Calculating disability benefits for owners of businesses can be very complicated, especially in situations where the insured continues working and receives both a salary as well as a share of the profits from the business. How is the insurer to know whether the insured is manipulating business earnings and under-reporting W-2 earnings from the business? A recent ruling from the 1st U.S. Court of Appeals attempted to tackle some of these issues.

In D&H Therapy Assoc., LLC v. Boston Mutual Life Ins.Co., 2011 U.S.App.LEXIS 8138 (1st Cir. April 20, 2011), the disability claimant, Robin Dolan, was a part-owner of D&H Therapy Associates, an organization that provides physical, occupational and speech therapy services at several clinics in Rhode Island. In 2001, Dolan needed to reduce her workload and salary on account of a physical disability and she applied for disability benefits to partially make up the earnings loss. Accepting her proof of disability, Boston Mutual paid partial disability benefits from 2002 until 2006. However, when a 2006 audit revealed that Dolan was receiving a share of the profits of her business in addition to her wages, the insurer counted those earnings in maintaining that Dolan did not suffer an earnings loss and was, therefore, never qualified to receive benefits. When pre-litigation appeals failed, Dolan filed suit seeking reinstatement of her benefits, while Boston Mutual filed a counterclaim seeking reimbursement of benefits paid.

Because the disability benefits were provided under a group employer-sponsored plan, the Employee Retirement Income Security Act (ERISA) law applied and the court utilized the abuse of discretion standard of review based on discretion-granting language in the policy. Finding the insurer’s actions were within the scope of its discretion, the court ruled in Boston Mutual’s favor upholding the termination of benefits. However, because the court also found that Boston Mutual’s counterclaim sought monetary damages rather than equitable relief, the only relief permitted under ERISA, the court denied any recovery on the insurer’s counterclaim. The appeals court reversed and held that Boston Mutual abused its discretion when it determined that business profits could be included in Dolan’s income.

Under the policy, benefits are due when an insured suffers at least a 20 percent loss in “predisability earnings.” That term is defined in the policy as “the insured person’s earnings for the prior calendar year as reported by the group policyholder on Form W-2, excluding commissions.” However, Boston Mutual maintained the term “current earnings” used in the policy allowed the insurer to consider earnings from all sources and that such an interpretation was within the bounds of its discretionary authority.

The court began its discussion by trying to ascertain what conduct would constitute an “abuse of discretion” under ERISA. Finding the absence of a generally accepted definition and the lack of a line of demarcation, the court turned to trust law for guidance. The court remarked that MetLife v. Glenn, 554 U.S. 105, 117 (2008) applied trust law principles to formulate a guideline that asks “judges to determine lawfulness by taking account of several different, often case-specific, factors, reaching a result by weighing all together.” However, the court also pointed out: “[O]ur analysis must weigh the values advanced by ERISA in empowering plan administrators as fiduciaries, … with the dangers policed by the statute arising from breach of fiduciary duty.” *27 (citations omitted). Applying that principle, the court noted that in some circuits “the analysis has been conducted with reference to the consistency of an administrator’s construction with the ‘plain meaning’ of the plan.” Id. (citations omitted). However, the court further remarked that those circuits “have not defined how courts should determine whether an interpretation does not accord with an ERISA plan’s plain meaning.” The 5th U.S. Circuit Court of Appeals, in Chacko v. Sabre, Inc. , 473 F.3d 604, 611 (5th Cir. 2006), asks whether a plan interpretation is “legally correct” and reaches that conclusion by considering: “(1) whether the administrator has given the plan a uniform construction; (2) whether the interpretation is consistent with a fair reading of the plan; and (3) any unanticipated costs resulting from different interpretations of the plan.” A conclusion that the decision is not legally correct then determines whether an abuse of discretion has occurred by examining three factors: “(1) the internal consistency of the plan under the administrator’s interpretation, (2) any relevant regulations formulated by the appropriate administrative agencies, and (3) the factual background of the determination and any inferences of lack of good faith.” *28-*29 (also citing Gosselink v. Am. Tel. & Tel., Inc. , 272 F.3d 722 (5th Cir. 2001)). Other circuits look to the following factors:

(1) whether the administrator’s language is contrary to the clear language of the plan; (2) whether the interpretation conflicts with the substantive or procedural requirements of ERISA; (3) whether the interpretation renders any language of the plan meaningless or internally inconsistent; (4) whether the interpretation is consistent with the goals of the plan; and (5) whether the administrator has consistently followed the interpretation.

