On April 30, 2018, the United States District Court entered judgment against a plaintiff, Kieran O’Hara (“Mr. O’Hara”), seeking to bring a class action against The Standard Fire Insurance Company doing business as Travelers Insurance Company (“Standard Fire”) for allegedly shortchanging the calculation of the no-fault benefits due self-employed insureds.
The suit filed by Kiernan O’Hara, on behalf of himself and all others similarly situated, v. The Standard Fire Insurance Company doing business as Travelers Insurance Company, claimed Standard Fire breached its automobile insurance contract with Mr. O’Hara and other similar insureds by wrongfully calculating the no-fault benefits due to self-employed claimants.
Standard Fire makes a change in policy no-fault wording
On May 29, 2016, Mr. O’Hara was involved in an automobile accident while driving a vehicle insured by a policy of auto insurance issued by Travelers that included persons injury protection benefits (“PIP benefits” or “no-fault benefits”). As a result of personal injuries in the accident, he was out of work for five (5) days. He filed a claim with Standard Fire for lost wages under the PIP benefits portion of the Massachusetts Standard Automobile Policy issued by Standard Fire. This provision provided:
If an injured person is out of work because of the accident, we will pay lost wages up to 75% of his or her average weekly gross wage or equivalent for the year ending on the day immediately before the accident. We will not pay for the loss of any other type of income. (Emphasis added).
This PIP provision is required in all Massachusetts automobile insurance policy by statutory law: M.G.L. c. 90, §§ 34A and 34M.
While § 34A, mandates an automobile insurer must provide no-fault benefits for lost wages, the statute itself does not include the word “gross” but instead uses the words “average weekly wage or salary or its equivalent.” Standard Fire dropped the word “salary” and added the word “gross” when it incorporated section 34A into its policy form.
Parties dispute where ‘gross wages’ for self-employed claimants appear on tax form
At the time he was injured, Mr. O’Hara was self-employed as the sole proprietor of an unincorporated business. He filed his business income and expenses on a Schedule C to his federal tax return. Based on his 2015 federal tax return, specifically Line 7 of the Form 1040 Schedule C, Mr. O’Hara received a “gross income” of $68,358 for that year. He divided that number by fifty-two to reach his weekly gross income basis and then further reduced that amount to 75% per the policy. By this calculation, Mr. O’Hara had as 75% of his average weekly gross income, the amount of $985.93.[pullquote]While § 34A, mandates an automobile insurer must provide no-fault benefits for lost wages, the statute itself does not include the word “gross” but instead uses the words “average weekly wage or salary or its equivalent.”[/pullquote]
Standard Fire calculated Mr. O’Hara’s benefits differently. Its calculation for a self-employed individual’s gross income was not their “gross income” at Line 7 on Schedule C, but rather their “net profits” at Line 31, their gross income minus their business deductions. In Mr. O’Hara’s case, his net profit after deducting business expenses on his 2015 tax return was other than any payment to himself, was $31,311.
Based on its net profit calculation, Standard Fire found Mr. O’Hara’s average weekly wage came to $451.59 and paid him for his five days off work based on that amount.
Mr. O’Hara decided to sue Standard Fire over its calculation method used on his claim and any other claims involving other self-employed insureds seeking no-fault wage benefits
Class involving 1873 members with $3 million riding on the meaning of “gross weekly wage”
Mr. O’Hara filed his suit seeking to represent himself and a class consisting of “all persons who made a claim for lost wages under the PIP provision of a policy of automobile insurance issued by Travelers and who received an amount less than 75% of the claimants’ average weekly gross wage or gross salary.” His suit claimed damages from Standard Fire and “all predecessors, subsidiary, affiliates, and assigns of [Standard Fire] including but not limited to The Premier Insurance Company of Massachusetts.”
In Mr. O’Hara’s suit, he sought for himself and his named class breach of contract damages “including but not limited to: The difference between 75% of the claimants’ average weekly wage and the lesser amount paid by Travelers for lost wages under PIP,” as well as attorneys’ fees and costs. The suit also sought multiple damages because of Standard Fire’s alleged violations of M.G.L. c. 93A, the Massachusetts unfair business practices act, and M.G.L. c. 175, § 176D(3)(9), the Massachusetts unfair claim practice act.
Based on a six-year statute of limitations, Standard Fire estimated the class Mr. O’Hara sought to represent consisted of one-thousand eight hundred and seventy-three insureds who received payments for no-fault wage benefits during that period as self-employed claimants. Standard Fire also estimated for the same six-year period before Mr. O’Hara filed his suit, the alleged payment discrepancies in dispute, using Mr. O’Hara methodology for calculating Standard Fire’s alleged underpayments for lost wages was $3,175,053.[pullquote][T]he ‘net profit’ of a self-employed individual’s business was the rough equivalent of an employee’s gross wages[/pullquote]
Standard Fire moves for judgment on the pleadings
Although Mr. O’Hara filed his suit in the Massachusetts Superior Court, Standard Fire moved the case to federal court under the provisions of the federal Class Action Fairness Act of 2005. This act allows the removal of most class actions filed in state court to federal court.
