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RLI INSURANCE COMPANY v. SANTOS
ROBERT SATTER, J.T.R
Plaintiffs bring this action against defendant City of Hartford (hereinafter "City") alleging breach of contract of a collective bargaining agreement in that the City allegedly miscalculated retirees' pensions. Plaintiffs seek money damages, an order that the City recalculate retirement pensions in accordance with the provisions of the collective bargaining agreement and pay such recalculated pensions to plaintiffs, and a declaratory judgment that the City recalculate such retirement pensions, as aforesaid, and pay the recalculated pensions to plaintiffs in the future. The specific claim plaintiffs make is that a retiree's final average pay should include the lump sum payments of accrued vacation and sick time made to the retiree at the time of his retirement for purposes of calculating his pension. At issue also is an interpretation of two apparently contradictory provisions of a city ordinance that governs this case.
The plaintiffs allege this is a class action on behalf of various classes of Hartford City employees. However, they have failed to obtain court certification as a class action, pursuant to Connecticut Practice Book Sec. 9-9, and to give proper notice to members of the class, as required by the aforesaid section. Consequently the court determines this is not a class action.
The facts are as follows.
Plaintiffs are retired employees of the City of Hartford and members of the collective bargaining unit, known as Hartford Municipal Employees Association (HMEA), and HMEA itself.
Pensions for retired city employees are calculated by multiplying the highest of their final average pay over a certain number of years times a certain percentage, times the number of years of service.
A predecessor to the 1999 collective bargaining agreement between HMEA and the City expressed final average pay as based upon the highest two of the last five years of an employee's earnings. The retirement allowance was calculated by multiplying the final average pay by 2%, and by the number of whole years of service. CT Page 18293
On calculating final average based upon "earnings" under the previous collective bargaining agreement, the final average pay calculations: (1) included lump sum payments for accrued vacation time (but not lump sum payments for accrued sick time); and (2) extended a member's final average pay period out beyond the last day worked to the corresponding number of vacation days for which the member received a lump sum payment. Consequently, these payments were not considered current and paid as of the last day of work.
Using this calculation, if a member had eight weeks of accrued vacation, and his/or her last day of work was October 31, he or she would be kept on the books until December 26 to account for the lump sum payment of the eight weeks of accrued vacation. The member's retirement date would be December 26 and the final average pay would be the highest two of the five years earnings going back from December 26. This would provide a member with eight more weeks of service at his or her highest rate of pay. In addition, the member would be permitted to include the additional eight weeks for purposes of calculating his or her years of service. Thus, if a member actually worked nineteen years and ten months, the use of eight weeks of accrued vacation could provide the member with twenty years of service required to become eligible for a retirement allowance. Likewise, these eight weeks could also be used to take a member beyond an anniversary date of his employment in order to receive 2% of final average pay for that additional year. This way of applying accrued vacation time in calculating pensions is called stretching.
In 1986, Hartford passed an ordinance that based final average pay on gross earnings. Under that ordinance certain of the highest City employees (the city manager, corporation counsel and city treasurer) were allowed to add their lump sum payments of accrued vacation and sick leave to their last year's earnings in calculating final average pay and so increase their pension. This adding the lump sum payments of accrued vacation and sick time to the final year of earnings is called stacking.
As a result of this favorable treatment given to the City's highest officials, city treasurer Denise Napier "expressed her concern that the ordinance does not identify the calculation method for employees retiring after July 13, 1993."
To clarify that situation, on October 25, 1993, the City council CT Page 18294 adopted an ordinance, incorporated in the city charter as Chapter XVII, Pensions. Section 3(a)ii(4) states "A member's `final average pay' shall be based upon his or her gross earnings only to the extent that the provisions of this Chapter specifically provide for his or her final average pay to be calculated and that manner."
Section 3(a)ii(5)(A) provides that "gross earnings" shall mean amounts paid for services rendered within such time period and shall not include lump sum payments for accrued vacation and sick time except as provided in Subsection (5)(B).
Subsection (5)(B) provides that when final average pay is based on gross earnings, those earnings will be "adjusted to account for any lump sum payments made to such member for accrued vacation and sick time upon his or her termination of employment by, and only by, adjusting such member's final average pay period such that the last day of that period corresponds to what such member's last day of work would have been had such member continued to work beyond his or her actual last day of work for that period of time equal to his or her creditable accrued vacation and sick time."
Subsection (6) provided:
Unless, and then only to the extent, this chapter provides that a member's final average pay is to be based upon his or her "gross earnings" over a stated period of time, a member's "final average pay" shall not include any amounts pay to such member upon or by reason of his or her termination of employment with the city either for accrued sick time or as a severance payment.
In 1994, after the adoption of the aforesaid ordinance and charter revision, HMEA and the City commenced negotiations on a new collective bargaining agreement. Many proposals and counter proposals were made by each side. As to pensions, HMEA at one point proposed calculating final average pay in the following language:
In calculating pension benefits, an employee's accumulated sick time and vacation pay will be converted to dollar value and added to the employee's earnings to determine the highest two of five year earnings.
This language would have permitted stacking. The City rejected the CT Page 18295 proposal.
On December 15, 1998, the City's negotiator, Attorney Sigsmund Sapinski, made a number of proposed changes to the pension provision, including an increased employee contribution to pensions, a cap on pension amounts, and a switch from defining final average pay based upon HMEA members "earnings" to a provision under which final average pay was based upon their "gross earnings." His proposal read as follows:
Current bargaining unit employees as of December 1, 1998, shall be eligible for normal retirement upon completion of at least twenty (20) years of full-time service regardless of his or her age. The normal retirement amount for such bargaining unit employees shall be based upon 2.5% of the employee's final average pay for each whole unit of service to a maximum of 70% of final average pay. Final average pay is defined as the highest two (2) of the last five (5) years of his or her gross earnings. (Emphasis added.)
Sapinski testified that the use of "gross" earnings in that proposal was a mistake on his part. He said that he had cut and pasted a provision of a collective bargaining agreement between the City of Hartford and the City of Hartford Professional Employees Association.
