Phillips Nizer LLP Articles
Taking Disability Claims to Federal Court: Is Present Value of Insured's Future Benefits Included to Calculate Jurisdictional Amount?
DISABILITY BENEFITS actions brought in or removed to federal court often present an important issue of diversity jurisdiction: are the claimed future potential benefits properly included in computing the requisite jurisdictional amount? This issue remains undecided in the Second Circuit. Since the amount of past due benefits in many such actions falls below the $75,000 threshold (28 U.S.C. §1332), the resolution of this issue will have direct impact on whether disability benefits actions brought or removed to federal court can proceed there and how a plaintiff may obtain/avoid federal jurisdiction through strategic planning.
THE JURISDICTIONAL AMOUNT
An action to recover disability benefits may be brought or removed "where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs" and there is diversity of citizenship. 28 U.S.C. §§1332(a)(2), 1441(a).
Assuming diversity, the party invoking federal jurisdiction, the plaintiff in the case of an original action or the defendant in the case of a removed action, bears the burden of establishing that the matter in controversy exceeds $75,000. McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 189, (1936). See Lupo v Human Affairs International, Inc., 28 F.3d 269, 273-74 (2d Cir. 1994); Emrich v. Touche Ross & Co., 846 F.2d 1190, 1195 (9th Cir. 1988).
The burden of showing that the requisite amount is actually in controversy, however, "is not a heavy one." Ball v. Hershey Foods Corp., 842 F. Supp. 44, 47 (D.Conn.), aff'd, 140 F.3d 591 (2d Cir. 1993). "If there is a reasonable possibility that the plaintiff can recover more than $50,000 [now $75,000] on his claim, the jurisdictional minimum is satisfied." Id.1
However, this standard must be tempered by the rule "[i]n the Second Circuit [that] courts must 'construe the removal statute narrowly, resolving any doubts against removability.' " Colon v. Rent-A-Center, Inc., 13 F. Supp. 2d 533, 556 (S.D.N.Y. 1998) (quoting Somlyo v. J. Lu-Rob Enters., Inc., 932 F.2d 1043, 1045-46 (2d Cir. 1996)). "This policy recognizes: (1) the well-documented intent of Congress to limit the jurisdiction of federal courts; and (2) the significance of 'preserving the independence of state governments.' " Id.
To justify a remand based on an insufficient jurisdictional amount, "[i]t must appear to a legal certainty that the claim is really for less than the jurisdictional amount." St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 289 (1938). "Legal certainty is analyzed by what appears on the face of the complaint; subsequent events -- such as a valid defense offered by the defendant, or actual recovery in an amount less than the minimum jurisdictional amount -- do[] not oust [the court of] jurisdiction". Wolde Meskel v. Vocational Instruction Project, 166 F.3d 59, 63 (2d Cir. 1999) (quoting St. Paul Mercury Indem. Co. v. Red Cab Co., supra, 303 U.S. at 289, 58 S. Ct. at 590). See Leslie v. Banctec Service Corp., 928 F. Supp. 341, 348 (S.D.N.Y. 1996) ("the court must find with a legal certainty that the claim is less than the jurisdictional amount").
The Second Circuit has held that "the legal impossibility of recovery must be so certain as virtually to negat[e] the plaintiff's good faith in asserting the claim. If the right of recovery is uncertain, the doubt should be resolved -- in favor of the subjective good faith of the plaintiff." Tongkook America, Inc. v. Shifton Sportswear Co., 14 F.3d 781, 784 (2d Cir. 1994).
Where declaratory relief, rather than damages, is sought, the dollar value of the claim for purposes of federal jurisdiction is measured by the value of the object of the litigation. See Hunt v. Washington State Apple Advertising Commission, 432 U.S. 333, 347 (1977); Beacon Construction Co. v. Matco Elec. Co., 521 F.2d 392, 399 (2d Cir. 1975) (amount in controversy is measured by "the value of the consequences which may result from the litigation").
