude that Defendant knew in 1995 that Dr. Ketchum had told Plaintiff to reduce his working hours.
Plaintiff argues that Defendant had a duty to request more information if necessary; the policy states that "[i]f UNUM needs more information, UNUM will tell the insured and any Loss Payee what UNUM needs." But the record does not show that Defendant needed more information to make its decision. According to the evidence before the court, Dr. Ketchum "did not support loss of work capacity." Absent evidence that Defendant had in its possession materials that would cast doubt on this statement, the court cannot conclude that Defendant needed more information to make a decision.
Plaintiff also argues that the plain language in Defendant's denial letter indicates that Defendant improperly denied Plaintiff's claim. In the letter, Defendant stated, "According to UNUM's review and based on the lack of objective medical documentation, it is UNUM's determination that your condition does not preclude you from performing the material and substantial duties of your occupation." Plaintiff points out that this language indicates that UNUM evaluated Plaintiff's condition under the standard for total disability instead of residual disability. Again, Plaintiff may be correct; it appears that Defendant may have used the wrong standard to evaluate his claim. But that does not alter the fact that Plaintiff has not shown that Defendant possessed information from which it could conclude that Plaintiff was residually disabled.
Plaintiff submitted a suggested finding of fact stating, "Defendant had received medical information showing the dates of treatment for Plaintiff's sickness, and had received medical information containing the medical advice for Plaintiff to reduce the number of hours worked, prior to denying the claim on August 28, 1995." (emphasis added). Defendant objected, stating, "There is no Stipulation of Fact on this, and the record does not support this [suggested finding of fact] as it is stated. The Stipulations of Facts and the record do not show what was received prior to August 28, 1995, although some of the information referenced in this [suggested finding of fact] was undoubtedly received by then." Plaintiff responded, "Certainly, the parties have not stipulated or agreed to this fact. However, based on the stipulation of fact regarding the treatment received by the Plaintiff, the claims submitted, the stipulated fact that does say that certain medical records were sent, all in connection with the statements in [the denial letter]. . . . Notably, [the denial letter] did not request additional medical information on the basis that UNUM did not have enough information to evaluate the claim. . . . Based on this, the Court could reasonably find that defendant had full knowledge of Plaintiff's treatment." (emphasis added). The court finds that such an inference is not supported by the record. But these statements by the parties indicate that they were aware that the record lacked evidence from which the court could find a breach. Moreover, they were given ample opportunity to submit such evidence; the court has before it four trial briefs and six briefs regarding suggested findings of fact and conclusions of law.
For the above-stated reasons, the court concludes that Defendant did not breach the insurance contract by denying benefits in August 1995.
2. December 31, 2001 Denial of Benefits
Plaintiff next argues that Defendant breached the insurance contracts by denying benefits in December 2001. In contrast to the August 1995 denial, the court does have enough information to determine that the December 2001 denial constituted a breach of contract.
The parties have stipulated, "On September 21, 2001, Richard Merker, attorney for Plaintiff, submitted medical and financial records to Defendant, including the financial and medical records for the years 1995 through 2000 referenced elsewhere in these stipulations, to support Plaintiff's claim." On December 20, 2001, Mr. Merker sent Defendant additional requested documentation. Defendant denied Plaintiff's claim on December 31, 2001. Plaintiff then filed the instant lawsuit on January 15, 2002.
Defendant began making payments to Plaintiff on July 19, 2002. Presumably, at the time of each payment, Defendant had determined that Plaintiff was disabled for the time period the payment referenced; Defendant made all payments without reservation of rights, except those payments made for October 2001 through October 2002. The only additional information Plaintiff submitted to Defendant between December 31, 2001 (the date of denial) and July 19, 2002 (the date of the first payments) was financial records relating to the period of October 2001 through April 2002.
Based on this series of events, the court concludes that Defendant did not have any more information at the time it began making payments than it had when it initially denied Plaintiff's claim in December 2001, at least with respect to months preceding October 2001. The court concludes that Defendant should have found Plaintiff disabled under the terms of the insurance contracts in December 2001, and that Defendant's failure to do so was a breach of the insurance contracts.
