New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on November 26, 2001, representing the position of the New York State Insurance Department.

RE: Private Disability Exemptions Under Section 3212 of the Insurance Law.

Question Presented:

Are benefits payable to, or received by, an insured pursuant to a private disability insurance policy exempt from the reach of creditors seeking to satisfy outstanding liabilities and debts owed by the insured?

Conclusion:

Yes, subject to specified limitations, in accordance with N.Y. Ins. Law §3212(c) (McKinney 2000).

Facts:

The inquirer described a situation where the insured had received benefits under a private disability insurance policy and deposited the proceeds into a bank account. The deposits to the bank were made either directly by the insured, or through a direct electronic deposit from the insurer to the insured's bank account.

Analysis:

N.Y. Ins. Law § 3212(c) (McKinney, 2000) governs the "Exemption of proceeds and avails of certain insurance and annuity contracts". This section is broken down into subsections as follows:

(c)(1) No money or other benefits payable or allowable under any policy of insurance against disability arising from accidental injury or bodily infirmity or ailment of the person insured, shall be liable to execution for the purpose of satisfying any debt or liability of the insured, whether incurred before or after the commencement of the disability, except as provided in subsection (e) hereof.

(2) With respect to debts or liabilities incurred for necessaries furnished the insured after the commencement of disability, the exemption shall not include any income payment benefits payable as a result of any disability of the insured, and with respect to all other debts or liabilities incurred after the commencement of disability of the insured, the exemption of income payment benefits payable as a result of any disability of the insured shall not at any time exceed payment at a rate of four hundred dollars per month for the period of such disability.

(3) When a policy provides for lump sum payment because of dismemberment or other specific loss of insured, such payment shall be exempt from execution of insured's creditors.

(4) This subsection shall not affect the assignability of any benefit otherwise assignable.

Section 3212(c)(1) creates a general exemption for benefits paid to an insured under a private disability from the financial reach of creditors of the insured. This exemption, however, is qualified by the limitations established under Section 3212(c)(2) and (3). Pursuant to Section 3212(c)(2), the exemption does not cover or include debts or liabilities for "necessaries" furnished to the insured by creditors, such as for food, clothing and shelter. Additionally, with respect to the amount of the permissible exemption for disability benefits, after debts for necessaries have been excluded, the remaining exemption "shall not at any time exceed payment at a rate of four hundred dollars per month for the period of such disability." Section 3212(c)(3) also states that a "lump sum payment because of a dismemberment or other specific loss of insured….is exempt from execution of insured’s creditors."

Though the inquirer argued that the provisions of Section 3212(c)(1) and (2) are contradictory, it is clear from the statutory language that the Legislature did not intend to create an absolute exemption for all disability benefits from the financial reach of their creditors. Rather, a plain reading of the provisions of Section 3212(c)(1) indicates that its provisions are intended to interrelate with each other as necessary. Therefore, the general exemption for disability benefits is subject to the above-referenced limitations.

The inquirer also argued that under the federal Social Security law, disability benefits received under that program are exempt from all creditors with the exception of back taxes and child support and that New York law recognizes this exemption pursuant to the federal supremacy clause. However, it must be noted that this exemption is applicable solely to disability benefits received under Social Security. In the situation presented in this inquiry, the benefits in question are disability benefits received under private insurance policies issued in New York and governed by the Insurance Law. As such, the federal exemption is not applicable, to such policies.

Lastly, the inquirer suggested that the exemption may be affected by the method of deposit of the policy proceeds into an insured's account, such as when the deposit is made by direct electronic transfer to the insured's account. Since the method of deposit does not alter the nature or calculation of the disability benefits paid, this distinction is in no way determinative of the statute's requisite application of the exemption standards.

For further information, you may contact Supervising Attorney Lawrence M. Fuchsberg at the New York City office.