The U.S. Court of Appeals for the Second Circuit has ruled that New York’s anti-subrogation statute, N.Y. Gen. Oblig. Law § 5-335(a), applies both to “offsets” for prospective benefit payments and to reimbursements for prior benefit disbursements.  In so holding, the Second Circuit ruled that a Plan’s choice-of-law provisions may not be dispositive of which jurisdiction’s anti-subrogation statute will apply to govern disbursement and/or recovery of that Plan’s assets.

The case, Arnone v. Aetna Life Ins. Co., 860 F.3d 97 (2d Cir. 2017), arose after the plaintiff-appellant, Salvatore Arnone, a New York resident, was injured while working in New York at the site of a customer of his employer.   Arnone filed for, and received, disability benefits through an ERISA-governed plan (“Plan”) insured and administered by Aetna.  Arnone also commenced a personal injury action in New York state court against his employer’s customer.  Arnone eventually settled the personal injury suit for a lump-sum payment.

Under the terms of the Plan, Aetna was required to reduce Arnone’s monthly disability benefits upon receipt of certain other income, such as Workers’ Compensation Insurance benefits, Social Security Disability Insurance benefits, and payments from third-party tortfeasors responsible for Arnone’s disability.  Thus, in accordance with the Plan’s terms governing other income benefits, Aetna offset Arnone’s monthly disability benefits by a percentage of his third-party settlement.

After exhausting administrative remedies, Arnone sued Aetna to recover the long-term disability benefits offset by the settlement, arguing that New York’s anti-subrogation statute barred Aetna from reducing his monthly benefits by any amount of the settlement.

The District Court granted summary judgment in favor of Aetna, reasoning that New York’s anti-subrogation statute was irrelevant in light of the Plan’s choice-of-law provision designating Connecticut law as controlling the Plan’s construction (to the extent it was not governed by ERISA).

On appeal, the Second Circuit reversed, building upon its 2014 decision in Wurtz v. Rawlings Co.,761 F.3d 232 (2d Cir. 2014) in which it held that New York’s anti-subrogation statute was not preempted by ERISA.  The Second Circuit first clarified that the language of New York’s anti-subrogation statute (1) creates a conclusive presumption that a third-party settlement does not include amounts that an insurer can recover, and (2) is not limited to reimbursement and subrogation actions.  The Court thus concluded that, if applied, New York’s anti-subrogation statute would prohibit the settlement offset.

The Second Circuit then turned its attention to the question of whether New York’s anti-subrogation statute in fact applied.  Answering in the affirmative, the Second Circuit ruled that Plan’s Connecticut choice-of-law provision was not dispositive because New York’s anti-subrogation statute had no bearing on how the Plan was “construed.”  In so deciding, the Second Circuit held that a choice-of-law provision in an ERISA-governed plan “sets forth only which jurisdiction’s law of contract interpretation and contract construction will be applied”, and does not preclude application of another jurisdiction’s anti-subrogation statute.

The Second Circuit’s decision in Arnone highlights a 3-1 circuit split on whether ERISA preempts state anti-subrogation laws, with the Third, Fourth, and Fifth Circuits each concluding it does, and the Second Circuit concluding it does not.  It also creates a separate circuit split on the issue of whether an ERISA-governed plan’s choice-of-law provisions incorporate state substantive law, with the Fifth and Sixth Circuits concluding it does, and the Second Circuit concluding it does not.

Aetna has petitioned the U.S. Supreme Court for a writ of certiorari to resolve these circuit splits.

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