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"Extraordinary" Expenses Decrease Income in Disability Benefits Calculation
Insurance Law Update
U.S. Court of Appeals for the Fourth Circuit
In Fortier v. Principal Life Ins. Co., ___ F.3d ___, 2012 WL 76021 (4th Cir. (N.C.) Jan. 11, 2012), the U.S. Court of Appeals for the Fourth Circuit held that a disability insurer had reasonably calculated "predisability earnings" when it reduced the insured income by the business expenses that the insured had deducted on his federal income tax returns, including a reduction for extraordinary expenses.
Fortier, the insured and owner of a medical practice, brought an action against his disability insurer under ERISA, alleging that the administrator had misconstrued the policy and undercalculated his predisability earnings when determining benefits. Under the policy, predisability benefits are defined as gross income less business expenses. Business expenses are (1) "usual and customary," (2) "incurred on a regular basis," (3) "essential to the established business operation," and (4) "deductible for Federal Income Tax purposes." The ERISA administrator held that because Fortier claimed his extraordinary expense as deductions on his federal tax returns, they were "ordinary and necessary", and therefore "usual and customary," "incurred on a regular basis," and "essential to the established business operation." After having deducted the extraordinary expenses, Fortier's predisability earnings were significantly lower than Fortier claimed. Fortier appealed, arguing that the administrator's interpretation rendered the policy's definition of business expenses repetitive and superfluous, and that each criterion was a further limitation that distinguished expenses deductible for tax purposes from expenses defined in the policy. The district court held that the administrator's interpretation was reasonable, and Fortier appealed again.
Applying an abuse of discretion standard, the Fourth Circuit concluded that the insurer's denial of benefits was based on a reasonable reading of the policy language. The court did question why the policy chose to include the criteria "usual and customary," "incurred on a regular basis," and "essential to the established business operation," when the phrase "deductible for Federal Income Tax purposes" arguably was the only criterion needed to accomplish the policy's purposes under the administrator's interpretation. The Fourth Circuit nonetheless held that based on the overall policy language, including two references to the Internal Revenue Code and the policy's grant of "complete discretion" to the insurer to resolve ambiguities and to determine benefits, the policy permitted the administrator to interpret the policy's definition of business expenses as coextensive with the federal tax code.
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