Was Boston Mutual's decision to terminate long-term disability insurance correct? (Part I)

The case we are going to look at here highlights the importance of involving a disability insurance attorney in your disability insurance policy purchasing decision. The language in disability insurance policies is complex and can often be turned against you when you most need the benefits. It is never safe to trust the assurances of the disability insurance company that a policy meets your requirements. The following case clearly demonstrates this reality.

D & H Therapy Associates, LLC is a limited liability S corporation owned by Robin Dolan, a physical therapist, and Kim Hanuven. D & H provides physical, occupational and speech therapy at several clinics in Rhode Island. The two women also established Association Professional Management, Inc. (APM), an S Corporation as well. Dolan’s primary contribution to the corporation was originally as a director of clinical services and physical therapist. Hanuven managed the business responsibilities of the corporation.

Both positions were salaried jobs based on the hours each woman worked. At the end of the year, Dolan and Hanuven also received dividends when the businesses were profitable. These dividends would play a pivotal role in the Boston Mutual Life Insurance Company (Boston Mutual) decision to terminate Dolan’s long-term disability benefits.

Boston Mutual Disability insurance company assures company that its plan meets specific needs.

In 2000, the long-term disability insurance policy that D &H Therapy had with Guarantee Life Insurance Company came up for renewal, Hanuven begin shopping for a better deal. After extensive negotiations with Boston Mutual, in which she was assured that Boston Mutual would define earnings strictly based on W-2 income, she replaced the existing policy with the new policy from Boston Mutual.

Early in 2001, Dolan had to undergo knee surgery. This required her to take six months off from work, after which she returned to work part time on August 20, 2001. Under the terms of the Boston Mutual policy, Dolan qualified for disability benefits, which were paid to her on a monthly basis. Then in 2006, Boston Mutual asked DRMS to conduct an audit of Dolan’s business and personal income tax returns for the years 2001 through 2004.

During the audit, CPA Judy Bodavonich discovered that Dolan received shareholder income from her holdings in D & H Therapy and APM. She reached the conclusion that this income should have been considered in determining whether Dolan qualified for the disability payments. It appeared in some years that Dolan actually earned more in dividends than she had earned, prior to her disability, in wages.

Based on this information, DRMS concluded that Dolan had ceased to be qualified for benefits on January 1, 2002. Boston Mutual informed Dolan of the results of this audit on August 25, 2006. The letter also made it clear that Boston Mutual had the right under the plan to recover the overpayments that were the result of fraud or error.

Disability insurance attorney argues that shareholder and partnership profits are not employment earnings.

Dolan and Hanuven contacted their disability insurance attorney. In a letter dated October 2, 2006, he insisted that Boston Mutual was not interpreting the plan language correctly. He insisted that the plan’s definition of “earnings” included salary income only. The disability attorney asserted that shareholder income reflected on the tax returns was paper income, taxable for IRS purposes, but not income that Dolan actually received.

Disability insurance dispute escalates.

Boston Mutual ordered disability surveillance in an attempt to prove that Dolan was no longer disabled. The disability insurance company also charged her with lack of cooperation when she was asked to produce financial records. Finally on October 27, 2006 Boston Mutual terminated benefit payments with the demand that Dolan repay the $145,958.32 received in benefits since January 1, 2002.

Dolan appealed the termination of her benefits on December 13, 2006. It took almost six months for Boston Mutual to review her appeal, but on May 1, 2007, Boston Mutual upheld their decision to terminate benefits and to recover the overpaid benefits. The denial letter made it clear that the disability insurance company did not consider Dolan eligible for benefits after December 31, 2001.

Dolan appealed the termination and demand for reimbursement on June 28, 2007. Hanuven submitted additional information concerning Dolan’s role within the company, on September 21, 2007. Bogdanovich reviewed her file again, and once again reached the conclusion that Dolan ceased to be eligible for disability benefits based on her monthly income on January 1, 2002.

