Rappaport v. Guardian Life Insurance Company of America

Background

Jason Rappaport, a beneficiary of a long-term disability plan administered by Guardian Life Insurance Company of America, received long-term disability benefits beginning in 2015. Guardian ended the benefits in 2021 after deciding that Rappaport could earn more than the plan allowed while disabled. Guardian also claimed it had overpaid him.

Rappaport alleged that Guardian had wrongly calculated his “insured earnings” by excluding his K-1 income from Industrial Credit of Canada, where he was a 50% owner, licensed mortgage banker, Secretary, and Treasurer. His K-1 income reflected his share of the company’s partnership profits. He sought benefits under the Employee Retirement Income Security Act, or ERISA, and alternatively sought reformation—an equitable correction of a written plan—to include bonuses and commissions in the earnings definition.

The parties agreed to a bench trial based on the stipulated record. The court previously determined that it would review the benefits issue independently, without deferring to Guardian’s decision, and that Rappaport’s reformation claim could proceed.

Plan Interpretation and Benefits Claim

The court held that the plan’s definition of “insured earnings” included Rappaport’s K-1 earnings. The plan referred to an insured person’s “rate of monthly earnings” and excluded bonuses, commissions, expense accounts, and other extra compensation, but it did not define “earnings” or expressly limit the term to W-2 wages.

The court concluded that “earnings” ordinarily covers more than salary or wages. Rappaport’s K-1 income was regular, nondiscretionary partnership income that he received because of his ownership interest in the company. It was not a discretionary bonus, a commission tied to a particular transaction, or compensation beyond what he ordinarily received. The reference to a “rate” of monthly earnings also meant that annual income could be averaged over twelve months, rather than limiting the calculation to income paid monthly.

The court also found that the surrounding evidence supported including K-1 income. ICC’s insurance application selected an earnings definition including bonuses and commissions rather than a W-2-only definition. Communications between ICC’s broker and Guardian confirmed that selection. Guardian’s internal census materials reported Rappaport’s total earnings, including W-2 and K-1 income, as “monthly earnings.” Rappaport also provided Guardian with K-1 records during the benefits process.

Guardian’s contrary evidence did not persuade the court. The court found that the use of “covered payroll” for premium calculations did not establish that “rate of monthly earnings” excluded K-1 income. It also found that Rappaport’s failure to object to a 2016 calculation excluding K-1 income was not persuasive because the calculation still provided him with the maximum monthly benefit.

Reformation

The court alternatively held that reformation was appropriate. It found by clear and convincing evidence that ICC and Guardian mutually intended the plan to include bonuses and commissions, but the final policy mistakenly excluded them. The application, the broker’s confirmation, Guardian’s internal documents, and Guardian’s later administrative review all supported that conclusion.

The court therefore held that the plan should be reformed so that its insured-earnings definition includes bonuses, commissions, and other extra compensation. Under that reformed definition, Rappaport’s K-1 income would be included even if it were treated as one of the categories excluded by the original policy.

Remand, Setoff, Fees, and Sealing

Because the parties agreed that Guardian should perform the benefits calculation if K-1 earnings were included, the court remanded the case to Guardian to determine Rappaport’s past and future long-term disability benefits using those earnings. Guardian must also determine whether any overpayment exists for purposes of a possible setoff. The court did not itself calculate the benefits or award a specific amount.

The court stated that it would entertain a later application by Rappaport for attorney’s fees. It also stated that the motion to seal was granted in part and denied in part, with only the portions relied on by the court to be unsealed and other irrelevant confidential business records remaining sealed. The Clerk was directed to terminate that motion.

Disposition

The court found that the plan’s insured-earnings definition includes Rappaport’s K-1 earnings, remanded the case to Guardian for a benefits redetermination, directed the parties to submit a status letter, and allowed Rappaport to submit an application for attorney’s fees. The opinion identifies the judge at the beginning as Jennifer L. Rochon but ends with a signature reading “alec chow”; this summary uses the name shown in the signature.