12‐3712 Nunn v. Massachusetts UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

August Term, 2013

(Argued: August 21, 2013 Decided: February 24, 2014)

Docket No. 12‐3712‐cv

RONALD NUNN AND DONALD VADEN,

Plaintiffs‐Appellants,

–v.–

MASSACHUSETTS CASUALTY INSURANCE COMPANY, NKA CENTRE LIFE INSURANCE COMPANY,

Defendant‐Appellee,

SUN LIFE ASSURANCE COMPANY OF CANADA,

Defendant.

Before: LEVAL, WESLEY, AND HALL, Circuit Judges.

Appeal from an order of the United States District Court for the District of Connecticut (Arterton, J.), entered on September 13, 2012, granting summary judgment to Defendant‐Appellee.

1 REVERSED and REMANDED.

DAVID M. BERNARD, Koskoff Koskoff & Bieder, P.C., Bridgeport, CT, for Plaintiffs‐Appellants.

PATRICK M. FAHEY, (Mark K. Ostrowski, on the brief), Shipman & Goodwin LLP, Hartford, CT, for Defendant‐Appellee.

WESLEY, Circuit Judge:

Plaintiffs‐Appellants appeal from a September 10, 2012 order of the United

States District Court for the District of Connecticut (Arterton, J.) granting

Defendant’s motion for summary judgment. The district court erred in failing to

apply Pennsylvania’s reasonable expectations doctrine to Plaintiffs’ reformation

claims and in finding the breach of contract claims to be time‐barred. We

therefore REVERSE and REMAND in accordance with the following.

BACKGROUND

Ronald Nunn and Donald Vaden are former National Basketball

Association (“NBA”) referees. In September 1996, Plaintiffs participated in a

referee training camp in New Jersey and attended a union meeting hosted by the

2 National Basketball Referees Association (the “NBRA”). At the meeting, Steven

Lucas, a sales representative for Sun Life of Canada, the company Defendant‐

Appellee, Massachusetts Casualty Insurance Company (“MCIC”), had

designated as its administrator for disability income products, gave a

presentation about supplemental disability insurance offered by MCIC. Sun Life

authorized Lucas to solicit applications for MCIC’s insurance policies. He was

introduced as a “disability expert” with seventeen years’ experience. During the

presentation, Lucas described a supplemental disability policy he had

implemented for umpires with Major League Baseball. Lucas also explained to

Plaintiffs that their current insurance coverage might be insufficient if they

became unable to work, but that he could offer supplemental disability insurance

that “changes the taxable benefit to a tax free benefit. It changes the benefit

period from 10 years to age 65. It covers you in your own occupation. If you

can’t do your job you’re disabled.” (Transcript of Fall NBRA Presentation at 8,

Sept. 29 1996). Lucas detailed how the supplemental insurance worked,

specifically describing the “own occupation” aspect of the arrangement:

this program is a function of you being covered in your occupation at the time disability starts. If you can’t be an official but you can work in a store some place you go ahead and work there. I mean, you are totally disabled from

3 being an NBA official that is what the disability is based on.

(Id. at 33) (emphasis added). He stressed repeatedly that one of the supplemental

insurance’s key advantages was that it covered policy‐holders unable to perform

their “own occupation”— here, NBA referee — until they were sixty‐five years

old, regardless of the extent of disability. Lucas reiterated this point numerous

times and further explained that while their current disability policy only paid

benefits for ten years after disability, his company’s policy would make monthly

payments to age sixty‐five no matter when the insured became disabled. (Id. at

10). Again and again he counseled the gathered referees that “[t]hey are all still

going to collect the [monthly payments] through the age of 65[;]” the “fact that it

is issued to age 65 it guarantees you that the supplement is truly that because it is

tax free[;]” “[t]he program covers you to 65 as I mentioned before[;]” and “[t]he

policy is guaranteed to you to age 65.” (Id. at 11, 12, and 14).

Within weeks of his presentation, Lucas sent each Plaintiff an application

for supplemental coverage. Each completed the application with Lucas’

assistance over the phone. Within a few days of each other, Plaintiffs submitted

applications through Lucas for the supplemental disability insurance policy he

had described. Lucas signed both. Neither Plaintiff read the description of

4 coverage prior to submitting their respective application. Plaintiffs received their

copies of MCIC’s supplemental disability insurance policy, but again neither read

the policy.1 Had they examined their policies, Plaintiffs would have discovered

that the policies’ definition of “total disability” was at odds with Lucas’

description. Though the definition for “total disability” in the policies began as

Lucas had promised — providing coverage when the insured could not work in

his or her occupation — that definition changed after 60 months of paid benefits.