Boston Mutual also sent her medical records to a doctor for medical review and a vocational consultant to determine whether she was able to carry out the various functions of her occupation. Both reviews indicated that Dolan would not be able to work as a physical therapist again.

While Dolan qualified for disability based upon her physical condition, the fact that Bogdanovich claimed that she did not qualify under the financial component of the plan became the basis for Boston Mutual once again upholding their denial of benefits and demand for restitution for overpaid benefits. In their denial letter of November 29, 2007, Boston Mutual pointed to the financial analysis of Dolan’s post-disability income and the fact that the additional material submitted by Hanuven demonstrated that Dolan still performed many of her duties as partner and director of the clinical services provided by D&H Therapy.

Disability insurance attorney files lawsuit.

Dolan and D&H Therapy, with representation from their disability insurance attorney, filed suit on January 3, 2008. Dolan’s physical condition had been deteriorating, and by February 24, 2008, she no longer worked in any capacity at D & H Therapy and ceased to receive a salary.

The disability attorney filed a five count complaint. The first count addressed the breach of the insurance contract. The second count addressed the denial of benefits. The third count sought relief from the charges of overpaid disability benefits. The fourth count addressed the recovery of the benefits Boston Mutual had stopped paying. The fifth count charged that Boston Mutual had fraudulently induced D&H Therapy to give up their previous insurance coverage through false promises that the policy would replicate the Guarantee Life policy it was replacing.

Disability insurance company’s attorneys argue to strike documents that support the fifth count of the compalint.

The two sides met before the U.S. District Court, District of Rhode Island, on March 16, 2009. It was agreed immediately that the first two counts of the complaint could be addressed at the State level. The last three counts of the complaint were preempted by the Employee Retirement Insurance Security Act (ERISA) and had to be heard before the District Court.

Disability attorney argues for de novo review.

Dolan’s disability attorney did not want the court to review Boston Mutual’s decision under the “abuse of discretion” standard. If the Court chose to use the “abuse of discretion” standard (also known as the “arbitrary and capricious standard in the 1st Circuit”), the Court would not have to consider whether Boston Mutual had misread the terms of the plan to the insurance company’s own advantage. All the Court would be obligated to consider was whether Boston Mutual’s decision was reasoned and supported by substantial evidence.

Dolan’s disability attorney argued that Boston Mutual had failed to meet the time frames set forth within the disability benefits policy for the review of claims appeals. The policy’s own time frame of 45 days, with one possible 45-day extension, is codified in Federal law. The disability attorney pointed to Jebian v. Hewlett-Packard Co. Employee Benefits Org. Income Protection Plan, where the Court of Appeals ruled that a de novo standard of review should be used when the plan administrator was so dilatory in making a benefit determination that the claim was eventually “deemed denied” under the operative plan language and regulation.

Boston Mutual counter-claimed that tolling (automatic resetting of time) applied, because the insurance company had frequently asked for information in order to conduct the review fairly and had to wait for it. When the Court looked at the record, it confirmed that Boston Mutual had remained in “substantial compliance” as defined by a previous First Circuit decision in Papadopoulos v. Hartford Life Ins. Co. The Court determined that the “abuse of discretion” standard of review applied.

Dolan’s disability attorney argued that Boston Mutual had changed its method of calculating Dolan’s qualifications for disability benefits. Boston Mutual claimed that this was not so. The problem according to the disability insurance company was that Dolan had failed to supply sufficient documentation when she made her claim. Boston Mutual contended it had not changed its interpretation of the plan language. Rather, the insurance company had overpaid Dolan because it did not realize that Dolan’s earnings exceeded the limits.

In Section 1 of the plan, earnings were described as “the insured person’s earnings for the prior calendar year as reported by the group policyholder on form W-2, excluding commissions.” The plan went on to provide different scenarios in Section 4 for how Boston Mutual would determine benefits.

