Arnone v. Aetna Life Insurance Co., 860 F.3d 97

Background

Salvatore Arnone, a New York resident injured in New York, received ERISA-covered long-term disability benefits through Konica’s Plan insured and administered by Aetna.
Arnone settled a New York personal-injury suit for $850,000 in 2012 and executed a broad release; workers’ comp lien was satisfied from settlement proceeds.
Aetna offset Arnone’s disability benefits under the Plan’s “other income benefits” provisions, applying a 50% deeming rule to the (net) settlement amount and reducing monthly benefits to the Plan floor.
Arnone sued under ERISA §502(a)(1)(B) seeking withheld benefits; District Court granted Aetna summary judgment, rejecting Arnone’s contract theory and relying on the Plan’s Connecticut choice-of-law clause to sideline N.Y. Gen. Oblig. Law §5-335.
On appeal, the Second Circuit considered whether N.Y. Gen. Oblig. Law §5-335 (an anti-subrogation/anti-reimbursement statute) prevents Aetna’s offset, whether ERISA preempts §5-335, whether the Plan’s choice-of-law clause displaces New York law, and whether Arnone forfeited the §5-335 argument.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether N.Y. Gen. Oblig. Law §5-335 bars Aetna from offsetting settlement proceeds against Plan benefits	§5-335 creates a conclusive presumption that personal-injury settlements do not include compensation for wage loss or other economic loss that an insurer paid — so Aetna cannot treat any part of the settlement as ‘‘for disability’’	Aetna argued the statute addresses subrogation/reimbursement and not plan offsets	Held: §5-335 applies and prohibits Aetna’s offset; treating part of the settlement as ‘‘for disability’’ was barred and Aetna’s decision was arbitrary and capricious under the deferential ERISA review standard
Whether ERISA preempts §5-335	§5-335 regulates insurers and thus is saved from ERISA preemption; Arnone relied on controlling Second Circuit precedent	Aetna claimed §5-335 would conflict with ERISA’s goal of uniform plan administration and thus is preempted	Held: ERISA does not preempt §5-335; the savings clause for state laws that "regulate insurance" applies (Wurtz controlling)
Whether the Plan’s Connecticut choice-of-law clause excludes application of §5-335	§5-335 is a state rule limiting insurer rights and not a rule of contract construction; the Plan’s clause only governs contract interpretation	Aetna argued the Plan expressly requires construction under Connecticut law, displacing New York law	Held: Choice-of-law clause governs contract construction only and does not displace New York’s §5-335; the statute is an external limitation on insurers, not a contract-construction rule
Whether Arnone forfeited reliance on §5-335 by not citing it during administrative appeals	Arnone consistently told Aetna settlement was for pain and suffering and not wage replacement; citing the statute later supplemented that position rather than ambushed Aetna	Aetna said failure to cite §5-335 in admin process should bar it from relying on the statute on review	Held: No forfeiture; Arnone’s prior factual arguments put Aetna on notice and Aetna, a sophisticated insurer doing business in NY, could not claim surprise

Key Cases Cited

M & G Polymers USA, LLC v. Tackett, 135 S. Ct. 926 (U.S. 2015) (ERISA requires written instrument for benefits plans)
Wurtz v. Rawlings Co., 761 F.3d 232 (2d Cir. 2014) (N.Y. Gen. Oblig. Law §5-335 is saved from ERISA preemption as a law that regulates insurance)
FMC Corp. v. Holliday, 498 U.S. 52 (U.S. 1990) (an insurer of an ERISA plan remains subject to state insurance regulation)
Metro. Life Ins. Co. v. Massachusetts, 471 U.S. 724 (U.S. 1985) (the ERISA savings clause permits state insurance regulation even if it affects uniform administration)
McCauley v. First Unum Life Ins. Co., 551 F.3d 126 (2d Cir. 2008) (standard for overturning administrator discretion includes decisions that are erroneous as a matter of law)
Zervos v. Verizon N.Y., Inc., 277 F.3d 635 (2d Cir. 2002) (describing deferential review of ERISA administrator decisions)
Lauder v. First Unum Life Ins. Co., 284 F.3d 375 (2d Cir. 2002) (forfeiture analysis in ERISA context requires case-specific inquiry)
Juliano v. Health Maint. Org. of N.J., Inc., 221 F.3d 279 (2d Cir. 2000) (concern about forcing administrators to list every conceivable defense during claims administration)