The court can only conclude, however, that Defendant breached the contracts with respect to the benefits and premium refunds due for the months preceding October 2001. As noted above, Plaintiff sent Defendant additional information and underwent additional medical exams and an MRI before Defendant conceded that Plaintiff was disabled for the period of October 2001 through October 2002. Between September 2002 and February 2003, Plaintiff was examined by several physicians and underwent an MRI at the request of Defendant. In November 2002, Plaintiff sent financial records for May through October 2002. Although Defendant made payments to Plaintiff regarding October 2001 through October 2002 before receiving all of the additional medical and financial records from Plaintiff, Defendant made such payments under reservation of rights. The court therefore concludes that Defendant did not have enough information to determine that Plaintiff was disabled for that period until sometime after February 2003, when Defendant withdrew its reservation of rights.
As a final note, the court rejects Plaintiff's argument that any breach of contract by Defendant automatically entitled Plaintiff to continuing benefits and premium refunds from the date of breach forward. The court has fully considered all of Plaintiff's arguments that submission of additional medical and financial records would have been futile after Defendant denied his claim, and determines that Plaintiff's claims for months beginning October 2001 did not accrue until Defendant had adequate information to process Plaintiff's claims.
C. Contract Interpretation
Although Defendant has made substantial payments under the disability income policy, Plaintiff claims that he is due additional benefits because Defendant misinterpreted the policy. When interpreting a written contract, the court seeks to ascertain the intent of the parties.Marquis v. State Farm Fire Cas. Co., 961 P.2d 1213, 1219 (Kan. 1998); Catholic Diocese of Dodge City v. Raymer, 840 P.2d 456, 459 (Kan. 1992). Unless the contract is ambiguous, both the intention of the parties and the meaning of the contract must be determined exclusively from the instrument itself. Rigby v. Clinical Reference Lab., Inc., 995 F. Supp. 1217, 1226 (D. Kan. 1998). Ambiguity is a question of law.O'Bryan v. Columbia Ins. Group, 56 P.3d 789, 793 (Kan. 2002) (citation omitted); Catholic Diocese of Dodge City, 840 P.2d at 458. "In determining whether ambiguity exists, the language of the contract is to receive a fair, reasonable, and practical construction."Marquis, 961 P.2d at 1219. A contract is ambiguous only when the words used to express the meaning and intent of the parties are "insufficient in the sense the contract may be understood to reach two or more possible meanings." Id.; see also Liggatt v. Employers Mut. Cas. Co., 46 P.3d 1120, 1125 (Kan. 2002). That the parties differ as to what an unambiguous contract requires does not require that this court declare the contract ambiguous. Ryco Packaging Corp. v. Chapelle Int'l Ltd., 926 P.2d 669, 674 (Kan.Ct.App. 1997).
"[M]eaning should be ascertained by examining the documents from all corners and by considering all of the pertinent provisions, rather than by critical analysis of a single isolated provision. . . ."Akandas, Inc. v. Klippel, 827 P.2d 37, 44 (Kan. 1992) (citation omitted); see also Gray v. Manhattan Med. Ctr., Inc., 18 P.3d 291, 298 (Kan.Ct.App. 2001). An unambiguous contract must be enforced according to its plain, general, and common meaning in order to ensure that the parties' intentions are enforced. O'Bryan, 56 P.3d at 792 (citation omitted); Boos v. Nat'l Fed'n of State High Sch. Assn's, 889 P.2d 797, 803 (Kan.Ct.App. 1995).
"Because the insurer prepares its own contracts, it has a duty to make the meaning clear. If the insurer intends to restrict or limit coverage under the policy, it must use clear and unambiguous language; otherwise, the policy will be liberally construed in favor of the insured."O'Bryan, 56 P.3d at 792 (citations omitted). "The test . . . is not what the insurer intends the language to mean, but what a reasonably prudent insured would understand the language to mean." Id. at 793 (citation omitted).
1. "Prior Net Income" and "Indexed Prior Net Income"
Plaintiff first argues that the term "prior net income," as used to calculate residual disability benefits, is ambiguous. The court disagrees.
The policy provides the following formula for calculating residual disability benefits:
Loss of Net Income × Maximum Disability Benefit Prior Net Income
The term "loss of net income" means the insured's indexed prior net income minus the net income the insured earned for the month to which the payment relates. "Indexed prior net income" is not defined in the policy. "Prior net income" is defined as:
the largest of (1) the insured's average monthly net income for the last 12 months before the Elimination Period began; (2) the insured's average monthly net income for the 12-month period immediately before those 12 months; or (3) the highest average monthly net income for any two consecutive years of the last 5 years before the Elimination Period began. On each anniversary of the first day of a period of disability, UNUM will calculate a CPI-U Factor. UNUM will multiply the prior net income by that Factor. Then UNUM will use that amount to calculate the Residual Disability Benefit or the Recovery Benefit.
