Eighth Circuit: “Discretion” means insurers can retroactively change policy terms to defeat coverage

The Eighth Circuit today issued Kutten v. Sun Life Assurance Co. of Canada,an ERISA disability case about whether a pre-existing-condition exclusion in Sun Life’s disability policy precluded Mr. Kutten from receiving benefits he would otherwise have realized. Under the Sun LIfe policy, Mr. Kutten was eligible for the benefits. Under the re-writing interpretation offered by Sun Life and approved by the Eighth Circuit, not so much.

Mr. Kutten was diagnosed with retinitis pigmentosa (RP) in 1994, and at his doctor’s suggestion took a Vitamin A supplement, over-the-counter, no prescription required, which, it was thought,might slow the disease’s progression. The RP eventually forced him to stop working in September 2010. Sun Life’s ERISA “insurance” policy, which had become effective starting in June 2010, had an exclusion for pre-existing conditions, contractually defined as “during the 3 months prior to the Employee’s Effective Date of Insurance the Employee received medical treatment, care or services, including diagnostic measures, or took prescribed drugs or medicines for the disabling condition.”

The only thing Mr. Kutten did for his RP in the three months prior to his Effective Date of Insurance was to take these vitamin A supplements. Sun Life, of course, said this so-called “medical treatment” meant his condition was pre-existing.

Sun Life had a problem here, though. The contract said a pre-existing condition was one for which “medical treatment” or  “drugs or medicines” were received during the critical three-month period. But a stinking vitamin supplement isn’t a drug or medicine, and if it’s going to count as “medical treatment” then, necessarily, so would any actual drug or medicine, and that interpretation means the entirely distinct reference to “drugs or medicines” is utterly meaningless. The court described the argument thusly:

Kutten urges us to adopt the district court’s rationale, that because the Pre-Existing Condition clause separates “medical treatment” from “prescribed drugs or medicines” with the conjunction “or,” Sun Life intended to exclude all “drugs or medicines” from the phrase “medical treatment.” Kutten argues if “prescribed drugs or medicines” are excluded from the phrase “medical treatment,” then vitamin A supplements must be excluded from the phrase as well because vitamin supplements require even less medical intervention than “prescribed drugs or medicines.” To construe the phrase “medical treatment” to include vitamin supplements but exclude “prescribed drugs or medicines” would create an internal inconsistency in the Pre-Existing Condition clause, and to construe the phrase “medical treatment” as broad enough to encompass both “prescribed drugs or medicines” and vitamin supplements would render the phrase “prescribed drugs or medicines” meaningless.

That’s pretty persuasive stuff; one of  the most basic rules if you’re interpreting a contract is that you don’t adopt an interpretation which would render one or more words or phrases meaningless – if at all possible every word should have some meaning and some effect.

Unfortunately for Mr. Kutten, Sun Life had conferred discretion upon itself when it issued its policy, and we know what that means. As the Eight Circuit allowed, the exclusion did not “neatly fit Kutten’s course of treatment,” but hey, where an ERISA “insurer” has “offered a reasonable interpretation of disputed provisions, courts may not replace it with an interpretation of their own.” (Internal punctuation and citations omitted). We certainly can’t have courts interpreting contracts, after all.