The phrase "gross earnings" had never been discussed by the parties before it was proposed by Mr. Sapinski. However, he repeated his proposal at least five times to the union, sent it to the city manager and the city personnel representative at least four times, sent it to the city's corporation counsel at least once, sent it to the city's personnel manager at least three times and submitted it to the City Council which approved it. The city manager signed the final contract with that phrase. At the trial Sapinski admitted that the phrase "accurately reflected what the union and [the city] agreed to" and was "the product of joint work" between Sapinski and HMEA.
HMEA's negotiating team saw the phrase "gross earnings" in the Sapinski's proposal and readily agreed to it because it satisfied their desire to include all earnings in final average pay and formed part of an acceptable whole that included an increase in the CT Page 18296 percentage of final average pay, a cap on overall pensions, and increased pension contributions for HMEA members.
At one time, a tentative contract was reached, without HMEA's stacking proposal, but it was rejected by the City Council. Negotiations continued through 2006 and 2007 when the parties again tried to settle matters informally.
Finally, a contract was agreed to, approved by the City Council and signed on April 22, 1999. It covered the period from July 1, 1994 to June 30, 2001. A subsequent collective bargaining agreement was entered into between the City and HMEA in 2005 which contained the phrase that final average pay was based upon "gross earnings."
1. THE ISSUE OF MISTAKE
The law of contracts relating to mistake is very clear. A unilateral mistake of one party in entering into a contract or understanding the meaning of the contract is not grounds for voiding the contract or reforming it. Bender v. Bender, 292 Conn. 691, 730 (2009); Gebbie v. Cadle Company et al., 49 Conn.App. 265, 276 (1998). However, a unilateral mistake may be grounds for relief "only when the mistake is induced by the conduct of the other party, or when he seeks unconscionably to take advantage of it." Bender v. Bender, supra, p. 731. (Italics as in the opinion.) Restatement (2nd) Contracts § 153 p. 394 (1981) states that a "contract is voidable if (a) the effect of the mistake is such that enforcement of the contract would be unconscionable or (b) the other party had reason to know the mistake or his fault caused the mistake." The classic definition of an unconscionable contract is one in which "no man in his senses, not under delusion, would make, on the one hand, and which no fair and honest man would accept, on the other." Smith v. Mitsubishi Motor Credit of America, Inc., 247 Conn. 342, 349 (1998).
In this case, even if Attorney Sapinski, representing the City, made a mistake in counter-proposing to HMEA the phrase "gross earnings" as the basis for final average pay, there is no evidence that HMEA had reason to know of the mistake or any fault on its part caused the mistake. Nor was there any evidence of fraud or inequitable conduct on the part of HMEA. Shawmut Bank Connecticut v. Connecticut Limousine Service, 40 Conn.App. 268, 273, cert. denied, 236 Conn. 915 (1996). The fact CT Page 18297 that HMEA accepted the counterproposal as part of the bargaining process under which the union also agreed to increase contributions to the pension fund by its members does not constitute unlawfully taking advantage of the inclusion of the term "gross earnings" in the contract. Moreover, the contract as worded with the term "gross earnings" does not constitute an unconscionable contract such that no reasonable person would enter into it.
When however, a mutual mistake is made as to any term of the contract, the court may conclude there was not a meeting of the minds as to that term and so it will not be enforceable.
As stated in Harlach v. Metropolitan Property Liability Ins. Co., 221 Conn. 185, 190 (1992), quoting Homeloaners' Loan Corporation v. Stevens, 120 Conn. 6, 9-10 (1935): "Reformation is appropriate in cases of mutual mistake — that is, where, in reducing to writing an agreement made or transaction entered into as intended by the parties thereto, through mistake, common to both parties, the written instrument failed to express the real agreement or transaction."
The mutual mistake here in question is the inclusion of the phrase "gross earnings" in the collective bargaining agreement.
The evidence is clear that during the course of bargaining over the 1999 contract, the parties never discussed the term "gross earnings." However, Attorney Sapinski testified that he mistakenly used the phrase "gross earnings" in his counterproposal to HMEA. Although Sapinski testified to the mistake, it's significant that he exchanged a draft of the contract containing the language "gross earnings" a number of times with the union, the city manager and city personnel representative, the city's corporation counsel, the city's personnel manager, and submitted it to the City Council which approved it. HMEA's negotiating team saw the phrase "gross earnings" in the city's counterproposal and readily accepted it as part of the bargaining that included an increase in the pension percentage of final average pay, a cap on overall pensions, and increased contributions from HMEA members.
A few months after the contract was signed, the City sought to get HMEA to agree to eliminate the word "gross." The union refused to do so. Thus, the union did not consider the phrase "gross earnings" to be a mutual mistake.
The City argues that after the contract was signed, plaintiffs and CT Page 18298 HMEA members made claims for calculating their pensions on grounds other than based on "gross earnings," indicating that they did not rely on the phrase in agreeing to the contract.
But, there was also evidence that the HMEA's president complained to city manager Sandra Key Borges on April 24, 2000, that because of "gross earnings" in the contract, pensions were being incorrectly calculated.
Moreover, both parties permitted the phrase "gross earnings" to be used in the renewal of the 1999 contract in 2005, clearly indicating the phrase was not a mutual mistake.
While there is a dispute between the parties as to whether or not "gross earnings" means stacking, the court finds that the phrase "gross earnings" in the contract was seen and agreed to by the union as part of the bargaining process and so its inclusion was not a mutual mistake.
2. THE MEANING OF GROSS EARNINGS IN THE CONTRACT
The collective bargaining agreement in Section 3.5 provides that effective December 1, 1998: "The normal retirement allowance for such bargaining unit employees shall be based upon 2.5% of the employee's final average pay for each whole year of service to a maximum of 70% of the final average pay. The final average pay is defined as the highest two (2) of the last five (5) years of his or her gross earnings."
As defined in Webster's Dictionary, "gross" means: "without or before deductions, total." Thus, plaintiffs claim the word is unambiguous and not subject to any tortured interpretation. In their eyes, "gross earnings" means all earnings, including sick and vacation lump sums paid to an employee at the time of his retirement and thus increase his final average pay for purposes of calculating the pension. In essence the plaintiffs claim gross earnings requires "stacking" of accrued vacation and sick time payments.
However, the meaning of "gross earnings" in this context is not as simple as plaintiffs are asserting. The collective bargaining agreement at Section 3.1 provides:
The City and the Association shall recognize and adhere to provisions of Federal, State and City laws and ordinances which are in effect on the CT Page 18299 date this Agreement is ratified by the Association and which are not otherwise specifically superceded by the terms of this Agreement.