Plaintiff argues that only the first sentence of the above paragraph defines "prior net income." Plaintiff contends that the remainder of the paragraph (referring to multiplying the prior net income by the CPI-U Factor) defines "indexed prior net income." Under Plaintiff's rationale, the residual disability income equation, with the proper substitutions, should read as follows: × × which Payment Relates
CPI-U Factor Prior Net Income — Net Income You × Maximum (Indexed Prior Net Income) Earned for Month to Disability Benefit Plaintiff argues that unless "prior net income" is defined differently than "indexed prior net income," the modifier "indexed" is superfluous. Plaintiff also argues that the definition of "prior net income" is circular if "prior net income" is the same as "prior net income multiplied by the CPI-U factor." Finally, Plaintiff argues that it makes no sense for prior net income to be a constantly changing number.Defendant maintains that the first sentence defines "prior net income" for the insured's first year of disability, when inflationary adjustment is unnecessary. Until the end of the first year, there is no need to continue to the second sentence, beginning "On each anniversary," because there has been no anniversary. But when calculating "prior net income" after the insured's first anniversary, the second sentence becomes imperative, according to Defendant. After the first year, the CPI-U factor will be used to calculate "prior net income" for purposes of calculating residual disability benefit. "Prior Net Income" is thus the same as "Indexed Prior Net Income" after the first year.
Defendant also argues that Plaintiff's interpretation is unreasonable. In Plaintiff's equation, inflation is a factor in the numerator but not the denominator. A logical means of indexing benefits only occurs if indexed loss of income is compared with indexed income before the period of disability.
The court determines that the term "prior net income" is not ambiguous. By examining the language within the four corners of the policy, the court concludes that logically, it is not possible to reach two meanings of the language.See Marquis, 961 P.2d at 1219; see also Liggatt, 46 P.3d at 1125. The only reasonable interpretation of the language is that during the first year, prior net income is not indexed, but during subsequent years, prior net income is indexed in order to take inflation into account in both the numerator and the denominator of the residual disability benefit equation. The court concludes that the modifier "indexed" is not superfluous and that the definition is not circular. Rather, the definition of "prior net income" changes after the first year to properly reflect the impact of inflation. This interpretation is "fair, reasonable, and practical." See Marquis, 961 P.2d at 1219.
2. Charitable Contributions
Plaintiff appears to have abandoned his position that charitable contributions are expenses that can be subtracted from gross revenue to arrive at Plaintiff's net income. In Plaintiff's suggested conclusions of law, Plaintiff states as follows:
35. Dr. Hofer's charitable contributions are not usual and customary business expenses within the terms of the policies.
36. Because charitable contributions are not usual and customary business expenses, they cannot be subtracted from the gross income to determine the monthly net income for a particular month.
Based on these statements, the court concludes that Plaintiff no longer claims that his charitable contributions were expenses that could be subtracted from gross revenue. The court therefore concludes that the language of the disability income policy is not ambiguous with regard to charitable contributions. The charitable contributions of Plaintiff were not usual and customary expenses and could not be subtracted from gross revenue under the terms of the disability income policy. Defendant acted correctly in including charitable contributions in net income when calculating loss of net income and in turn determining eligibility for and the amount of Plaintiff's benefits under the disability income policy.
3. "CPI-U" and "The Last CPI-U Index Published in the Calendar Year before the Disability Begins"
Plaintiff next contends that the terms "CPI-U" and "the last CPI-U index published in the calendar year before the disability begins" are not defined with adequate specificity and are ambiguous. The court agrees.
