Thursday, June 5, 2008

Fair Price Medical -- Affirmed

Fair Price Med. Supply Corp. v. Travelers Indem. Co.
(Ct. Apps., decided 6/5/2008)

In a 5-2 decision, the Court of Appeals has AFFIRMED the Second Department's decision.

Judge Read wrote the majority opinion, in which Chief Judge Kaye and Judges Ciparick, Graffeo and Jones concurred. Judge Smith wrote the dissent, in which Judge Piggott concurred.

The majority answered "yes" to the certified question before it of whether the Second Department's decision and order were properly made. With apparent approval of its sentiment, Judge Read quoted from the Appellate Term's decision:

The two-Justice majority opined that the "clear implication" of Presbyterian Hosp. in City of N.Y. v Maryland Cas. Co. (90 NY2d 274 [1997]) was that "a defense based on a provider's alleged fraudulent claim for no-fault benefits is precluded by an insurer's failure effectively to invoke its remedies in the 'contestable period,' one of the 'tradeoff[s] of the no-fault reform' which the Legislature recognized as the cost of providing 'prompt uncontested, first-party insurance benefits'" (Fair Price Med. Supply Corp. v Travelers Indem. Co., 9 Misc 3d 76, 79 [App Term, 2d and 11th Jud Dists 2005], quoting Presbyterian, 90 NY2d at 285 [alteration in Appellate Term opinion]).

As some commentators had predicted, the majority cited the Court's own decision from November 2007 in Hospital for Joint Diseases v. Travelers Prop. Cas. Ins. Co. (9 NY3d 312 [2007]), in which the court reviewed "the basic no-faul regime" and verification process in the context of Insurance Law § 5102(a)'s 30-day pay or deny rule. Turning next to the question of what no-fault defenses fall within and without that preclusion rule, the majority held:

Thus, the key issue here — as was also the case in Hospital for Joint Diseases — is whether the facts fit within the narrow no-coverage exception to the preclusion rule. Travelers argues that they do, and so it is "irrelevant" that Fair Price's claims were pending for nearly two years before Travelers finally denied them. Specifically, Travelers argues "where . . . the medical supplies and equipment for which the plaintiff provider is suing to recover payments were never provided to the insured-assignor, there is no coverage in the first instance, and a defense of fraud based upon the plaintiff provider's failure to provide the supplies and equipment cannot be waived, even if its denial of claim was untimely."

But there are important differences between this case and Chubb. As already noted, the majority in Chubb emphasized the "narrow[] . . . sweep" of the exception for "denial[s] of claims [] premised on lack of coverage" (90 NY2d at 199). Moreover, the relevant statutory language reveals "neces[sity]" and "incur[sion]" to be of a kind in Insurance Law § 5102 et seq. (see id. at § 5102[a][1] [providing coverage for "[a]ll necessary expenses incurred for services"]), which is important because we explicitly stated in Chubb that billing for unnecessary procedures — i.e., overbilling — was subject to preclusion, not the no-coverage exception (see e.g. Chubb, 90 NY2d at 199 ["We would not, for example, extend this exceptional exemption to excuse Chubb's
untimely defense in relation to treatment being deemed excessive by the insurer. That would not ordinarily implicate a coverage matter and, therefore, failure to comply with the Insurance Law time restriction might properly preclude the insurer from a belated rejection of the billing claim on that basis"] [emphasis added]).

More fundamentally, determining whether a specific defense is precluded under Presbyterian or available under Chubb entails a judgment: Is the defense more like a "normal" exception from coverage (e.g., a policy exclusion), or a lack of coverage in the first instance (i.e., a defense "implicat[ing] a coverage matter")? In our view, a defense that the billed-for services were never rendered is more akin to the former. In this case, there was an actual accident and actual injuries. As the Appellate Division put it, "coverage legitimately came into existence" (42 AD3d at 285), thus removing this fact pattern from the realm of cases where preclusion would "create coverage where it never existed" (Matter of Worcester Ins. Co. v Bettenhauser, 95 NY2d 185, 188 [2000]).

While preclusion requires Travelers to pay a no-fault claim it might not have been obligated to honor if timely disclaimed, the same can be said of any policy defense subject to preclusion. Moreover, although there may be some merit to Travelers' protest that a 30-day (plus potential tolling) window is generally too short a time frame in which to detect billing fraud, any change is up to the Legislature [FN2]. As we observed in Presbyterian and repeated in Hospital for Joint Diseases:

"No-fault reform was enacted to provide prompt uncontested, first-party insurance benefits. That is part of the price paid to eliminate common-law contested lawsuits. . . . The tradeoff of the no-fault reform still allows carriers to contest ill-founded, illegitimate and fraudulent claims, but within a strict, short-leashed contestable period and process designed to avoid prejudice and red-tape dilatory practices" (Presbyterian, 90 NY2d at 285 [citations omitted]; see also Hospital for Joint Diseases, 9 NY3d at 320, quoting Presbyterian, 90 NY2d at 285).