The City ordinance adopted October 25, 1993 and incorporated into the City charter at Chapter XVII, Pensions, provides at Section 3(a)(ii)(4):
A member's "final average pay" shall be based upon his or her gross earnings only to the extent that the provisions of this charter specifically provides for his or her final average pay to be calculated in that manner. (Emphasis added.)
Section 3(a)(ii)(5)(A) provides:
Commencing August 1, 1993, a member's "gross earnings" with respect to any year of service shall mean and include all amounts payable by the City directly to such member for services rendered by such member to the City . . . within such time period which amounts shall include, but not necessarily be limited to, such member's basic salary . . . but, except as provided in Subsection (B) below, shall not include either any amounts for services rendered in some other time period or any payments made to a member upon and by reason of his or her termination of employment (including, but not limited to . . . lump sum payments for accrued vacation and sick time). (Emphasis added.)
Section 3(a)(ii)(5)(B) provides:
Commencing August 1, 1993, any member who's final average pay is based upon his or her "gross earnings" over a stated period of time shall have his or her "gross earnings" adjusted to account for any lump sum payments made to such member for accrued vacation and sick time upon his or her termination of employment by, and only by adjusting such member's final average pay period such that the last day of that period corresponds CT Page 18300 to what such member's last day of work would have been had such member continued to work beyond his or her actual day of work for that period of time equal to his or her credible accrued vacation and sick time; providing however, that nothing herein shall be construed to permit or require the adjustment of the length of time included within a member's final average pay. Thus, expressed as a formula and subject to the foregoing provisions, a member's final average pay based upon "gross earnings" shall have his or her final average pay adjusted as follows: last day of final average pay period `last day worked + credible accrued vacation and sick time.
(Emphasis added.)
This section clearly provides that when final average pay is based upon gross earnings, gross earnings shall be adjusted to account for any lump payments made to such member for accrued vacation and sick time only by adjusting such member's final average pay such that the last day of actual work is extended by the accumulated days of vacation and sick time. This section gives an enormous benefit to retired employees. If the extension of the service by the amount of accrued vacation and sick time goes past an anniversary date of employee's employment, the employee gets an additional year of service. Moreover, if the extension brings the employee into a higher pay rate, the employee gets that benefit in increasing his average pay.
If the court finds there is no mutual mistake as to the inclusion of gross earnings in the agreement, as the court does find, the City concedes that accrued vacation and sick time should be stretched in the manner provided in Subsection (5)(B) above. However, since the City has considered gross earnings in the contract to be a mistake, it has calculated the pensions of retirees since 1999 as if the contract said "earnings" and has stretched the accrued vacation time of retirees, but has not stretched accrued sick time.
The plaintiffs recognized that Subsection (5)(B) may apply and, therefore, may limit gross earnings to mean stretching of both vacation and sick time. Nevertheless, they argue that Section 3(a)(ii)(6) requires stacking of sick leave only. That subsection provides: CT Page 18301
Unless, and then only to the extent, this chapter provides that a member's final average pay is to be based upon his or her "gross earnings" over a stated period of time, a member's "final average pay" shall not include any amounts paid to such member upon or by reason of his or her termination of employment with the city either for accrued sick time or as a severance payment.
The subsection is phrased as a conditional negative: unless final average pay is based on gross earnings, no sick time shall be included in final average pay. The plaintiff asserts that when the section as read as a positive, it translates as follows:
When a member's final average pay is based upon "gross earnings," a member's final average pay shall include any amounts paid to such member by reason of accrued sick time.
That rephrasing of the statute is consistent with court cases interpreting the words "unless" in a statute. In WJIV-TV, Inc. v. Federal Communications Commission, 231 Fed.2d 725 (1956), the United States Court of Appeals for the District of Columbia Circuit was required to interpret Section 319 of the Communications Act of 1931 that provided:
No license shall be issued . . . for the operation of any stations . . . unless a permit for its construction has been granted by the commission.
The court examined a number of instances where a statute was phrased as unless "A," no "B." It held: "Obviously, if the condition introduced by the conjunction `unless,' be met, we have an affirmative not a negative result." (P. 729.) It gave as an example the following:
When (the statute) says that the officer shall not be bound to keep the property, or to deliver it to the plaintiff, unless the plaintiff, on demand, shall indemnify the officer against the claim of a third party, although negative in form it conveys the affirmative meaning, that if the plaintiff does so indemnify, then the officer shall keep the property or deliver it to the CT Page 18302 plaintiff. ( Id.)
The court went on to say:
The word "unless" has the force of except; its primary meaning is "unloosened from," so what follows in the sentence after the word "unless" is excepted or unloosened from what went before it . . . For such a form of expression in a statute amounts to an affirmative enactment, and in fact . . . confers all that is excepted from a negative or restricted provision. ( Id.)
Plaintiffs point to the testimony of the Lorraine Sattensky, pension plan administrator, to the effect that Subsection (6) required her to include the amounts paid for sick pay lump sums in final average pay. Her testimony under cross-examination was:
Q: You understood that that language [in Section 6] meant that where a member's final average pay is to be based upon gross earnings, a member's final average pay shall include any amounts paid to such member by reason of accrued sick time, correct?
A: Yes.
However, it is significant that despite that testimony of Sattensky, the Pension Commission, after the adoption of the October 1993 ordinance, never stacked both vacation and sick time, but simply stretched them as required by Subsection (5)(B).
The legislative history of the subject ordinance indicates that prior to its adoption on October 25, 1993, the Common Council received a report from the chairman of the operations, management and budget committee. It stated:
The proposed amendment would address the issue of stacking of accrued sick and vacation time, as well as, effectively change the date to close the window.
The Pension Committee reported to the Common Council CT Page 18303 on October 22, 1993, three days before adoption of the ordinance, as follows:
As you may recall, certain non-bargaining city employees receive pension benefits based on the stacking of their lump sum sick and/or vacation payout in the final year of earnings. This ordinance discontinues this practice, effective August 1, 1993. (Italics added.)
The legislative history further reveals that both Subsections (5) and (6) were adopted together. If Subsection (6) is construed as requiring stacking of sick time, it directly conflicts with Subsection (5) which requires both vacation and sick time to be stretched.
