Barclay Damon
Barclay Damon

Legal Alert

General Obligations Law § 5-335 Prohibits Insurer’s Reduction in Disability Benefits

In Arnone v. Aetna Life Insurance Company, the United States Court of Appeals for the Second Circuit held that New York General Obligations Law § 5-335 prohibits a disability insurance carrier from providing a reduction in monthly disability payments from a group long-term disability plan as a result of a personal injury settlement.

Plaintiff Sylvester Arnone, an account executive, was injured in June, 2009 when he slipped in a puddle of water at a customer’s premises, causing injuries to his head, lower back, and neck. Plaintiff was enrolled in his employer’s group long-term disability plan administered by Aetna (“the Plan”), which qualified as an employee welfare benefit plan under the federal Employment Retirement Income Security Act (ERISA). He began to receive disability benefits under the Plan, which were reduced upon his receipt of Workers’ Compensation and Social Security Disability Insurance benefits due to the accident.

In November 2009, Plaintiff instituted a personal injury lawsuit against the customer that eventually settled for $850,000. Aetna determined that the settlement included compensation for disability under the Plan as the general release did not specify that the compensation was for Plaintiff’s pain and suffering only. As a result, Aetna reduced its obligation to Plaintiff by half of the settlement amount under the Plan’s provisions regarding offsetting payments from other sources.

After pursuing internal appeal mechanisms through Aetna, Plaintiff instituted this action, claiming that General Obligations Law § 5-335 prohibited Aetna from offsetting half of the settlement amount against his disability benefits. Specifically, General Obligations Law § 5-335 provides: “…[w]hen a person settles a claim . . . for personal injuries . . .it should be conclusively presumed that the settlement does not include any compensation for the cost of health care services, loss of earnings, or other economic loss.” General Obligations Law § 5-335(a) (emphasis added). The statute also prevents an insurer from pursuing a subrogation claim or claim for reimbursement as a result of the settlement. The United States District Court for the Eastern District of New York granted summary judgment to Aetna, holding that the provisions of the Plan called for the application of Connecticut law, and thus General Obligations Law § 5-335 was inapplicable.

In reversing the District Court’s decision, the Second Circuit narrowly interpreted the Plan’s choice of law provision, holding it called for Connecticut law to govern contract interpretation and construction only, and that the General Obligations Law had nothing to do with how the Plan’s provisions were construed. It also dismissed Aetna’s remaining arguments, concluding that ERISA did not expressly preempt the General Obligations Law because it is a state law that regulates insurance, and thus falls under ERISA’s saving clause. See 29 U.S.C. § 1144(b)(2)(A).

Aetna’s payment offset was further inappropriate because “other economic loss” as contemplated by the General Obligations Law was broad enough to include disability payments rendered under a group-savings plan. Thus, Aetna was statutorily barred from factoring the settlement into its offset calculation.

This case is significant because it prevents insurers who write disability policies in New York from providing any offset for personal injury pain and suffering settlements. The decision also makes clear that state law regulates an insurer even if the insurance at issue qualifies as an ERISA plan.


If you require further information regarding the content of this Legal Alert, please contact either of the Co-Chairs of the Torts & Products Liability Defense Practice Area, Thomas J. Drury, at (716) 858-3845 or tdrury@barclaydamon.com, or Matthew J. Larkin, at (315) 425-2805 or mlarkin@barclaydamon.com.