Hall, Tory v. Life Insur Co

In the
United States Court of Appeals
For the Seventh Circuit
____________

No. 02-1704
TORY A. HALL,
Plaintiff-Appellant,
v.

LIFE INSURANCE COMPANY OF NORTH AMERICA,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Central District of Illinois.
No. 97-1448—John A. Gorman, Magistrate Judge.
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ARGUED JANUARY 10, 2003—DECIDED JANUARY 30, 2003
____________

Before EASTERBROOK, MANION, and KANNE, Circuit
Judges.
EASTERBROOK, Circuit Judge. As part of her employ-
ment with Diagnostek, Inc., Tory Hall was covered by a
disability-benefits policy underwritten by Life Insur-
ance Co. of North America (LINA). This perquisite of em-
ployment is part of a welfare-benefit plan covered by the
Employee Retirement Income Security Act. Hall pur-
chased additional insurance through a professional so-
ciety to which she belongs; that coverage was furnished
under a group certificate issued by New York Life In-
surance Co. to the Texas Society of Certified Public Ac-
countants Insurance Trust, on behalf of those accountants
who opted in and paid a premium.
2 No. 02-1704

Hall became unable to work; both disability carriers
commenced paying benefits. LINA, however, reduced
Hall’s monthly stipend by the amount she received under
the New York Life policy. She contends in this suit—
properly in federal court under §502(a)(1)(B) of ERISA, 29
U.S.C. §1132(a)(1)(B)—that the reduction is improper.
Presiding by agreement of the parties, see 28 U.S.C.
§636(c), a magistrate judge entered summary judgment
for LINA. Appellate jurisdiction is secure: the judgment
was entered on February 25, 2002, and the notice of ap-
peal was filed on March 22. Although Hall also filed in
the district court what she styled a motion for reconsid-
eration, and although a timely motion may suspend the
finality of the judgment until the district court has acted,
see Fed. R. App. P. 4(a)(4)(A)(iv), this motion was filed
after the period allowed by Fed. R. Civ. P. 59. It there-
fore did not affect the judgment’s finality, and the notice
of appeal took effect immediately on its filing.
The LINA policy sets the monthly benefit at 60% of the
employee’s former earnings “minus Other Benefits for that
month.” Other Benefits is a defined term, including not
only Social Security and similar governmental income-
replacement programs but also “any amounts which the
Employee or his dependents receive on account of disabil-
ity under . . . any group or franchise insurance or sim-
ilar plan for persons in a group”. Clauses of this kind not
only reduce the employer’s outlay for disability coverage
(and thus enable the employer to provide additional fringe
benefits from a given budget) but also control the moral
hazard of insurance—that is, the chance that the exis-
tence of insurance will increase the likelihood of the
insured event. People who know that their full income
will continue after they stop working may take more
risks in their daily lives and will not try as hard to re-
turn to work after injury or illness; some insureds will
fake the existence of a disability or exaggerate its se-
No. 02-1704 3

verity. The closer the disability benefit to 100% of earned
income, the greater the moral hazard. As a practical mat-
ter even 80% may fully replace lost wages, for persons
who no longer work do not incur commuting and related
costs, and they enjoy certain tax advantages. The provi-
sion in LINA’s policy deducting other sources of disability
income, so that no more than 60% of earned income is
replaced, gives employees an incentive to work if they
can. The New York Life policy equates to about 31% of
Hall’s income with Diagnostek, so if the two benefits
cumulate she will receive more than 90% of her former
earnings, a dangerously high level from the perspective
of moral hazard. But the deduction in LINA’s policy is not
universal, so we must inquire whether the New York
Life policy is a “group or franchise insurance or similar
plan for persons in a group”.
LINA contends that “group insurance” has a plain mean-
ing: any insurance obtained through a group. New York
Life issued its certificate to the Texas Society of Certified
Public Accountants Insurance Trust; Hall purchased
coverage through that group (and by virtue of her mem-
bership in it); the New York Life policy has the word
“group” on its cover; and that, LINA insists, is that. Things
are not quite this simple, however. “Group insurance” could
mean coverage of whole groups. This is the sense in which
the LINA policy itself is group insurance: it applies to all
of Diagnostek’s employees. One cannot be an employee
without being covered, nor can one be covered under the
LINA policy without being a Diagnostek employee. Compre-
hensive coverage of a group helps insurers control ad-
verse selection—that is, the tendency of persons safer
than the norm to drop out of the pool, which raises the
average risk and premium and induces still more drop-
outs. By offering an all-or-none deal, an insurer obtains
a pool of normal riskiness and can charge the normal
premium. Coverage obtained through the accountants’
society is not “group insurance” in this sense; individual
4 No. 02-1704