The language of (6) does not expressly require stacking. It says, if read in the affirmative, that when final average pay is based on gross earnings, amounts paid for sick time shall be "included" in final average pay. Significantly it does not say how it will be "included."
Our law is that a city charter must be interpreted so as reasonably to promote its ultimate purpose. "Its parts must be reconciled and made operative so far as possible." Armino v. Butler, 183 Conn. 211, 218 (1981).
Construing the subsections of Section 3(a)(ii) together, Subsection (5)(A) provides "gross earnings" "shall include all amounts payable by the City directly to such member for services rendered by such member . . . within such time period . . . but, except as provided in Subsection B below, shall not include . . . lump sum payments for accrued vacation and sick time." Note that the exception is made for Subsection B, but not for Subsection 6. Note also that accrued sick time paid at the time of termination is not paid for services rendered within that time period.
Subsection (5)(B) provides that when final average pay is based on "gross earnings," those earnings shall be adjusted to account for lump sum payments for accrued vacation and sick time upon termination of employment " by and only by" stretching the employee's services and not by stacking.
Section 6 says, if read positively, that when final average pay is based upon gross earnings, final average pay shall "include" amounts CT Page 18304 paid for accrued sick time. But subsection (5)(A) provides that gross earnings shall not "include" lump sum payments for accrued vacation and sick time except as provided in subsection (5)(B). And, subsection (5)(B) provides that such payments for vacation and sick time shall be considered in calculating pensions only by stretching and not by stacking those amounts. Thus, Section 6 reaffirms Subsections (5)(A) and (5)(B) in that amounts paid for accrued sick time shall be included, but only for purposes of stretching and not for stacking.
To construe Subsection (5)(B) as plaintiffs assert, to require stretching of vacation and sick time and Subsection (6) to require stacking sick time alone would not only distort the meaning of those provisions, but also defeat the purpose of the ordinance. This is especially so because the Pension Commission had stated to the Common Council that the intent of the entire ordinance was to discontinue all stacking as of August 1993.
Moreover, while Subsection (6) is ambiguous as to how sick time is to be included in final average pay, Subsection (5)(B) is specific and crystal clear. When final average pay is based upon gross earnings, vacation and sick days are to be stretched. This is how the same language in the CHPEA contract has been construed by the Pension Commission since 1999.
Thus, this Court construes Subsection (6) as reinforcing Subsection (5)(A) and (B) by including the amounts paid for both accrued vacation and sick time in final average pay but including them only by stretching, as provided for in Subsection (5)(B).
3. RELIEF
Although this Court determines that plaintiffs have failed in their claims for stacking both vacation and sick time, or for stacking sick time alone, they are entitled to some relief.
The evidence is that because the City considered the phrase "gross earnings" in the collective bargaining to be a mistake, it unilaterally eliminated the word "gross" and construed "earnings" as the basis of final average pay to mean it was obligated to stretch only vacation time and not sick time. Since this Court has found that the inclusion of "gross earnings" in the contract was not a mutual mistake, the City has illegally denied the plaintiffs the benefit of also stretching sick time in calculating their pensions. CT Page 18305
Accordingly, the court renders a declaratory judgment to the effect that, pursuant to the terms of the collective bargaining agreement and to Section 3(a)(ii)(5)(B) of the October 25, 1993 city ordinance, the City shall recalculate the pensions of the plaintiffs by stretching not only their accrued vacation time but also their accrued sick time. The City shall, starting with the next monthly payment due following completion of the calculation and continuing with all subsequent payments, increase the plaintiffs' pension payments by the additional monthly pension amounts derived from the recalculation. It is further ordered that the City shall pay, within ninety days of this Court's decision, the arrearage on the corrected amounts, retroactive to each plaintiffs' retirement date.
In light of the complexity of this case, and on the basis of the reasons for the City's conduct, the court will not order prejudgment interest. But, it will order postjudgment interest at the statutory rate from the date of this decision to the date of payment of the additional pension amounts due the plaintiffs.
Plaintiffs also seek counsel fees by reason of this purporting to be a class action. However, the plaintiff has never sought to certify the action as a class action, pursuant to Section 9-9 of the Connecticut Practice Book, and has never given proper notice to the class. Consequently, plaintiffs are not entitled to counsel fees on the basis of this being a class action. The underlying action is simply a breach of contract claim and such a case cannot be the basis for the awarding of counsel fees. Plaintiffs' claim for counsel fees is thus denied.
The court shall retain jurisdiction of this case in order to enforce its orders.
III. Analysis
A. RLI's Claim for Declaratory Judgment
RLI has moved for summary judgment on its declaratory judgment claim on two alternate grounds. First, it contends that Lima's failure to disclose Santos' status as a driver under the age of 22 — whether on the July application, the August application, or at any time after Santos received his driver's license and before the renewal policy became effective — was a material misrepresentation that voided the policy. Second, it contends that an applicant's signature on the renewal application is a condition precedent to receiving insurance coverage and that Lima is barred from recovering under the policy if she did not sign the August renewal application, as she alleges.
In Massachusetts, an insurer may void an insurance policy if the policyholder failed to disclose "material" facts when requested to do so in an application for the insurance. See Barnstable Cnty. Ins. Co. v. Gale, 425 Mass. 126, 127-28 (Mass. 1997). There is, however, a limitation imposed by statute as to the insurer's ability to void the policy. Mass. Gen. Laws ch. 175, § 186(a) provides:
No oral or written misrepresentation or warranty made in the negotiation of a policy of insurance by the insured or in his behalf shall be deemed material or defeat or avoid the policy or prevent its attaching unless such misrepresentation or warranty is made with actual intent to deceive, or unless the matter misrepresented or made a warranty increased the risk of loss.
