Group life insurance policies often have confusing language about when they become effective. A trial court recently interpreted one to mean that the policy had not become effective to a full-time employee, though he was already eligible for the coverage, because he was not physically present at work when the policy was issued to his employer. Instead he was at home for a paid holiday and then in the hospital on sick-leave because of a sudden and fatal illness. The insurer and trial court penalized the employee for taking his paid holiday and sick-leave. They docked him the life insurance proceeds for which he had paid. The dispute centered around the policy’s “effective date of coverage” provision: whether being a full-time employee was enough to make the policy commence even if out for a sick-day. Or whether the employee had to be actively working in the employer’s building.

Fortunately for Michelle Sequeira, the California Court of Appeal, in Michelle Sequeira v. Lincoln National Life Ins. Co., — Cal. App. 4th — (Aug. 31, 2015), reversed the trial court’s draconian decision denying her life insurance benefits based on such a policy interpretation. The trial court had concluded Mrs. Sequeira was not entitled to receive the life insurance proceeds for which her husband had already paid premiums because the policy had not yet become “effective” when her husband died because he had yet to return to actual work from his paid holiday and sick-leave. The trial court got this wrong, buying the insurer’s literal interpretation of confusing policy language the insurer drafted. The Court of Appeal correctly noted that the trial court failed to interpret ambiguous policy language in favor of the insured, which has been the law in California for  decades.

Mrs. Sequeira’s husband Donald Sequeira, like most of us, did not work on January 1, 2010 because it was a paid holiday. Tragically, he was hospitalized the next day, a Saturday, due to a sudden viral infection of his heart. He died four days later on Wednesday, January 6. He did not work during that period. But Mr. Sequeira had worked for his employer, the City of Vacaville since 1990. He had dutifully worked as a full-time employee for the City for two decades when his wife Michelle (the beneficiary of his group life insurance policy through the City) submitted a claim for his life insurance proceeds.

The insurer, Lincoln National Life Insurance Company denied the claim on a technicality. It argued under convoluted policy language that because Mr. Sequeira was not physically present at work on the day the policy incepted and he became eligible for coverage (nor any time before he died), the group policy was not yet effective as to him. Even though he was eligible for coverage, had paid premiums for the policy and had been a full-time employee for years before he died, the insurer still denied the claim contending the policy was not yet effective to him. Thankfully the appellate court rejected National Life’s and the trial court’s non-sensical, though technically feasible, policy interpretation. It just doesn’t make any common sense that a full-time employee eligible for group life insurance through his employer should be penalized because he did not work on a paid holiday or during his paid sick-leave.

Under the policy’s language, Mr. Sequeira became “eligible” for coverage on January 1, 2010 when the policy was issued by Lincoln National to his employer, the City. But the policy limited his “effective date of coverage” until “the day you resume Active Work, if you are not Actively at Work on the day you become eligible.” The policy defined “Active Work” and “Actively at Work” as “the full-time performance of all customary duties of an employee’s occupation at the EMPLOYER’S place of business . . .” Thus, Mr. Sequeira’s “effective date of coverage” was when he resumed performing his job-duties full-time at the City if he was not performing them full-time on January 1, 2010, the day he became “eligible” for coverage (or January 1 if he was performing his job duties full-time for the City on that date).

The insurer (and the trial court) determined the policy’s definition of Active Work unambiguously meant Mr. Sequeira had to be physically present at the City’s office building actually working on or after his date of eligibility for the insurance to kick-in, rather than merely having the status of a full-time employee like he did. Since Mr. Sequeira was not physically at the City’s office building working on January 1, 2010 and did not come back to work before he died, the trial court held the policy was not yet “effective” to him.

The Court of Appeal soundly rejected the trial court’s interpretation of the policy. It concluded the policy language was ambiguous, meaning it was susceptible to at least two reasonable interpretations and, therefore, under long-standing California law, had to be strictly interpreted against the insurer and in accordance with the insured’s reasonable expectations of coverage. The appellate court had no trouble at all finding what the insured would have reasonably expected:

We have no trouble determining that Sequeira reasonably expected that the supplemental policy was effective before his death. He enrolled in coverage in October 2009 and made premium payments for coverage later that year. Lincoln then issued a policy on January 1, 2010. Sequeira could reasonably expect that the supplemental policy was effective on January 1, 2010, and he certainly would not expect that the coverage he paid for would be ineffective because he took New Year’s Day off from work and became ill the next day. “An employee reasonably would expect his coverage to extend beyond the time periods that he is physically at work and to cover those hours and days when he is out of the plant due to an illness.” “Surely, employees are entitled to take their sick leave, vacations, and holidays without losing their status as full-time workers.” [Citations omitted].

The Court of Appeal concluded the policy’s definition of “Active Work” had two reasonable interpretations, the one advanced by the trial court and also the one advanced by Mrs. Sequeira, i.e. her husband only had to be a full-time employee to be considered “Actively at Work,” not actually perform his job duties while physically present at the City’s building. The Court looked at other parts of the policy to construe the phrase “full-time performance” in the “Active Work” definition in the context of the entire policy, as it must under the law. It noted the policy defined “full-time employee” to mean a worker that is permanent, not a temporary worker that has another job and regularly works limited hours for the City. Because that definition did not depend on the employee being physically present on the job at a given moment in time but on his employment status, the Court reasoned a reasonable insured could interpret “full-time performance” in the definition of “Active Work” to also refer to employment status.

The Court of Appeal also examined out-of-jurisdiction decisions that reached the same conclusion when interpreting similar policy provisions. And it applied the insurer’s interpretation of “Active Work” to other policy provisions that used the same policy definition. It concluded the insurer’s interpretation led to bizarre meanings to those provisions but the insured’s to far more sensible results. For example, the policy had a waiting period requiring “30 days of continuous Active Work.” Under the insurer’s interpretation of “Active Work,” an insured employee would have to actually work thirty days continuously including weekends and holidays to be eligible for coverage under the policy. The Court found that was a strained interpretation of the waiting period provision “as a matter of common sense.” It would cause an insured to jeopardize coverage by not working on a weekend or calling in sick, an absurd result not in accord with an insured’s reasonable expectations.

Luckily the Court of Appeal took a common sense approach when interpreting the policy. Had it not, employees purchasing group life insurance policies would be severely penalized for taking a vacation or not working on a paid holiday. That is just not the American way. The trial court even commented, “Although sympathetic to Plaintiff, the court cannot redraft this insurance contract.” Apparently the court was not well versed in the “black letter” insurance law that ambiguous policy provisions must be strictly construed against the insurer. That a policy provision must be interpreted in the context of the policy as a whole. And that a policy cannot be interpreted in a way that leads to absurd or unreasonable results. The Court of Appeal applied each of these well-known policy interpretation rules and arrived at the only sensible result.

By: Joe McMillen
McKennon Law Group PC
20321 SW Birch Street, Suite 200
Newport Beach, California 92660
877-MSLAW20
(877) 675-2920

The California Insurance and Life, Health, Disability Blog at www.californiainsurancelitigation.com and at www.mckennonlawgroup.com
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