"CPI-U" means the consumer price index for all urban consumers published by the Bureau of Labor Statistics or its successor. The problem with this definition is that in actuality, the Bureau of Labor Statistics publishes more than one consumer price index for all urban consumers. Plaintiff urges the court to apply the consumer price index — all urban consumers, not seasonally adjusted, U.S. city average, all items. Defendant argues that the court should apply the consumer price index — all urban consumers, seasonally adjusted, U.S. city average, all items. Defendant claims that the seasonally adjusted index is the only index that reasonably can be applied. Defendant also asks the court to consider the impact that using Plaintiff's index would have on Defendant's treatment of other policyholders. Defendant has used the seasonally adjusted index since 1981. Defendant argues that application of the ambiguity principles should not result in the inconsistent altering of indexing figures. Finally, Defendant asks the court to use the seasonally adjusted index because the effect of this issue is de minimis.
The amount of time Defendant has been using a particular index and the fact that the effect of this issue is de minimis are irrelevant in evaluating whether a term is ambiguous. The proper inquiry is whether the words are "insufficient in the sense the contract may be understood to reach two or more possible meanings." Id. Here, CPI-U has more than one definition. Both CPI-U numbers appear to be reasonable. When all else is equal, the court should construe the contract against the drafter. O'Bryan, 56 P.3d at 792 (citations omitted).
The court concludes that because the policy would allow the insured to apply more than one index, the policy is ambiguous and should be construed against Defendant. The court will apply the "not seasonally adjusted" CPI-U. Under this index, the "last CPI-U index published in the calendar year before the disability begins" may be the December CPI-U index or the annual index. Neither party has adduced evidence showing which is published last. Because Plaintiff requests application of the annual index and the court construes the ambiguous language against Defendant, the court will apply the annual index.
4, Maximum Disability Increases
As a final contract interpretation argument, Plaintiff submits that the policy does not limit the benefit index increases to the maximum disability benefit when the insured is disabled. The court disagrees.
The relevant policy provision states:
On each annual review date until the policy anniversary when the insured's age is 55, the insured will automatically have the opportunity to increase the Maximum Disability Benefit by the Indexed Amount provided that the insured is not then disabled and the insured has not refused the opportunity to increase the insured's coverage in two consecutive years.
Plaintiff reasons that the statement does not prohibit increases in benefit amounts when he is disabled; it merely states that he is no longer automatically entitled to them. Plaintiff asks the court to rephrase the above policy provision as follows: "If you automatically have the opportunity to increase the Maximum Disability Benefit by the Indexed Amount, then you are not then disabled and you have not refused the opportunity to increase your coverage in two consecutive years." Notably, under Plaintiff's logic, the court would have to find that Plaintiff was not disabled in every year that he automatically received Maximum Disability Benefit increases, even though the parties have now stipulated that Plaintiff was disabled from March 15, 1995 through October 31, 2002. This interpretation is not reasonable, and the court declines to apply it.
As an alternative, Plaintiff contends that Defendant waived the prohibition against automatic increases during disability by sending Plaintiff letters informing him of the opportunity to obtain the increases. "Waiver implies that a party voluntarily and intentionally gives up a known right or takes some action inconsistent with the contractual right." City of Topeka v. Watertower Place Dev. Group, 959 P.2d 894, 901 (Kan. 1998). "`[T]he intent to waive known rights is essential.'" Stratmann v. Stratmann, 628 P.2d 1080, 1087 (Kan.Ct.App. 1981) (quoting Prather v. Colo. Oil Gas Corp., 542 P.2d 297, 303 (1975)).
The court concludes that Defendant did not waive the right to withdraw the automatic increases once it determined that Plaintiff was disabled. Defendant did not engage in an intentional or voluntary act to waive the prohibition. The evidence indicates that Defendant's actions were in accordance with the maximum disability benefit provision as it viewed Plaintiff's status at the time. Because Defendant had denied Plaintiff's disability claim and Plaintiff had not further pursued the claim, Defendant had no reason to believe that Plaintiff was disabled. After Plaintiff submitted another claim and additional information, and Defendant determined that Plaintiff was disabled, Defendant refunded the additional premiums that Plaintiff paid to increase the benefits. Plaintiff's waiver argument is unavailing.
Finally, Plaintiff urges the court to take into account equitable considerations. Plaintiff argues that he relied on the increases offered by Defendant and that Defendant only offered the increases because they were a "substantial money maker." The court is not persuaded by Plaintiff's argument. The equities do not weigh in favor of awarding Plaintiff the maximum benefit increases.