A fact is regarded as "material" if "the knowledge or ignorance of [it] would naturally influence the judgment of the underwriter in making the contract at all, or in estimating the degree and character of the risk, or in fixing the rate of the premium." Employers' Liab. Assur. Corp. v. Vella, 366 Mass. 651, 655 (Mass. 1975); see also Barnstable Cnty., 425 Mass. at 128; Daniels v. Hudson River Fire Ins. Co., 66 Mass. 416, 417 (Mass. 1853). Thus, an insurer may void a policy even if the policyholder made an "innocent misrepresentation of a material fact" if the disclosure of the truth would have affected the insurer's decision in fixing the rate of premium. Northwestern Mut. Life Ins. Co. v. Iannacchino, 950 F. Supp. 28, 31 (D. Mass. 1997); see also Barnstable Cnty., 425 Mass. at 128 ("for purposes of G.L. c. 175, § 186, a fact is deemed material if it influences the premium"); Hanover Ins. Co. v. Leeds, 42 Mass. App. Ct. 54, 57, 59-60 (Mass. App. Ct. 1997) (affirming declaratory judgment in insurer's favor given policyholder's failure to give accurate information as to the location of her automobile, which, if disclosed, would have resulted in a higher premium).
1. Whether Lima Made a Misrepresentation in the Renewal Application a. The July Renewal Application
RLI first contends that Lima made a material misrepresentation on the July renewal application. Question 5 of the renewal application asked for the number of drivers in the household, and defined "driver" as "`you' and `members of your household' who operate motor vehicles licensed for road use. . . ." At the time that Lima filled out the July renewal application, Santos was a holder of a learner's permit. Because he had such a permit, he was legally permitted to operate automobiles (and did so at the driver's school where he was enrolled). Lima did not, however, indicate on the application that Santos was a driver who was a member of her household. Santos fit within the definition of "driver" on Question 5, and Lima's response was thus incorrect.
Question 6 asked whether any drivers in the household were under the age of 22. It specifically instructed the applicant to "include drivers with a learner's permit." It added that, in Massachusetts, "only those drivers with six years or less driving experience" should be included, and that "driving with a permit is not considered driving experience and should therefore not be included within the six years as driving experience." Lima indicated that there were no drivers under 22 in her household. Santos was a driver under 22 with less than six years of driving experience, and thus Lima's response to Question 6 was also incorrect.
Defendants contend that Questions 5 and 6 on the July renewal application were ambiguous as a matter of law and, therefore, Lima's responses cannot be considered misrepresentations. As to Question 5, defendants note that the definition of "driver" did not explicitly refer to individuals, such as Santos, who had learner's permits. As to Question 6, defendants concede that the first sentence instructs the applicant to "include drivers with a learner's permit" in her answer. They contend, however, that the two sentences that follow make the question confusing and ambiguous. Specifically, they argue that a person could reasonably interpret the question to mean that an individual who holds a learner's permit does not have any "driving experience" (because this experience is not counted towards the six-year requirement) and therefore does not qualify as a "driver" under Questions 5 or 6.
It is well-settled that "where there is more than one rational interpretation of policy language, `the insured is entitled to the benefit of the one that is more favorable to it.'" See Hingham Mut. Fire Ins. Co. v. Mercurio, 71 Mass. App. Ct. 21, 24 (Mass. App. Ct. 2008) (citing Hakim v. Massachusetts Insurers' Insolvency Fund, 424 Mass. 275, 281 (Mass. 1997)). However, even assuming that Question 5 is ambiguous — a question that the Court does not reach — Question 6 is not. Question 6 tells the applicant, clearly and directly, to "include drivers with a learners permit." That statement is not ambiguous as a matter of law.
It is true that Question 6 goes on to state that in Massachusetts, only those drivers with six years or less driving experience should be included, and that "driving with a permit is not considered driving experience and should therefore not be included within the six years as driving experience." The statement that "driving with a permit is not driving experience" is clearly meant to be read along with, and in the context of, the rest of the sentence. Defendants' reading of this question is tortured and would produce a nonsensical outcome. This Court will not read ambiguity into the renewal application where it does not exist. See, e.g., Arbella Mut. Ins. Co. v. Feigo, 2009 WL 1906418, *2 n. 6 (Mass. App. Ct. Jul. 6, 2009) (rejecting arguments that policy definitions were vague or ambiguous). At a minimum, therefore, the July renewal application contained misrepresentations in the response to Question 6.
b. The August Renewal Application
As noted, RLI did not accept the July application because it was incomplete. It then received a further application in August, well after Santos received his driver's license (on July 14). RLI then issued the policy in September. RLI contends that Lima did not provide truthful answers on the August application and that this provides an additional basis for voiding the policy.
Whether Lima actually signed or submitted the August application is a disputed issue of material fact. Drawing all inferences in the light most favorable to defendants, the Court must assume that Lima did not sign or submit the August application. If she did not sign or submit that application, she could not have made any misrepresentations on it.
According to defendants, the misrepresentation inquiry should end there: if RLI rejected the July application and issued the policy in reliance on the August application, and if Lima made no misrepresentation on the August application, the policy could not have been issued in reliance on any misrepresentation by Lima. That argument, however, raises a threshold question: if RLI rejected the July application, and Lima did not sign or submit the August application, how was an insurance contract formed between RLI and Lima?
2. Whether a Contract Was Formed
RLI contends that defendants cannot collect under the policy because an applicant's signature on the renewal application is a condition precedent to receiving insurance coverage. In other words, RLI contends that if Lima's testimony that she did not sign the August application is true, then the contract was not formed, and she cannot recover under the policy.
Defendants contend that Mancuso-Nowak employees filled out the renewal application without Lima's assistance and that, because Mancuso-Nowak is an agent of RLI, RLI is estopped from voiding the policy. See Guerrier v. Commerce Ins. Co., 66 Mass. App. Ct. 351 (Mass. App. Ct. 2006) (insurer equitably estopped from voiding policy where agent was responsible for misstatement in application signed in blank by insured). They point to the July renewal application, which contained pre-printed information, including the language "RLI Agent: Mancuso-Nowak Ins."
RLI disputes that Mancuso-Nowak is its agent for these purposes, and has submitted substantial evidence to that effect.
Even assuming that Mancuso-Nowak was RLI's agent — a question the Court does not reach — defendants' version of events would nonetheless preclude recovery. It is true that an agency relationship would permit Mancuso-Nowak to bind RLI to a contract with Lima. But under any circumstances, Lima would still need to have assented to that contract's formation. In defendants' version of the facts, Lima had no knowledge of or involvement in the creation of the August application. Under ordinary principles of contract formation, Lima's resulting lack of assent to the August application precludes the formation of any valid insurance contract between Lima and RLI.