accountants choose whether to purchase coverage, and
adverse selection is bound to occur.
So which sense does “group insurance” take in this pol-
icy? The reference to “franchise insurance” and any “sim-
ilar plan” reveals what we need to know. According to
Couch on Insurance §1.29 (3d ed. 2002), “[g]roup insur-
ance is an arrangement by which a single insurance pol-
icy is issued to a central entity—commonly an employer,
association, or union—for coverage of the individual mem-
bers of the group. Franchise insurance is a variation
on group insurance, in which all members of the group
receive individual policies.” It looks very much as if the
New York Life policy is “group insurance” under this
definition; but if it is not, because Hall may have received
an individual certificate (and paid premiums directly to
New York Life), then it must be “franchise insurance.” The
inclusion of “franchise insurance” and “similar plans” in
the list of Other Benefits shows that an all-in-or-all-
out feature is not essential to classification of a policy
as “group insurance”. Hall obtained the New York Life
coverage through a policy issued to a professional asso-
ciation, so it fits within Other Benefits.
Hall responds that the LINA policy nonetheless is ambig-
uous: an accountant who did not consult Couch on In-
surance could not have known which sense of “group insur-
ance” the LINA policy used. Because federal common law
under ERISA (the applicable rules for a case such as this)
resolves ambiguities in favor of the plan participant, see
Phillips v. Lincoln National Life Insurance Co., 978 F.2d
302, 307-08 (7th Cir. 1992), Hall submits that she should
receive unreduced benefits. The contra proferentum rule
that Hall invokes is, however, just a tiebreaker; it does
not entitle insureds to prevail simply because lay readers
do not know all technical details of insurance law. See
May Department Stores Co. v. Federal Insurance Co., 305
F.3d 597, 600 (7th Cir. 2002). English does not contain
No. 02-1704 5

words for all complex economic arrangements; whenever
the language lacks a one-to-one mapping of words to ideas
(or words to things) there is a potential for ambiguity and
confusion. This potential is not enough to justify a pro-
insured decision in every case, however; if it did, the cost
of insurance would skyrocket and policies would become
even longer, more complex, and less digestible, as insurers
tried to define every term (and then define the words
used in the definitions). The Other Benefits section re-
fers, for example, to “the Jones Act”; few non-lawyers
know what this is (many non-admiralty lawyers also
would draw a blank), but the reference is not ambiguous.
The doctrine that ambiguities are resolved against
insurers serves its function when it prevents traps for
the unwary. Hall was not ensnared; even a modest degree
of diligence would have enabled a CPA to understand that
the New York Life policy, offered through a professional
group and captioned “Group Insurance,” probably would
be classified as “group insurance” under the LINA policy.
Hall did not read the LINA policy, misunderstand a vague
passage or veiled allusion, and only then opt into the
New York Life policy; she did not read the LINA policy at
all until it was too late. That omission led her to pay for
coverage under the New York Life policy, which, as things
have turned out, offered her no net benefit, but ERISA
does not protect employees against their own imprudence.
AFFIRMED

A true Copy:
Teste:

________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit

USCA-02-C-0072—1-30-03