1. If you are not working or working and earning less than 20% of your pre-disability earnings, then multiply your pre-disability earnings by the benefit percentage. As long as this is less than $6,000, that’s your gross monthly payment. (If it’s more than $6,000.00, then your gross monthly payment is $6,000.00.) Finally, “Subtract from the gross monthly payment any other income amounts except any income you earn or receive from any form of employment. This is the payment that you may receive.
2. If you are working and earning between 20% and 80% of your pre-disability earnings, then:
   1. For the first 24 months, multiply your pre-disability earnings by the benefit percentage. Then take your pre-disability earnings and “subtract any other income amounts including current income you earn or receive from any form of employment.” The lesser of these two figures is your benefit (not exceeding $6,000.00).
   2. After 24 months, calculate your gross monthly payment by multiplying your pre-disability income by the benefit percentage (again, not exceeding $6,000.00). Then, subtract from the gross monthly payment:
      • 100% of any other income amounts except any income you earn or receive from any form of employment; AND
      • 50% of any income you earn or receive from any form of employment.

The plan went on to describe the six categories it considered “other income.” One of these categories played a pivotal role in the Court’s evaluation of whether Boston Mutual’s decision was reasonable. It said:

Any income you earn or receive from any form of employment. We may require you to send us proof of your income. We will adjust our payment to you based on this information. As part of the proof of income, we can require you to send us appropriate tax and financial records we believe we need to substantiate your income.

The following boldfaced, all-capitalized, paragraph appeared within Section 4 as well: “IF YOU ARE DISABLED AND WORKING, EARNING MORE THAN 80% OF YOUR PRE-DISABILITY EARNINGS, NO PAYMENT WILL BE MADE.“

The matter to be determined then was whether Dolan’s disability attorney’s argument that her S-Corporation dividends were not “earnings” was valid. The Court said, “No.” The Court found that this income fell under other the “income you earn or receive from any form of employment” category. The Court refused to recognize the same distinction that the IRS does that S corporation income is not considered employment earnings. Boston Mutual’s interpretation that Dolan’s income from dividends from her ownership in the company was indeed a form of earnings seemed to be reasonable interpretation of the policy.

Disability attorney argues that Boston Mutual made fraudulent promises.

The Court moved on to consider whether Boston Mutual had truly made promises that it had then reneged on. In order to do this, the Court had to consider supplemental documents that were not part of the administrative record. When it did so, it discovered that the policy language in Guarantee Life’s long-term disability plan was essentially the same as that found in the Boston Mutual plan. There was no clear way to know if a claim filed with Guarantee Life would have been any more successful.

The Court found that it was possible that Dolan had simply failed to understand how the policies worked. This meant that the Court would not hold Boston Mutual responsible for fraudulent inducement.

Finally, the Court had to address Boston Mutual’s counterclaim that Dolan owed the disability insurance company $163,661.57 in overpaid benefits. The plan clearly provided for this. ERISA also allows a fund administrator to seek “appropriate equitable relief.” At the same time, in order to claim equitable restitution, Boston Mutual had to establish that “money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession.”

Boston Mutual could not do this. Great-West Life & Annuity Ins. Co. v. Knudson made it clear that collection of overpayments cannot impose personal liability if the insurance company cannot secure reimbursement through particular funds or property, and Dolan claimed that she had been suffering from financial hardship as a result of the termination of benefits.

Court issues decision but delays final judgment until state-level claims are resolved.

The Court denied Boston Mutual’s motion for summary judgment for their counterclaim for overpaid benefits. It also denied Dolan’s motions for partial summary judgment on the three ERISA complaints, because the Court determined that Boston Mutual’s decision to terminate Dolan’s disability benefits was reached in a reasonable manner.

Boston Mutual had asked the Court to affirm their decision to terminate Dolan’s long-term disability benefits. It did so by granting Boston Mutual’s motion for summary judgment. At the same time, the Court decided not to enter a final judgment on this case until all the claims had been resolved. District Judge William E. Smith filed a Memorandum and Order on September 2, 2009.

This is a case we will continue to discuss in Part II: Boston Mutual Can Not Recover $163,000 Overpayment To Long-Term Disability Claimant.