D. Statute of Limitations
The parties agree that Plaintiff's claims to benefits, premium refunds, and/or interest that accrued prior to January 15, 1997 are barred by the statute of limitations. The issue before the court is when each monthly benefit accrued. The policy states that "[l]egal action must be started within five years after the written Proof of Loss is required to be furnished." See also K.S.A. § 40-2203(A)(11). The policy also states that written Proof of Loss "must be furnished to us within 90 days after each month for which a benefit is payable. . . ." See also K.S.A. § 40-2203(A)(7). Based on this language, the court determines that Proof of Loss of Plaintiff's October 1996 claims was due at the end of January 1997. The statute of limitations does not bar benefits, premium refunds, and/or interest beginning with the month of October 1996.
The parties' briefing indicates that Defendant may have erroneously paid Plaintiff for benefits that are barred by the statute of limitations. Plaintiff claims that such payment tolled or revived the statute of limitations under K.S.A. § 60-520. The court disagrees, but does not require Plaintiff to return any excess payments to Defendant.
K.S.A. § 60-520 provides as follows:
(A) Effect. In any case founded on contract, when any part of the principal or interest shall have been paid, or an acknowledgment of an existing liability, debt or claim, or any promise to pay the same, shall have been made, an action may be brought in such case within the period prescribed for the same, after such payment, acknowledgment or promise; but such acknowledgment or promise must be in writing, signed by the party to be charged thereby.
"Part payment of a debt is a voluntary acknowledgment which implies a new promise to pay the debt." O'Malley v. Frazier, 49 P.3d 438, 444 (Kan. 2002). In O'Malley, the Kansas Supreme Court indicated that the circumstances surrounding the payment are critical in evaluating whether the payment effectively tolls the statute of limitations. The court quoted Elmore v. Fanning:
A payment to toll the statute, must be made under such circumstances as to amount to an acknowledgment of an existing liability. Such acknowledgment must be distinct, unequivocal, and without qualification, and it must be made by the obligor against whom the statute is sought to be tolled, or by someone at his direction.O'Malley, 49 P.3d at 442 (quoting Elmore v. Fanning, 117 P. 1019 (Kan. 1911)) (internal citations omitted). TheO'Malley court distinguished Hustead v. Bendix Corp., 666 P.2d 1175 (Kan. 1983), where it had stated in dicta that "[a] part payment speaks for itself, and, when a part payment is made in a contract case, the provisions of K.S.A. 60-520 come into play, having the effect of tolling the statute of limitations." Id. (quotingHustead, 666 P.2d at 1180-81).
Based on the record before it, the court cannot conclude that any excess payments by Defendant for claims barred by the statute of limitations constituted an acknowledgment or acceptance of any claim, debt or liability under K.S.A. § 60-520. The parties have stipulated that all payments made under the disability income policy, including the April 7, 2003 payment at issue, were made by checks which noted periods of time other than the period from June 1995 to January 1997. There is no evidence indicating that Defendant intended to acknowledge that it owed Plaintiff for claims barred by the statute of limitations. Accordingly, the court concludes that the payment did not cause any tolling or revival of any statutes of limitation under K.S.A. § 60-520. Defendant's additional overpayment of premiums on October 13, 2003 also did not cause any tolling or revival of statutes of limitations under K.S.A. § 60-520.
Plaintiff's argument that he is entitled to keep overpayments made for claims barred by the statute of limitations, however, is availing. The Kansas Supreme Court has provided the following explanation of the purpose of the statute of limitations:
The effect of the operation of the statute of limitations is not to create a cause of action; its effect is to take away a cause of action already created by acts or one or both of the parties. The effect is not to disturb rights nor to transfer property; but to leave rights and property just where the parties themselves have voluntarily chosen to leave them during the running of the statute. The statutes of limitations simply say this to the injured party: `You have voluntarily allowed . . . the money you claim as compensation for some injury done to you . . . to remain in the possession of your adversary during a certain period without any effort to recover it, and now we will allow it to remain in the same place and in the same condition forever.'Harding v. K.C. Wall Prods., Inc., 831 P.2d 958, 965 (Kan. 1992) (quoting Bowman et al. v. Cockrill, 6 Kan. 311 (1870)). Under the above rationale, this court will not enforce Plaintiff's right to recover any money owed that accrued prior to January 15, 1997. However, if Defendant actually made payments for claims accruing prior to that date, the court will not require Plaintiff to return the payments, particularly when Defendant has not brought a counterclaim against Plaintiff for overpayments.