The policy states that after 60 months, “[total disability] shall then mean the

Insured’s substantial inability to perform the material duties of any gainful

occupation for which he/she is suited. . . .” (Nunn and Vaden Dis. Inc. Policy at 3)

(emphasis added).

During his deposition, Lucas agreed that “the terms of the policy as [he]

described them were not consistent with the terms of the policies that were sold

to the NBA referees[.]” (Lucas Dep. at 12‐13). He admitted that the policies’

“own‐occupation period of the definition of disability” was “inconsistent” with

the terms described in his presentation. (Id. at 17). He did not tell the NBRA

1 The policy includes a “Notice of 10‐Day Right to Examine this Policy” clause stipulating that Plaintiffs could return the policy if they were “not satisfied for any reason” within 10 days of receiving it. (Nunn and Vaden Dis. Inc. Policy at Cover).

5 members that the policy he described was not actually available to them. (Id. at

74‐75).

In 2002, Nunn suffered a knee injury that ended his career as an NBA

referee. The next year, Vaden also suffered a career ending injury. Each began

receiving monthly payments pursuant to their supplemental insurance policies;

but after sixty months — Nunn was fifty‐eight and Vaden fifty‐five — the

payments stopped. Because both Plaintiffs were able to work at other jobs — in

fact, both continued working for the NBA in other capacities — MCIC ceased

payment.

Both Plaintiffs claim that based on Lucas’ presentation, they expected to

receive payments until age sixty‐five. Vaden explained that he did not read the

policy because “[he] really went by what [Lucas] told [him] because [he] trusted

[Lucas].” (Vaden Dep. at 37). “[Lucas] was convincing, and then the union as a

whole was excited about it, so I trusted him.” (Id. at 60). Nunn similarly

explained that “[he] didn’t feel there was a need [to read the policy]. It was

pretty clear how [he] understood Mr. Lucas’s presentation.” (Nunn Dep. at 27).

In August 2010, Plaintiffs filed suit in the United States District Court for

the District of Connecticut, alleging breach of contract and/or seeking

6 reformation with respect to each policy. MCIC moved for summary judgment,

asserting that Plaintiffs’ claims were barred by Connecticut’s six‐year statute of

limitations, and that the insurance policies contained unambiguous language

limiting Plaintiffs to sixty months of supplemental disability insurance payments

if they were able to perform any gainful occupation thereafter. The district court

(Arterton, J.) granted MCIC’s motion for summary judgment.

The court concluded that Plaintiffs were not entitled to reformation. In

reaching this decision, the district court found that Pennsylvania law governed

the substance of the contract. The court explained that under Pennsylvania law,

courts generally give effect to the plain language of a contract, but if “the insurer

[] either unreasonably obscure[d] the terms or outright deceive[d] the insured,”

Pennsylvania law requires courts to interpret contracts based on the“reasonable

expectations” of the insured. Nunn v. Massachusetts Cas. Ins. Co., 3:10CV1350 JBA,

, at *8 (D. Conn. Sept. 10, 2012) (internal quotation marks

omitted). Because Plaintiffs had alleged neither fraud nor misrepresentation —

which the court understood as prerequisites to the reasonable expectation’s

doctrine — the court concluded that it must apply Pennsylvania’s general rule

7 and look to the contract’s plain meaning without regard for Plaintiffs’ reasonable

expectations.2

The court also determined, and the parties do not dispute, that Connecticut

law supplies the statute of limitations period for Plaintiffs’ breach of contract claims.

Based on Connecticut’s six‐year period, the court concluded the claims were

time‐barred because the breach occurred in 1996, the date the policies were issued —

not in 2008 or 2009, when MCIC ceased making payments and Plaintiffs became

aware of the limits of their policies.

DISCUSSION3

While Connecticut is the forum state, both parties agree that Pennsylvania is

the “contract state,” and thus Pennsylvania’s law applies to “matters of substance.”

