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State Anti-Subro Law Prohibits “Offset” of Disability Benefits

A disability insurer cannot reduce the benefits owed to its insured where state anti-subrogation law bars insurers from seeking reimbursement out of personal injury recoveries, the Second Circuit ruled Thursday.

In a case arising in New York, Aetna Life Insurance Company had deemed half of Salvatore Arnone’s third-party personal injury recovery to be payment in respect of wage loss already compensated by its long-term disability policy, part of an ERISA-governed employee benefits plan provided by Arnone’s employer. Aetna claimed that the LTD policy, issued in Connecticut, allowed it to offset benefits in respect of payments an insured received from other sources. Aetna argued that the New York statute prohibiting insurers’ subrogation and reimbursement claims against parties to personal injury actions did not apply because it was preempted by ERISA and because Aetna’s LTD policy required it to be construed according to the law of Connecticut. Aetna further claimed that Arnone had forfeited his right to rely on the New York statute, General Obligations Law § 5-335, because he had not specifically identified it in Aetna’s internal appeals process.

Writing for the Second Circuit panel, Judge Susan L. Carney flatly rejected all of Aetna’s arguments. The court found that the New York statute applied to an insurer’s “offset” of benefits as well as to subrogation and reimbursement claims, and that Aetna’s benefits determination was subject to the New York law regardless of whether the LTD policy was issued in Connecticut, since the personal injury case arose in New York and was governed by New York law. The court ruled that Aetna’s deision to reduce Arnone’s benefts was erroneous as a matter of law, and therefore met the “arbitrary and capricious” standard for reversal of a plan’s administrative determination.

The court also brushed aside Aetna’s ERISA preemption argument, noting that the Supreme Court “has left no doubt” that an insurance company is regulated by state law even where it insures an ERISA-governed plan; the panel declined to revisit the Second Circuit’s 2014 decision in Wurtz v. The Rawlings Company, which held that GOL § 5-335 is an insurance regulation not preempted by ERISA.

The case is reported as Salvatore Arnone v. Aetna Life Insurance Co., ___ F.3d ___, 2017 WL 2675293 (2d Cir. 2017). Arnone was represented on the appeal by Franklin P. Solomon, who also serves as counsel to The Lien Resolution Group. Aetna was represented by Michael H. Bernstein and Matthew P. Mazzola of Sedgwick, LLP.

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