Receiving disability benefits from a disability plan is no guarantee that the plan won’t take you to court to get back benefit payments it feels it overpaid, a lesson that Wooten Epes learned in April 2010. Not only did Unum Life Insurance Company of America (Unum) terminate his disability benefits, the disability insurance company also sought to recover what it claimed was an overpayment of benefits. How did Epes find himself in this situation? Would Unum’s suit against him be successful?
We will look into the background of this case before looking at how the Court reached its decision. Before Epes applied successfully for long-term disability benefits, he had been a partner in the law firm of Kutak Rock, LLP. A back injury qualified him for disability benefits in September 2004. In order to retain these benefits Epes had to provide continuing proof that he was still disabled. He also had to provide on a quarterly basis proof of his earnings. This was because the Unum long-term disability policy stipulated that if his earnings exceeded 80% of his indexed pre-disability earnings, benefits would stop.
In November 2004, Epes revealed that he was a partner in Edgewater Affordable Housing Limited Partnership (EAH). As a partner, his duties were to “communicate via telephone and computer with partner and two employees about multifamily housing rental property acquisitions and sales.” He stated that he had not received any income from EAH at that time.
In a June 26, 2005 interview, Epes informed the Unum representative that while he hoped to eventually see annual profits of $250,000 – $300,000, he had at that point still not seen any profits from the venture. Based on this interview, Unum approved two more benefit payments. In September 2005, Epes submitted the required Supplemental Claimant’s Statement which affirmed that he was working part-time from home in the EAH real estate investment and development business.
When Epes provided Unum with copies of his 2004 and 2005 tax returns, Unum considered his loss of about $150,000 in 2004 and his gain of over $200,000 in 2005 as earnings. Epes considered them income and losses as defined by the IRS. When asked in July, 2007 to provide copies of his 2002 and 2003 tax returns, Epes did so. Based on these returns, Unum determined that it had probably overpaid Epes for both 2006 and 2007. They asked for a copy of his 2006 tax return on September 11, 2007. On September 13, Unum once again asked for a copy of his 2006 tax return. He explained that he had filed an extension, but would provide it as soon as his accountant completed the return.
Meanwhile after these two interviews, the disability insurance company began offsetting his long-term disability payments by $6700/month. They also conducted a financial analysis of Epes’ 2002 through 2005 tax returns. Unum concluded that Epe’s income was not passive and thus met the definition of earnings in the disability insurance contract. When they received his 2006 tax return in October, in which he reported almost $900,000 in income, the disability insurance company determined that this was not passive income because Epes was actively involved in the business.
Unum concluded that Epes was clearly earning more than the 80% allowed by the plan, and had been since January 1, 2006. Unum terminated his benefits and informed him, on December 14, 2007, that he owed the disability insurance plan $253,050.83 for overpayment of long term disability benefits. Epes asked for an explanation. Unum began collections efforts on January 11, 2009.
When he began receiving phone calls and letters, he referred Unum to his disability attorney. When Unum finally took Epes to court, it claimed that Epes’ attorney had agreed that the disability insurance company had overpaid and only wanted to confirm that the amount was correct. The disability attorney claimed that this was not a complete or accurate summation of the conversation. Regardless, when Epes did not pay a revised figure of $207,894.88, Unum took Epes to Court, claiming that Epes had ceased to be eligible for benefits as of January 1, 2006. Thus Unum was entitled to equitable relief – the recovery of the $207,894.88 it had overpaid him in benefits.
Epes disability attorney filed a counterclaim. He argued that Epes was still eligible for benefits and had been terminated improperly and deserved reinstatement of his benefits with back payments and interest. He also argued that Unum could not recover the overpayments.
Court uses ERISA contract interpretation rules
The first order for the Court was to determine how to interpret the contract. Because the disability insurance policy did not give Unum discretion, the Court reviewed Unum’s termination of Epes’ benefits de novo, without deference to either side. This decided, the Court recognized that the Employee Retirement Income Security Act (ERISA) mandates that each term in a contract must be considered as present for a purpose and that it should be understood in the way any reasonable plan participant would understand it.
Epes’ disability attorney argued that Unum had erred when it used his non-passive income for the basis for terminating his disability benefits. The Court found otherwise. The policy considered “money derived from one’s own labor or active participation; earnings from services” as earnings. Any reasonable person would consider Epes income from his active involvement in EAH as earnings under the policy.
Epes disability attorney sought to use the U.S. tax code to prove that his “non-passive” income was in reality passive, but this failed to convince the Court. In the absence of any proof that Epes was not earning more than 80% of his pre-disability earnings, the Court found that Unum had properly terminated Epes disability benefits. The Court also found that Epes was not entitled to reinstatement of benefits or back benefits with interest.
Court considers limited Equitable Relief under ERISA.
Having determined that Epes counterclaim for benefits had no merit, the Court went on to consider whether Unum could seek equitable relief. Under ERISA equitable relief is only available under specific guidelines.
In Great-West Life & Annuity Ins. Co. v. Knudson, the Supreme Court limited equitable restitutionary remedies to those that would have been available traditionally before courts of law and equity were merged at the Federal level in 1938. In Sereboff v. Mid Atlantic Medical Services, Inc., the Court found that if a specific fund could be identified, then the insurance plan could seek equitable relief. In Knudsun, the Court found that equitable relief was not available because the beneficiary’s personal assets would have to be attached, something not allowed under Great-West Life.
Unum could not point to a specific fund or bank account in which Epes had the money it claimed to have overpaid. Without a specific fund to attach the claim to, the Court could not order equitable restitution for the $208,000 that Epes was overpaid.
Whether it was right or wrong for Epes to keep the overpaid benefits is not the issue here. The issue is whether a disability insurance plan can ask the Court to order reimbursement of money’s paid. In this case, while the Court sided Unum in terminating Epes’ disability benefits, it sided with Epes in finding that he did not have to repay Unum. This case is very fact specific and if you have an overpayment situation you should never assume that you will not be responsible to reimburse the disability carrier.