If Mancuso-Nowak was or appeared to be Lima's agent, on the other hand, a valid insurance contract between RLI and Lima might have been formed when Mancuso-Nowak faxed the renewal application to The Number One Insurance Agency. Defendants make no such claim here.
For this reason, defendants' reliance on Guerrier is misplaced. In Guerrier and its predecessors, the insurer was estopped from voiding its policy based on the errors of its agent only after the insured had met with the agent, assented to buying the policy, and had detrimentally relied on that agent's assurances. 66 Mass. App. Ct. at 357 (finding estoppel where insured signed application in blank and "rel[ied] on oral assurances from . . . [agent] to the effect that `everything was fine' and that . . . [agent] would correctly complete the necessary forms for obtaining the insurance"); accord Sullivan v. John Hancock Mut. Life. Ins. Co., 342 Mass. 649, 650-51 (Mass. 1961) (finding estoppel where insured had signed application and given truthful answers that had been incorrectly recorded by agent); John Hancock Mut. Life Ins. Co. v. Schwarzer, 354 Mass 327, 328 (1968) (same). There is no evidence here that anyone at Mancuso-Nowak made any assurances to Lima, and likewise no evidence that Lima relied to her detriment on such assurances. As a result, RLI cannot be estopped from voiding the policy.
Indeed, even assuming that Lima did in fact meet with someone at Mancuso-Nowak, she would still have to assent to the formation of the contract. Defendants contend that Lima never signed the August application, and there is no other evidence of her assent in any form.
Furthermore, if the signature on the August application is not Lima's, the policy is voidable as a matter of law. In Massachusetts, "[i]f an insured fails to satisfy a condition precedent, the coverage is void regardless of whether there was proof of an intent to deceive or an increased risk of loss." Mass. Mut. Life Ins. Co. v. Fraidowitz, 443 F.3d 128, 131 (1st Cir. 2006); accord Krause v. Equitable Life Ins. Co. of Iowa, 333 Mass. 200, 203 (Mass. 1955) (stating that if "conditions . . . were not satisfied[,] no contractual duty under the policy ever arose"). Whether a provision in an insurance policy application qualifies as a condition precedent is a question of law. Mass. Mut. Life. Ins. Co., 443 F.3d at 131 (citing Kobico, Inc. v. Pipe, 44 Mass. App. Ct. 103, 105 (Mass. App. Ct. 1997)). A statement may become a condition of the policy if "(1) the statement made by the insured relates essentially to the insurer's intelligent decision to issue the policy; and (2) the statement is made a condition precedent to recovery under the policy, either by using the precise words `condition precedent' or their equivalent." Id. (citing Charles, Henry, Crowley Co. v. Horne Ins. Co., 349 Mass. 723, 26 (Mass. 1965)). The first part of the test turns on "[whether the] matter [would] be considered of importance by a reasonable insurer." Drake Fishing, Inc. v. Clarendon American Ins. Co., 136 F.3d 851, 852 (1st Cir. 1998). "Equivalent" language under the second part of the test includes provisions that state "in no uncertain terms that misrepresentation would result in a voiding of the policy." Kobico, 44 Mass. App. Ct. at 106.
There is no question that a reasonable insurer would consider an applicant's original signature important to its intelligent decision to issue a policy. An original signature assures the insurer that the applicant has attested to the verity of her answers and that she consents to entering into the insurance contract. Thus, the first prong of the test is met. Furthermore, it is clear from RLI's documents that an original signature was a condition precedent to recovery. On RLI's renewal application, the words "APPLICATION WILL NOT BE ACCEPTED WITHOUT APPLICANT'S ORIGINAL SIGNATURE" appear in bold just above the signature line. (Edelstein Aff. Ex. 16). The application also states that "any . . . misstatement of fact in the information given, which if known to . . . [RLI] would have caused . . . [it] to decline this application, is grounds for voiding the policy." ( Id.). Together these statements clearly communicate that a false signature would result in a voiding of the policy, fulfilling the second prong of the test.
In short, there is no evidence that Lima assented to the creation of an insurance contract. Even if she were somehow involved in the submission of the August application, her failure to sign it constituted a breach of a condition precedent and would permit RLI to void the policy as a matter of law.
3. Whether Lima Failed to Update the Application
Even assuming that Lima submitted an application for the formation of an insurance contract, she nonetheless had a duty to advise RLI of the presence of a teenage driver in her household before the policy issued.
In Massachusetts, "[s]tatements made in an application for insurance are in the nature of continuing representations and speak from the time the application is accepted or the policy is issued." Hanover Ins. Co. v. Leeds, 42 Mass. App. Ct. 54, 57 (Mass. App. Ct. 1997) (citing Ayers v. Massachusetts Blue Cross, Inc., 4 Mass. App. Ct. 530, 536 (Mass. App. Ct. 1976)). Therefore, "an [insurance policy] applicant has a duty to inform the insurer of any known changes rendering his or her initial representations untrue until such time as the policy becomes `operative.'" Chicago Ins. Co. v. Lappin, 58 Mass. App. Ct. 769, 780 (Mass. App. Ct. 2003) (quoting Gabbett v. Connecticut Gen. Life Ins. Co., 303 Mass. 433, 435 (Mass. 1939)).
Although she knew that Santos had received his driver's license on July 14, it is undisputed that Lima never made any attempt to advise RLI of that fact at any time before the policy became effective on September 10. Drawing all reasonable inferences in favor of defendants, the Court will assume that the omission was unintentional. Even a misunderstanding on the part of Lima, however, cannot prevent RLI from voiding the policy on those grounds.
Defendants assert that as a matter of law neither the policy itself nor the application required Lima to notify RLI of changes to the initial information that she provided. In support of that argument, defendants cite to Quincy Mutual Fire Insurance v. Quisset Properties, 69 Mass. App. Ct. 147, 153 (Mass. App. Ct. 2007), in which the court held that "when neither a policy provision nor a renewal application requires the insured to provide updated information to the insurer, the insured's failure to do so is not a misrepresentation." In that case, the insurer automatically renewed the insured's policy without requiring any renewal applications. Id.