Manning v. Am. Republic Ins. Co., 604 F.3d 1030, 1041-42 (8th Cir. 2010); see also Howley v. Mellon Fin. Corp., 625 F.3d 788, 795 (3d Cir. 2010). The 4th U.S. Circuit Court of Appeals adds to those five factors the question of “whether the decision-making process was reasoned and principled,” “any external standard relevant to the exercise of discretion” and “the fiduciary’s motives and any conflict of interest it may have.” Carden v. Aetna Life Ins. Co., 559 F.3d 256, 261 (4th Cir. 2009).

The 1st Circuit declined to formulate any specific guiding factors because it was clear to the court that Boston Mutual’s policy interpretation “stretches beyond the bounds of reasonableness.” Given the various definitions in the policy, the court ruled the only reasonable interpretation is to consistently use W-2 earnings in calculating both predisability and post-disability earnings. Ultimately, the court found that Boston Mutual’s interpretation “renders meaningless the only provision in the plan that appears to define ‘earnings’ in a substantive way” in relation to W-2 earnings. Countering Boston Mutual’s argument that its construction was appropriate in order to avoid someone in Dolan’s position from artificially reducing W-2 earnings and boosting profits, the court cited policy provisions relating to termination of benefits which provide that benefits will end if the insured is “able to increase [his or her] current earnings by increasing the number of hours [he or she] work[s] or the number of duties [he or she] performs in [his or her] regular occupation but … does not do so.” The court also found Boston Mutual’s argument was undermined by its payment of benefits for four years despite having knowledge since the inception of the claim about Dolan’s other sources of income.

A significant omission from this opinion is any discussion of contra proferentem, a principle of insurance law that construes ambiguities in the contract against the insurer and in favor of the insured. While it can be argued that applying that doctrine is contrary to the plan administrator’s discretion to interpret the policy, a financially self-serving interpretation of an ambiguous term would obviously implicate the insurer’s inherent conflict of interest due to its dual role as plan administrator and benefit funding source. Since the issuance of the Supreme Court’sGlenn decision, the law on that issue is only just beginning to develop.

The court’s discussion about how to analyze an abuse of discretion, while interesting, ultimately offered no guidance at all, which is yet another reason why the entire notion in ERISA law of granting deference to insurers’ claim decisions and policy language interpretations is inapt. The two principal arguments made to support such a regime are easily exposed. First, while the notion that deferential review would result in lower premiums appears attractive at first blush, the cost savings at the expense of coverage that may ultimately prove illusory constitutes a poor bargain.

Second, the oft-quoted statement that ERISA’s legislative history supports the notion that ERISA litigation was intended to be “a method for workers and beneficiaries to resolve disputes over benefits inexpensively and expeditiously,” is hardly justification for a regime of overly lenient claim reviews lacking ordinary discovery and plenary trial procedures. Even more importantly, though, the quotation has no application whatsoever to ERISA civil actions brought pursuant to 29 U.S.C. § 1132(a). The citation for that comment can be traced to Senate Report 93-383 accompanying S.1179, a predecessor to the bill that eventually became the ERISA law. The draft bill afforded “the opportunity to resolve any controversy over [ ] retirement benefits under qualified plans in an inexpensive and expeditious manner … Accordingly, the committee has decided to provide that controversies as to retirement benefits are to be heard by the Department of Labor.” S.Rep. 93-383, reprinted in 1974 U.S. Code Cong. & Admin. News 5000. That provision was dropped from the final bill, nor is there any comparable provision in ERISA.

On the contrary, the final conference report explained that ERISA civil actions “are to be regarded as arising under the laws of the United States in similar fashion to those brought under Section 301 of the Labor-Management Relations Act of 1947.” H.R. Conf. Rep. 93-1280, 93d Cong., 2d Sess. 327 (1974). According to Textile Workers Union v. Lincoln Mills, 353 U.S. 448, 456 (1957), Section 301 (29 U.S.C. ‘§185) requires the federal courts to “fashion from the policy of our national labor laws” a federal common law governing the interpretation of collective bargaining agreements which includes plenary proceedings that even encompass trials before juries. See, Chauffeurs, Teamsters & Helpers, Local No. 391 v. Terry, 494 U.S. 558 (1990).While the 1st Circuit’s conclusion in D&H Therapy Associates was justifiable based on Dolan’s uncontested disability, the reduction of her hours and duties and the insurer’s inconstancy, given the uncertainty as to the meaning of what behavior constitutes an abuse of discretion, a trial would have led to a more certain result.

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