Claiming a Kentucky Exemption: Disability Indurance

I believe I once read through a disability insurance policy some forty years ago, but it was not a memorable experience. Nor is it an experience that I yearn to repeat anytime soon. I'm not that type of glutton for punishment.

So, everything I have to say about privately purchased disability insurance policies is rank speculation and conjecture. I do not know what any standard private disability insurance policy says. Caveat emptor.

In MPM Financial Group, Inc. v. Morton, 289 S.W.3d 193 (2009), the Kentucky Supreme Court granted discretionary review of an unpublished Kentucky Court of Appeals opinion which construed K.R.S. 427.170 to provide a general expansion of property exempt from execution for all purposes, and not just for Bankruptcy purposes, and reversed the Court of Appeals. The most interesting part of the case and the appeal was the part not decided.

The case arose when MPM Financial Group sought to garnish private disability insurance benefits being paid to Morton. In addition to claiming that these disability insurance benefits were exempt from execution under KRS §427.170, which didn't work out for Morton on appeal, he also claimed the exemption provided by KRS §427.150(2)(d):

"A payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;"

Yeah, disability insurance benefits being compensation for loss of future earnings makes a certain amount of sense, but the trial court ruled that Morton's disability payments were not exempt under KRS §427.150(2)(d). The trial court agreed with Morton that the disability insurance benefits were exempt under KRS §427.170. MPM Financial appealed the trial court's application of KRS §427.170 to all debtors, and the applicability of KRS §427.150(2)(d) was procedurally neglected by those involved in the appeal.

"We note that, in Morton's brief, he argues that the trial court erred when it held that KRS 427.150(2)(d) did not apply to his disability benefits. KRS 427.150(2)(d) contains an exemption for debtors who receive compensation for the loss of future earnings. Morton argues that his disability benefits constitute compensation for the loss of future earnings. While Morton's argument is interesting, he failed to file a cross-appeal regarding the issue; therefore, we cannot address its merits since it is not before us."

Likewise, before the Kentucky Supreme Court, "Morton did not file a cross-petition for discretionary review with respect to the availability of an exemption under KRS 427.150." Both the unpublished Court of Appeals opinion and the Kentucky Supreme Court opinion in MPM Financial Group, Inc. v. Morton are silent on the question: Does KRS §427.150(2)(d) provide a non-bankruptcy exemption for benefits paid under a private disability insurance policy?

There are two critical components to KRS §427.150(2)(d):

1. The payments are compensation for loss of future earnings, and;
2. The payments are reasonably necessary for support.

Each of these factors would be the focus of considerable proof and evidence at the trial level. The logic of equating "disability insurance" with "loss of future earnings" is not sufficiently compelling. It may be true in whole or in part, as an issue of fact, but it is not necessarily true as a matter of law. Disability insurance benefits might conceivably be wholly unrelated to future earnings, if the insurance policy is a mere casino betting game. Or, the terms of the policy may connect policy premiums and benefits with present earnings as a predictor of future earnings. However, payout benefits may include compensation for expenses associated with a disability that are unrelated to the insured's loss of future earnings resulting from the disability.

Also, KRS §427.150(2)(d) provides an exemption only "to the extent reasonably necessary for the support of the debtor and any dependent of the debtor."

As with so many things in the law, winning on the facts is a better bet than trying to win with an abstract appeal to logic. With proper proof of the terms of the disability insurance policy, the nature of the disability and how insurance benefits relate to the insured's loss of future earnings, coupled with evidence the disability insurance benefits are reasonably necessary for support, a good case can be made.