By Mark S. Thomas and 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). 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.
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.
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