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

Eliot Spitzer
Governor

Eric R. Dinallo
Superintendent

The Office of General Counsel issued the following opinion on March 5, 2008 representing the position of the New York State Insurance Department.

Re: Short Term Disability Policies, Benefit Payments to Insured

Question Presented:

May an insurer pay the benefits under a group short term disability policy to the employer for credit to the insured employee?

Conclusion:

Yes, if properly structured, an insurer may make payments only for credit to the insured employee without violating N.Y. Ins. Law § 4235(e) (McKinney 2007).

Facts:

The inquirer’s client is an insurer that issues group short term disability policies to various employers in New York State. In addition, the client issues policies to employers to enable them to comply with Article 9 of the New York Workers’ Compensation Law. Upon occasion, the client will issue both types of policy to the same employer.

Some of the employers who purchase policies from the client also pay an additional sum from their own funds to their disabled employees, such that the total of the employer’s payment, Workers’ Compensation Law Article 9 policy payment, and the short term disability insurance benefit is equal to the disabled employee’s full salary after deduction of income taxes. In many cases, the disabled employee has the employer deduct from his salary amounts to pay continuing expenses, such as automobile insurance.

As is permitted by Workers’ Compensation Law § 237, the employer may advance the Workers’ Compensation Law Article 9 benefits to the employee’s payroll account, and receive reimbursement from the Workers’ Compensation Article 9 carrier. Because payments under the employer’s self-funded wage continuation plan may not, under certain circumstances, extend over a substantial period of time, and since the Workers’ Compensation Article 9 benefits may not be sufficiently substantial, some employers have requested that the client make payments under the group short term disability policy directly to the employer for crediting to the disabled employee’s payroll account. This will allow continuation of payroll deductions for the benefit of the disabled employee

When the inquirer raised this query with the Insurance Department’s Health Bureau (“Bureau”), the Bureau expressed several concerns. Among them, were: (1) whether using the employer as a conduit would continue to allow the insurer to comply with Insurance Law § 3224-a1; (2) whether the program would be mandatory, and deprive the beneficiary of choice as to form of payment; and (3) whether the employer would be functioning as an independent adjuster within the definition in Insurance Law § 2101(g)(1).

While the inquiry does not refer to the previous conversations, we are addressing the Bureau’s concerns in a general manner.

Analysis:

Workers’ Compensation Law Article 9 requires employers to provide limited statutory benefits to employees for non-occupational disabilities. Workers’ Compensation Law § 237, which is one of several statutes governing payment of statutory disability payments, states:

If an employer has made advance payments of benefits or has made payments to an employee in like manner as wages during any period of disability for which such employee is entitled to the benefits provided by this article, he shall be entitled to be reimbursed by the carrier out of any benefits due or to become due for the existing disability if claim for reimbursement is filed with the carrier prior to payment of the benefits.

Insurance Law § 4235 regulates group health insurance policies, including disability income policies. One of the statute’s requirements is that the payments under group health insurance policies may not inure to the benefit of the employer. Accordingly, Insurance Law § 4235(e) requires:

The benefits payable under the policy shall be payable to the employee or other insured member of the group or to some beneficiary or beneficiaries designated by him, other than the employer . . .

While there is no provision comparable to Workers’ Compensation Law § 237 in the Insurance Law, it would exalt form over substance to interpret Insurance Law § 4235(e) as preventing a disabled employee from benefiting from direct payment of short term disability benefits into the disabled employee’s payroll account. Accordingly, if the insurer can satisfy the concerns of the Bureau set forth above and demonstrate that (1) the direct payment of the short term disability proceeds will go to the disabled employee and will not inure to the benefit of the employer, (2) is discretionary on the part of the employee, and (3) would be made in a manner that the insurer was in compliance with Insurance Law § 3224-a with respect to prompt payment of claims, then the Insurance Department would not interpose an objection to such payments. Note, however, that, since the employer would be acting as the insurer’s conduit, the time limits of Insurance Law § 3224-a would not be satisfied upon payment to the employer, but only upon actual receipt by the employee.

The Bureau also raised concerns that the employer may be acting as an adjuster without a license. But, based on the facts presented, the Department’s Office of General Counsel would not consider the employer, by merely serving as a conduit, to be acting as an adjuster. However, before implementing any program, this issue would need to be more fully explored with the Bureau.

For further information you may contact Principal Attorney Alan Rachlin at the New York City office.

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1   This statute requires health insurers to pay or deny claims within a specified period.