2 The court denied MCIC’s motion to dismiss the reformation claim for laches but then curiously concluded that even if the reasonable expectations doctrine applied, contract reformation would be improper because it “is an equitable remedy that is sparingly applied, and here, there has been extreme delay in filing suit . . . .” Nunn,

, at *9. 3 We review an award of summary judgment de novo, construing the evidence in the light most favorable to the nonmoving party and drawing all reasonable inferences in his favor. McBride v. BIC Consumer Prods. Mfg. Co.,

(2d Cir. 2009). Summary judgment is appropriate where the record reveals that there is “no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). A factual dispute is genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc.,

(1986).

8 In ascertaining the substantive law of the forum, federal courts will look to the

decisional law of the forum state, as well as to the state’s constitution and statutes.

Erie R. Co. v. Tompkins,

(1938).

Pennsylvania law is somewhat unique in that it employs the reasonable

expectations of the insured in some situations to govern contract interpretation.

Gilderman v. State Farm Ins. Co.,

(1994). As in other

jurisdictions, the default rule in Pennsylvania is to allow “the language of an

insurance policy [to] provide the best indication of the content of the parties’

reasonable expectations.” Bensalem Twp. v. Int’l Surplus Lines Ins. Co.,

(3d Cir. 1994). But unlike most jurisdictions, which will not look beyond the

four corners of an unambiguous writing, Pennsylvania law instructs that we examine

“the totality of the insurance transaction involved to ascertain the reasonable

expectations of the consumer.” Dibble v. Sec. of Am. Life Ins. Co.,

(1991). Thus, even a clear and unambiguous writing will not bind the insured

where the insurer or its agent gives the insured a reasonable expectation that

coverage is different than that stated in the written policy. See Tonkovic v. State Farm

Mut. Auto. Ins. Co.,

, 455‐56 (1987). Under Pennsylvania law when an

insurer’s agent makes a representation with regard to coverage which is inconsistent

9 with the later delivered policy, that inconsistency creates an ambiguity in that regard

notwithstanding the clarity of the policy’s provisions and entitles the insured to rely

on the agent’s representation. See

.

The Third Circuit surveyed the Pennsylvania Supreme Court’s decisions on the

doctrine of reasonable expectations eight years ago in Tran v. Metro. Life Ins. Co.,

(3d Cir. 2005). Tran reviewed three cases that provide a roadmap of

Pennsylvania’s reasonable expectations doctrine: Rempel v. Nationwide Life Ins. Co.,

(1977); Standard Venetian Blind Co. v. Am. Empire Ins. Co.,

(1983), and Tonkovic v. State Farm Mut. Auto. Ins. Co.,

(1987). In Rempel,

the insured received a verbal confirmation from an agent that the insurance company

would match a competitor’s offer for life insurance, but signed a contract inconsistent

with that commitment. Following the insured’s death, the beneficiary sought to

collect on the policy as promised by the agent and not surprisingly, the company

denied coverage. The Pennsylvania Supreme Court acknowledged that insureds

make the purchase decision at the time they apply and “[b]y the time the written

policy is received, it has lost its importance to the insured. . . . It is not unreasonable .

. . for a purchaser of insurance to ‘pass’ when the time comes to read the policy.”

Rempel,

(citation omitted).

10 In Standard Venetian, the insured purchased a general liability policy for his

company, Venetian. The policy covered personal injury or property damage caused

by Venetian, but excluded coverage for property damage to Venetian’s products

caused by its employees or by the products themselves. Standard Venetian,

. Four years after installation, one of Venetian’s porticos collapsed following a

snow storm, destroying the portico and some property of the portico’s owner. When

the owner sued Venetian, the company sought indemnification from its carrier for

the cost of the owner’s property damage and the cost of the portico. The carrier

brought a declaratory judgment action asking the court to find that while it was liable

for the cost of the damage to the owner’s property stored under the portico, the plain

terms of the policy excluded coverage for the cost of the portico. One of Venetian’s

principals testified in a deposition that he had asked the insurance agent to procure a

policy the provided “full coverage on everything we have,”

, but the poor

fellow never read the policy when it was delivered to Venetian.

Venetian argued that because the exclusion had never been noted or explained

to its principals the exclusion could not be enforced against it.

at 305‐06. The

Pennsylvania high court was not impressed. The court found that the exclusion was

clear and unambiguous and therefore had to be enforced as written.

