Background
Jeffrey Wagner was the named insured under a long-term disability insurance policy issued by Certain Underwriters at Lloyd’s London through his employer, the law firm Kaye Scholer. The policy, effective June 1, 2015, provided monthly disability benefits equal to 65% of earned income ($32,100 per month) and a lump sum Principal Sum Amount of $5,000,800 payable after 66 months of total disability until age 70. The policy included an “Automatic Benefit Increase Endorsement” permitting increases to both the monthly benefit and principal sum if the employee was not “currently on claim,” could document increased earned income, and Underwriters received and agreed to that documentation.
Wagner suffered a heart attack on November 7, 2016, and was deemed permanently and totally disabled. His claim was approved on March 16, 2018. Wagner alleged that census data showing his earned income had increased from $1,330,276 (2015) to $1,350,000 (2016) was transmitted to Underwriters on June 16, 2016—before he went on claim—yet Underwriters failed to increase his Principal Sum Amount as required by the endorsement.
At trial, the court found Wagner entitled to an increased benefit and calculated it as five times his annual income at disability ($6,750,000) less the amount already paid ($5,000,800), totaling $1,749,200 plus 9% prejudgment interest. Underwriters appealed.
The Court’s Holding
The appellate court affirmed that Wagner satisfied the endorsement’s conditions for an increased benefit but reversed the calculation amount. First, the court held that Wagner was not “on claim” when his income increase was documented in June 2016, well before his formal claim approval in March 2018. Second, the evidence—primarily an email and deposition testimony from Kaye Scholer’s insurance broker—sufficiently proved an income increase from $1,330,276 to $1,350,000. PIU/Underwriters’ failure to dispute the broker’s email constituted receipt and agreement to the documented increase.
However, the court rejected the trial court’s calculation methodology. The endorsement’s silence on calculation methodology was not an “ambiguity” warranting strict construction against the drafter, but rather a “missing term” that must be supplied reasonably under contract principles. The reasonable calculation applied the policy’s original methodology: 65% of the incremental earnings increase ($19,724) over 156 months until age 70. This yielded approximately $166,608, not $1,749,200. The court rejected Wagner’s argument that Underwriters’ initial calculation contained errors requiring correction, holding that Wagner explicitly agreed to the $5,000,800 figure and could not now demand the policy be rewritten.
Key Takeaways
- An insurance endorsement’s silence on a calculation methodology is a missing contractual term, not an ambiguity, and does not trigger strict construction against the drafter.
- When a required contractual term is missing, courts must supply a term that is reasonable under the circumstances and consistent with the parties’ expressed intent, applying fairness standards.
- An insurer’s failure to contradict documented earnings information submitted by an employer constitutes receipt and agreement under an automatic benefit increase endorsement.
- An insured cannot use a claim for increased benefits as a vehicle to require recalculation of the initial benefit amount already accepted.
Why It Matters
This decision addresses the tension between strict construction of ambiguous insurance terms (a rule favoring insureds) and the limits of that doctrine. Although the court recognized that Underwriters drafted the endorsement and failed to specify a calculation formula, it held that the absence of a formula is fundamentally different from an ambiguous term. This distinction matters: ambiguous language must be construed in favor of coverage, but missing terms must be supplied reasonably—a test that applies fairness considerations even to the drafting party’s omission.
The ruling also clarifies what constitutes “receipt and agreement” in the automated benefits context: an insurer need not send a formal approval letter or adjust premiums to demonstrate receipt and agreement to documented income increases. Passive acceptance of earnings documentation the parties had agreed to use constitutes sufficient agreement. However, the court’s insistence that Wagner’s modest $19,724 income increase should produce only ~$166,608 in additional benefit—not the $1.75 million windfall the trial court awarded—signals that courts will police unreasonable results even while applying ostensibly strict construction principles.