Defendants' reliance on Quincy Mutual is misplaced. Unlike the insurer in Quincy, RLI required the applicant to provide updated information in a renewal application as a condition of renewing the policy. See id. at 152-53. That application obliged Lima to answer honestly and accurately and activated her duty to "inform [RLI] of any material changes that occurred between the time of the application and inception of the policy." Id. (citing Lappin, 58 Mass. App. Ct. at 780). Her failure to advise RLI that Santos had received his driver's license — even if she was not aware of her obligation to do so — was, under the circumstances, a misrepresentation.
The issue is, of course, complicated by Lima's contention that she did not sign or submit the August application. But under any reasonable interpretation of the facts, there must have been a period of time during which an application was pending — and during which Lima had a duty to update. It is undisputed that Lima signed and submitted the July application (which did not reveal the presence of a teenage driver). Taking the facts in the light most favorable to the defendants, there are only three plausible possibilities: (1) RLI reconsidered and accepted the July application on its own terms; (2) RLI accepted the July application after the problems were fixed by the submission of the omitted information in August; or (3) RLI rejected the July application permanently, after which a new application was submitted in August and later accepted. But the policy had to be based on some form of application by Lima. Surely it is unreasonable for her to believe that her insurance coverage had materialized out of thin air, without any application process.
Put simply, Lima cannot have it both ways: she cannot have an insurance policy without an application indicating her assent to enter into an insurance contract. And if she made an application — whether that application occurred in July or August or some combination of the two — she had an obligation to inform RLI of material changes that occurred after the time of the application.
In short, under any view of the undisputed facts, Lima reasonably should have known that RLI was proceeding in reliance on the statements she made in her application. Lima was obligated to inform RLI of any material changes that occurred between the time of her application and the inception of the renewal policy. Lappin, 58 Mass. App. Ct. at 780. It is undisputed that she never advised RLI that Santos had received a driver's license. Her failure to do so gives RLI the right to void the policy.
4. Whether RLI Should Be Estopped from Relying on the July Application
Defendants further contend that RLI should be estopped from relying in any way on the July application. According to defendants, because RLI specifically identified misrepresentations on the August application (but not the July application) as the basis for its denial of coverage in its letter dated April 20, 2007, it is estopped from voiding the contract on the ground that the July application contained a misrepresentation. In support of that proposition, they cite Mass. Gen. Laws ch. 176D § 3(9)(n), which states that "failing to provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim" is an unfair claim settlement practice. That argument fails for several reasons.
First, RLI's explanation for denying coverage falls well below the level of an unfair settlement practice. See Commercial Union Ins. Co. v. Seven Provinces Ins. Co., Ltd., 217 F.3d 33, 40 (1st Cir. 2000) (noting that an insurance carrier that "in good faith denies a claim of coverage on the basis of a plausible interpretation of its insurance policy is unlikely to have committed a violation of G.L. c. 93A.") (quoting Gulezian v. Lincoln Ins. Co., 399 Mass. 606, 613 (Mass. 1987)). RLI's explanation — that misrepresentations on the August application were grounds for voiding the policy — appears to have been reasonable in light of the facts available to it at the time.
RLI's failure to interview Lima is not sufficient to suggest bad faith under the circumstances, particularly in light of Lima' failure to volunteer the information requested by RLI's claim examiner in its denial letters. (Edelstein Aff. Exs. 31-32).
Second, RLI explicitly reserved its right to present additional grounds for denying coverage in its letters. Both of its denial of coverage letters cautioned that "[t]here may be other facts and circumstances, as well as other provisions of the policy, which would serve to relieve RLI. . . . [T]his correspondence shall not be deemed or construed as a waiver of any of the rights and defenses available to RLI." (Edelstein Aff. Exs. 31-32).
Finally, defendants do not appear to have been prejudiced in any way by RLI's failure to raise some claims in its denial of coverage letters, or to have detrimentally relied on those statements. See Jimmy's Diner v. Liquor Liab. Joint Underwriting Ass'n of Mass., 410 Mass. 61, 64 n. 3 (Mass. 1991) (insurer not estopped from asserting alternative grounds for denying coverage where insured not prejudiced by the delay).
5. Whether the Misrepresentation Was Material
Under Massachusetts law, a party seeking to void an insurance policy must not only show that there was a misrepresentation, but also that the misrepresentation was either intentional or material. Mass. G.L. c. 175 § 186. There is insufficient evidence to suggest that the misrepresentation (that is, Lima's failure to advise RLI of the presence of a young driver) was intentional, and thus the issue is whether it was material.
RLI contends that Lima's misrepresentation was material as a matter of law because it increased the risk of loss and affected the premium that she paid under her plan. Lima paid a premium of $224 for a "Standard" policy. (Edelstein Aff. Exs. 2, 8). RLI asserts that if she had revealed that Santos was a driver under the age of 22, she would have fallen under the "Standard with Inexperienced Operator" category, which requires a $358 premium. ( Id. Ex. 8). According to RLI, the higher premium is charged to reflect the increased risk posed by inexperienced drivers. As evidence of the higher rate, RLI has submitted a copy of its rate sheet for personal umbrella premiums in Massachusetts, effective July 15, 2005 for renewals. ( Id. Ex. 8). The rate sheet defines "inexperienced operator" as "any driver with six years or less driving experience." ( Id.).
RLI has asserted (in a footnote) that Lima's misrepresentations were made with the intent to deceive. However, as RLI appears to recognize, the question of Lima's intent is one of fact and, as such, it is not appropriate for resolution at the summary judgment stage. Furthermore, the Court must make the opposite assumption for the purposes of deciding these cross-motions.
In Massachusetts, the touchstone for "increased risk of loss" materiality is the premium. "For purposes of G.L. c. 175 § 186, a fact is deemed material if it influences the premium." Barnstable Cnty., 425 Mass. at 128. The calculation of a premium is actuarial in nature and does not depend on the facts relating to any particular insured; thus, the only factually relevant information is whether RLI did in fact charge a higher premium for adding drivers like Santos to the policy. Id. at 128-129. To the extent that defendants are challenging the authenticity or relevancy of the rate sheet, they have not raised a genuine issue of material fact. The rate sheet states that it is effective May 1, 2005, for new business and July 15, 2005, for renewals. ( Id.). The accompanying affidavit states, "[a]ttached hereto as Exhibit 8 is a true and correct copy of a RLI Rate Sheet for Massachusetts, effective 2005." (Edelstein Aff. at 2). It is a reasonable inference, in the absence of any other evidence, that the premiums reflected on the rate sheet were in effect when Lima filed her renewal applications in July and August 2006. Defendants have presented no evidence that the rate sheet is inauthentic or inaccurate or that it was superseded by a different rate sheet.