DISABILITY BENEFITS ISSUE
The treatment of the amount in controversy in disability benefits litigation has not uniformly followed this approach and still remains an open issue in the Second Circuit. Before examining the case law, it is necessary to examine the nature of such a claim.
In the typical case, an insurance company, for an annual premium, has agreed to pay a monthly benefit if the insured becomes disabled.2 The burden of proof of establishing entitlement to disability benefits is always on the insured. Shapiro v. Berkshire, 1999 U.S. Dist. LEXIS 11789 (S.D.N.Y. 1999), aff'd, 212 F.3d 121, 124 (2d Cir. 2000); Klein v. National Life of Vermont, 7 F. Supp. 2d 223, 226-27 (E.D.N.Y. 1998).
The policy usually has a waiting or elimination period before benefits are payable, typically 30 to 90 days after the onset of the disability. The policies usually provide for benefits up to age 65 or for the lifetime of the insured. From an economic viewpoint, the disability policy should be viewed as a series of one-month agreements in which the insured must establish his entitlement to benefits every month.
These disputes arise after the carrier has declined to pay benefits or, after paying benefits for a time, terminates them because in its view, the insured is no longer disabled. After a time in which the insured generally submits additional proofs of his allegedly disabling condition and the carrier investigates the additional materials, and in some cases, further independent medical evaluations, the carrier advises the insured that it will not pay or resume paying benefits. Thus, by the time the insured retains counsel, several months (or even years) of benefits are unpaid. The plaintiff commences a suit to recover past benefits and usually seeks a declaratory judgment or even an injunction as to future benefits.
Unless the monthly benefit is very large, usually by the time suit is filed, less than $75,000 in past benefits have accrued. However, the value of future benefits, either independently or when added to the value of past benefits, will almost always exceed $75,000. If the court were to apply the law as previously set forth, the value of the matter in controversy exceeds $75,000 and thus, federal jurisdiction should exist. However, that result does not always follow.
There is a line of cases that holds as a matter of New York (and other states') substantive law that in a suit on a disability policy, plaintiff can only recover the amount due on the date that suit is filed, and that declaratory judgments are not appropriate for future benefits. See Romar v. Alli, 120 A.D.2d 420 (1st Dep't 1986); Gordon v. Continental Cas. Co., 91 A.D.2d 987, 988 (2d Dep't 1983); Apostolou v. Mutual of Omaha, 72 A.D.2d 781 (2d Dep't 1979); Searle v. Equitable Life Ins., New York Law Journal, Nov. 3, 1998 (Sup. Ct. Nassau Co.); Marciano v. Metropolitan Life. Ins. Co., 179 Misc. 758, 759 (Sup. Ct. Westchester Co. 1943); Shapiro v. Berkshire Life Ins. Co., supra, 1999 U.S. Dist. LEXIS 17789 *25, n.7; McGee v. Paul Revere Life Ins. Co., 954 F. Supp. 582, 585-86 (E.D.N.Y. 1987).
In Romar, the First Department, analogizing disability benefits cases to claims for anticipatory breach, held that "the New York rule [is] that in an action on a disability policy, the insured is not entitled to a lump sum money judgment for future payments, nor to a declaration to that effect with respect to the insurer's future obligations." Romar v. Alli, supra, 501 N.Y.S.2d at 878.
Federal courts in other circuits have relied on this rule of state substantive law to disallow the present value of future benefits in computing the dollar threshold requirements. See generally, Wright, Miller & Cooper, Federal Practice and Procedure, 3d Edition §3710, pp. 258-70 and cases cited therein. "The prevailing view is that only the amount of the installments unpaid at the commencement of the suit may be taken into account, even though the judgment will be determinative of the company's liability for future installments." Id. The rationale for this position was expressed by one court as follows:
The matter in controversy involves only the liability of the insurance company to make the payments already accrued. No controversy exists in this action as to any disability payments under the contract in the future. The insurance company may or may not decline to pay them, and facts occurring subsequent to the filing of this action may completely justify its refusal to make future monthly payments even though the result of this action obligates it to pay those already accrued; such subsequently occurring facts might lead the insurance company to make payments in the future irrespective of the result of this action. This action is in no way res judicata as to its liability under the policy in the future. Although the effect of the judgment in this case may result in the insured collecting from the insurance company a total sum far in excess of the jurisdictional amount, yet it is well settled that when federal jurisdiction depends upon the amount in controversy, "it is determined by the amount involved in the particular case, and not by any contingent loss either one of the parties may sustain by the probative effect of the judgment, however certain it may be that such less will occur."
