ERISA-Fourth Circuit Rules That Insurer/Administrator Properly Calculated Predisability Earnings When Determining That No Disability Benefits Are Payable

In Fortier v. Principal Life Insurance Company, No. 10-1441 (4th Cir. 2012), the plaintiff, Dr. Kenneth Fortier (“Dr. Fortier”), became disabled, and applied for short- and long-term disability benefits from the defendant, Principal Life Insurance Company (“Principal”), under policies which Principal had issued to Dr. Fortier’s medical practice (the “Policies”). The Policies are subject to ERISA. The Policies provide that a disabled insured is entitled to receive 60% of his predisability earnings, capped at $1,500 per week for short-term benefits and $6,000 per month for long-term benefits. This benefit, however, is reduced by the amount that all disability benefits (from the Policies and any other policies) exceed the insured’s predisability earnings. Principal determined that Dr. Fortier was disabled within the meaning of the Policies. However, since Dr. Fortier was receiving $15,470 per month in disability benefits on individual disability policies issued by another company, and his predisability earnings are $9,916, he was not entitled to any further benefits under the Policies.

This suit ensued under ERISA. Dr. Fortier claimed that Principal had misconstrued the Policies by calculating his predisability earnings to be $9,916 and that, with a proper calculation, his predisability earnings were far greater, entitling him to the maximum benefits from the Policies, even though he was receiving $15,470 on his individual disability policies. More particularly, he contended that Principal, when calculating his predisability earnings, erroneously deducted from his gross predisability earnings extraordinary and one-time business expenses incurred by him in 2003-04 in starting up his practice and in pursuing litigation with partners in his former medical practice. Without the reductions resulting from these extraordinary, one-time business expenses (the “Extraordinary Expenses”), Fortier’s predisability earnings were sufficiently large (being about $48,913) to entitle him to the maximum disability benefits from the Policies. The question for the Fourth Circuit Court of Appeals: was Principal’s calculation of Dr. Fortier’s predisability earnings correct?

In answering this question, since the Policies gave Principal complete discretion to interpret the policies, Principal’s interpretation of the Policies is entitled to a deferential review. The Court concluded that Principal’s interpretation of the Policies’ provisions dealing with the calculation of predisability earnings was reasonable and must be upheld. Principal had concluded that, because Dr. Fortier claimed the Extraordinary Expenses as deductions on his federal income tax returns, he thereby represented that they were “ordinary and necessary” business expenses, consistent with the Internal Revenue Code provision-section 162(a)-permitting the deduction. Thus, those same expenses were also, in the language of the Policies, “usual and customary,” “incurred on a regular basis,” and “essential to the established business operation.” Therefore, they should be taken into account and subtracted from gross income, as Principal did, in calculating Dr. Fortier’s predisability earnings. As such, the Court ruled that Principal’s calculation of the predisability earnings, and its ultimate determination that no disability benefits are payable under the Policies, are correct.

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