A Florida federal appeals court ruled that Reliance Standard Life Insurance Company (“Reliance") unreasonably denied an ophthalmologist’s disability benefits because her income was not paid directly to her by the policy holder but instead through her corporation.
Background
Dr. Krista Rosenberg was an ophthalmologist who was part of a medical practice group known as the “Retina Group,” which offered long-term disability (“LTD”) coverage to members of its practice. Dr. Rosenberg was not paid directly by the Retina Group, but rather through her Chapter S corporation.
According to RSL’s LTD policy, “Covered Monthly Earnings” was defined as “compensation from the partnership averaged over … 36 months … as reported on the partnership federal income tax return as ‘self-employment earnings (loss)’ per Schedule K1, Federal Form 1065 (box 14).”
Dr. Rosenberg submitted a claim for long term disability benefits when she was no longer able to work. However, RSL denied the claim arguing that because the Retina Group paid her via her Chapter S corporation and her tax returns showed no income in Box 14 as self-employment earnings, there were no eligible earnings upon which to base a benefit.
Consequently, Dr. Rosenberg filed suit against RSL under ERISA.
The Lower & Appeals Courts’ Decision
The district court found RSL’s denial of LTD benefits wrong because it was based on a reading of the disability policy that “was entirely devoid of context and borders on the absurd.” Specifically, Dr. Rosenberg was an employee of the Retina Group which paid her compensation under an employment and partnership agreement. There was no evidence, according to the lower court, that the Retina Group paid Dr. Rosenberg for any other reason than for the work she performed as an employee. The lower court further found that RSL knew this interpretation of covered earnings was untenable because it tried to retroactively accommodate Dr. Rosenberg’s LTD claim by amending the definition of the term.
Thus, the lower court ruled in Dr. Rosenberg’s favor and RSL appealed. The appeals court agreed with the lower court’s decision, noting that RSL’s reasoning was “nonsensical and thus arbitrary and capricious.” First, its interpretation was inconsistent with the common sense meaning of “compensation from the partnership” as all partners were paid through their closely held pass-through corporations.
Under RSL’s reasoning, premiums were paid on the policy for 8 years by the practice group with no eligible beneficiaries. Because the only reasonable interpretation was that payments to Dr. Rosenberg’s pass-through corporation were “Covered Earnings”, the appeals court affirmed the lower court’s decision.
This case is a good example of how insurance companies will interpret contract language to their favor despite the absurdity of doing so. Having an expert in disability insurance law on your side can help you fight nonsensical denials like this.
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Case: In Rosenberg, M.D. v. Reliance Standard Life Insurance Company, No. 23-13761, 2024 WL 3385678 (11th Cir. July 12, 2024)