Button v. Mutual Life Ins. Co., 48 F. Supp. 168, 171 (W.D. Ky. 1943) (quoting New England Mortgage Security Co. v. Gay, 145 U.S. 123 (1891)).
In Keck v. Fidelity & Guaranty Co., 355 F.2d 840 (7th Cir. 1966) the court limited the above rule:
Future benefits payable under a contract of insurance may be used to compute the sum in controversy for jurisdictional purposes only when the validity of the insurance policy itself, and not merely the presence or absence of conditions measuring the insurer's liability thereunder, is the matter in dispute.
Id. at 841.3
This issue has never been squarely decided in the Second Circuit. However, District, now Circuit Judge Pierre Leval, in Massachusetts Cas. Ins. Co. v. Renstrom, 831 F. Supp. 1088, 1090 (S.D.N.Y. 1993), in denying the carrier a preliminary injunction against piecemeal disability litigation in the state court, observed that the Keck rule:
...has never been adopted by the Second Circuit, and while the Court is unaware of any Second Circuit cases deciding the precise question of future insurance benefits, it appears the Circuit generally takes a broader view of what is sufficient to establish a jurisdictional amount.
The amount in controversy formerly required under §1331 has been held to have been met by expected future pension payments, Tron v. Condello, 427 F. Supp. 1175 (S.D.N.Y. 1976), and the jurisdictional amount for §1332 has been met on the basis of shareholder dividends that could be anticipated if plaintiffs succeeded in their effort to force a defendant corporation to reinvest certain monies, Burton v. Exxon Corp., 536 F. Supp. 617 (S.D.N.Y. 1982). Given these precedents, and the statistical likelihood that Renstrom will live long enough so that payments will exceed $50,000, I cannot say at this point that this Court lacks jurisdiction over this controversy.
Judge Leval's reasoning is consistent with the established case law that the "amount in controversy" is always determined at the commencement of the action, not at some mid-point. See Chase Manhattan Bank, N.A. v. American National Bank & Trust Co., 93 F.3d 1064 at 1069; Gally v. Columbia Univ., 22 F. Supp. 2d 199 (S.D.N.Y. 1998). See also, 15 Moore's Federal Practice 91, 102-104[3] (3d ed. 1997) ("If diversity jurisdiction existed at the time the case was filed, it is not effected by the dismissal of one of the claims -- even though the amount recoverable on the remaining claim is less than the required amount."); Reddy v. Barclay's Bank of New York, N.A., 773 F. Supp. 655, 657 (S.D.N.Y. 1991) ("since all of the defendant's arguments -- cannot be resolved without addressing the merits of these defenses, those allegations cannot be a basis for a conclusion that a motion to dismiss for lack of the jurisdictional amount should be granted"); Assoc. Business Telephone Systems Corp. v. Danihels, 829 F. Supp. 707 (D.N.J. 1993) ("existence of perfect defense that might reduce recovery below requisite amount does not defeat diversity jurisdiction").
The ultimate resolution of this issue has serious implications for practitioners. The insured usually seeks a jury trial of his or her entitlement to benefits. In the state court, plaintiff need only obtain the vote of five of the six jurors. In the federal court, plaintiff needs unanimity. Because the jury panels in the state and federal courts are drawn from overlapping, but differing geographic areas, the demographics of the composition of the juries are different. There are also subtle and real differences in the attitude of the courts towards motions for summary judgment, which are frequently made by carriers in such cases. Consequently, the choice of forum can well be outcome-determinative or substantially affect the value of the case in a settlement posture.
