District Court Orders Guardian to Include Claimant’s K-1 Earnings in Calculation of Long-Term Disability Benefits

In Rappaport v. Guardian Life Insurance Company of America, No. 1:22-CV-08100 (JLR), 2025 WL 1156760 (S.D.N.Y. Apr. 21, 2025), New York Southern District Judge Jennifer L. Rochon granted judgment in favor of Plaintiff on his claim for recovery of unpaid ERISA-governed long-term disability (“LTD”) benefits. In a bench trial, the court addressed whether the LTD plan administered by Guardian included Plaintiff’s K-1 earnings in the definition of “insured earnings.” This determination was central to Plaintiff’s claim that his disability benefits were improperly terminated.

Plaintiff Jason Rappaport was diagnosed with leukemia in 2015, and had received LTD benefits until January 2021, when Guardian terminated them, asserting that he was capable of earning more than 80% of his pre-disability earnings. Guardian denied Rappaport’s administrative appeal, prompting him to file the instant action. The court applied a de novo standard of review, as determined in a prior ruling, Rappaport I, and analyzed the plan’s language and relevant extrinsic evidence. The plan defined “insured earnings” as the “rate of monthly earnings,” excluding bonuses, commissions, and “any other extra compensation.” The court found that the term “earnings” was broad enough to encompass K-1 earnings, which reflect a partner’s share of a company’s profits and are a common form of compensation for business owners like Rappaport.

The court rejected Guardian’s argument that “insured earnings” should be limited to W-2 wages, noting that the plan’s language did not specify any particular type of earnings, but rather excluded specific categories such as bonuses and commissions. The court concluded that K-1 earnings did not fall under these exclusions because they were part of Rappaport’s regular, non-discretionary income derived from his ownership stake and not transactional or supplemental in nature.

Extrinsic evidence further supported this interpretation. During the company’s application for the LTD policy, it selected an earnings definition that included bonuses and commissions, and Guardian’s internal documents reflected this choice. Additionally, the company’s census report, used by Guardian to calculate employee earnings, included both W-2 and K-1 income, suggesting that the parties intended to include K-1 earnings in “insured earnings.”

Guardian’s reliance on the calculation of premiums based on “covered payroll,” which included only W-2 earnings, did not persuade the court, as this term did not appear in the plan’s insured-earnings definition. The court emphasized that the term “rate of monthly earnings” was more aligned with the broader definition that includes K-1 earnings.

In the alternative, the court addressed Rappaport’s request for reformation of the plan to include bonuses and commissions if the definition was found to exclude K-1 earnings. The court found clear and convincing evidence of mutual mistake, as the employer/company and Guardian had agreed upon an earnings definition that included bonuses and commissions, evidenced by the application and communications between the company’s broker and Guardian. The issued policy mistakenly excluded these terms, warranting reformation to reflect the parties’ true agreement.

The court remanded the case to Guardian to determine Rappaport’s past and future LTD benefits, taking into account his K-1 earnings, and to assess any potential overpayments subject to offset. The court also left open the possibility for Rappaport to apply for attorney’s fees.

This decision underscores the importance of clear definitions in policy language and the potential for reformation where mutual mistake is evident. If Guardian or your disability insurer has denied or otherwise limited your ERISA benefits claim, contact us for assistance.