In addition, the premium that Lima was charged after her renewal ($224) matches the premium associated with a "Standard" plan on the rate sheet.
It is also undisputed that providing coverage for Santos would have materially raised the premium for Lima's policy. The RLI rate sheet defines "inexperienced operator" as "any driver with six years or less driving experience." There is no dispute that Santos met that definition at the relevant time. Furthermore, it is undisputed that Santos had obtained his driver's license by the time RLI renewed Lima's policy on September 10. At a minimum, therefore, Santos would have certainly fallen under the definition of "driver," and therefore "inexperienced operator," at the time Lima made the misrepresentation. 6. Whether Any Misrepresentation Had to Be Intentional
Defendants also challenge the rate sheet by arguing that RLI does not have a "Preferred" rating class in Massachusetts. The Court does not see any relevant implications stemming from this fact.
Defendants contend that under the policy language, RLI must show that the misrepresentations were intentional in order to void the policy. In support of their contention defendants point to the following provision of the policy:
K. Concealment — Misrepresentation. This insurance is void if you intentionally conceal or misrepresent any material fact or circumstance relating to this insurance at any time.
(Defs.' Mem. Ex. 10). They also point to the following language in the renewal application:
I understand that any omission or misstatement of fact in the information given, which if known by RLI Insurance Company would have caused [it] to decline this application, is grounds for voiding the policy.
( Id.).
Defendants interpret this language as stating that the only circumstances under which RLI can void a policy is if a misrepresentation was intentional. This is similar to defendants' earlier estoppel argument and fails as a matter of law for similar reasons. The language quoted merely states that intentional misrepresentations are grounds for voiding the policy; it does not state that unintentional misrepresentations are not grounds for voiding the policy. Absent some
prejudicial effect on defendants, of which there is no evidence here, there is no reasonable grounds for construing the policy language to limit RLI's ability to void the policy on other grounds.
* * *
In summary, even when viewing the facts in the light most favorable to defendants, RLI is not obligated to provide coverage under the policy. Either (1) the application for the policy contained a material misrepresentation, and the policy is therefore voidable; (2) no application or other document evidencing Lima's assent was ever submitted to RLI, and thus no insurance contract was ever formed; or (3) Lima failed to provide updated information to RLI after the application and before the issuance of the policy, and the policy is once again voidable. Summary judgment will therefore issue in favor of RLI on the declaratory judgment claim.
B. Defendants' Counterclaims 1. Santos's Breach of Contract Claim (Count 2)
Because RLI had the power to void the insurance policy for the reasons stated above, it did not breach the contract when it denied coverage to Santos. RLI is thus entitled to judgment as a matter of law on Santos's claim for breach of contract.
2. Santos's and Lopes's Chapter 93A Claim (Counts 1 and 3)
The counterclaim of Santos and Lopes alleges that RLI violated Chapter 93A because it (1) misrepresented facts in its letter to Lima denying coverage; (2) failed to acknowledge and act reasonably in its communications with defendants; (3) did not conduct a sufficient investigation of the claims arising under Lima's policy; (4) did not provide a prompt and reasonable explanation for its denial of the claims; (5) submitted an inadequate offer of settlement; and (6) acted in bad faith. (Counterclaim ¶¶ 4-8, 18-21). However, in defendants' replies to RLI's interrogatories, in their Chapter 93A demand letter, and in their briefs, the only alleged violations identified by defendant are (1) a claim that RLI's denial of coverage based on material misrepresentations by Lima was improper; (2) a claim that, after discovering the misrepresentations in the renewal applications, RLI should have conducted interviews of defendants, Mancuso-Nowak employees, and Number One employees; and (3) a claim that RLI misrepresented facts when it stated that it had "confirmed" that Lima made misrepresentations in her August application, when in fact it had not interviewed Lima to find out if she had filled out the form. As a matter of law, defendants' assertions do not rise to the level of "unfairness" prohibited under Chapters 93A.
Defendants' first claim — that RLI wrongly denied insurance coverage — necessarily fails. Generally, claims under Chapters 93A and 176D "[fall] away by derivation" once a court determines that denial of coverage is proper. Aguiar v. Generali Assicurazioni Ins. Co., 47 Mass. App. Ct. 687, 692 (Mass. App. Ct. 1999) (affirming trial court determination that insurer properly denied coverage for fire loss and, therefore, claims asserting unfair settlement practices against insurer were unsustainable). Here, the Court has determined that RLI had the right to void the policy. RLI therefore had a reasonable foundation for denying coverage and was not acting in bad faith when it did so.
As to defendants' second claim, the Court does not find that the failure of RLI to interview defendants and other parties amounted to a violation of Chapter 93A. Insurers are bound to conduct investigations in a reasonable manner. See Van Dyke v. St. Paul Fire Marin Ins. Co., 388 Mass. 671, 676-77 (Mass. 1983). Here, RLI reasonably inferred that Lima had
made misrepresentations on both the July and August renewal applications. Her signature, while varying slightly between the applications, appeared on both forms. Neither form indicated that Santos was a teenage driver living in Lima's household. At the time that it made its decision to deny coverage, RLI did not have any reason to believe that anyone other than Lima had filled out the August renewal application. Moreover, even when RLI learned during discovery that Lima denied completing the August application, it had several other bases for denying coverage for which interviews of the defendants and other parties was not necessary.
Finally, defendants' third claim — that RLI acted improperly when it stated that it had "confirmed" Lima's misrepresentations — also fails. This statement does not rise to the level of a misrepresentation, much less a Chapter 93A violation. As stated above, RLI had ample reason to believe that Lima had made misrepresentations on her applications.
In sum, neither RLI's handling of the claim nor its coverage position rise to the level of unfair trade practices or otherwise constituted violations of Chapters 93A or 176D.
IV. Conclusion
For all the foregoing reasons, the motion of plaintiff RLI Insurance Company for summary judgment is GRANTED and the motion of defendants for summary judgment is DENIED.
So Ordered.
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