BY: MARK S. THOMAS & ROBERT W. SHAW
The U. S. Court of Appeals for the
Fourth Circuit upheld a plan administrator's interpretation of a long
term disability plan and affirmed the denial of a disabled physician's
claim for benefits in Fortier v. Principal Life Insurance Company, No. 10-1441 (4th
Cir. January 11, 2012) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law]. The court sided with the plan administrator's
determination that certain business expenses that the physician deducted
on his federal income tax return were also deductions for the purpose
of calculating the physician's income in a disability benefit plan
determination, which had the effect of substantially reducing his
calculated predisability income and eliminating his group disability
benefits.
Background
The plaintiff, Dr. Fortier, formed a
medical practice in 1994. He left that practice following a dispute
with his partners and formed a new practice in October 2002. In doing
so, he incurred substantial start-up fees and also attorney's fees
arising from his dispute with his former partners. His federal income
tax return for 2003 reported gross income of $975,511 and business
expenses of $910,168 (including his start-up expenses and litigation
expenses). Likewise, in 2004 his federal income tax return reported
gross income of $997,647 and business expenses of $825,006 (again
including start-up and litigation expenses). His net reported income
for 2003 was thus $65,343, and for 2004 the net reported income was
$172,641.
In early 2005 Dr. Fortier became
medically disabled and closed his practice. His practice had short-term
and long-term disability coverage under policies issued by Principal
Life Insurance Company ("Principal") for Dr. Fortier and his employees.
He also had coverage under individual disability policies issued by Unum
Life Insurance Company ("Unum"). Principal's policies granted
Principal full discretion to interpret the policies' terms.
Principal's disability policies
provided for a benefit based on 60% of Dr. Fortier's "Predisability
Earnings". The policies determined the "Predisability Earnings" by
subtracting from his federally reported gross income the insured's
"usual and customary unreimbursed business expenses" which were
"incurred on a regular basis" and "essential to the established
operation of the Policyholder [that is, the medical practice]." The
benefits were also reduced by the amount that all disability benefits
(both group and individual benefits) exceeded the insured's
"Predisability Earnings".
When Dr. Fortier applied for
disability benefits in 2005, Principal immediately began paying
short-term benefits but stopped two months later when Unum began paying
$15,470 a month to Dr. Fortier under the individual policies. Basing
its calculation of Dr. Fortier's "Predisability Earnings" on his net
reported federal income for 2003 and 2004, Principal concluded that the
resulting 60% benefit was only $9,916, less than the benefits paid by
Unum. Principal therefore decided that no further benefits were due
under the Principal policies.
Dr. Fortier submitted a claim for
benefits under the Principal policies, asserting that the expenses
incurred in his business start-up and litigation were "unusual and
non-customary reorganizational business expenses" which, being
"extraordinary", could not be subtracted from his gross income under the
policies to derive his "Predisability Earnings". He contended that in
fact his average monthly predisability earnings were $48,913, which
would have afforded him a basis for benefits under the Principal
policies in addition to the benefits from Unum's policies.
Principal rejected this argument,
finding that the start-up and litigation expenses Dr. Fortier claimed as
deductions on his federal returns were also deductible under the terms
of the policies for calculating "Predisability Earnings". Filing suit,
Dr. Fortier attacked Principal's interpretation of the policies as an
abuse of discretion. The district court ruled for Principal.
Dr. Fortier's Appeal
On appeal, Dr. Fortier renewed his
argument that Principal's position mischaracterized unusual and
non-customary reorganization and litigation expenses as "usual and
customary" expenses within the meaning of the policies, while
disregarding other language in the policies. In particular, his appeal
focused on the policies' reference to expenses incurred on a "regular
basis" and "essential to the established business operation" of his
medical practice. He contended that such terms could not include
expenses unless they were frequent and repetitive, and this necessarily
precluded characterizing his one-time start-up costs as costs essential
to an "established business".
The Fourth Circuit rejected those
arguments and affirmed Principal's interpretation as reasonable. The
court agreed with Principal that the policies' defined attributes of
predisability business expenses, that is, as "usual and customary",
etc., merely expressed attributes of the expenses traditionally
considered deductible on federal income tax returns under Internal
Revenue Code §162(a). Principal's plan administrator was therefore
reasonable to use the business expenses Dr. Fortier himself listed on
his income tax returns. The court also noted a pair of explicit
references in the policies to federal income tax returns as bases for
determining an insured's monthly earnings. Finding the policies'
definition of "business expense" "somewhat confusing" and "needlessly
verbose", the court nevertheless held that, taken in their overall
context, the policies' terms permitted the plan administrator to decide
that the policies' definition of business expenses was equivalent to
"ordinary and necessary" business expenses deductible under I.R.C.
§162(a). In short, Principal's interpretation of its policies' terms
was reasonable, and, in light of the policies' complete grant of
interpretive discretion to Principal, the Fourth Circuit affirmed
Principal's interpretation of the plan's formula for the calculation of
Dr. Fortier's predisability earnings.
The decision highlights the
importance of a grant of discretion to the plan administrator and the
controlling importance of plan terms. Despite the dissent's emphasis on
the "goals" of the plan's definition of "Predisability Earnings", the
plan administrator's reasonable interpretation of the plan terms was
controlling. The decision also highlights the benefit of clarity in
plan drafting.
For more information about this topic, please contact the author or any member of the Williams Mullen ERISA Litigation Team.
Please note:
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competent counsel. For more information, please visit our website at www.williamsmullen.com or contact Mark S. Thomas, 919.981.4025 or mthomas@williamsmullen.com. For mailing list inquiries or to be removed from this mailing list, please contact Julie Layne at jlayne@williamsmullen.com or 804.420.6311.
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