.

11 Unlike the insured in Rempel, Venetian never asked for or received a specific

representation that the policy would cover damage to its products. Venetian’s

principals simply assumed that the general liability policy would cover that category of

property damage. Lacking an affirmative misrepresentation, the Pennsylvania

Supreme Court concluded that reformation was unjustified. Compare Standard

Venetian, 503 Pa. at 306‐07, with Rempel, 471 Pa. at 410‐11. Some might have been

tempted to view Standard Venetian as a signal that the state high court was stepping

back from the reasonable expectations doctrine, but this was not to be the case.

Four years later in Tonkovic, the Pennsylvania Supreme Court put an end to

that temptation. In Tonkovic, the insured had specifically requested a disability policy

that would pay his home mortgage if he became disabled as a result of an accident

for which he would also receive workers’ compensation. His insurance agent —

aware of this expectation — made no effort to disabuse the insured that his policy

would not coincide with the coverage requested. Tonkovic, 513 Pa. at 447‐48. When

the insured was injured at work and received worker’s compensation benefits, the

insurance company promptly rejected his claim.

. The court explained why

Rempel and not Standard Venetian dictated the result. The court noted

a crucial distinction between cases where one applies for a

12 specific type of coverage and the insurer unilaterally limits that coverage, resulting in a policy quite different from what the insured requested [as in Rempel], and cases where the insured received precisely the coverage that he requested but failed to read the policy to discover clauses that are the usual incident of the coverage applied for [as in Standard Venetian]. When the insurer elects to issue a policy differing from what the insured requested and paid for, there is clearly a duty to advise the insured of the changes so made. The burden is not on the insured to read the policy to discover such changes, or not read it at his peril.

Id. at 454. In reviewing these three cases, the Third Circuit found that

one theme emerges . . . courts are to be chary about allowing insurance companies to abuse their position vis‐à‐vis their customers. Thus we are confident that where the insurer or its agent creates in the insured a reasonable expectation of coverage that is not supported by the terms of the policy[,] that expectation will prevail over the language of the policy.

Tran,

(citing Bensalem,

) (alteration in original).

These cases reveal that reasonable expectations cases fall into two camps. In

one, “where one applies for a specific type of coverage and the insurer unilaterally

limits that coverage, resulting in a policy quite different from what the insured

requested,” the insured’s expectations are reasonable and therefore govern the

contract. West v. Lincoln Ben. Life Co.,

(3d Cir. 2007) (internal

quotation marks omitted). In the other, where “the insured received precisely the

13 coverage that he requested but failed to read the policy to discover clauses that are

the usual incident of the coverage applied for,” any other expectations are simply

unreasonable.

(internal quotation marks omitted).

Lucas’ representations to Vaden and Nunn with regard to specific provisions

of the policy he subsequently sold to them establish the reasonable expectations of

the parties.4 Vaden and Nunn never read their policies, instead assuming that each

reiterated the terms Lucas had previously described to them. When they were

subsequently injured and unable to work as NBA referees, they anticipated that, as

Lucas had promised, they would receive payments until age sixty‐five.

Plaintiffs’ failure to read the policy does not defeat their reasonable

expectations. As the Supreme Court of Pennsylvania explained in Tonkovic, “[w]hen

the insurer elects to issue a policy differing from what the insured requested and

paid for. . . . [t]he burden is not on the insured to read the policy to discover such

changes, or not read it at his peril.”

(emphasis added). Pennsylvania

law recognizes that “[c]onsumers . . . view an insurance agent . . . as one possessing

4 This might be a tougher case if the carrier had established that disability policies never define disability beyond five years in terms of inability to perform the job the insured performed at the time the disability began. But Lucas’ success on behalf of the Major League Baseball umpires forecloses that argument here.

14 expertise in a complicated subject[, and i]t is therefore not unreasonable for

consumers to rely on the representations of the expert rather than on the contents of

the insurance policy itself.” Rempel,

. Indeed, “the insurance industry

forces the insurance consumer to rely upon the oral representations of the insurance

agent.” Collister v. Nationwide Life Ins. Co.,

(1978). Under the

circumstances in this case, “it [was not] unreasonable [for Plaintiffs] not to read [the

policy].” See Tonkovic,

(quoting Rempel,

). Under

Pennsylvania law, Vaden and Nunn are therefore entitled to reformation of their

policies in line with their reasonable expectations.

