Denial of LTD benefits reversed by 1st Circuit

An insurance company could not deny long-term disability benefits claimed by a policyholder who worked fewer hours after undergoing orthopedic surgery, the 1st U.S. Circuit Court of Appeals has decided.

The insurer argued that the policyholder was ineligible for benefits based on the earnings she received as part owner of the business for which she worked.

But the 1st Circuit disagreed.

“[W]e hold that [the insurer]’s construction of the [long-term disability] plan was unreasonable and, therefore, that its determination that [the policyholder] has never been eligible for benefits constituted an abuse of discretion,” Chief Judge Sandra L. Lynch wrote for the court.

The 32-page decision is D&H Therapy Associates, LLC, et al. v. Boston Mutual Life Insurance Co.

Plan language

Plaintiff D&H Therapy Associates obtained a long-term disability benefit plan from defendant Boston Mutual Life Insurance Co. The plan was regulated by the Employee Retirement Income Security Act, or ERISA.

Plaintiff Robin Dolan and Kim Havunen each held a half ownership stake in D&H, a company providing physical, occupational and speech therapy services at several clinics in Rhode Island. Dolan and Havunen were also employees of the firm.

The plan provided for benefits to employees who “are not able to perform some or all of the material and substantial duties of [their] regular occupation” and “have at least a 20% loss in [their] pre-disability earnings.”

The plan defined pre-disability earnings as “your monthly rate of earnings from the employer in effect just prior to the date disability begins.”

It also included language that stated: “Basic annual Earnings shall mean the Insured Person’s earnings for the prior calendar year as reported by the Group Policyholder on form W-2, excluding commissions.”

The plan emphasized, in all capital letters and in bold, that if an individual was “disabled and working, earning more than 80% of [his or her] pre-disability earnings, no payment will be made.”

In February 2001, shortly after D&H obtained the Boston Mutual policy, plaintiff Dolan underwent orthopedic surgery. When she returned to work in August 2001, she worked fewer hours and received less salary.

The following January, the defendant approved her claim under the policy and began dispensing benefits.

After a 2006 audit, however, the defendant discontinued the benefits and demanded repayment of the sums already paid. The defendant’s position was that the benefit payments had not properly taken account of business profits the plaintiff received as a principal of D&H.

A subsequent lawsuit culminated in a U.S. District Court judgment for the defendant.

Plan interpretation

On appeal, the insurer’s position was based on plan language.

According to the insurer, the plan’s definition of “basic annual earnings” defined “earnings” as W-2 income, and a reasonable reading of the plan demanded a consistent application of that definition, irrespective of the temporal periods “pre-disability” and “current.”

Thus, the insurer’s position was that when the term “earnings” preceded the terms “pre-disability” or “basic annual,” it referred to monthly W-2 income, but when the term “earnings” was used alone or combined with the term “current,” it referred to all income derived from employment, including ownership income.

“With all due deference to Boston Mutual’s role as a fiduciary, it is clear that its construction of the ERISA plan at issue stretches beyond the bounds of reasonableness,” Lynch said.

The judge said Boston Mutual’s construction of the term “earnings” could not be applied consistently within its own account of the plan’s meaning.

“Boston Mutual’s interpretation also renders meaningless the only provision in the plan that appears to define ‘earnings’ in a substantive way,” Lynch said. “The plan defines ‘Basic annual Earnings’ with reference to W-2 earnings; elsewhere, the plan is silent as to what counts as earnings.”

If Boston Mutual wanted to offer a plan that determined benefit eligibility by comparing pre-disability W-2 income with post-disability income deriving from employment, it could have drafted a plan that made that clear, she said.

“Boston Mutual may not transform an existing plan to achieve this end by construing it in a fashion contrary to its terms,” Lynch concluded. “In light of the foregoing, we hold that Boston Mutual’s construction of the plan was unreasonable and, therefore, that its determination that Dolan has never been eligible for benefits constituted an abuse of discretion.”