Finally, Travelers and amici curiae argue that, unless we adopt the approach they advocate, insurers in the future will be forced to blanket insureds and their assignees with demands for additional verification in order to combat fraud. A flurry of verification requests, however, is unlikely to burden the no-fault system more than the uncertainty and delay apt to result from judicial expansion of the no-coverage exception. And in this case, of course, Travelers discovered potential billing fraud well within the 30-day time period. Rather than acting on Fair Price's claims in a timely fashion, however, Travelers waited for almost two full years.

And there you have it. We learned in law school that bad facts make bad law. If you are inclined to view this decision as bad law, that last sentence is telling. Nonetheless, at this point, it won't matter whether the lateness is two years, two months, or two days. Unless the New York State Legislature "overrules" this decision, like it or not, New York no-fault insurers must regard and treat a defense that billed-for services were never rendered as falling within the 30-day preclusion rule.

Judge Smith's dissent offers some valid points:

The rule of Central Gen. Hosp. and Zappone is difficult to apply. Despite our use of the word "strict" in Central Gen. Hosp., there is no theoretically perfect way to distinguish lack of coverage defenses from others. It can plausibly be said that any claim not payable under the terms of the policy is a claim the policy does not cover (see Zappone, 55 NY2d at 140-143 [Gabrielli, J., dissenting]). In Zappone, we said that to preclude a defense based on lack of coverage "would be to impose liability upon the carrier for which no premium had ever been received" (55 NY2d at 135-136), but every loss for which a carrier did not agree in its policy to pay is one for which it never received a premium. Nevertheless, it is clear under Presbyterian that insurers must pay most such claims if they do not assert their defenses in a timely way.

The Zappone/Central Gen. Hosp. rule is best understood as requiring different treatment for defenses of such fundamental importance that, unlike most defenses, they should not be subject to waiver by insurance company inaction. These defenses are treated as "lack of coverage" defenses. The defense we upheld in Zappone was that the liability sued on was "incurred neither by the person insured nor in the vehicle insured" (id. at 135). The defense in Central Gen. Hosp. was that the injuries for which the insured was treated did not arise out of an automobile accident. That no medical supplies were provided to the insured is an equally fundamental objection to a claim, and should be treated as a defense based on lack of coverage. That is consistent with the plain meaning of the words "lack of coverage." Neither the insurance policy at issue here nor any other covers wholly fabricated claims.

If indeed Travelers' insured never received the supplies for which Travelers was billed, to uphold these claims would be to countenance a particularly gross form of fraud. I acknowledge that, under Presbyterian, some "illegitimate and fraudulent claims" must be paid if a defense to them is not asserted promptly (90 NY2d at 285); no doubt padded medical bills, overpriced merchandise and other relatively petty abuses will sometimes slip through. But I agree with Justice Golia, dissenting from the Appellate Term's ruling in the present case, that the line should be drawn at what he called "pure fraud" or "classic fraud" (Fair Price Med. Supply Corp. v Travelers Indem. Co., 9 Misc 3d 76, 81 [App Term 2d Dept 2005] [Golia, J., dissenting]). An attempt to distinguish this kind of fraud from the lesser kinds would not succeed perfectly, and would no doubt be the cause of some delay and administrative inconvenience, but I think it would be worth the cost.

The impact of fraud on this State's no-fault system is notorious, as the Appellate Term majority and the Appellate Division acknowledged, even while rejecting Travelers' defense. The Appellate Term referred to "the steep increase in fraudulent no-fault benefits claims arising . . . from provider claims where the services or supplies were . . . never rendered" (9 Misc 3d at 78); the Appellate Division said that "the fraud and abuse that plagues the no-fault insurance system is a serious problem with widespread consequences" (42 AD3d 277, 285-286 [2d Dept 2007]). Today's decision, I believe, unjustifiably hinders insurers' efforts to keep that problem within bounds.

Notice that neither the majority nor the dissent mentions what recourse a no-fault insurer might have if, precluded by the 30-day rule from denying payment for services or supplies that were never rendered or delivered, it must such payment. Will the New York courts permit insurers to counterclaim in provider recovery suits for such repayment? Or bring separate, affirmative actions for recovery? Technically speaking, what occurs when the 30-day rule is not adhered to is neither a waiver (intentional relinquishment of a known right or defense) nor an estoppel (words or conduct by the insurer upon which the insured or assignee reasonably relies to her/its detriment). Consequently, there arguably should be no legal or equitable impediment to seeking recovery under theories of either fraud or unjust enrichment.

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