Contrary to the holding of the district court, nothing in Pennsylvania

precedent suggests that Plaintiffs must allege fraud or misrepresentation before the

reasonable expectations of the insured can be applied — in fact, it suggests the

opposite. In Tonkovic, the Supreme Court of Pennsylvania applied the reasonable

expectations doctrine and found for the insured even though the insured “did not

set forth a separate cause of action . . . for negligent misrepresentation.”

(Zappala, J., dissenting) (emphasis added). Similarly, in Rempel, although the

insured’s claim was formally a claim of negligent misrepresentation, the Court noted

that the insured more simply “sought recovery on the basis of the policy as it should

15 have been written,” and permitted recovery based on the insured’s reasonable

expectations.

. In short, Plaintiffs’ failure to plead negligent

misrepresentation or fraud does not prohibit the court from looking past the plain

language of their written policies.

MCIC offers no rebuttal evidence to the claims of Nunn and Vaden that Lucas

promised to deliver a disability income policy that defined disability in terms of

one’s current job. Thus reformation of the contracts, which the district court

determined was not barred by laches, is available to Plaintiffs as a matter of law.5

But even if we reform the contract to meet the reasonable expectations of the

insured, MCIC still presses that Plaintiffs’ attempt to enforce the contract is

untimely. Its argument is premised on a strained understanding of the relationship

between a procedural matter — the applicable state statute of limitations — and the

substantive policies inherent in Pennsylvania contract law.

5 The district court correctly decided that MCIC failed to show any prejudice from the delay in Plaintiffs’ bringing their claim for reformation. This conclusion would seem to preclude its later finding that even if Plaintiffs had made out a claim for reformation it would deny the claim in an exercise of its discretion as a result of Plaintiffs’ “extreme delay” in commencing suit. The standard for determining laches also measures the court’s discretion. To have employed the correct standard only to ignore it later was error as a matter of law.

16 Plaintiffs concede in their brief that Connecticut law controls the statute of

limitations — 6 years — on their breach of contract claims. See Connecticut General

Statutes § 52‐576(a). Connecticut, however, does not follow Pennsylvania’s version

of the reasonable expectations doctrine; nor does it excuse an insured from not

reading her policy. Connecticut’s view is that the statute of limitations commences

for a non‐conforming policy at delivery of the insurance contract. See Tolbert v.

Conn. Gen. Life Ins. Co.,

, 125‐26 (2001).

But the parties and the district court agree that Pennsylvania substantive law

defined the contract’s interpretation and the parties’ obligations thereunder;

Pennsylvania is the contract state. Pennsylvania law determines Plaintiffs’ right to

reformation; absolves the insured from not reading the policy at delivery; and

allows the contract to be interpreted (or recast) from the date the carrier acts in a

manner inconsistent with the insured’s reasonable expectations of coverage. The

policies that underlay Pennsylvania’s substantive contract law of the reasonable

expectations doctrine directly contradict those that drive Connecticut’s view of

when a claim for non‐conforming coverage accrues.

The substantive law of Pennsylvania controls how to interpret the contract —

and reform it when necessary — and how to determine the nature and scope of the

17 contractual rights and obligations in play; it is the last word in this case. Though

Connecticut law decides the length of the statute of limitations, in this unusual

confluence of competing and contrary policies, it would eviscerate the very heart of

Pennsylvania’s reasonable expectations doctrine to give force to Connecticut law as

to when the claim accrued. It would be a hollow victory indeed for Plaintiffs to

succeed on their claim that the contract as written is not the contract to which they

agreed only to be told that the contract as written should have triggered their breach

of contract claims when the law of the contract state absolved them from knowing

that fact. The district court’s decision dismissing Plaintiffs’ breach of contract claims

is therefore reversed.6

The district court’s order and judgment dismissing Plaintiffs’ complaints is

REVERSED with costs and the matter is REMANDED to the district court for further

proceedings in accord with this decision.

6 MCIC also asserted in its motion for summary judgment at the district court that it is not accountable as a matter of Pennsylvania law for Lucas’ representations, which are the subject of this lawsuit. The district court never reached this issue. On remand, the district court will be required to resolve this issue, as well as the issue of damages, costs, and interest if required by law.

18