E. Prejudgment Interest
Plaintiff claims that he is entitled to prejudgment interest on all amounts owed by Defendant. For the following reasons, the court determines that Plaintiff is entitled to prejudgment interest on the benefits and premium refunds that Defendant has paid, excluding the benefits and premium refunds paid for October 2001 through October 2002. Plaintiff is also entitled to prejudgment interest on the additional amounts he is owed after recalculation of benefits using the "not seasonally adjusted" CPI-U index. Finally, Plaintiff is entitled to prejudgment interest on any amounts he is owed for the months of October through December 1996.Kansas authorizes prejudgment interest under a contract where the claims are liquidated. United Cities Gas Co. v. Brock Exploration Co., 995 F. Supp. 1284, 1294 (D. Kan. 1998). "A claim becomes liquidated when both the amount due and the date on which it is due are fixed and certain, or when the same become definitely ascertainable by mathematical computation." Neustrom v. Union Pac. R. Co., 156 F.3d 1057, 1067 (10th Cir. 1998); Kilner v. State Farm Mut. Auto. Ins. Co., 847 P.2d 1292, 1300 (Kan. 1993). But prejudgment interest may still be awarded when a good-faith controversy exists as to whether the party is liable. Varney Bus. Servs., Inc. v. Pottroff, 59 P.3d 1003, 1020 (Kan. 2002). "Where an amount is due upon contract, either express or implied, and there is no uncertainty as to the amount which is due or the date on which it becomes due, the creditor is entitled to recover interest from the due date." Id. at 1067 (citation omitted); United Cities Gas Co., 995 F. Supp. at 1294. "The allowance of prejudgment interest under K.S.A. § 16-201 is a matter of judicial discretion subject to reversal only when there is an abuse of discretion." Miller v. Botwin, 899 P.2d 1004, 1012 (1995). K.S.A. § 16-201 provides, "Creditors shall be allowed to receive interest at the rate of ten percent per annum, when no other rate of interest is agreed upon, for any money after it becomes due."
The court determines that on December 31, 2001, Defendant had adequate information to determine that Plaintiff was disabled for all months preceding October 2001. The benefits and premium refunds due to Plaintiff were definitely ascertainable at that time. Defendant failed to make payments to Plaintiff until July 19, 2002, at the earliest. In withholding payments from Plaintiff, Defendant deprived Plaintiff of the time value of his money, and Plaintiff is therefore entitled to interest on the amounts he was due. All interest should run from December 31, 2001.
With respect to the interest Plaintiff is awarded on the benefits and premium refunds for months preceding October 2001, Plaintiff is only entitled to such interest until the dates that Defendant made payments. For example, the interest awarded on the payments made July 19, 2002, stopped running on July 19, 2002, and the interest awarded on the payments made August 6, 2002, stopped running on August 6, 2002.
With respect to the interest Plaintiff is awarded on any amounts owed for October through December 1996 and any additional amounts owed after recalculation of benefits using the "not seasonally adjusted" CPI-U index, the interest shall run until the date of judgment. All interest shall be calculated at the statutory rate of ten percent per annum.
IT IS, THEREFORE, BY THE COURT ORDERED that: (1) Defendant did not breach the insurance contracts when it denied Plaintiff benefits in 1995, but it did breach the contracts in 2001; (2) the disability income insurance policy was unambiguous with respect to the term "prior net income," did not allow charitable contributions to be subtracted from gross revenue to arrive at net income, and prohibited benefit increases during a period of disability; (3) the policy was ambiguous with respect to the terms "CPI-U" and "the last CPI-U index published in the calendar year before the disability begins"; (4) the statute of limitations bars benefits, premium refunds, and/or interest for months preceding October 1996; and (5) Plaintiff is entitled to prejudgment interest on payments Defendant made for months preceding October 2001, on any additional amounts owed after recalculation of benefits using the "not seasonally adjusted" CPI-U index, and on any additional amounts owed for the months of October 1996 through December 1996.
IT IS FURTHER ORDERED that the parties shall submit an agreed-upon suggested entry of judgment for Plaintiff within thirty (30) days of the date of this Memorandum and Order. Computations shall be consistent with the rulings in this Memorandum and Order.
Copies or notice of this order shall be transmitted to counsel of record.
IT IS SO ORDERED.