After Standard Fire filed an answer to Mr. O’Hara’s complaint, it moved for judgment on the pleadings because Mr. O’Hara’s legal claim did not require a trial. The federal judge referred Standard Fire’s motion to a magistrate judge for a Report and Recommendation. The magistrate judge heard Mr. O’Hara’s arguments and Standard Fire’s arguments and wrote a detailed Report and Recommendation for the federal judge to act upon in deciding Standard Fire’s motion for judgment on the pleadings.
The dispute between Mr. O’Hara and Standard Fire came down to a narrow question as to how Standard Fire could interpret the meaning of “gross wages” for a self-employed insured:
- O’Hara read the policy phrase, “gross wages,” literally with a meaning independent of one’s employment status.
- Standard Fire, instead, read the phrase, “gross wages,” as a relative term whose meaning may differ depending on one’s employment status.
Mr. O’Hara contends that the defendant breached the policy when it applied its interpretation of the phrase and paid him proceeds based on his net profit rather than his gross income.
The magistrate judge found the meaning of the phrase “gross wages” in the policy was ambiguous. The policy did not define “gross wages,” and nothing else in any other portion of the policy provided any guidance as to its meaning. Standard Fire urged the magistrate judge to find that “gross wages” had to mean “net profit” when referring to a self-employed insured. However, to the magistrate judge, that conclusion was not self-evident from the policy itself because the policy did not distinguish at all between employed or self-employed insureds.
The magistrate judge also found that neither the Massachusetts statute mandating no-fault coverage nor the IRS Form 1040, Schedule C, resolved the ambiguity over the meaning of the phrase “gross wages.”
As a result, the magistrate judge recommended to the federal judge assigned Mr. O’Hara’s lawsuit to deny Standard Fire’s motion as to the count in the lawsuit alleging the breach of the insurance contract. As to all the other claims in Mr. O’Hara’s lawsuit he recommended the judge enter judgment for Standard Fire.
Federal judge finds term ‘gross wages’ unambiguous and rules for Standard Fire
When the magistrate judge’s Report and Recommendation was filed with the assigned federal judge, both Mr. O’Hara and Standard Fire filed timely objections. Mr. O’Hara objected to the recommendation to dismiss most of his case, and Standard Fire objected to the magistrate judge recommending allowing Mr. O’Hara to go forward on his breach-of-contract claim.[pullquote]The judge reasoned that “net profit” for someone who is self-employed is the amount of funds available to him after his business expenses are subtracted from the business’ overall “gross income” and before any taxes, retirement contributions, and insurance contributions are paid.[/pullquote]
The federal judge approved and adopted as his decision the magistrate judge’s Report and Recommendation to the extent that it recommended dismissal of all the other claims other than Mr. O’Hara’s breach-of-contract claim. However, the judge decided that Standard Fire was entitled to dismissal of Mr. O’Hara’s remaining claim for breach of contract.
The judge reasoned that “net profit” for someone who is self-employed is the amount of funds available to him after his business expenses are subtracted from the business’ overall “gross income” and before any taxes, retirement contributions, and insurance contributions are paid.
On the Schedule C to their federal tax return, a self-employed individual describes the “gross income” of their business on Line 7. They then enter various applicable business expenses, such as advertising, car and truck expenses, contract labor, office expenses, repairs and maintenance, travel, meals, and entertainment. They then deduct these business expenses from their business’ gross income to determine the “net profit” of the business as entered on Line 31.
From that amount, they deduct health insurance premiums, the deductible amount of self-employment taxes, and retirement contributions.
To the judge, it followed that the “net profit” of a self-employed individual’s business was the rough equivalent of an employee’s gross wages. This net profit is the best approximation of the earnings that are available to the individual—not the business—before taking into standard deductions like taxes, retirement contributions, and health insurance.
The judge noted Mr. O’Hara’s interpretation would give him an unfair advantage over regular employees because it would allow him to collect benefits based upon the entire gross income of his business when only a portion of that figure is available to him for his personal use.
The judge ended his decision ruling:
IT IS ORDERED AND ADJUDGED: The defendant’s objection to the Report and Recommendation is sustained, and the plaintiff’s objections to the Report and Recommendation are overruled. The defendant’s Motion for Judgment on the Pleadings is GRANTED in full. March 30.
Thirty-day appeal period of District Court’s decision expires without notice of appeal filed
Under the federal rules of appellate procedure, Mr. O’Hara had thirty days from March 30, 2018, to file a notice of appeal with the United States District Court if e wished to appeal the dismissal of his case to the First Circuit Court of Appeals.
Based on the docket of the case, Mr. O’Hara never filed a timely notice of appeal, so the decision on his suit is now final.