IF SECOND CIRCUIT RULES
If the Second Circuit ultimately follows the Keck rule, the plaintiff can effectively defeat removal jurisdiction at will. Since all claims regarding benefits accruing after the filing date will be ignored for purposes of determining the amount in controversy, plaintiff's counsel's choice of a state court forum in a diversity case cannot in all likelihood be disturbed. If, however, the claim for past benefits has exceeded $75,000 by the time suit is filed, plaintiff could simply shorten the damage period to avoid reaching the federal jurisdictional threshold and, thereafter, commence a second action for the later period.4
In any of the foregoing scenarios, the defendant would be powerless to remove the action to the federal court. See St. Paul Mercury Indemn. Co. v. Red Cab Co., supra; Gafford v. General Electric Co., 997 F.2d 150, 158 (6th Cir. 1993); Laver v. Chubb Life Ins. Co., 1996 U.S. Dist. LEXIS 4266 (E.D. Pa. April 5, 1996). Conversely, should the plaintiff wish to litigate in the federal court, he need only wait until sufficient months of unpaid benefits have elapsed to meet the $75,000 threshold.
If, on the other hand, Judge Leval's reasoning were to become the law in the Second Circuit, federal jurisdiction would exist, regardless of the outcome of the carrier's defense under state substantive law calling for the exclusion of post-filing periods from the computation of damages.5
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(1) If the jurisdictional minimum is lacking, the district court lacks subject matter jurisdiction and must either dismiss the action, if originally filed in the district court, or remand the action to the state court, if it had originated there and had been removed by the defendant. See, e.g., Tongkook America, Inc. v. Shipton Sportswear Co., 14 F.3d 781, 785-86 (2d Cir. 1994); State of Mo. Ex. Rel. Pemiscot County, Mo. v. Western Sur. Co., 51 F.3d 170, 175 (8th Cir. 1995).
(2) For purposes of this article, it is immaterial whether the insured claims to be totally, partially or residually disabled or how the particular policy defines those terms.
(3) The cases draw an important distinction between instances in which the validity of the entire insurance contract is brought into issue, as when the insurer sues to cancel the policy for fraud, as opposed to instances where the insurer claims entitlement to monthly benefits because of a claimed disability. The clear federal rule is that "where the validity of the insurance policy containing disability benefit provisions -- future potential benefits may be considered in computing the requisite jurisdictional amount.' " Massachusetts Cas. Ins. Co. v. Harmon, 88 F.3d 415, 416 (6th Cir. 1996) (quoting Edwards, Annotation, "Determination of Requisite Amount in Controversy in Diversity Action in Federal District Court Involving Liability Under, or Validity of, Disability Insurance," 11 A.L.R. F.2d 120, 128 (1972) (collecting cases)).
(4) Questions regarding the preclusive effect of the disposition of the first action upon the second are beyond the scope of this article.
(5) There is a question whether the Romar v. Alli line of cases technically amounts to an affirmative defense. They only go to the amount of damages recoverable where the insured presents a single claim for all benefits, past and future. However, if the insured pleads past benefits in one claim and future benefits in a second, the carrier may be required to allege the state law limit as an affirmative defense to the second claim. Moreover, in light of the language of Fed R. Civ. Proc. 8(c) requiring the pleader to "set forth affirmatively -- any other matter constituting an avoidance or affirmative defense," it appears to be the better practice to plead same as an affirmative defense in all cases.
Pull Quote: There is a line of cases that holds as a matter of New York (and other states') substantive law that in a suit on a disability policy, plaintiff can only recover the amount due on the date that suit is filed, and that declaratory judgments are not appropriate for future benefits.
This article is reprinted with permission from the December 4, 2000 edition of the New York Law Journal. © 2000 NLP IP Company.
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